Tuesday, February 05, 2013

Reforming the corrupted banking culture.

"...The current regulatory regime (the FSA in the UK) has not fostered an environment for taking swift decisive action when wrong-doing has occurred..."

These damning words were spoken by former SEC lawyer Mark Berman on the 'Today Programme' this morning at 07.51am.

He had been asked about the failings of the present UK regulatory system, and having been a financial regulator in both the USA and the UK, he might be thought to be especially suited to answer.

He spoke about the need for a single regulator, for the need for a simple-to-understand set of rules, and a regulator who would act swiftly and decisively when wrong-doing was discovered. He spoke slightingly of the proposed 'Twin Peaks' system which is to be the future of UK financial regulation, calling it a discredited system which was only used in two other countries, Holland and Australia, and which did not work well in either country.

He said; '...In the UK there are no proper laws or regulatory structures which are required to bring strong swift decisive action against wrong-doers...'

Readers may be familiar with these criticisms, as they have formed the backbone of many of my blogs and the comments from readers who have agreed with them!

Mr Berman's observations come at a very opportune time, literally the day after the Chancellor's speech to J.P.Morgan, in which he announced that the UK's big banks will be broken up if they fail to follow new rules to ring-fence risky investment operations from High Street outlets.

The Chancellor referred to the scandalous conduct of the UK banks in recent years and said that the taxpayers were very angry at banks' behaviour and will never again be expected to bail them out.

My friend Caroline Barwick has described the situation in her seminal Blog, 'Life after Debt' thus;

"...In 2009 the National Audit Office  stated 850 billion pounds had been spent on saving the UK’s banks from the consequences of their fraudulent actions...The obligation to fund the banking crisis continues to be laid firmly on the shoulders of each and every individual in the UK...Four full years since the first distasteful load of banksters dirty washing was aired in public, the tawdry truth has had little effect on those who masterminded this calculated redistribution of wealth.  Their houses and their lands along with their money remain intact and the fines levied by regulators and perceived by the majority as punishment have been, for the most part, funded from company coffers which were previously filled from the pockets of the long suffering British taxpayer..."

The Chancellor's speech came on the same day the government introduced its Banking Reform Bill in Parliament.

Mr Osborne also said the banking system was not working for its customers, particularly small businesses and individuals.

The Chancellor appears now to have accepted a major recommendation of last year's Parliamentary Commission on Banking Standards which called for a reserve power to "electrify the ring-fence" if banks did not implement reforms.

What the Banking Reform Bill does

The Ring-Fence: The High Street activities of each UK bank are to be put into a separate subsidiary from its riskier investment banking.

Electrification: Regulators will be given the power to split up an individual bank altogether, subject to certain conditions, if the regulator deems that bank to be undermining the purpose of the ring-fence. Regulators will also review the entire UK banking industry each year to determine whether the ring-fence is proving effective.

Deposit Guarantees: The Financial Services Compensation Scheme currently guarantees up to £85,000 of every deposit in a UK bank. Under the bill, if a bank goes bust, the FSCS will be paid out ahead of other people owed money by the bank. It means that the FSCS will be better able to recover the money it has guaranteed, which should reduce the potential bill for taxpayers if there is a shortfall.

Loss Absorbency: The bill gives the Treasury the power to impose tougher requirements on banks to increase their ability to absorb losses, in particular by requiring a bank to borrow money from markets in a form that allows the bank to impose losses on the lenders if it gets into trouble.

The Independent Commission on Banking, led by Sir John Vickers in 2011, had concluded that ring-fencing was the best way to protect "core" retail banking activities from any future investment banking losses.

Mr Osborne said in his speech, at JP Morgan's administration offices in Bournemouth, that banks had failed to take responsibility for their actions. The 2008 crisis, which marked the start of the credit crunch, saw the government use £65bn of public money propping up Royal Bank of Scotland and Lloyds Banking Group alone.

Mr Osborne also referred to greed and corruption over banks' rigging of the Libor interest rate, and blamed recklessness by banks' so-called "casino operations" for dragging the financial system to the brink of collapse. The reputation of banks has been further undermined by scandals such as the fraudulent sale of payment protection insurance and the rigging of the Libor interest rate.

The chairman of the Parliamentary Commission on Banking Standards, Andrew Tyrie, warned the banks could not be trusted: "Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place."

He said once the spotlight had moved away from the banks, they would be likely to try to soften the regime: "At that time, banks could be particularly active in testing the ring-fence and lobbying politicians to alter its design for their benefit. Electrification creates incentives against such behaviour."

Not everyone agreed with the new proposals, perhaps not surprisingly, and the usual suspects made themselves heard, lead among them the British Bankers' Association. Why we should take any notice of this bunch of clowns is beyond me. They were the people responsible for administering and supervising the LIBOR market, and we all know what a damn fine job they did. Frankly, right now, it might be better for them if they kept their heads firmly down and their opinions to themselves, because some might think they were a tad discredited!

Anthony Browne, chief banking apologist of the British Bankers' Association, acknowledged that banks had made "massive mistakes" but he said the Government's change of heart on the reserve power to "electrify the ring fence" was good politics but bad economics that would lead to even less lending.

Of course it would, what else should we expect, the banks would punish the Government for having the temerity to do something about their criminogenic culture. They would lend even less money to an already credit-starved economy, thus holding back any prospects of growth or the creation of new jobs. This is how the City has always held Governments to ransom when they didn't like what was being done to curb their more spiteful instincts.

BBA's Anthony Browne trotted out the usual shibboleths:

"The banks are committed to reform, but it creates uncertainty"

What uncertainty is being caused and for whom? What does this mean, when all the Government is seeking to do is to ensure that the ring-fence designed to protect client's interests would not be put at risk? If the banks are so committed to reform, why does their chief weasel wordsmith need to apply conditions to their agreement? He continues;

"It's bad economics because it's yet another measure that makes it more difficult for banks to lend money to businesses, which is what the economy needs at this stage...'

How does it make it more difficult to lend money to business? What is standing in the way of further lending? This is just the usual semi-veiled threat of holding back funding in an attempt to bring pressure on the Government. The problem is these bastards have been doing this for so long and getting away with it for so long, they think they can continue as it suits them.

Tell you what Mr Browne, if the Government were to let it slip that any bank CEO or chairman who refused to lend money in this way stood a very good chance of seeing his putty medal, his plastic honour, his sinecure on some quango, his seat on the Board of the Royal Opera House, or his possible Knighthood going down the tubes, and you would suddenly see all the money that business needed suddenly becoming available.

Bankers are shallow, venal people, who know that when the chips are down, they are nothing more elevated than grubby money lenders. They need to adopt the trappings and veneer of respectability to lend a degree of gravitas to their otherwise discredited and frankly tawdry jobs, which is why they like to be seen riding to hounds or going to the opera, sponsoring major sporting events or doing charitable works. Take those petty baubles away and what are they left with?

Browne finished off with the most discredited and pathetic excuse of all for wanting to do nothing. He said that the proposals would damage London's attractiveness as a global financial centre.

How can this possibly be? The whole world knows what a bunch of criminogenic scumbags operate inside the Square Mile. Half of them know it, as Mark Berman said this morning, and regret the fact, the other half want to invest with them. Nothing is going to change those perceptions, and the world's criminals, money launderers, tax evaders and terrorists will still look to the usual suspect London banks to house, invest, manage or launder their money for them.

So, if the Chancellor thinks that his proposals are going to make the City banking sector change their spots, he had better do something more than just proposing giving a power to the Bank of England to break up the banking empires if they don't separate their retail from their casino functions, which, let's be honest and on a balance of probabilities is frankly pretty unlikely to happen.

This is the same old problem, the Chancellor puffs himself up, makes what he wants us to believe is a major pronouncement, but when you evaluate it, it doesn't really amount to a row of beans, and behind all the moaning and whining, the banks know it as well.

To really get to grips with the banks, the head of the FCA has got to implement a new regime of direct action, in the event of any defalcation. He needs to install a team of investigators comprised of men and women who have good experience of dealing with criminals, who know how criminals' minds work, and who know what a criminal would most likely do in all the circumstances.

These people need to have a very detailed knowledge of their powers under the criminal law, how far they can go to demand compliance with their investigative powers, and how to use their unique powers to demand access to documents and records, and finally how to interview and interrogate suspected persons. Above all, they need the moral and physical courage to take on the big players, face them down, stick to their principles when the masters of the universe start attacking them for not understading how the market works, and to put them away behind bars.

At the same time, the FCA needs to sit down with the head of the SFO, and create a water-tight set of procedures and gateways for jointly working together in selected investigations where it is very obvious that major criminal offences may have been committed. They should be working in tandem from the beginning, each sharing information and evidence with the other, so that swift, effective and dynamic regulatory interventions can be brought at the same time as criminal investigations are mounted.

This is how the SEC and the DoJ used to work together in the 1980's in Washington, before their powers were diluted and emasculated first by Regan and then by the Bush Jr regimes.

Once the "...environment for taking swift decisive action when wrong-doing has occurred..." has been established, and the first major scalps are hanging from the tent pole, then a collective hush will settle over the Square Mile. You will be able to hear pin drop in Throgmorton Street, you will hear birds sing in Bishopsgate as the bankers and the brokers begin to digest the new atmosphere of compliance.

They will collect in their private dining clubs, and they will assess the new climate of control, and they will privately review how old Squiffy might be faring in Ford Open Prison, and they will make a conscious commercial decision to start obeying the law. That is one of the wonderful things about the financial sector, everything is subject to a cost-quantitive analysis, and when breaking sanctions, laundering drug money, defrauding clients or harbouring terrorist money becomes less profitable than being cast out of the City with a criminal record, into social outer darkness for the rest of their lives, then they will start to toe the line.

It is honestly, truthfully and seriously as simple as that! 


Mary Kapadia said...

I agree completely with everything that was said in your blog --- except for the solution. Why can't we have a state/utility bank where we keep our piddling pensions and pay cheques and from which we can pay our bills? Just leave the launderers and fraudsters to do what they like, twisting each other and unsuspecting victims --- but allow us ordinary mortals to bank in a utility... get us away from these damned leeches!

Big Bill said...

The bankers aren't money lenders though, are they? They're credit creators, and that makes their role in society as money suppliers pivotal. It's too much power for a private cartel over which we as voters have no authority. If they want to be regarded as money-lenders, grubby or otherwise, then let them be just that and nothing more. Let the State, over which we do have some control, take back the power of money creation, and exercise it for the betterment of the community as a whole, not use it as it is now so a few can lord it over the rest of us.

Rowan Bosworth-Davies said...

Thank you, Big Bill, very good point. Frankly, I was using the term pejoratively to express my dislike of their activities more generally, and to point out, as Lord Lawson did the other night on Newsnight, that bankers are not really that clever or intelligent, they are two a penny, and we would lose nothing if a few of them emigrated. Come to think of it, we would lose nothing if the whole damn cabal emigrated. I agree with your wider point wholeheartedly, they have to be controlled, and the Government really does have to take back the control of the money supply.

Antifascist said...

Excellent post and set of ideas, Rowan.

However, I must disagree when you write: "This is how the SEC and the DoJ used to work together in the 1980's in Washington, before their powers were diluted and emasculated first by Regan and then by the Bush Jr regimes."

Although true Reagan and Bush Jr. diluted laws that actually held financial criminals to account, don't forget that Bush Sr., in the wake of the S&L crisis of the late eighties, rounded-up, prosecuted and then jailed some thousand criminal banksters for their (then) massive frauds which cost US taxpayers upwards of a billion dollars. And no, I'm not mounting a defense of Iran-Contra architect Pappy Bush.

Contrast those actions with Clinton and Obama. Glass-Steagel, the US version of the "electrified fence": gone! Lack of regulatory diligence that resulted in Long Term Capital Management, the dot.com bubble, Enron and WorldCom scandals? Hands-off when it came to regulating banksters who market their crappy securitized products. Not to mention wrist-slaps for banks that laundered vast quantities of blood money for drug cartels. Can you say Wachovia and HSBC?

And now we come to the Obama DOJ and Treasury. Eric Holder, Lanny Breuer, Timothy Geithner? Craven toadies who haven't prosecuted a single corporate criminal for the greatest financial crimes in history! I urge readers to watch the PBS Frontline investigation, The Untouchables, if you want a glimpse into the Washington impunity cesspool! http://www.pbs.org/wgbh/pages/frontline/untouchables/

lifeafterdebt said...

Thanks for the mention. I take great solace in knowing that I am not beating this drum alone. Still find it unfathomable that after a plethora of official statements along with FSA and parliamentary inquiries have revealed so much "wrong doing", the boards who chose personal profit at such gargantuan cost to the majority are not being asked to personally redress the situation form their own coffers and not the company ones. However, suspect the water is so muddy by now the ugly truth and nothing but the truth is unlikely to surface. Great post Rowan. http://lifeafterdebts.blogspot.co.uk/2013/02/costs-of-living.html

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