Bill Jamieson: No hiding place as New Order wreaks its revenge

Published on Thursday 9 October 2008 21:53

TODAY the blaze still rages in markets and the sky rains fire. Yet no sooner has this storm in money markets started to wane than another is gathering on the horizon: the Great Recession Storm. And as this gathers force, it carries the ominous sound of hammers working on the hanging scaffolds. There is going to be a Reckoning. The trial will be by outcry. The sentencing a formality. The executions swift.

The days of supermarket whizzkids running banks are over … banks will come to resemble highly regulated public utilities

With every great wave of wealth destruction comes an atavistic, vengeful retribution. Years after the onset of America's Great Depression, searing Congressional hearings hauled Wall Street's finest before them. An inquiry into the excesses, launched by Herbert Hoover, made little progress until the appointment of The People's avenger, Ferdinand Pecora, "a scrappy little Italian lawyer with a steel-trap mind", as historian Selwyn Parker described him.

Pecora hounded the rich and famous. Richard Whitney, president of the New York Stock Exchange, went to jail. Jack Morgan, the secretive multi-millionaire who once took a cane to a photographer, was dragged before a Washington hearing – "a Congress of wholly uneducated people who have no courage", was his summation. "Are you listed among the banks?" a senator asked. "We hope not", Morgan haughtily replied. "We have taken every precaution to prevent it."

Morgan was interrogated, ridiculed and demonised. Similar recriminations followed the dotcom bubble and bust and the collapses of Enron and WorldCom. And the first Congressional hearings into the current credit crisis began this week with the former boss of Lehman Brothers, the $300 million Dick "The Gorilla" Fuld called to account: not an impressive performance.

Here in Britain, there will also be an inquisition into Why It Happened and Who's To Blame. The sweep will be broad and involve many in the financial services sector borne aloft on the great credit tide and who shot the foaming rapids while they could. But before this gets under way I expect a gale of change to blow through some of our leading financial and regulatory institutions. The New World Order will require, indeed insist on, new faces at the top.

The tide of opinion is changing fast. Earlier this week I attended a private dinner and discussion in Edinburgh with some of Scotland's leading brokers and fund managers. The discussion was "Chatham House", so I cannot name names. But what I can report is a notable shift in mood about the future of Scotland's leading banks and the Royal Bank in particular.

Where, just two months ago, there was broad support for chief executive Sir Fred Goodwin on the grounds that you do not change captains in the middle of a storm, several voices spoke up vigorously for his replacement. The reasoning is that the old era is most definitely over and that the New Order will require a purge of all those associated with the past. Indeed, the reputation of RBS would be strengthened by a change at the top.

RBS described as "incorrect" reports suggesting on Wednesday that Sir Fred and chairman Sir Tom McKillop were imminently to be replaced. Certainly any resignations so close to the launch of the government's massive rescue package for the banks would have blown a massive hole in its credibility. But an orderly handing over at the end of the year or next spring now looks quite possible. For much of this year the hugely ambitious – and hugely mis-timed – purchase of ABN Amro could have been justified on long-term strategic grounds. But now the horizon has changed utterly – and the can must be carried.

A similar changing of the guard is likely at HBOS, a combine driven and then destroyed by a massive expansion into the UK mortgage market. The days of supermarket whizzkids running banks are over. As for the City of London's leadership skills – for which the tycoons have been paid so much – these have barely been seen since the storm broke.

More convulsive will be the cultural changes required at many banks. A generation ago, stock market investment in a bank was seen as dull and safe. Indeed, full profits weren't even stated in the annual report. Dividends were modest but dependable. That model was blown up in favour of banks as mega-businesses with annual double-figure percentage gains in profits, adventures into other financial activities, and bumper dividend increases. Dull banks had morphed into hot stocks. Now we are set to return to the 1960s. And banks will come to resemble highly regulated public utilities. Let's hope we're spared a Jacobin quangocracy.

Yesterday's high-fliers will not be the only losers as the New Order sweeps in. Many of the Old Guard at the Financial Services Authority will be brought to account. Ex-Goldman Sachs boss Hank Paulson has not covered himself in glory. Questions mount over the efficacy of his $700 billion bail-out, with the British model regarded as superior. Mervyn King, the Bank of England governor, has not had a good Crash. He is widely thought to have been persistently "behind the curve" of events. However, his shortcomings pale before those of the European Central Bank, still raising interest rates as recently as this summer: a mad, Olympian, Wagnerian rush to destruction.

And in the political realm, we are still searching for the leadership required. Gordon Brown has gained in authority while bereft of inspiration. And his Chancellor, with his fiscal framework now shot to pieces, has been forced this week to eat all those complacent phrases trotted out earlier this year about being "well placed to withstand the global buffeting" and the economy's "fundamental resilience". All gone. Only Vince Cable, the Liberal Democrat finance spokesman, has been consistently on the button. He even has the look of a grim Gladstonian. What a travesty he is not chancellor.

The New Order is fast emerging. It will sweep through politics as well as finance. For as this painful recession unfolds, convincing leadership rather than bumbling through will be required. David Cameron and George Osborne simply don't cut it, and have struggled to look effective. As for the Old Order, it does not look good. The hammers are ringing and the gibbets are going up.