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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Why Angela Merkel's comments about the UK and US shouldn't be given too much weight

The Chancellor's comments are aimed at a domestic and European audience, and she won't be abandoning Anglo-German relationships just yet.

Angela Merkel’s latest remarks do not seem well-judged but should not be given undue significance. Speaking as part of a rally in Munich for her sister party, the CSU, the German Chancellor claimed “we Europeans must really take our own fate into our hands”.

The comments should be read in the context of September's German elections and Merkel’s determination to restrain the fortune of her main political rival, Martin Schulz – obviously a strong Europhile and a committed Trump critic. Sigmar Gabriel - previously seen as a candidate to lead the left-wing SPD - has for some time been pressing for Germany and Europe to have “enough self-confidence” to stand up to Trump. He called for a “self-confident position, not just on behalf of us Germans but all Europeans”. Merkel is in part responding to this pressure.

Her words were well received by her audience. The beer hall crowd erupted into sustained applause. But taking an implicit pop at Donald Trump is hardly likely to be a divisive tactic at such a gathering. Criticising the UK post-Brexit and the US under Trump is the sort of virtue signalling guaranteed to ensure a good clap.

It’s not clear that the comments represent that much of a new departure, as she herself has since claimed. She said something similar earlier this year. In January, after the publication of Donald Trump’s interview with The Times and Bild, she said that “we Europeans have our fate in our own hands”.

At one level what Merkel said is something of a truism: in two year’s time Britain will no longer be directly deciding the fate of the EU. In future no British Prime Minister will attend the European Council, and British MEPs will leave the Parliament at the next round of European elections in 2019. Yet Merkel’s words “we Europeans”, conflate Europe and the EU, something she has previously rejected. Back in July last year, at a joint press conference with Theresa May, she said: “the UK after all remains part of Europe, if not of the Union”.

At the same press conference, Merkel also confirmed that the EU and the UK would need to continue to work together. At that time she even used the first person plural to include Britain, saying “we have certain missions also to fulfil with the rest of the world” – there the ‘we’ meant Britain and the EU, now the 'we' excludes Britain.

Her comments surely also mark a frustration born of difficulties at the G7 summit over climate change, but Britain and Germany agreed at the meeting in Sicily on the Paris Accord. More broadly, the next few months will be crucial for determining the future relationship between Britain and the EU. There will be many difficult negotiations ahead.

Merkel is widely expected to remain the German Chancellor after this autumn’s election. As the single most powerful individual in the EU27, she is the most crucial person in determining future relations between the UK and the EU. Indeed, to some extent, it was her intransigence during Cameron’s ‘renegotiation’ which precipitated Brexit itself. She also needs to watch with care growing irritation across the EU at the (perceived) extent of German influence and control over the institutions and direction of the European project. Recent reports in the Frankfurter Allgemeine Zeitung which suggested a Merkel plan for Jens Weidmann of the Bundesbank to succeed Mario Draghi at the ECB have not gone down well across southern Europe. For those critics, the hands controlling the fate of Europe are Merkel’s.

Brexit remains a crucial challenge for the EU. How the issue is handled will shape the future of the Union. Many across Europe’s capitals are worried that Brussels risks driving Britain further away than Brexit will require; they are worried lest the Channel becomes metaphorically wider and Britain turns its back on the continent. On the UK side, Theresa May has accepted the EU, and particularly Merkel’s, insistence, that there can be no cherry picking, and therefore she has committed to leaving the single market as well as the EU. May has offered a “deep and special” partnership and a comprehensive free trading arrangement. Merkel should welcome Britain’s clarity. She must work with new French President Emmanuel Macron and others to lead the EU towards a new relationship with Britain – a close partnership which protects free trade, security and the other forms of cooperation which benefit all Europeans.

Henry Newman is the director of Open Europe. He tweets @henrynewman.

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