Regulating the Banks - What must Government do now?

The British banking sector, certainly as it impacts the big banking conglomerates, is an obsolete and broken edifice. It is now damaged beyond any kind of meaningful repair, and it needs a radical reform of its function, its role, its systems, its employees and management, and above all, its criminogenic culture.

Paul Moore, the whistleblower who exposed the criminal goings-on inside HBOS, and who was sacked for his temerity has put the problem in these terms;

“...The whole banking system is broken and needs total reform. We need a fully transparent, forensic no-holds-barred inquiry in which everyone with a vested interest in further cover-ups, which includes existing and past politicians, existing and past regulators, any City of London grandee, must be barred from taking part other than as a  witness. It should be presided over by three judges and three ordinary British people voted onto the tribunal.”

Included in the list of persons who should be debarred from having any part in this debate except as witnesses would be all accountants, lawyers, Big 4-type consultants, recruitment agencies, and any other agency that derived an income from serving the banking sector, and whose commercial interests were served by the continuance of the status-quo.

Something very bad has happened to the British financial sector, something deeply corrosive and cynical. I trace it back to the era of 'Big Bang', the revolution in financial trading systems, and the emergence of foreign banking institutions coming into London to take advantage of the regulatory free-for-all, which arrived in the wake of de-regulation.

In his article, "...Mavericks at the Casino: Legal and Ethical Indeterminancy in the Financial Markets...",  Christopher Stanley identifies the development of this new phenomenon within the previously ordered environment of the City of London.

       "...The New City reflected the ideological aspirations of a system of political administrations which disrupted the post-war consensus of relations between polity and economy. It also reflected the Casino or Disorganisation of Capitalism: an international financial system in which gamblers in the casino have got out of hand. The New City was international, technological and subscribed to the Enterprise Culture ethos which placed individual success and self-reliance as the primary indicators of excellence. The structural changes which the Government introduced, in terms of trading practice and regulation, operated with the new financial products and markets to ensure that the particular elite of the Old City, which was (now) perceived as a dangerously destabilising hegemonic counterforce as a result of the tension between Establishment and Disestablishment, was dislodged in the face of externally imposed change. Thus settled norms of conduct were open to disruption'..."

      

      "... Pursuing the 'Legitimation of Deviancy' theory, Stanley draws upon the concepts of the 'Anomie of Affluence' to attempt 'explanations in this formulation of individual conduct within this particular field of moral and economic deregulation.' He posited a vision of a market in which money no longer possessed any intrinsic value as a benchmark of the underlying value of the commodity traded, but became a 'free-floating signifier detached from the real processes to which it once referred...there is therefore a transition in its nature as a commodity to which moral or ethical values can be attached. In addition the artificiality of electronic money enables the further disappearance of the victim and the possibility of justification through reference to prevailing economic rationality ('Greed is Good').

Put more succinctly, the old settled ways of the City of London had been replaced by a culture of 'get rich quick and the devil take the last person holding the parcel when the music stops'. The banks had ceased to be institutions with defined roles and functions. Whereas before they had placed significant focus on the prudent management of the public's limited savings, providing them with a clearing system which enabled the ordinary citizen to conduct his personal financial business in a safe and efficient manner, now the emphasis rapidly passed to the focus on 'casino'-style banking, proprietary trading on behalf of the parent bank, gambling in the open market to make vast profits.

So profitable did this business become at the height of the boom, that even politicians were bamboozled into believing that it could go on and on. Gordon Brown was more bedazzled than many, and in his slavish adherence to the power of these markets, he waxed lyrical in their praise.

An example of Brown’s dewy-eyed adoration for financial alchemists can be read in his Mansion House speech in 2007,just before the whole edifice went belly-up! He said;

 “I congratulate you on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London ... I believe it will be said of this age, the first decades of the 21st century, that out of the greatest restructuring of the global economy, perhaps even greater than the industrial revolution, a new world order was created."

If you are reading these words for the first time, you must after the devastating market crash be wondering what planet Gordon inhabited. He has never once since felt it necessary to apologise for this lunatic analysis, or for the era of destabilisation it unleashed. Instead, in usual Brown style he sought to lay the blame for his incompetence on others, and in this case, the banks themselves. He was reported in the Guardian on 14th October 2010 as follows:

"...Brown has admitted mistakes in regulating the banks, accusing the City of lobbying against greater scrutiny before the financial crisis plunged Britain into recession. Brown had previously blamed the scale of the recession mainly on the international financial crisis and the refusal of other countries to agree to tighter international surveillance of the banks.

In an ITV interview due to be broadcast tonight, Brown admits he had been influenced by bankers' lobbying.

"In the 1990s, the banks, they all came to us and said, 'Look, we don't want to be regulated, we want to be free of regulation.' ... And all the complaints I was getting from people was, 'Look you're regulating them too much.'

"The truth is that globally and nationally we should have been regulating them more. So I've learnt from that..."

The City had once again managed to do what the City has a genius for, they had completely suckered the Labour Government who interpreted the arrogance and pushiness of the City elite, as some kind of financial expertise.  Brown was so enthralled by the financial figures which were being wafted over his desk, he was determined as Chancellor to let them have their head, and he encouraged them to carry on in the same vein.

An article in the London Progressive Journal identified yet another of the many Brown mistakes.

"...He therefore called for ‘light touch regulation,’ in other words less regulation on the City and finance capital. Before his Mansion House audience in 2007, he called for, "a risk-based regulatory approach". It was an old theme. In the same hall three years before, he pledged that "in budget after budget I want us to do even more to encourage the risk takers"  

Now of course we know better. We now know that 'light touch' regulation really means 'no regulation' and present proposals for regulatory reform do not carry any weight.

Paul Moore, former head of group regulatory risk and so-called ‘HBOS whistleblower’, who last month set up the New Wilberforce Alliance to campaign for economic and financial reform, said:  “I am a huge fan of Conservative MP Andrew Tyrie but his commission is not going to work. In the light of recent revelations and the post-crisis whitewashes and cover ups, hardly anyone in the UK trusts the politicians, the government, the regulators to handle this any more.”

Among solutions proposed by the alliance include that the fiduciary duties of the directors of publicly-quoted companies, including banks, should be amended to encompass public duties. Moore said: “There should be legal obligation not to focus solely on destructive goals such as short-term profit and share-price maximisation.”

Moore also favours a return to full-reserve banking. Under full-reserve banking, banks must retain the funds of each depositor in reserve, either as cash or other highly liquid assets, often deposited with the country’s central bank, rather than use them as seed capital for speculative trades.

He added: “We should also be looking to cut off the heads of the hydra that the banking issue has become, by breaking up the banks into smaller units, creating regional, credit-style banks like landesbanks and credit banks. There has to be a deconstruction of the ‘too big to fail’ institutions and a firm enforcement of the split between their retail and casino arms. That will ultimately deprive the casino arms of the ability to borrow speculative capital for the purposes of gambling in world markets.”

Moore also said that there should be a blanket ban on banks engaging in proprietary trading. “Proprietary trading is an abuse of a dominant position in information, often generated through conflicts of interest, mathematics, and computer science.”

Most important of all, we must in future see a regime of financial regulation which encompasses the recognition that in all cases where fraud, market manipulation, money laundering, insider dealing or any of the myriad offences of which banks have been guilty in the past, they will be prosecuted to the limit of the law.

There must be no more cosy deals done in backrooms whereby junior members of staff are offered up as sacrificial lambs, while the main board directors walk free, and the institution they manage pays up, even a large fine. It doesn't matter how much you fine banks, the only people who suffer are the shareholders.

We have to install a system of regulation whereby the regulatory agencies are staffed with young, ambitious prosecutors who have the moral courage to go up against the big institutions, with the knowledge, and the power to bring down even the most senior executive.

In the United States, it is a common way for a young and ambitious lawyer to make his or her mark by joining one of the public prosecutorial or regulatory agencies, and then taking on the very biggest cases, with a view to getting big convictions which will catch headlines. In this way, the lawyer becomes observed to be someone who is has credibility and they become a sought-after commodity, in both private practice or in public life.

We need the same brand of morally-courageous prosecutors in the UK because that will begin to dismantle the aura of 'too big to jail' which has been allowed to cling to too many financial practitioners.

What is the likelihood of any of these reforms happening under the present government? Let me know your views.