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Sunday 8 July 2012

Trust broken – can it be mended?


By Ronald Hepburn, Etoile Partner

The Economist this week leads with an indictment of the lack of morals of the banking industry, globally (see Banksters). They it accuses them of “a culture of casual dishonesty”; collusion, cartels, greed and a scant regard for the truth are not trust makers. The finance industry relies on one thing, trust. It is the core attribute which persuades people to allow the industry to handle their money; but trust is now the last thing we can bestow upon our bankers.

I have a small confession to make; I worked in the investment banking industry for 10 years, through the heady Champagne days of the 90s. I saw the deregulation of the industry and the free-for-all that ensued. I saw first-hand the destruction of value of the broking house for which I worked as it collapsed. At first it thought it was above regulation, then it tried to fiddle its way out of trouble, then it lost the trust of the regulators and shareholders. This was a Japanese collapse and the shock to the people of Japan was as palpable as they were forced to question their faith in the system.

Then as now, the issue remains the same. Bankers – and for that matter all people involved in the financial services industry – go wrong when they forget the fundamental social purpose they are there to serve. That purpose is not to make money for shareholders – that is merely a by-product. 

Banks need to rediscover their social purpose
About three years ago, just after Lord Turner, then Chairman of the FSA, accused the industry he regulated as being “socially useless” (Financial Services Authority chairman backs tax on 'socially useless' banks), I found myself chairing a meeting of City communications directors. I challenged them to answer the “socially useless” accusation of their own regulator. To a man and woman, they referred to their CSR policies – the thin veneer of do-goodery of the financial services corporation. After some further discussion there was general agreement that in fact they had no “social” purpose - other than to make money for the shareholders – and themselves of course, which could be seen as anti-social. And here is the rub. With such an attitude, moral rectitude in business dealings flies out of the window. They were all wrong in fact and I shall explain why.

Money and the single-minded pursuit of it flies in the face of the real purpose of the financial services industry, the social purpose which gives it permission to exists, which is to take custody of money lent to it by the public (shareholders, savers) and make sure it doesn’t get stolen or frittered away. Ideally it should also grow and be safe, while be put to good use. Most importantly it should still be there when the people whose money it is need it. This is the social purpose of the finance industry in an oversimplified nutshell.

Ah! But clearly there must be exceptions? Please let me have them? Proprietary trading? Surely that has no social purpose? It does actually, although the traders themselves wouldn’t recognise it. Proprietary traders (who use their own funds to trade securities for profit) provide much needed liquidity in the market. Derivatives traders? Amongst other things they provide farmers in Lincolnshire, Denmark and Alabama with valuable information about the price of their pork bellies in the future and allow oil and gas exploration teams to estimate the future viability of their finds.

The banking industry needs to buy back its soul, remember its real purpose and keep in mind that the money they are playing with is not theirs. They are just keeping it in trust. And the people, the regulators, the governments don’t trust them.

Thursday 5 July 2012

Time for Barclays tabula rasa

By Etoile Partner, Martin Roche

On Monday, my colleague, Trevor Datson, suggested that Barclays Bank chief executive, Bob Diamond, would be unlikely to hold out against the clamour for his head to roll in the wake of the LIBOR rate fixing scandal. Trevor’s instincts were spot on, for the very next morning, even before London’s financial markets were open, Mr Diamond had quit. Now it’s said in informed circles that what finally did for the mega-high-earning Mr Diamond was pressure from the Governor of the Bank of England, Sir Mervyn King, and from the Chairman of the UK Financial Services Authority, Lord Adair, for him to fall on his sword. If the rumours are true, and they make perfect sense to me, the regulators have acted at speed to try and limit the reputational damage to the City of London, send a signal to the world that the authorities are firmly in charge and give Barclays the earliest possible chance to start again with a tabula rasa – a clean slate.

So, what kind of man or woman is needed to rescue one of the world’s biggest banks from the trough of public despair and disgust into which Barclays has been plunged by the LIBOR rate-faxing, the miss-selling of retail and small business products, legal but publicly unpopular tax avoidance practices and a breathtaking degree of corporate arrogance by its now departed chief executive?

Who runs Barclays matters to the global economy and particularly to the places Barclays does most of its business, London and New York. The bank came through the crash of 2008 in a strong position and with a balance sheet that allowed it to snap up what was left of Lehman Brothers to become a much bigger player on the New Your investment banking scene. That fast and clever move was seen as a typically self-confident piece of entrepreneurial chutzpah of the type that had for centuries put London at the forefront of world finance.

Who runs Barclays matters, because the banks – those bailed out by the taxpayers and those like Barclays that were not – have since the crash of 2008 to keep winning the public’s “licence to operate”. How they behave is no longer simply a matter for shareholders and regulators, but also for politicians and the general public. All of the banks hold our financial future in their hands. The indebtedness of the UK’s banks is greater than the entire GDP of the United Kingdom, so now they are playing in the last chance saloon. More scandal and more failure could result in the City of London losing many of the privileges and tax benefits that give it a global competitive edge. The public wants the City to succeed, but not at any price.

The challenge for the new boss of Barclays will be to find ways of keeping the bank rich in swashbuckling dash, derring-do and breathtaking deal-making, whilst reducing reliance on high-risk trading and derivatives products, expanding lending to business in what is still a very uncertain market, satisfying the ordinary banking needs of corporate and retail customers, giving regulators little cause for concern and rebuilding the bank’s reputation for integrity. Perhaps even bringing it back to being the uncompromisingly principled and scrupulously honest bank of its Quaker founders. Maybe our readers will tell me if they think I’m being naïve in seeking a more ethically based banking culture.

Without doubt, the new boss at Barclays will need the toughest and thickest of skin, lots of high level experience in finance, in managing people and turning strategic theory into winning banking for customer and shareholder. But I venture that it will be personal values and strength of character that will wholly condition whether the new captain steers a straight and true course safely into port or strikes a reef and goes down with the ship. He or she will need an outstandingly gifted head of communications who comes with an equally strong reputation for integrity and strength of character. Such creatures are rare in most walks of business and public life and have all but disappeared from the City in recent years.

Let me give you an example of the type of advice the new Barclays’ communications chief must have the guts and experience to give his chief executive. Yesterday, the departed Bob Diamond gave evidence before the Treasury Select Committee of The House of Commons, one of the most powerful committees of Parliament. Now Mr Diamond is an American, though he’s no stranger to the UK, having lived here for 16 years, so he knows how the British behave in formal and informal situations. Yesterday he referred to every member of the Select Committee by their first name. That action sent all the wrong signals. Firstly, it showed discourtesy to Parliament and to the Committee (the Committee chair and members at all times called him Mr Diamond). It could also mislead the outsider into thinking that Mr Diamond and each Committee member are personal friends. What Mr Diamond appeared to be trying to do was what we in the communications business call “borrowing interest.” In short, he was trying to get some of the status and authority of the Committee and its members to run off on him and convince us he is as good a guy as they are and not the banker he is thought to be. Personally, I would not buy a used car from Mr Diamond. But he is history. His successor has to have very special qualities and a truly brilliant communications machine in support. Advice note Number 1 – when in formal settings be formal. That’s how proper bank managers behave.

Anything else will not be a tabula rasa. It will be a false start not a fresh start.

Monday 2 July 2012

London does not have a divine right to rule the banking world.


by Trevor Datson, Etoile Partner

Forget the individuals: Institutionally, London's banks are beginning to look and behave like wounded animals, and rival financial centres old and new are not only right to be licking their lips, they would be foolish not to.

Emerging relatively unscathed from the credit crunch, Barclays might have been forgiven for a moment of self-congratulation, no matter how weakly deserved. But the breathtaking audacity of the dodgy dealings on its trading floor has unseated its chairman Marcus Agius, whose resignation stands only a limited chance of saving the scalp of CEO Bob Diamond. If Diamond is forced to go - and the British media are unlikely to settle for less as they enjoy a moment's respite from examination of their own equally pernicious practices - then that sets a very troubling precedent for rival bosses. Because the one thing that we do know for sure about attempted LIBOR fiddling is that no one bank would stand an earthly chance of achieving this by itself. There are many more skeletons in the cupboard, and it's only a matter of time before the U.S. DoJ and the UK's FSA shake them out.

The advisers of these woebegone CEOs would do well to consider fronting up before the truth is dragged out of them. Currently, the spotlight is on Barclays, but it will only take one or two more dominoes to topple before the entire industry is held guilty by association. If the truth is merely murky rather than entirely black, better to get it out there while one or two people still actually care about the detail of what happened.

Needless to say the City of London can't rely on Westminster to dig it out of its self-created abyss. It's an interesting tightrope for the politicians, and one that history suggests they will straddle in a spectacularly painful fashion. Prime Minister David Cameron knows full well that Britain's unbalanced and tottering economy can't survive for long without the tax take from the City, but equally he knows that voters will have absolutely no truck with any expressed sympathy for his paymasters. Ed Miliband is in an identical position, albeit with the advantage that no-one will hold him too much to account just yet.

About the only thing that London's bankers have earned honestly in recent years is their awful reputation. Can it be recovered? Of course, but we're talking years, and that recovery will only ever be partial. The banks will be hamstrung by their own past and by a political and regulatory environment that might once have saved them, but which will now open the doors to the competition.

London does not have a divine right to rule the banking world. It has in some sense already abdicated. And the conventional pretenders to the throne (New York? Paris? Frankfurt? Really?) are assuredly not whiter than white. So, in some small way, the door to new ideas in banking is ajar. And bankers in Asia, the Gulf and even southern Africa are taking note. Honest bankers have nothing to fear from the sunshine.