More money for bankers!
We have one at last! According to press reports, Kwasi Kwarteng is thinking of lifting the cap on bankers’ bonuses and presenting it as a Brexit win. To echo the eminent lawyer, Marshall Hall (asked by a judge if his clients were familiar with the phrase res ipsa loquitur) – Chancellor, in the Red Wall, they talk of little else.
A little history. The best single essay on financial misbehaviour was written not by a journalist, academic or former trader, but a novelist 29 years ago: The Deficit Millionaires by Julian Barnes, that most pointillist and French of English writers. It is about Lloyds of London, its misbehaviour during the 1970’s and 1980’s and how trusting Names slowly realised that their faith in a long-standing, well-established institution was utterly misplaced. How could anything possibly go wrong? With exquisite care, sympathy and the precision of a surgeon’s scalpel, Barnes shows us. The story is a surprisingly familiar one.
- Novel but complicated instruments designed to reduce risk but instead increasing it.
- Greed – “If you are making a good living……. it’s human nature to get greedier and greedier and greedier”.
- The market’s rapid expansion in a short period of time.
- A lack of due diligence, a suspension of critical faculties, a lack of scepticism coupled with an all too human willingness to believe in the promises of a no risk investment, all wrapped up in a flattering appeal to vanity.
- A deeply cynical – and possibly fraudulent – approach by the professionals to unsuspecting customers.
- Relaxation of the rules and lax monitoring of those that existed.
- The undisclosed conflicts of interest and lack of transparency.
- The breakdown of trust – what Barnes describes as the “tickle of fraud“, the realisation that the belief in “an honourable society, operating on trust, on shared values” was a chimera. Or as one Name put it more bluntly, “You know, trust, honour, and then to find in such an august body a bunch of craven crooks”.
- The realisation, far too late, that private warnings were given about some of the risks and unacceptable/criminal behaviour but these were ignored or not shared with those who ought to have been told.
- The turning of blind eyes to unacceptable/negligent and/or criminal behaviour by a remarkable cast of shameless rogues during the 1980’s, even when the latter were the subject of legal action.
- The failed institution’s repeated insistence that any problems were only the result of that well-worn old favourite: one or two rotten apples, despite one of those rotten apples being a Chairman of Lloyds.
- The determined focus by new management only on its new procedures and processes and business plans for the future in the hope that a veil would be cast over the past, without any unseemly digging into it.
- The eventual realisation by the institution that, as its deputy Chairman, put it, for the previous twenty years it had lacked “total integrity” and “strong government“.
Barnes eloquently shows how an institution seen as part of a certain sort of honourable Englishness, around for three hundred and five years, a City stalwart, selling its services around the world, as venerable as the Bank of England and thought to be as safe, came to be seen, harshly but accurately, as “a cesspit of dishonesty“.
If only people had paid attention.
Some did. In 1986 Robert Armstrong wrote to Mrs Thatcher’s private office: “I do not know whether you are having the same experience but I am finding, among people who work outside the City of London but whose activities bring them into touch in some degree with the City, that there is increasing disquiet about the things that people think are going on in the City. ……They think more about the way in which corners are being cut and money is being made in ways that are at least bordering on the unscrupulous.” David Willetts warned of the temptations of fraud and unethical behaviour, the risks of boom and bust, increased risk-taking and unpalatably high salaries.
These concerns were ignored. The government preferred the arguments of John Redwood who thought that greater competition would minimise wrongdoing in the City. “The basic common sense of the British public .?.?. will not be tempted into Get-Rich-Quick Limited,” he advised. (His utter wrong-headedness on this is worth remembering when he opines on politics now.) Deregulation, Big Bang and self-regulation were unleashed to shake up the stuffy orthodoxy. Everything that went wrong in the run up to the near collapse of the Lloyds insurance market happened again two decades later and led to the financial crash 15 years ago, even with the benefit of external regulation and control. We are still paying for it. The government owns 48% of NatWest. Not content with posting the largest corporate loss in UK corporate history in February 2009, last year it was criminally convicted of three offences of failing to comply with anti-money laundering rules and fined an eye watering £264 million, the first time a UK bank has been convicted of such charges.
Now the Truss government wants to shake up the Treasury and again promote the City. Deregulation is seen as necessary for growth. This is not so much a challenge to orthodoxy as doubling down on it, despite its many past failures. And doing so without giving the remotest indication of understanding what went wrong last time or the many times before that and why. The Bank of England has an unimpressive Governor; the FCA has hardly covered itself with glory in recent years under the current BoE governor and recently got rid of many its most experienced staff. The only senior Treasury mandarin with experience of a financial crisis has been sacked, the government preferring to keep a pliable Cabinet Secretary in place instead.
Human nature being what it is, it’s a pretty safe bet that a version of what happened before will happen again, is likely happening now. If you don’t believe me, let me remind you of Ernst &Young fined $100 million in June of this year by the SEC because its audit professionals – those who are meant to keep others in check – decided to cheat on their ethics exams and, when the SEC investigated, its managers withheld evidence and misled the SEC.
There is something remarkably politically tone deaf about the government’s proposals. Quite apart from the likely effects on the City and its place in the economy, how would such moves reconcile Remain-voting London to a Brexit-loving Tory government? How will it keep Tory voters in the North and Midlands on side? How will it attract those primarily concerned about the cost of living and energy prices? How will it persuade those worried about a governing party seemingly interested only in accommodating its financial backers? How will the Business Secretary, that master of de haut en bas condescension (and erstwhile fund manager), persuade workers that they should only get below inflation pay increases while bankers get bonuses many multiples of salaries already beyond the dreams of avarice?
Does the Chancellor really think “This time it’s different? When politics resumes, we will see what answers, if any, the government has to such questions.