LIBOR Scandal and the way we were

Since 1969 I have seen just about all the changes that have created the financial markets we have today, some good some bad, but generally for the good. Beginning like that you might expect that I am going to say everything was simply great in the old days and nothing wrong went wrong with all summers dry and sunny and all winters full of snow and fun. Hindsight is a wonderful human trait but we can learn from history. What worked and what didn’t work and try and steer a more enlightened course for the future

Throughout my career in the City there have always been instances of dodgy corporate behaviour or that odd individual bounder looking to make hay of the trust that firms and clients give them. In the main they were dealt with rather publically and ostracised from future business. It appears fraud was far more a dastardly act in the past than it is today. Trawl the newspapers of history and you can find countless instances of fraudulent behaviour that set a downward spiral on the miscreants. Nearly always to long time hardship by their family. However, in the main the City flourished with good honest hard working people that became rich on the back of a successful performance for their clients. The City and society prospered and was able to adapt to changing economic conditions both good and bad and be a force for good in developing new business and new technologies. Wealth creation was not limited to the few but the many. More people have become millionaires over the last 100 years than at any time in world history. The creation of individual wealth is accelerating with wealth more evenly distributed today than in the past.

So the past and todays performance in general wealth creation terms, does not look at all bad, but unfortunately this hides a black cancer, which has now found its way into the heart of the City. This cancer has symptoms of greedy callousness and an almost total disregard of moral or ethical performance.

In the past when fraud was discovered, mainly it was an unusual occurrence, which had no or little direct effect on society and did not call into question the reputation of the City. Instances of fraud were mainly dealt with within the inner sanctum of the City. This became known as self-regulation but it was mighty effective in limiting crime and efficiently removing the criminal. Peer to peer adjudication is usually far more intense than in a criminal court. Occasionally, however, cases were brought to court and did make headline news, but these occasions were rare and because they were rare gained notoriety well beyond their actual impact on society. How different from today where the newswires are hot with major fraudulent activities that are systemic within the financial system, where society has been seriously and badly mauled, by individuals and corporates that are morally decadent and have no peer control because everyone is involved to a greater or lesser extent.

We can all remember the scandals of the past; possibly some more than others, those which had a more of a profound impact on today’s market, like the Maxwell pension fraud at the Mirror Group. The problem is that these scandals and criminal actions, created kneejerk regulatory reactions, all with good intentions to prevent any reoccurrence. But as we have seen recently, these new regulatory implementations have been shown to be somewhat ineffectual in totally deterring infringement and really need the full might of the law behind them to make firms and their employees sit up and take notice.

The City which I loved is now gone and is now mainly a centre for speculation rather than investment. The balance of the markets pre Big Bang were more closely aligned towards investment where speculation was proffered to a few firms (Jobbers now called Market Makers) who only used their own money to gamble. This duel capacity arrangement was created specifically to ensure that conflicts of interest were never an issue. Certainly there were instances of collusion but these were hardly earth shattering and never created the types of scandal we have seen with LIBOR.

Today the speculators rule the roost with technology utilised to trade an enormous array of securities within minuet fractions of a second. Speed to take advantage of arbitrage between different international markets all trying to do the same thing is as far away from investment as it is possible to be. Not surprisingly pressures between investing and speculating have grown, where today we almost have two markets. One for high volume professional gamblers utilising investor money and the other, trying to invest longer term to create returns over a long period and where stock picking, based on traditional principles still hold.

The speculative side of the business undertaken by Banks using other people’s assets would have been illegal throughout most of history. Indeed it was why the Stock Exchange was set up to prevent criminal behaviour. Why then have we not heeded the evidence of the past and put back into place the very structure that was deemed so bad before?

I suspect the tendency is for people to believe that the world today is a better place and the past should never be repeated, however the evidence is that society is still full of people and firms that are motivated by greed.

But we can learn from the past and we should try and put back the barriers that protected investors and created unprecedented widespread economic growth and prosperity, which accelerated people from Victorian slums to owning their own houses.

So break up the banks and create real competition in the financial markets. Create a market once again that has single capacity, where investors are confident that their service supplier is not conflicted. Cut loose the speculative market we have today and allow banks to trade as they do today between themselves but using just their own assets and taking their own risks.

Build a City that has high moral principles and ethics that people protect and ensure are enforced. Treat greed as a pariah by delinking corporate financial and individual performance. Where bonuses are only paid as a percentage of profit not to the individual based on position or name or performance. Don’t worry about banks leaving these shores or so called successful bankers. They have brought the City and the Country to the edge of disaster and if we create a financial centre that global investors can trust which is secure, built on proven high moral and ethical individual behaviour we will get back to being better than the way we were.