The march of the middle men

A new breed of intermediary, who manipulate the market economy for their own interest, is on the ris

The spectacle of Southern Cross, the privately owned care homes operator, teetering on the brink of bankruptcy whilst its 31,000 elderly and vulnerable residents worry about being thrown onto the street, is a potent symbol of much that is wrong with the model of the market economy as it has developed in the UK.

Four senior executives sold their shares at the top of the market,, netting £35 million between them, whilst private equity owners traded up the company's debts and restructured it in a way which has now been shown to be totally unsustainable. Doubtless they also took generous commissions and fees for this miracle of financial re-engineering. Private equity after all claims that it makes failing companies stronger by restructuring them. The recent collapse of Focus DIY has highlighted the behaviour of one private equity firm, Duke St Capital, which took a staggering £700 million out of the stricken company after an initial investment of a mere £68 million.

These are examples of the behaviour of a new breed of intermediaries and agents who act in their own self interest rather than in the owner's interest -- much less in the public interest. They concentrate on extracting what economists would call "rent" for themselves (those fat fees and commissions), rather than doing what they are supposed to do in a properly functioning market economy -- which is act in the interests of the shareholders and beneficiaries they are meant to serve. Their focus is all too often concentrated on the short term and their measurements of "success" for the purposes of their own fees and remuneration are almost always the near term share price which is used as a convenient proxy for value.

Pension fund managers are responsible for looking after billions of pounds of members' money. And the size of the funds under management is likely to carry on rising. In 2009, the total assets of UK pension funds, insurance and trusts was £2,669 billion. This struck me very forcibly when, as minister for pensions, I found myself speaking at the annual Gleneagles pension conference and realised I was in the presence of a hundred or so men (there was only one other woman in the room) who between them controlled about half of the UK's GDP.

It is increasingly important therefore, as the campaigning group Fair Pensions has pointed out, that the fiduciary duty owed by these fund managers to their pensioner beneficiaries and the companies they effectively own is properly discharged. Those entrusted to act on behalf of others must not be tempted to abuse their position for their own ends. Yet the increasing complex and specialist nature of investment decisions has led to the rise of "investment consultants" and other agents who have plenty of opportunity to act in their own self interest. They have become a charmed circle, difficult to keep an effective check on. Their accountability has tended to centre on their ability to generate short term returns. They tend to be very handsomely rewarded irrespective of their actual performance.

The potential for these conflicts of interest to arise in financial services was greatly increased by the big bang deregulation of the City in the 1980s. This created large financial services conglomerates which combined asset management operations with investment banking, only erecting the flimsiest of Chinese walls. It is no coincidence that the huge increase in income inequality dates from precisely this period, rising by 40 per cent during the Thatcher/ Major governments as their remuneration levels soared.

Analysis of the causes of the global banking crisis in 2008 highlights the malign role of intermediaries and similarly dubious "financial innovation" which just happened to make billions in fees, commissions and bonuses for these middle men too. They invented financial products which consisted of packages of increasingly dubious mortgage debts and sold them as if they were risk-free assets. Their reassuring triple-A ratings signalled that these "products" were virtually risk-free and so they were traded across world financial markets, infecting the entire banking system with toxic debts and inflating property bubbles in many countries. More of these apparent assets were "manufactured" by the expansion of mortgage finance in the US -- especially to those with no jobs and no or low income. This was done precisely because these financial instruments were so lucrative to those investment banks which packaged them up and sold them on for huge commissions.

Few noticed or commented on the direct conflict of interest inherent in the sellers of such financial instruments paying for the risk assessment process which in turn directly inflated the price. The ratings agencies got bigger and more profitable as a result. The investment bankers walked away with billions and the entire financial system had to be bailed out by governments worldwide to the tune of $14 trillion.

As a direct result, millions of people have lost their homes, their jobs and their security while a privileged few walk away with fortunes. Action to pay down the resulting government deficits means that the benefits were privatised by the tiny few but the losses were socialised to the hundreds of millions. The government's oddly named Project Merlin final deal with UK banks does not even begin to respond to the challenges presented by this march of the middle men.

There is now a widespread recognition that not enough was done by institutional owners to curb the excessive risk taking and poor corporate governance which nearly destroyed the global banking system. Ed Balls has apologised for the last government's failure to regulate the banks more effectively (as have the regulators), but we have yet to hear any meaningful contrition from the middle men or the banks.

We need a banking system which operates in the interests of the real economy and the customers rather than in its own self interest. In its anxiety to embrace the market and accommodate to the Thatcher Reagan orthodoxy, New Labour was naïve about this particular strain of free market capitalism. Markets have to be regulated in the public interest. The march of the middle men needs to be checked.

Angela Eagle is the shadow chief secretary to the Treasury and Labour MP for Wallasey.

Angela Eagle is the Member of Parliament for Wallasey.

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Hopes of an anti-Brexit party are illusory, but Remainers have a new plan to stay in the EU

Stopping Brexit may prove an impossible task. Remainers are looking to the "Article 49 strategy": reapplying for EU membership. 

The Remain campaign lost in the country, but it won by a landslide in parliament. On 23 June 2016, more than two-thirds of MPs voted for EU membership. Ever since the referendum, the possibility that parliament could thwart withdrawal, or at least soften it, has loomed.

Theresa May called an early general election in the hope of securing a majority large enough to neutralise revanchist Remainers. When she was denied a mandate, many proclaimed that “hard Brexit” had been defeated. Yet two months after the Conservatives’ electoral humbling, it appears, as May once remarked, that “nothing has changed”. The government remains committed not merely to leaving the EU but to leaving the single market and the customs union. Even a promise to mimic the arrangements of the customs union during a transition period is consistent with May’s pre-election Lancaster House speech.

EU supporters once drew consolation from the disunity of their opponents. While Leavers have united around several defining aims, however, the Remainers are split. Those who campaigned reluctantly for EU membership, such as May and Jeremy Corbyn, have become de facto Brexiteers. Others are demanding a “soft Brexit” – defined as continued single market membership – or at least a soft transition.

Still more propose a second referendum, perhaps championed by a new centrist party (“the Democrats” is the name suggested by James Chapman, an energetic former aide to George Osborne and the Brexit Secretary, David Davis). Others predict that an economic cataclysm will force the government to rethink.

Faced with this increasingly bewildering menu of options, the average voter still chooses Brexit as their main course. Though Leave’s referendum victory was narrow (52-48), its support base has since widened. Polling has consistently shown that around two-thirds of voters believe that the UK has a duty to leave the EU, regardless of their original preference.

A majority of Remain supporters, as a recent London School of Economics study confirmed, favour greater controls over EU immigration. The opposition of a significant number of Labour and Tory MPs to “soft Brexit” largely rests on this.

Remainers usually retort – as the Chancellor, Philip Hammond, put it – “No one voted to become poorer.” Polls show that, as well as immigration control, voters want to retain the economic benefits of EU membership. The problem is not merely that some politicians wish to have their cake and eat it, but that most of the public does, too.

For Remainers, the imperative now is to avoid an economic catastrophe. This begins by preventing a “cliff-edge” Brexit, under which the UK crashes out on 29 March 2019 without a deal. Though the Leave vote did not trigger a swift recession, a reversion to World Trade Organisation trading terms almost certainly would. Although David Davis publicly maintains that a new EU trade deal could swiftly be agreed, he is said to have privately forecast a time span of five years (the 2016 EU-Canada agreement took seven). A transition period of three years – concluded in time for the 2022 general election – would leave the UK with two further years in the wilderness without a deal.

A coalition of Labour MPs who dislike free movement and those who dislike free markets has prevented the party endorsing “soft Brexit”. Yet the Remainers in the party, backed by 80 per cent of grass-roots members, are encouraged by a recent shift in the leadership’s position. Although Corbyn, a Bennite Eurosceptic, vowed that the UK would leave the single market, the shadow Brexit secretary, Keir Starmer, and the shadow chancellor, John McDonnell, have refused to rule out continued membership.

A group of Remainers from all parties met in the Labour MP Chuka Umunna’s office before recess, and they are hopeful that parliament will force the government to commit to a meaningful transition period, including single market membership. But they have no intention of dissolving tribal loyalties and uniting under one banner. A year after George Osborne first pitched the idea of a new party to Labour MPs, it has gained little traction. “All it would do is weaken Labour,” the former cabinet minister Andrew Adonis, a past Social Democratic Party member, told me. “The only way we can defeat hard Brexit is to have a strong Labour Party.”

In this febrile era, few Remainers dismiss the possibility of a second referendum. Yet most are wary of running ahead of public opinion. “It would simply be too risky,” a senior Labour MP told me, citing one definition of insanity: doing the same thing and expecting a different result.

Thoughtful Remainers, however, are discussing an alternative strategy. Rather than staging a premature referendum in 2018-19, they advocate waiting until the UK has concluded a trade deal with the EU. At this point, voters would be offered a choice between the new agreement and re-entry under Article 49 of the Lisbon Treaty. By the mid-2020s, Remainers calculate, the risks of Brexit will be clearer and the original referendum will be history. The proviso is that the EU would have to allow the UK re-entry on its existing membership terms, rather than the standard ones (ending its opt-outs from the euro and the border-free Schengen Area). Some MPs suggest agreeing a ten-year “grace period” in which Britain can achieve this deal – a formidable challenge, but not an impossible one.

First, though, the Remainers must secure a soft transition. If the UK rips itself from the EU’s institutions in 2019, there will be no life raft back to safe territory. The initial aim is one of damage limitation. But like the Leavers before them, the wise Remainers are playing a long game.

George Eaton is political editor of the New Statesman.

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear