London and Big Bang Legacies

SCMP August 12 2012

The London Olympics has been a big and enjoyable bang for the city and most followers of the events. But now Londoners will have to start contemplating the after-effects not just of the Olympics but of another Big Bang which occurred 25 years ago and whose benefits may have run their course. There are lessons here for Hong Kong , a city that similarly likes to punch above its weight in international commerce.

I refer to that day, October 27, 1986, when Britain 's financial rules were changed dramatically and in one go by the Thatcher administration. Gone were most of the rules that had made the City of London a slowly declining place of cosy cartels and old-boy networks to which foreigners had limited access. The Big Bang set the course that enabled London to become the world's trading centre for a financial industry itself on the cusp of a communications-driven surge in the number and turnover of tradeable instruments. Without the Big Bang and the US-driven trading boom, there would be no Canary Wharf , no Shard, no surge of foreign financiers, no deluge of bonus money to support property prices, art collections and gourmet restaurants.

Now we know that the whole financial system on both sides of the Atlantic got out of control partly as a result of the combination of new products and lightly regulated markets. The crisis which began in 2008 is not resolved; significant parts of the international financial industry will contract, putting a lot of pressure on London , and some on Hong Kong .

Painful adjustment is needed. It does not necessarily call for more regulations but for what the Big Bang originally introduced - more competition. Looking at recent actual or alleged scandals in the sector shows up several quite separate issues.

To start with the most recent - the New York allegations of massive illegal transactions with Iran . These allegations say not a jot about banking principles but much about US politics and policies. Firstly, note that the international banking system was roiled by a recently created New York state agency acting in an area that should be the preserve of the US Treasury and federal agencies. Like the rush to charges in the Dominique Strauss-Kahn case, it reflects how political posturing affects law enforcement. Secondly, the obsession with Iran again shows Middle East policy is led by the nose by its closest ally, the race-based, expansionist, nuclear-armed state of Israel .

There is a wider issue here, too, about the relationships between so-called laundering of money, whether of an Iranian oil company or Mexican drug lords. HSBC may have thought it worth paying the penalty for laundering drug money rather than take on the regulatory system. But selective prosecution of such activities is the norm for the US , a norm which is becoming a real threat to freedom of commerce. Because all dollar transactions must pass through the US banking system, such interference will encourage use of other currencies and undermine the US dollar.

It is lucky for Asia that countries like China openly ignore the US and carry on their normal banking business in New York . US exceptionalism is clashing with the free trade, free flow of investment policies from which the world has benefited.

The irony is Standard Chartered is under fire when it largely avoided the 2008 crisis by sticking to its main business - trade and business and retail loans - rather than board the high-speed trading and derivative bus with the likes of Barclays.

The light touch of regulation in London certainly contributed to global problems. The trust on which Libor, the London interbank offered rate, was based dissolved under the pressure of short-term profits.

But London 's faults were far less important than developments in the US - the abolition of Glass-Steagall, the unmonitored derivatives trading and the culture of huge bonuses ensuring a focus on risk-taking to boost short-term profits, the ambivalent role of the big four audit groups, the lobbies in Washington , etc.

After 2008, more should have been allowed to fail and be broken up, and well-capitalised specialist firms and partnerships to re-emerge in their place. As it is, public money continues to be the backstop of the system and investment banks to make much of the so-called trading profits as profits at the expense of their clients. What is high-speed trading but a system of sophisticated front-running? Controls on funds at risk remain inadequate, systems too complex for proper oversight and the computers themselves sometimes go wrong - as Knight Capital found, losing US$440million on one day.

Hitting foreign banks for alleged laundering is a diversion from the real issues of how to make the financial and securities industries competitive and innovative without putting the wider system at risk.

Meanwhile, major banks that are supposed to service businesses and households are run by investment bankers with scant interest in these. I have spent three weeks trying to get Barclays Bank, UK - where I have had an account for 50 years - to remit funds to my own account with HSBC. After a visit to a branch in London and five international phone calls, I remain thwarted by a computerised security system from which there is no human exit. If I am ever able to close the account, I will!

It's a small example of why banks cannot be all things to all financial sectors, let alone in all countries. Hopefully, for London , it is an international magnet for many, not just the financial crowd. The quarter-century of Big Bang boost is at an end.

 

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