The reputation of the City of London has been badly damaged, however the LIBOR affair turns out. People will inevitably ask, who knows what other kinds of criminal or near-criminal activity have been taking place? Would the LIBOR attempted price fixing have come to light without those incriminating emails? What other forms of collusion are going on between more grown-up City folk who know better than to send such emails?
But here’s a thought: maybe London can lead the renewal. After all, such a rebirth is needed not just in London but in the whole world of global finance. It has happened before. London led the revival of international money and capital markets after World War II. Leaders such as Sir George Bolton created the eurodollar market. Other great innovators saw the potential of Canary Wharf. One reason why the unsecured lending market flourished in London was precisely the higher levels of trust there. Can the City do it again?
Perhaps, but first we need to clean out the Augean stables and implement sweeping reforms. The scandal of the collusion to fix LIBOR is an extreme example of immoral attitudes to money. Money is seen as something to be manipulated – and it is not only private agents who are under suspicion.
Yet leaders who should know better fuel such suspicions. Lord O’Donnell, a former UK Treasury mandarin on whose advice Gordon Brown sold half of Britain’s gold stock at the worst possible time, has proposed that in future the salaries of key Treasury civil servants should be paid by City of London banks. Banks already funded the payroll costs of the Financial Services Authority – so why shouldn’t they pay those of officials who make top level policy at the Treasury?
The objection to that proposal is familiar to every schoolchild: he who pays the piper calls the tune. Can it be expected that men and women whose salaries are dependent on the deep pockets of banks will not take special care to take their paymasters’ interests into account in framing policy? Especially if they hope to end their careers, as so many do, as advisers to or directors of the banks they are supposed to regulate?
Equally disappointing was the initial failure of Marcus Agius, chairman of Barclays, to resign immediately following the disclosure of the fine on the bank on June 27. It is not a question of being “proven” guilty in a court, or otherwise, but a matter of honour. Any leader in such a position should resign when the organisation under his watch clearly fails the system and society’s expectations. That is the whole point of holding top positions – you take the flak, whether it is your “fault” or not. He may have an explanation, but it had better be a good one.
His eventual resignation on July 2 lost the moral impact it should have had as it was seen as a move to protect Bob Diamond, the CEO.
The princes of finance already have excessive political influence. Nigel Lawson, former UK chancellor of the exchequer, has called not only for a full separation of investment from commercial banking but also for an end to the practice whereby top bankers “go trooping in and out of Downing Street, almost weekly, to press their private interests… ” (For a US parallel see Simon Johnson’s blog). Lawson is right.
But we need to go much further. The City can recover its honour, if it turns its talent for innovation into a search for renewal. Ways in which this should be done are outlined in my new book. Public policy must follow stronger rules. To get out of the money trap, these should instil confidence in those with the money to increase spending – consumers and companies.
Banking and international money must be re-connected to the real world, not just in the UK but globally, as outlined in part 4 of The Money Trap: “Harnessing the Power of Global Finance” (Palgrave Macmillan, p 328).
The required new framework of money and banking as described in the book goes with the grain of market developments, cleansed of their impurities.
Written on July 2, 2012 at 9:10 am, by robert
Categories: Banking, Homepage, News and Comment, Part IV: The Power of Global Finance, RP's Diary | Tags: Bob Diamond, city of london, Downing Street, Financial Services Authority, gold, Gordon Brown, LIBOR, Lord O'Donnell, Marcus Agius, Nigel Lawson, Simon Johnson, Sir George Bolton, UK Treasury