First published on Huffington Post on 11 July 2012
Appointing a trader to run Barclays, one of Britain’s finest retail banking names, was a big mistake. Almost as big a mistake as appointing Andy Hornby, an ex-supermarket boss, to run HBOS. Neither had the right skills for the role of chief custodian for our deposits: one was too willing to gamble it away; the other was a salesman who did not understand risk. Thankfully, both are now gone and the British banking system is that much safer for it.
The LIBOR rate-rigging scandal that forced Bob Diamond’s hand is symptomatic of an industry that has lost its way and betrayed customers’ trust. Let us hope that the next generation of bankers follow a more acceptable moral code. Like many senior executives in the banking sector, Mr Diamond and his board forgot what banking was about.
Banking is about honour
The most important issue in banking today is the ethical issue. Are banks behaving responsibly? In order to answer that question, it’s worth reminding ourselves what banks actually do.
Banks don’t sell cars or iPods or hamburgers. Banks sell trust: you go to a bank; you hand over your money; and you trust that the bank will look after it. The problem is, when an industry is based on trust – solely on trust – there is an i lot of scope for abuse.
Over the last 10 to 20 years, bankers have blatantly abused that trust. Simply by not putting aside enough money – enough ‘capital’ – to guarantee that they could pay back the money they owed in good times and in bad.
Now trust takes a long time to acquire. London became a leading banking centre because it had built up trust over the centuries. Then somewhere along the way, the honour dropped out of the banker’s dictionary. Traditional, safe banks became hijacked by pirates, by treasure hunters, by risk takers. People who rarely risked their own money, but were happy to risk yours. And to add insult to injury, they’d get you to pick up the losses whilst they kept the bulk of the profits.
How did this come about? And have so many commentators branded this an Anglo Saxon banking crisis? The origins of this crisis lie in two regulatory changes on either side of the Atlantic: the first was “Big Bang” which began in the UK in 1986; and the second was the Repeal of the Glass Steagall Act in the USA in 1999.
Big bang was the sudden deregulation of the UK’s financial markets under Margaret Thatcher. It was done to make London an attractive place for foreign banks to set up shop. And it worked. It became easier to get a banking licence and you could do more with it. Everyone, especially the American banks, came to London to do what they weren’t allowed to do by law in their own back yard: take excessive risks and invent highly complex products that no one could understand.
London became one big free-for-all and banking became ridiculously complicated overnight. No one could understand how everything fitted together any more, or how some of these fancy derivatives worked, least of all the boards of the banks that took big risks with our money.
The Glass Steagall Act was America’s response to the credit crisis that created the Great Depression in the 1930s. Its sole purpose was to prevent bankers from putting savers’ deposits into risky investments. It separated retail banking from investment banking. The risky bit of banking would stay in investment banks and the safe bit in retail banks.
There was a good reason for this split. Depositors regard banks as an institution whose core role is to safeguard their money. Attaching a casino to a bank is not the best way to do that. President Clinton repealed the Act in 1999. That allowed the investment banks to take your money and gamble it away, laying the foundations for this crash.
So within two decades you had a banking regulatory environment that was just asking for trouble on both sides of the Atlantic. In the UK, you had regulation that was so light it was virtually invisible. In the USA, you had the government openly signalling to their banks that it was OK for them to invest depositors’ money in risky assets like sub-prime debt.
As if that weren’t enough, you also had cheap money, thanks to Alan Greenspan, the Chairman of the Federal Reserve. That meant banks could borrow money at very low interest rates. Cheap money can be a good thing if it is used to lend to solid, growing businesses to generate wealth and jobs. But when cheap money is simply used to make the bankers themselves rich, that’s what Lord Turner was referring to when he described them as socially useless. And that’s what they did. The banks used cheap money to gear up their own positions to absurd levels. For example, Lehman Brothers balance sheet, just before it went bust, had a gearing ratio of 40x. That meant that for every £1 of its own money it invested, it borrowed £39 from someone else. In the old days, that ratio was closer to 2 or 3.
Can anybody spot the problem? If you did, you’ve passed the test to become CEO of an investment bank. Congratulations. We know from our own experience that too much borrowing can bring us down. Yet, the banking regulators ignored this danger. They simply left the banks to manage their own risk, to police themselves. Then, they feigned shock horror when the bankers turned London into a City of Thieves…
“City of Thieves”
Back in 2003, after 14 years of working in the financial services industry, I no longer liked what I saw. So I took a sabbatical year and wrote a book about what was wrong with banking. When I approached publishers they said it was too far-fetched. Just not credible. Bankers simply wouldn’t be so unethical, they told me. So the book sat on my bookshelf gathering dust. Five years later the credit crunch came along and I had more literary offers than I knew what to do with.
“City of Thieves” is a murder thriller set in London’s banking sector. It tells the story of one man’s fight to protect his honour in a world where honour holds no value. Written from the viewpoint of a young analyst who stumbles almost by accident into a high-powered banking job, the novel delves deep into the characters that make the City what it is. My aim in writing this story was to show how badly things can go wrong when a bunch of alpha males are given other people’s money and set free on the markets. My hope is that the next generation of bankers put honour back into banking.
City of Thieves is published by Sphere and is available on Amazon and all good book shops around the world.