The new bonfire of the vanities.

In a blog-piece I wrote not so long ago, I challenged Britain’s Banks to demonstrate that they could continue to return the levels of profitability they had hitherto made, but to do it by acting ethically and honestly and not through a series of criminal offences! My challenge to them was that I did not believe they could do it!

Some years ago, a good friend of mine rang me up to tell me he was going to work as a senior MLRO for a bank in the Middle East.

‘Nice jpackage’. I said, ‘but I thought you had a good job with Barclays?’

‘I had to leave them’ he said. ‘I was wondering all the time when I might be arrested, and I wanted to be able to sleep at nights’!

As a senior and experienced compliance officer at Barclays Capital, he was caught in the middle of the heady days of the Diamond regime, but he was still trying his best to make sure that the Money Laundering Regulations were being respected and applied. He wanted to make sure that the KYC provisions were respected, and if or when he was not satisfied that the necessary due diligence about the identity of the beneficial owner had been properly achieved, he would require more investigation, or further documentation before allowing the funds to be traded.

He was particularly specific about PEPs and insisted that the relevant enquiries were satisfactorily completed.

If he was not happy about the provenance of the funds he would discuss the client with the account managers to see if they could acquire more clarification of the source of the deposits, but if this could not be achieved, he would advise the account manager of his intention to make a Suspicious Activity Disclosure to the relevant law enforcement agency.

He was a tough, experienced compliance professional, and his insistence on ensuring that the laws dealing with Money Laundering were obeyed, led to his having to endure screaming arguments, torrents of abuse from traders and account managers, ostracism from the relevant senior managers who accused him of not being part of the team, and a working life which was one long series of battles.

Another man (or woman) with less moral courage, would have long since sought the line of least resistance and would have stopped fighting the other members of the team, and just signed off whenever required.

He worked closely with the police when they investigated STRs that were made and he sought to make sure that the relationship between the bank and the law enforcement agencies was respected, and most importantly, that as far as he could, he sought to protect the reputation of his employing institution. He should have saved his breath, because no-one else around him cared and instead, confronted him at every turn.

All this did was to make his life a very unhappy one, and in the end, sooner than continue to face the daily grind of having to explain why money of deeply suspicious criminal origin was not welcome, he chose to leave and go elsewhere.

I have long suspected that the UK Investment Banking arm was very closely linked with the fortunes in dirty money that daily found its way into the City of London. Indeed, I believe that the only thing that helped to provide liquidity to some UK banks in the really dark days of the credit crisis, was the amount of drug money from dubious foreign sources sloshing around the City banking sector. Not for nothing could it be said that the UK banking sector was truly drug dependent!

Consider the implications.

The City of London is the most effective and connected financial market in the world, bar none. It connects effortlessly with the global offshore sector, many of whose practitioners are former British protectorates or in some way connected with GB.

Investment banking has a varying number of technical names to describe its professional function, but the one I like best is ‘gambling’!

I know there are a large number of people out there who will accuse me of ignoring vast swathes of banking activity which are undertaken for legitimate reasons, but I will try and show why those functions are more properly the function of more traditional ‘merchant banking’, financial advisory work, as opposed to ‘investment banking’.

For example, when a big corporation asks for the bank's help if it wants to borrow money in the bond markets, or float itself on the stock market, or buy up another company. In this capacity, the investment bank acts as an impartial adviser - like a solicitor or an accountant - using its expertise to help its client in return for a fee.

This group of activities was undertaken by traditional British Merchant Banks for many years and with a great degree of success. But it never generated the level of fees and revenues that were generated by the investment banks.

This is what happens when investment banks also do something else quite different – dealing directly in financial markets for their own account. Then an investment bank's "markets" division makes money by buying financial assets from one client, and then selling them to another - often with a hefty mark-up.

But it was the capital markets whizz-kids who were behind the last decade's boom in "derivatives" – the complex contracts that allowed clients to speculate on financial markets, by reversing the polarity of the traditional use of the risk-hedging function of derivatives and using them to amplify risk so as to earn inflated profits, which gave the ‘investment’ arm of these institutions the belief that significant levels of profitability were a foregone conclusion.

Once the taste for dealing on their own behalf, or proprietary trading became a profit centre in its own right, then the investment banks started to trespass into areas where the ordinary rules of business were quickly jettisoned.

Whether it was in straight-forward derivative trading for the bank’s own book, or dealing in options strategies, trading baskets of stocks against put options designed to be unwound at a strategic moment to enhance profitability; market making in shares, manipulating benchmark products, dealing in Foreign Exchange, you name it, once that stage had been reached, then the potential for down-right criminality became the operating norm!

In a blog-piece I published entitled ‘Behind every great fortune there is a great crime’, I wrote;

“   You only have to look at the activities of all the major banks in the perpetration of the institutionalised level of PPI fraud which has lasted for many years, to understand the truth of this allegation. The monies made in the pursuit of profits and the ‘grabbing of the biggest share of the customer’s wallet’ which so identified the PPI fraud era, has enriched many bankers a hundredfold.

“...Add into this the other levels of criminal fraud perpetrated against clients, the deliberate lying about the valuations of debt-secured securities followed by the fraudulent foreclosure on loans, the false enrichment of bankers at the expense of client’s criminally forced out of their contractual obligations, and you begin to see a positive policy of criminal activity being widely perpetrated.

“...Then you start to look at the level of foreign money laundering, sanctions busting and other breaches of anti-terror controls being imposed by Governments, many if not most of which were routinely ignored by the banks. HSBC led the way with their billions of dollars recovered from their money washing activities on behalf of the Mexican Drug Cartels.

“...Libor, and Forex manipulations are among the more recent exposees, and we have absolutely no way of knowing how much criminal money has been recovered from these dishonest adventures.

“...For these, and for other reasons, I assert that the level of organised criminality is so widespread in the banking galere that it is impossible to calculate the amount of money they have created for themselves, and which has been paid to them in the form of bonuses. 

While their basic salaries may remained relatively modest, they have more than made up for the wealth they have absorbed through other payment mal-practices, as well as tax avoidance methods.

“...I lived through the era of change as a detective at the New Scotland Yard Fraud Squad, and I watched with mounting irritation and bemusement while perfectly proper cases we should have been investigating were undermined by Government lawyers, and later, as a regulator, I observed the spineless kow-towing of the regulatory regime towards those who were facilitating the movement of the growing levels of criminal money being slushed through the UK financial sector.

“...I believe that it is now too late to put the genie back into the bottle, we must live with the fact that the City of London (has been) and is run by a gang of organised criminals who make Al Capone look positively benign!

“...Without their intervention, as an integral component in the onward transmission of the billions (if not trillions) of foreign dirty money which comes to London, I seriously wonder how UK plc would survive if we had to run our affairs lawfully and properly, I am not sure we could do it...”

Well, imagine my great surprise when I read the Sunday Times this week-end and saw the story “...Who did you think you were kidding Mr Banker...”

The piece was sub-titled “...Barclays and RBS have reined in their ambitions to be global players in investment banking. Will the City regret it..?”

Quoting from the article;

“...Now, Barclays is in retreat. Anthony Jenkins, Barclays boss, has already slashed the size of the Investment Bank, and last week, professed he had limited patience with the rest.

At Royal bank of Scotland...the flight is full blown. Its giant investment bank will shrink by two thirds over the next three years. By the end of it, tens of thousands of pin-striped warriors will have been scythed down.

“...Due to the damage done by the credit crisis, however, when over-ambitious and greedy bankers cost tax-payers billions, the Industry is without friends. Britain is saying goodbye to the commanding heights of investment banking and  - rightly or not – good riddance...”

The authors are not like me. They do not go the full 9 yards and identify the reasons for the wholesale retreat from what was a highpoint of British Banking, but their message is still clear.

Well, I have no such reservations. It is, as I challenged the bankers before, show us, prove to us that you can continue to make the scale of inflated profits and pay the obscene level of bonuses you have traditionally paid, but by doing so honestly and without committing criminal offences.

Demonstrate to us that you were making all this money because of the so-called highly qualified skills you boasted about so assiduously and for which you had to pay such high salaries.

Remind us of the rocket-science brains your dealers and traders are said to possess to enable to to make all this money, so that we can justify to ourselves the fact that the rest of us are unworthy to deserve similar salaries and bonuses.

And the simple fact is, they can’t. I never thought they could and now, they have admitted it!

Barclays and RBS, two of the most aggressive and highest risk-taking institutions in the business are now openly admitting that they cannot make these returns using the new, conventional, hopefully ethical, integrity-driven banking regime that their new CEO’s are seeking to incorporate.

Banks don’t give up highly profitable business centres for no reason. These banks have discovered what most of us outside the industry have known for a long time, and that is the business model they used hitherto was one more akin to the business methods of Mafiosi, or organised criminals.

Now, using the newly adopted methods which, we are told, incorporate greater honesty, accountability and integrity, the banks are discovering that the traditional profits are not available any more.

We should be pleased that such a series of reforms is taking place, but not too quickly! Let us remind ourselves that London is and remains still, the leading magnet for the world’s funny money. As the Sunday Times article points out;

“...Whether they are UK-owned investment banks or not, is not the issue. The question is whether investment banking is taking place in London...in terms of London being attractive as a location, it remains strong..!”

London will continue to be attractive to the world’s crooks, oligarchs, dictators and other corrupting influences for a long time to come!