The crooked cash grab sucking the City dry

Once-trusted London banks are now used as vehicles for fattening the wallets of employees. Corruption has sunk its claws into bankers, and ruthless management from the Bank of England is needed to restore trust.

The City of London has always been susceptible to corruption. For generations, insider-trading provided incomes for comfortable lives in the Stockbroker Belt on the outskirts of London, but traditional City bankers, who boasted that their word was their bond, seemed above all that. Not any longer. Banks are now run as vehicles for creating large pools of private wealth for their employees. The City is so infected by venality that it is no longer a case of seeking out rotten apples. The barrel is full of them.

The case against the City started with dribs and dabs of bad news that have grown into great piles of it. In 2012, there were embarrassing revelations about money laundering at HSBC and Standard Chartered, which cost them more than £2.5 billion in fines by US regulators.

But the first evidence of institutional corruption also emerged in 2012 in the Libor market that set a globally applicable interest rate for banks. By fixing that rate, a ring of dealers helped each other to increase their profits, not just in the City, but across the world. The evidence for this was sufficiently widespread for the legal authorities in London to take a more critical look at financiers. These men and women had survived the chaos of 2008-09 to which they had contributed without provoking the interest of the law. The Libor scandal changed that. Suspect dealers were not just suspended; they felt the heavy hand of PC Plod on their collars. Some will surely come to trial.

The full extent of the latest evidence of fraud in the foreign exchange market is still to be revealed, but Mark Carney, Governor of the Bank of England, told MPs on the Treasury Committee of the House of Commons on Tuesday that it is “as serious as Libor, if not more so. It goes to the heart of integrity of markets.” The Bank is collecting evidence of long-term collusion among traders at the daily 4pm Forex fix, and the Governor has promised that the perpetrators will be prosecuted to the full extent of the law.

The underlying problem is that investment bankers, in particular, still use their astronomical earnings as their way of keeping the score, and they always want more. Barclays paid 482 bankers more than £1 million last year, up 53 from 2012. Profits were down by 32 per cent, but the bonus pool was up by 10 per cent (pushed hardest by Barclay’s employees in the US).

Michael Jenkins, Barclay’s chief executive, insists that he wants to change the culture of his bank. He even denied himself a bonus last year. He was, however, awarded from the executive bonus scheme with shares worth £5 million to make his sacrifice easier to bear. At the Royal Bank of Scotland, where all £45 billion of the taxpayers’ bail-out money has been spent to cover losses since 2009, a bonus pool worth £24 million has been gifted to members of the Bank’s executive committee.

In the past, the Bank of England was the arbiter of the City’s morals; but under Carney’s predecessor Mervyn King it became absorbed by its new power to set interest rates, and left the banking to a subordinate regulator. It is shocking, but not necessarily surprising, that the Bank’s employees had some knowledge that there was fraud in the Libor and Forex markets, but did nothing about it. “It’s not our job to go out hunting for rigging of markets,” Paul Fisher, the executive director of the Bank’s markets division, told MPs at Tuesday’s Treasury Committee hearing.

Andrew Tyrie, chairman of the Treasury Committee, declared these scandals to be the first real test of the Bank’s new governance structure; early signs were not encouraging, he said. Tyrie described the Bank’s structure as “opaque, complex and Byzantine”. Carney did not demur at this description, but merely smiled knowingly when Tyrie pointed this out.

Carney placated MPs by announcing the appointment of a new deputy Governor (the fourth) who is to focus on banking and markets, and presumably to do some hunting for market riggers. In fact, reform in the City will begin at the top, in the Bank of England itself. Carney outlines a strategic review next week, and Tyrie presses for a new management structure in which the advisory Court would be replaced by a better informed and more influential non-executive management board.

Cultures sometimes appear impervious to change. In the City bankers have blackmailed politicians -- and central bankers -- by arguing that the money they bring into the City justifies their inflated earnings. But that argument is running out of puff. Personalities change cultures. Strong, not to say ruthless, management in the Bank of England would be a start. Moral courage will also be required when bankers threaten to desert the City for Switzerland, New York or Shanghai. Someone needs to be willing to say ‘good riddance’.

But cultural change can occur with startling speed when the rules of the game are changed. Since cricket was the means by which I became a contributor to Business Spectator, allow me an unlikely analogy. Precisely a year ago, Mitchell Johnson and James Pattinson were sacked, the team was broken, and the performance director said it would be years before it recovered its belief.

In only six months, seven wins in eight Tests have followed the rediscovery of the Australian virtues of aggression (David Warner), fast bowling (Mitchell Johnson) and imaginative captaincy (Michael Clarke). A disciplinarian coach had been replaced by a working man known as Boof (Darren Lehmann), who was anxious to maximise the talents of his colleagues.

Australia’s cricket team has risen phoenix-like, with the Ashes. They have demonstrated that cultures can shift and improve with startling speed. Having disposed of the pessimism that envelops defeat, the experience encourages hope and optimism. Maybe Carney should ask the Reserve Bank for a briefing.

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