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Banking Needs a Braxfield (August 2009)

June 2009 was the centenary of Eric Ambler, doyen of thriller-writers. He had been on the ball, charting international roguery since The Mask of Demetrious in 1939, and would in a baleful way have enjoyed the pile-up of 2008, under his occasional business alias of Paul Firman, since he forecast much of what came about.

Ambler had been much influenced by a book published in Scotland in 1975. Not Gordon Brown’s Red Paper but The Crime Industry, commissioned by the Scottish Home Department from John A Mack and Hans-Juergen Kerner. This remarkably prophetic work outlined effectively the way that computers, tax havens and globalisation would blur the shadow-line between sharp business practice and outright criminality. Ambler used their thesis in the ingenious and realistic plot of his last thriller Send no more Roses (1977) in which one Paul Firman relieves bent US NCOs of their cash, aided by a questionably reliable associate whose resources run to a Pacific microstate.

Not utterly foolproof – which is where the roses, and the dodgy associate, came in – but it would be now. Leading British banks, delighting in Gordon Brown’s 'light touch regulation', opened themselves to such attentions and in due course got it in the neck.

What was marked during Brown’s salad years as financial magician was the ever greater salience of ‘illegalism’ in the financial system, from the daily tedium of the cybercitizenry coping with ‘phishing’ e-mails and shots at identity fraud to such huge Ponzi schemes as those of Bernard Madoff and Allan Sherman, which went undetected for years. Inevitably the reluctance of Intercrime or Megahood to publish their annual accounts means a reliance on circumstantial evidence, but what’s on hand adds up to a tolerance of illegality by the investment banking fraternity – the bonus boys – who are now bent on cashing in on the current temporary boom.

What they should face is a quite different future. The damage that they did to UK savings, and the irrelevance of their efforts to our pressing requirements for industrial and infrastructural finance suggests, in the words of Stevenson’s old monster Weir of Hermiston, modelled on the eighteenth-century Scottish judge Lord Braxfield, that they would be ‘nane the waur o’ a hanging!’

Brown and the ‘sell your granny’ propagandists of the Adam Smith Institute were oddly united in projecting a bowdlerised version of the Scots Enlightenment. This gloried in ‘unanticipated’ and usually benign consequences - all ‘helping’ or ‘invisible’ hands - and not Braxfield’s gallows, the collier-serf’s collar, the press-gang and the Scotch Manager fixing things for the ‘lads o’ pairts’ colonising the Admiralty or exploiting India, selling opium to the Chinese, pouring whisky down the throats of the Inuit. There were parallels in the rise and fall of the City under Brown, and the catastrophic career of Edinburgh as one of its many outstations and tax havens: maybe protected to some extent from investigation because of the crisis in the Union following the election of a Nationalist government in May 2007.

The City bubble was pumped out of rapacious speculation, into which went a lot of the proceeds of international criminality, detailed by ‘revisionist’ histories of post-1989: contrast Misha Glenny’s McMafia, Paul Mason’s Meltdown, and other fly-on-the-wall accounts like Geraint Anderson’s Cityboy with the benign heroics about the liberation of East Europe. This wasn’t a world of philosophers and inventors but of Mississippi gamblers, coked-up nerds devising complex algorithms in a Chicago economic theory a planet away from prudent housekeeping, hard-wired instability, and an ethos of ‘make your pile, get your Merc/supermodel/ Caribbean beach/ yacht and clear out’.

The ballooning of ‘tradeable securities’ was in part the work of the tribal nerds Gillian Tett of the FT has described, but it also owed to huge speculative sums sloshing into London from the Middle East and Russia, often with its origins in drugs, arms-dealing, counterfeiting and people-smuggling, the main components of a criminal international which Germany's Die Zeit estimated in April 2008 at north of € 1.3 trillion.  The bonus moment was in some ways the only possible response for smart finance in industry-lite Britain: the gambler quitting via a type of sophisticated money-laundering before the bank started winning.

The bank crisis has seen finance valuations slump since mid-2008: the Royal Bank of Scotland, in 2007 fifth-largest in the world, fell from £ 18 a share in 2007 to £ 3 in 2008, threatening shareholders, depositors and necessitating a state – and unashamedly London – takeover. It has yet to be seen whether its new executives will contribute to the solution, other than quitting – with their bonuses.

Did reward bring wisdom? In March 2007 the RBS board was paid £ 2 billion in bonuses. Later that year dealers at ABN Amro, taken over in October 2007 by RBS, Santander and Fortis, when sub-prime was already falling apart, demanded payments in cash of £ 542 million. Amro's price had been based on its function of devising new and complex forms of 'asset-backed securities'. Concieved as mobilising the ‘latent value’ of property as credit in the pursuit of ‘more perfect markets’ what actually happened was the now-familiar story of 'sub-prime lending' contaminating the system. RBS insiders, as the Company’s Chief Economist told MSPs on Holyrood’s Economics Committee, admitted that only a handful in the concern knew how these things worked.

A Financial Times investigation (18 0ctober 2008) into the role of the lightly-supervised Credit Ratings Agencies (Moodys, Standard and Poor, etc.) found that they had been assessing such products as ‘AAA’ - rock solid - when in fact they were at a junk bond level, only given the superior rating by the willingness of the giant monoline insurer AIG to insure them. When in June 2008 the CRAs reassessed these securities and downgraded them, the result froze inter-bank lending and precipitated the crisis.

In other words ABN Amro's valuation was so much fairy gold, but the bonuses of RBS and Amro bosses and dealers were paid in hard cash, and hard cash in the form of tax receipts (our money) has gone into saving the bank.

The FT’s estimate of net losses in the main banking countries as at July 2009 has been: Germany € 35 billion, the USA €350 billion, the United Kingdom € 180 billion: out of a total of € 585 billion or £ 480 billion. In his Who Runs Britain? the ubiquitous BBC correspondent Robert Peston summed up on the situation last summer:

Citigroup, UBS, J P Morgan Chase, Barclays and Royal Bank of Scotland … will suffer billions of dollars in losses, probably somewhere between $ 10 billion and $ 20 billion in aggregate (my estimate is that they will lose around £ 13 billion).

There is a big difference between £ 13 billion and £ 480 billion, Mr Peston. Factor in population, and the UK can plainly be seen as the main victim.

The news from Halifax Bank of Scotland was even worse. The bank was, through its Corporate Finance Director Peter Cummings pouring cash into big property and retail projects whose time was past. The losses on these are still cloudy, but could have been as much as £ 250 billion. Yet the Government’s confidence in HBOS was confirmed by its boss Sir James Crosby being made Depute Chair of the Financial Services Authority (more cheer-leader than regulator) by Gordon Brown, and then in September 2008 by a coup in which Brown persuaded Sir Victor Blank of Lloyds TSB he could magic away competition policy and combine Lloyd’s prudence with HBOS’s ‘assets’. The contagion spread to afflict the City of London with a malaise which saw the FSA, London’s ‘light touch’ supervisory body, snoring its way through much of the mania. Even so, Conservative think-tanks like the Centre for Policy Studies wanted it to be made less regulatory, more pro-business. David Cameron wrings his hands, but do his financial associates Lord Ashcroft – spread-betting in Belize; Michael Spencer of the tortuous finances; Stanley Fink late of the huge Man hedge-fund, agree?

In 1850 Thomas Carlyle in ‘Hudson’s Statue’ flailed the speculators who prostrated themselves before the Railway King Richard Hudson and the Ponzi fraud that he ran – paying dividends out of cash subscribed for new lines. But the lines got built. If we get from London to Edinburgh these days – sometimes possible – it’s along them. What have we got out of Goodwin, Crosby, Cummings, old uncle Tom Hunter and all? Some of Europe’s least-efficient housing? Out-of-town megamalls, where we buy food a third of which we throw away? Derelict town centres? Boozed-up kids? Crap public transport? A disgraced political class?

How do we get out of this? First of all, realise that the reputation of investment banking is justifiably in the pits, and ought to be left there. The literature on the collapse is unequivocable. Greed and sharp practice undid the City, and the slickers will shaft us rather than own up to what they’ve done. In this situation Carlyle’s friend and disciple Sir James Fitzjames Stephen’s principle of ‘judicial vengeance’ is unavoidable, even exhilarating.

Secondly, we must re-invent a financial structure appropriate to establishing a hi-tech, low-energy manufacturing society, based on mutuality. We need local trustee savings banks, and a national public bank which can co-operate with the financial institutions of social-democratic Europe and raise funds for infrastructural investment of a type that will cope with Peak Oil: ‘passive houses’ which don’t need heating, a public transport/ walking/ cycling/ car-sharing system, recycling schemes, the end of the retail megamall. A lot of pretentious schemes are not going to survive: luxury/gas-guzzling car brands, flash architects, witless celebs, and resorts for the rich. Brown’s pointless new generation of Tridents and his two giant aircraft carriers have got to be torched now. We need the technologists for renewable energy. If Britain survives as a commonwealth of co-operating nations, it will be as a middle-ranking European region, another Benelux or Scandinavia. There is no alternative.

And Scotland has to choose. The world does not owe us a living. Our bankers tried playing with magic money, but we, savers and tax-payers, got shafted. We have had a near-death experience, and the real thing is on its way, unless we take avoiding action. What we need, though, is something going back to the Enlightenment: a transparent way in which ‘sense and worth’ can be appropriately rewarded. In Adam Smith and Robert Burns’ day this was the labour theory of value, and its revival, in the form of energy budgeting, could offer our one way out: through estimating the embodiment of energy in our economy, its rational use, and our rescue from its misuse. We could start with the 67 million tons of CO2 we spew out annually – from the 15 million tons of CO2 emitted by the coal we burn in Longannet power station, to the perhaps 20 million tonnes of CO2 spewed out by Scotland’s two million family cars.

This is the political economy of death, and it needs a hanging judge to end it.

 
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