Sunday, 16 February 2014

The City - Legacy of Big Bang and Labour Sycophancy

Let's face it, bankers have always been better paid than the Great Unwashed and it has grated for a long time. However there are bankers and bankers. Upon upon the army of John Cleese lookalikes who trudged across London Bridge in the morning were primarily wage slaves of the clearing banks. 

Their salaries were not exceptional (and minus the bowler hats and leavened with a big infusion of female bankers) that situation is pretty much unchanged. In fact, as the grey ghosts of Lutyens buildings around Bank station indicates, most of these bankers have been turned into provincial call centre jockeys or planted in office parks on the outskirts of Milton Keynes and Peterborough. 

The real money was with the merchant bankers at the likes of the long-gone Kleinwort Benson, Warburgs, Hambros, Barings and Morgan Grenfell. That crowd were never seen by the Great Unwashed and keep a low-profile except to the extent that their top hats (until the 1950s) stuck above the crowd. I recall seeing the last of the breed, the Government broker (from the firm of Mullens) walking along Lothbury in the mid-1980s.. Last sighting of a rara avis..  

Then came Big Bang in October 1986.... what seemed innocuously like the breaking of the cartel of fixed commissions became a Bonfire of the Vanities. The parties most burnt in the Bang and then the Crash a year later (one of the only examples where a bang proceeds the crash... think about it) were the hordes of banks that had bought LSE brokerage firms which were little better than ill-managed under-capitalised corner stores. 

Out of the wreckage though came the merger of the survivors and moreover the rise of the US banks (and the US bank wannabes). These had always been kept at bay in the City, locked out of the Exchange until Big Bang and hobbled at home from being commercial bankers by the strictures of Glass-Steagall. The Eurobond boom in the 1970s powered by petrodollars had opened quasi-banking opportunities that they pursued away from the beady eyes of the SEC and the Comptroller of Currency in Washington D.C..

Now the American and Continental banks came into their own. The scarifying of the remnant British-owned brokers and merchant banks by the Crash of 1987 and then the recession caused by the collapse of the housing surge created by Nigel Lawson (to counteract the Crash) meant that the City sailed into the 1990s with a skeleton crew of domestic financial institutions besides the clearing banks. Even the clearing banks were in retreat as their purchases during the run up to Big Bang were shuttered in the wake of the Crash. Who remembers BZW axed by Barclays, W. Greenwell dispatched by Midland Bank, County Securities decimated by NatWest and James Capel in a long-term decline under HSBC's tender mercies. Ironically, Lloyds was the only bank not to play the broker game in 1986. Scores of other brokerage firms that had been the heights of the City's financial foothills are sent to the trash-bin of history.

Out of this came the whole culture of American banks (for the European banks were run by US trained MBAs who sang from the same hymnbook). The US started down the disastrous path towards unwinding Glass Steagall with an unholy alliance between Bill Clinton and Citibank powering the process. 

The investment banks replaced the merchant banks and a wave of high-paid puritanism descended over the financial sector. Dalliance with the Square Mile was declared undesirable and the bulk of them decamped to Manhattan-on-the-Thames known as Canary Wharf where a version of Wall Street was recreated. The theory going that Midtown could be recreated here with no slipping out to the wine bar or Sotheby's and other decadent pre-Big Bang behaviour. This reached its apogee in 2008 and we are all still paying the price.  

So that brings us to now. The City is not much healthier now than it was two years after the 2008 debacle. Something is clearly awry. The US banks have been diminished in numbers and the survivors are laying low because at home there are powerful forces braying for Glass Steagall to be reimposed. The French, German, Belgian and Dutch banks were put through the wringer  and now play lesser, if any, roles. Vast swathes of instruments related to mortgages and their ilk have disappeared as playthings of the dealing desks. Prop-trading desks have decamped to outsourced hedge funds in Mayfair.

Recently we have witnessed the assault of Ed Milliband on the banking industry. Agonising over bankers' salaries is a discussion of the wrong issue. As we all know US politicians and the Washington "deep state" are in the thrall to Wall Street. This has meant that Frank-Dodds (a puny shadow of Glass Steagall that is the financial legislative equivalent of "peace in our time") has been passed but remains a toothless tiger. However many forces called for Glass Steagall to be revived (most notably Paul Volcker, the best head of the Fed in the last 50 years). The forces of evil have deeper wallets than the forces of economic sanity. Washington may be wrapped around the finger of Wall Street (and by that we mean four or five investment banks, not the thousands of brokerage firms ground daily under the thumb of the SEC) but the UK government is not. 

Perversely it was Labour who was in thrall to the fast money crowd of 1992 onwards. And it was in this relation that the debacle was born. The current Coalition government is farther from the City than any Tory-led administration has ever been. Why? Because old Etonians no longer rule the roost. They are more likely to own the franchise of a wine bar frequented by solicitors and junior staff members of auditing firms than sit atop the towers of Canary Wharf in the board room eyrie of some Wall Street investment bank.  

This distance between the Tories (and an even greater distance, to our shame, the LibDems) and the City potentially enables a big rethink of what we want the City to look like. Most of the analysis of the debacle of 2008 has been spot on. The culprits, the faults, the political mistakes have all been analysed and their is very little dispersal of opinion on where the problems lay. The Crash of 2008 had nothing to do with stockbrokers... nothing to do with commodity traders.. nothing to do with insurance brokers.. the blame lay pure and simply with banks engaging in activities they should not have been engaged in. The solution was identified as stopping banks from engaging in risky activities. The banks said they could downgrade these activities. The widespread suspicion is that some of these activities which were off-balance sheet in many cases have just been put at some arms-length distance or hidden away somewhere, awaiting a moment when the regulators aren't looking (or when Labour gets back in) to be dusted off and put back in motion.

This post is essentially a scene setting for further thoughts in posts to come on how the City might be given an over-arching rule (separation of commercial and investment banking) a sort of UK version of Glass Steagall.. and then be essentially left to its own devices with a "light touch" and a return to caveat emptor and, at the risk of sounding naive, dictum meum pactum

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