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.