Ruth Wishart: Our banking system needs US-style controls

Published on 21/07/2012 00:00

MORE punitive measures are required to deter speculators who play fast and loose with clients’ money, writes Ruth Wishart

As yet another brick falls loose from the British banking walls, their New York counterparts gaze nervously out of their glass and metal tower blocks with a mixture of disbelief and schadenfreude.

How can it be, they muse, that four years on from the horrors of sub-prime mortgages and the serial implosion of corporate giants, London traders are still betting other people’s farms on dodgy dealing?

They also watch and wonder at the mounting totals thought to have been gambled away in the London investment arm of their own mighty JP Morgan Chase, three of whose rogue traders have now felt a pressing need to hire a US-based lawyer.

How can it be, they inquire, that four years on from US warnings to some British banks about dirty work at the Libor crossroads, the city boys were still being economical with the truth about their own borrowing rates, casually undermining a system on which trillions of dollars of deals are predicated?

And, given the widely held suspicion that Barclays were only one of the players at the fake rate-fixing table, they speculate that London’s future as the premier financial centre is now on a very shoogly nail.

Most exercised by this latest series of scandals are some of the British bankers currently plying their trade across the Pond. Most especially they look at the spectacular fall of the mighty Bob Diamond, the buccaneering yank who strutted the world stage aboard the last major British bank with a truly global presence.

One head of risk, presently seconded to America, contrasted the current confused regulatory system in Britain to her own bank’s relationship with the Federal Reserve in New York, the financial sector regulators, with whom, she relates, she’s in constant contact.

Yet she regards the fact of their riding close shotgun as a comfort rather than intrusion, and points to a prevailing culture where senior bankers routinely take time out of their corporate careers to spend two or three years working for the Fed. She regards this as no more than enlightened self-interest, temporarily trading some of their very high salaries for the kind of insider knowledge of regulation which will make them more employable when they leave gamekeeping and re-join the world of the well heeled poacher.

But, she says, they will also return with a better defined set of moral parameters, and a firmer grasp of the need to protect the macro economy from sharp practice. Not least because the US has a greater appetite for popping white collar fraudsters behind bars, as some senior executives from Enron and Worldcom can testify.

This week Paul Moore, the British banker sacked by his bosses for blowing the whistle on sharp practices at what was then HBOS, suggested that we could use some of that judicial enthusiasm on this side of the Atlantic where, as he noted, you could get 30 days behind bars for making off with bottled water, but a verbal slap on the wrist for catastrophic gambling losses on the trading floors of major banks, despite playing with clients’ chips.

His take is that we need a robust new legal framework which will impose specific obligations on bankers to their customer base as opposed to their own earning power, and specific and punitive penalties for a failure to comply.

Mr Moore also indicated that he thought British investment banking attracted the narcissistic, manipulative, and downright dishonest.

But he’s mining a rich seam of public distrust and disgust when he suggests that we need more than a shareholder spring to alter an entrenched culture of personal greed.

Yet the head of risk in New York with whom I was reviewing the current banking car crash, was at pains to draw a distinction between who urged whom to do what during the massive financial crisis of 2009, and the activities of traders who play fast and loose with rates to line their own pockets.

She suggested that with the world’s finances teetering on a cliff edge, it would have been more than passing strange had the Bank of England, the Treasury, and the banking bosses not been having some urgent conversations of an unusually frank nature as they stared catastrophe in the face.

She contrasts that with trading floor chicanery whose perpetrators she would not rush to visit in the local penitentiary where they belong.

And what of Mr Diamond, lately master of the investment banking universe, once lauded for his acumen in picking up the Lehman corpse at bargain basement prices and welding it to the good ship Barclays.

US-based bankers it seems, don’t think he was made to walk the plank for being a yankee-style pirate…rather that his mix of hubris and arrogance left him with very few friends.

As the head of risk explained, he got few brownie points from setting his face against taking a share of the great British banking bailout, preferring to raise capital in the Middle East and elsewhere.

The more banks took up the bailout offer, she argues, the less exposed and vulnerable would seem the rest of the pack at a time of crisis.

For the same reasons, she says, US banks are encouraged to come to the “discount window” from time to time, allowing a certain amount of face saving for those in most need.

None of which is to suggest that everything in the American banking garden is rosy. Their own bailout scheme has been criticised for – as they say in these parts – targeting help on Wall Street rather than Main Street. Like Britain, banks are keener on helping themselves to some capital than recycling it round smaller businesses desperately trying to keep their show on the road until that elusive corner is turned.