The blood-letting begins – but who will benefit from burying the banks?

Mon Jul 23, 2012

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Destroying the self-belief, the creativity and the vast economic contribution of the financial sector is an insanely reckless strategy

By Nick Evans

So they shot the right man – but for the wrong reason. Bob Diamond and his top acolytes at Barclays may have epitomised the culture of greed, self-satisfaction, self-interest and arrogance that has been so repellent to the man in the street ever since the music stopped in 2007.

But the charge of rigging interbank rates seems like the wrong crime to pin on them, and at the wrong time. The Libor-fixing (and Euribor-fixing) scandal is, of course, reprehensible on many levels – and the systematic manipulation of rates over very many years leading up to the financial crisis is shameful.

Even though everyone inside the industry (regulators and supervisors included) must surely have known it was going on, it is hard to imagine anything that would cause a more widespread and fundamental loss of faith in such economically critical institutions – or which would simply confirm in the minds of everyone outside the industry the suspicion that, for years if not decades, the banks were rigging the system for their own benefit.

But the posting of lower funding levels that Barclays and many other banks were supposed to have been engaging in after the crisis broke looks like another matter altogether.

Arguably the banks were only doing what they believed that others were encouraging them to do – and for good reasons on all sides, given the extreme fears of a systemic banking meltdown and the ruinous economic effects that would have resulted.

EuroHedge has been no fan of the odious and venal culture of investment banking that became so pervasive and corrupting throughout the financial system over recent years. But revenge is not the answer, however tempting – and now is definitely not the moment.

"Tear down the banks" is the cry – with even central bankers joining the politicians and the public in an all-out assault on those very institutions whose efficient functioning, willingness to take risk and self-confidence are (however undesirable that may appear to be) essential to getting us out of this ghastly economic mess.

The political point-scoring and playing to the public gallery that is going on, nearly five years after the crisis broke, is raising very grave risks for the future of the City of London and the UK’s economically all-important financial sector.

London appears besieged. The Americans are on the warpath, implying that all financial scandals begin in the UK and conveniently overlooking their own countless contributions to the hall of shame.

The French and the Germans loathe London’s free-wheeling financial capitalist culture with a passion – and are determined to bring it to heel. The Asians are licking their lips. And almost nobody in the UK is now prepared to offer any kind of real support to the City, with short-term gamesmanship completely obscuring any long-term considerations.

A cosy relationship between financiers, regulators and politicians may indeed seem very distasteful when the cycle turns. But a relationship based on mutual mistrust and contempt is far more dangerous still.

Of course, taxpayers should not be on the hook for bank failures and things clearly cannot go on as they were pre-crisis. Reform, both cultural and structural, is essential. And there is an urgent need for new, better and more appropriate regulations.

But this goes further than that. This feels like simple scapegoating, with bankers carrying the can for the faults and errors of many. And, given the current levels of political and public hysteria, the prospects of any sensible or well thought-through reform seem very remote.

Destroying the self-belief, the creativity and the vast economic contribution of the financial sector is an insanely reckless strategy – and all the more so at a time when policy-makers seem to have no other plan for growth other than to shower their economies with cash.

What is happening now feels like the beginning of a no-holds-barred blood-letting against bankers as a breed – and an almost mob-style vendetta against everything to do with finance, from which hedge funds are very unlikely to find themselves excluded.

It may make people feel a bit better in the short term. It is certainly too late now to halt or reverse it. And who knows how far it may extend before the thirst for vengeance is sated. But it is something that we will all have plenty of time and cause to regret.

ISSN: 2151-1845 / CDC10004H

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