George Kerevan: Sun may yet set on the City of Shame

Published on 20/07/2012 00:00

WHILE Westminster’s politicians turn a blind eye, George Kerevan reveals how London’s financial centre is now a centre for criminal deals and sharp practice

WHAT have the following recent banking disasters got in common? The Lehman Brothers collapse that triggered the global credit crunch and recession. The near failure of AIG, the world’s largest insurance firm. The Libor rate-fixing scandal. And now the revelation that HSBC Bank knowingly turned a blind eye to massive money laundering by everyone from Mexican drug lords to Iran’s busting of international sanctions (25,000 separate transactions in the latter case).

If this were a fictional detective story – with, say, that wonderful Sicilian cop and gourmet, Salvio Montalbano, doing the investigating – a blindingly obvious clue would soon have emerged. Every one of these scandals – be they theft, malfeasance, embezzlement, conspiracy, illegal price fixing, hiding criminal gains, laundering terrorist funds, or just plain incompetence – originated in the City of London, the world’s so-called financial capital.

Of course there are incompetent and criminal bankers in New York, Zurich and Frankfurt. But nearly all of the world’s major banking scandals of the past 20 years have had their roots in the City of London. Inspector Montalbano would have seen the connection in a trice. Lest you think I am exaggerating, let’s go through some of the juicier ones.

In 1991, at the dawn of globalisation, the Bank of Credit and Commerce International (BCCI), a private bank headquartered in London, was forcibly liquidated by the Bank of England, leaving liabilities of $20 billion. According to a Bank of England investigation, BCCI had engaged in “widespread fraud and manipulation”. It also held accounts for Saddam Hussein, the Colombian Medellin drug cartel, the Palestinian terrorist Abu Nidal, and just to be ecumenical, the CIA. Attempts by creditors to sue the Bank of England for failing to regulate BCCI came to nothing.

Four years later, Barings Bank imploded after a staggering $1.4 trillion loss caused by a single rogue trader, Nick Leeson. Barings, founded in 1762, was the Queen’s personal bank. The official report into the collapse stated it was “a consequence of a failure of management and other internal controls of the most basic kind”. Leeson went to jail, but no-one else did.

The 1990s saw a catalogue of major fraud scandals involving (amongst others) Morgan Grenfell and the London trading arms of Credit Suisse and Merrill Lynch (a US investment bank that eventually failed in 2008). By now a pattern was emerging in the City: lax official regulation was combined with a business culture in which senior managers ignored how subordinates delivered profits, then escaped responsibility if anything went wrong. US banks found London particularly congenial, as they could hide operations from the more watchful eye of American regulators. The scene was now set for the great Credit Crunch of 2008. The trigger was US sub-prime mortgages packaged into securities called derivatives and traded through London where their true (and increasingly worthless) value could be obscured. In addition, London served as the centre for insuring these doggy derivatives against inevitable failure, which only multiplied the eventual losses to the equivalent size of whole countries.

In September 2008, the American insurer AIG had to be rescued by a mind-boggling $183bn bailout from the US Treasury, after losses incurred when its London arm sold insurance on sub-prime derivatives. The head of the London operation, Joe Cassano, had insured $441bn of virtually worthless mortgage securities.

Panicked by the scale of the AIG bailout, the White House then decided to let Lehman Brothers, the big investment bank, go into liquidation. Unfortunately, the company had used an accounting procedure that was legal in London, but not in America, to hide $50bn of debt. As a result, the global financial system froze solid.

Since 2008, no lessons have been learned. In the past year, the Swiss bank UBS and the American bank JPMorgan Chase have both reported massive new losses caused by “rogue” traders in their London operations.

Then came this month’s double whammy: the Libor rate-fixing scandal and HSBC’s money-laundering shenanigans. In a nutshell, the City is corrupt to its core. Why?

There are technical reasons, particularly the fact that propriety trading (aka casino banking) has taken precedence over normal lending.

That should be banned. However, there is a deeper malaise. Uniquely, British politicians have surrendered to the banking lobby.

The City became a political power when it organised the English Civil War after Charles I defaulted on his debts. It grew fat on empire and trade. With the loss of empire, the City looked obsolete. But in the 1960s, it re-invented itself as the world’s off-shore financial capital. In post-industrial Britain, the City paid for UK imports, making politicians beholden to its will.

Despite plenty of political hot air, that bargain continues. The current trade minister and leading member of the Cabinet’s bank reform committee is none other than Lord Green, ex-chief executive of HSBC, the world’s conduit for laundering criminal gains.

Politicians may sound off against greedy bankers but in truth they consider the City untouchable. It is the world’s largest market for foreign exchange dealing and trades $1.4 trillion derivatives every working day. To protect this bonanza, the Coalition has already watered down the recommendations of the Vickers Commission on banking reform. As long as our politicians are supine, the City will get away with it.

However, one thing has changed: the reputation of the City is shot to pieces internationally. European rivals such Frankfurt will seize on a British exit from the EU to attract business.

American prosecutors are already planning revenge for the Libor affair – we could see extraditions. The days of the City are numbered.