Will We Recover From Investment Banking?

Is President Obama being smart about financial regulation? The Republicans in Congress objected to new financial regulation rules. These laws challenge the complete freedom hitherto enjoyed by the economic elite to conduct the hedge fund industry as they wish. Obama’s response was straightforward and well taken. He told Wall Street, “Unless your business model depends on bilking people, there is little to fear from these new rules.”

The federal government seeks to introduce transparency and fairness into the hedge fund market. Republicans are protesting on grounds of “more socialism” and “denial of freedom.” Not so long ago, these same Republicans were very keen to have the federal government bail out their banker friends. Then they stood mute whilst the bankers paid themselves huge bonuses, to the disgust of the American taxpayer. Freedom for the few should not be subsidized by the sacrifices of the many.

Five years after the worst world banking crisis since 1929, little or no action has been taken by western governments against those to blame. I have to ask, who do these bankers think they are? There seems to be a parallel with the way some Premier League soccer players are treated in England and an acceptance that a separate set of social rules applies. The soccer stars can rightfully claim to entertain hundreds of thousands every Saturday or Sunday as they play the beautiful game, but this is no excuse for some pretty deplorable behaviour on their part. One well-known Liverpool player descended to cannibalism last season. He deemed it justifiable ear-nibbling!

However, investment bankers play their game only for the very few and can make no claim for “the beautiful deal.” Over the past five years, we, the taxpayer bailers of the banking system, have been treated to disclosure of the behaviour that got the global financial world into the disaster from which we all suffered, something regrettably some Americans still don’t seem to understand.

In 2007, as the American housing market showed signs of weakness, Goldman Sachs, the doyen of Wall Street investment bankers, sold an investment product based on the housing mortgage market. The product was inherently bound to fail, something which Goldman knew but failed to mention. Worse, another Goldman client and customer, John Paulson Inc, was certain to profit from the in-built failure of the Goldman investment. I have no doubt that within the hundreds of pages of small print attached to the investment in question, Goldman will have warned buyers that investments can result in losses, that independent advice should be sought before buying and, possibly, a few words buried deep in the documentation even described the reality of the deal, namely that the buyer would almost certainly lose.

What is clear to me, as one who worked in the City of London for many years, is that Goldman behaved unethically and certainly breached conflict of interest principles. Goldman claimed that an individual rogue director was solely to blame, asserting that this person was working on his own. That won’t fly. Did Goldman not have a vetting process for financial products? Surely, its lawyers would have written the small print. Methinks this banker doth protest too much.

Lehman Brothers failed, Merrill Lynch got taken over and the American taxpayer bailed and bailed. On this side of the pond, the Labour government took a majority shareholding in two big banks, Royal Bank of Scotland and Lloyds, investing billions of pounds to shore up the failures. And what has happened since? I understand the American government has been repaid but our government has not. Yet the underlying principle of investment banking has held firm. Never mind ethics, ignore the shareholders, let’s make huge profits from risky trading so we can be paid huge bonuses. Life for investment bankers doesn’t seem to have changed. For savers and investors, however, life is very different. Annuities are on the floor, interest earned by savers is pitiful and there is no encouragement to save, which in turn weakens any economy. And the bloody investment bankers carry on as if nothing can touch them.

There is a proposal before Parliament to ring fence the savings side of UK big banks from the investment side but no legislation has yet been passed. I’m delighted to report that the Bank of England has imposed new rules on leverage ratios. I’m no expert but I believe leverage equates to retaining in capital a percentage of equity to the money lent. Barclays screamed “foul” but the regulator told this Bank to shut up, causing it to go to the market to seek some £7 billion in new capital. I know Barclays’ shareholders will be hurt but the remedy is in their hands. Why don’t they tell management that the bonus culture is ended? If all the investment banks did this, then maybe we would get some sense in the industry.

When the crisis was at its height, I found myself in North Carolina. Chapel Hill, home of the University of North Carolina, a wonderful campus, provided a delightful interlude. Then I moved on for a few days to Beaufort, pronounced “Bo-Furt,” a jewel of a town in the jewellery box that is North Carolina’s Crystal Coast. Here I must pause and invite the reader to Google both places for information. Don’t rely on me.

They are very polite people, the North Carolinians. On my last morning in “Bo-Furt,” I took a stroll to a coffee place, some two hundred yards away from my B & B. It took me a full twenty minutes, as I passed people who not only wanted to say “hello” but who enquired after my well being and wanted to engage me in conversation. True, it was small talk but it gives one a strong sense of bonhomie.

I stayed at the Inlet Inn, a delightful place with a view of a pretty yacht harbour. My spacious room had a veranda with his and her rocking chairs and a great view of the harbour, the river Newport inlet and unspoilt islands beyond. At $94 plus tax (a hefty 13%) per night – including a “continental breakfast” – it was a good deal. I am not being paid by the Inlet Inn for this review and the discounted room rate was achieved by being a senior, not for writing this piece. A Health Warning:  I wouldn’t come to NC in high summer, too hot and definitely too buggy.

Beaufort is part of the Inner Banks. The town was settled in colonial times and there is much architecture to admire. I took a boat ride to the Outer Banks, an Oceanside wilderness which has hardly changed since the founding fathers’ time. I have seen wild horses, all kinds of bird life, dolphins and maybe a whale – the glimpse was too quick to confirm. The boat ride, the beauty and peace there, the restaurants – don’t miss Front Street Grill - and the sights and sounds of the coast provided a refreshing change to large American and European cities.

Furthermore, it is my clear, immutable opinion that life on the Inner Banks and Outer Banks of North Carolina is infinitely better than any of the Wall Street and City of London banks, on any view imaginable.