The questions a real banking inquiry must ask

MPs should look at whether we need this style of investment banking at all.

Tony Blair is keen that bankers are not hung from lamp posts. Some would say such a punishment would be the easy way out for today's investment banks. Tony himself was paid handsomely to advise JP Morgan and they are directly implicated in the Libor scandal. Libor, however, is merely the tip of the iceberg in market manipulation by investment banks.

Blair's key Downing Street officials Jeremy Heywood and Jonathan Powell both went to work for Morgan Stanley - indeed Powell still does. Heywood was the author of the Libor letter to the Bank of England uncovered by the Treasury select committee and his role at Morgan Stanley was not an advisory position, instead he was managing director of their UK investment banking division. With a 42% share collapse in the 2008 financial crisis and a $107 billion bail-out, Morgan Stanley was fortunate to survive.

Morgan Stanley demonstrates why George Osborne's timid joint committee on Libor will barely scratch the surface of the problem. In each of the last ten years Morgan Stanley have been fined for cheating. In 2003, they were fined for misleading research. In 2004, for using customers money as collateral on loans. In 2005, for failure to supervise. In 2006 and in 2007, for deleting damaging emails. Fines were given for failure to disclose information to municipal bond investors.  Meanwhile, Sir Howard Davies, the former FSA regulator in the UK sits on their board of directors and perhaps unsurprisingly their alumni includes one Bob Diamond.

Each of these dishonest activities was engineered to profiteer from manipulating the market. Using their market power, they have repeatedly squeezed extra profits, at all costs. But Morgan Stanley is no different to other investment banks. Whilst investment banks brashly parade their wares and successes, what is unusual about their activities is how often they operate in cartels. They hunt as a pack and they profit as oligarchs. In some bespoke areas they compete ferociously, but when RBS last week sought advice on selling off Direct Line insurance they brought in not one, but eleven investment banks to advise them, just as when Cadbury was asset stripped by Kraft, seven investment banks were at the feast.

What Parliament should be looking at is whether we need this style of investment banking at all. How would behaviour change if we were to tax derivatives trading? If we were to ban short-selling would the real economy weaken? Where has the money gone? It is the bar room question, and the answer is very clear. Three groups have lost out directly: sovereign states who have ended up with huge deficits in their finances; public sector investers, such as US cities, who have been defrauded by mis-sold derivatives; and sub-prime mortgagees who have defaulted on their exorbitant loans.

Whilst bankers suffer the temporary loss of a year or two's bonuses, their poorest customers have lost out the most, whilst the weakest economies have suffered the greatest.  Meanwhile, the real battle amongst politicians is to see who can manoeuvre for national competitive advantage. From Qatar to China, cash rich governments have bought up assets. Large multinationals have stockpiled their cash. European legislators have seen the possibility of transferring financial markets to Frankfurt or Paris. Singapore, Shanghai and Hong Kong have grabbed every possible opportunity. Nobody should be kidded into thinking that US legislators and regulators have seen anything bigger than the prize of shifting dollar trading from London to New York.

The real questions are therefore: can Europe act as a counterbalance to the USA and China? Can Europe maintain investment banking whilst squeezing out short term market manipulation? Is self reporting still possible? How do we regulate large cartels? Will the taxpayer again have to bail out large banks?

There is though another model: that of transferring risk. If you put money in the bank, then you need to know what the risk it is. If you want no risks and government guarantees, then you will get less interest - a premium bond style bank account. If you want medium risk then go for more interest, and if you want high risk then do not expect government underwriting. Our current debate fails to trust the individual and the underpinning of their risk profile with full transparency. Should we not have tight controls on market manipulation, including on mergers and takeovers, with the interests of consumers, employees and the nation state carrying proper weight? Do we not have a particular responsibility to clean up offshore banking?

This is the big UK policy gap. Many offshore centres are UK crown dependencies or British overseas territories, from Jersey to Bermuda , from the Isle of Man to the Cayman Islands. There are 10,000 hedge funds in the Cayman Islands, Bermuda and the British Virgin Islands - a large majority of the world's total amount. We are responsible for their foreign affairs and crucially for their defence. The biggest single change we can make to stabilise the world banking system is the opening up of these offshore financial centres, to minimise tax avoidance, reduce financial fraud and democratise world banking. This is where Parliament's inquiry must go.

The sun sets over Canary Wharf in London. Photograph: Getty Images.

John Mann is Labour MP for Bassetlaw and a member of the Treasury select committee.

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How Tony Blair's disingenuous line on Iraq eroded our faith in politicians

Not the Chilcot Report by Peter Oborne reveals how Blair exagerrated evidence from the intelligence services to parliament – and the public.

In this incisive book, Peter Oborne calls the invasion of Iraq “the defining calamity of the post-Cold War era” and I am inclined to agree. Not long after the March 2003 attack, I interviewed Adnan Pachachi, a former foreign minister and UN ambassador for Iraq. He told me that he had visited President George W Bush in Washington a few weeks before the invasion and begged him not to go ahead with it. The overthrow of Saddam Hussein would, Pachachi warned, lead inevitably to civil war between Iraq’s two main religious groupings, the Sunnis and the Shias. Bush was shocked. According to Pachachi, he had no idea that any such division among Muslims existed.

Granted, Bush was an ignoramus – but you would have thought that someone might have explained this crucial fact to him. Pachachi turned out to be right. Iraq has fallen into a disastrous religious civil war as a direct result of the invasion and Isis, a more extreme force even than al-Qaeda, has come to the fore. Nearly 5,000 coalition soldiers died; many hundreds of thousands of Iraqi civilians, perhaps a million, have lost their lives; and the man who led the whole terrible business didn’t know that the danger even existed.

Pachachi, like many politicians across the Middle East, found this puzzling. The US had never understood the Middle East, he said, but the British did; so why hadn’t Tony Blair warned the Americans what was going to happen? We know the answer to that: although Blair was far cleverer than Bush and had better advisers, his approach was always a subservient one. Like the entire British establishment, he believed that Britain’s influence in the world depended on sticking close to the US and he was prepared to be led around on a leash because he knew that this was the only relationship Bush’s people understood or wanted from him.

To “stand shoulder to shoulder” with Bush – at least, to stand closer behind him, head bowed, than any other national leader – Blair had to persuade the British people that Saddam posed a threat to them. Oborne, in fine forensic form, demolishes (his word) the notion that Blair was simply repeating what the intelligence services had told him about Saddam’s weapons and capability; he shows that Blair exaggerated and misrepresented the intelligence he was given.

Lord Butler, the former cabinet secretary who had investigated the government’s pre-invasion use of intelligence, said the same thing in a speech in the House of Lords in 2007. He described Blair’s approach as “disingenuous”: mandarin-speak for dishonest. Oborne quotes Butler at length:

 

The United Kingdom intelligence community told him [Blair] on 23 August 2002 that, “We . . . know little about Iraq’s chemical and biological weapons work since late 1988.” The prime minister did not tell us that. Indeed, he told parliament only just over a month later that the picture painted by our intelligence services was “extensive, detailed and authoritative”.

 

Oborne’s central point is that this dishonesty has done serious damage to the fundamental trust that the British people used to have in their rulers. There are all sorts of reasons why people have lost faith in politicians but it was the charismatic Blair – along with his head of communications, Alastair Campbell – who let us down the most.

Campbell is a former journalist who, even when he was the political editor of the Daily Mirror, seemed far more concerned with pushing a party line than with trying to report things truthfully. In May 2003, the BBC journalist Andrew Gilligan accused him of “sexing up” the dossier on Saddam’s weapons of mass destruction. Campbell was irate. In July, Dr David Kelly, the Ministry of Defence weapons expert who had briefed Gilligan, committed suicide. If, indeed, it was suicide – once you start losing faith in the ­official version of things, there is no end to it. And that is Oborne’s point.

Kelly’s death was followed by the scandalous Hutton inquiry, which managed to deflect attention from the questionable nature of the dossier to the way in which Gilligan had reported on it. However, although Kelly wasn’t a sufficiently senior source for Gilligan to base his report on, there is no doubt that Gilligan was essentially right: the intelligence dossier had been grossly hyped up. Campbell’s frenzied efforts to protect himself and Blair did huge damage to the BBC, the judiciary, the intelligence and security agencies and public trust in government.

Oborne’s excellent book is clear-headed and furious in its condemnation of Blair. But what about the Chilcot report, when it appears on 6 July? The ludicrous delay in publishing it has given people the expectation that it, too, will be a whitewash. Yet we are starting to get leaks that it won’t be – that it will be just as savage as Oborne would like. That is the only way we can start to drain the poison that has built up in our national life since Blair took the calamitous decision to follow the US into invading a country that its president knew zip about.

John Simpson (@JohnSimpsonNews) is the world affairs editor of the BBC

Not the Chilcot Report by Peter Oborne is published by Head of Zeus (208pp, £10)

John Simpson is World Affairs Editor of BBC News, having worked for the corporation since the beginning of his career in 1970. He has reported from more than 120 countries, including 30 war zones, and interviewed many world leaders.

This article first appeared in the 26 May 2016 issue of the New Statesman, The Brexit odd squad