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The future lies in a properly regulated City, one with greater transparency to illuminate the conflicts of interest inherent in integrated banks. It can throw its arms open and welcome hedge funds, private equity and listing refugees from around the world. The City should stand for liberty — but properly regulated liberty. And this is the fastest route to recovery.
Ken Costa is chairman of Lazard International and Gresham Professor of Commerce.
Yes
Does the banking system need fixing? Given that its explosion may yet end up costing each British householder some £20,000 — in national debt, to be repaid by taxes — there is a case for saying that the sector needs a lot of reform along the lines proposed by Barack Obama. Those who think it doesn’t should consider the following facts.
The last ten years witnessed two of the largest equity market collapses in history — the dotcom bust and the bank collapse — and probably £3 trillion in bank lending losses. Shareholders who had invested in bank stocks with investment bank arms have lost a fortune. And remember: the stock market is not owned by gentlemen in White’s. Investment in banks represented a very significant part of people’s retirement savings.
Despite the shareholders getting nothing, the financial intermediaries have seen their incomes go through the roof. Something is clearly — and massively — wrong here. The owners of capital keep losing, and the middle men keep winning. This is not the Anglo-Saxon capitalist model people felt they had signed up for. Above all else, the bank bailouts and subsequent bonus bonanza is fundamentally offensive to the US and UK culture — the simple premise that reward should be for success. The entitlement culture shown by parts of the banking sector here is reminiscent of 1970s trade unionism.
When Thatcher and Reagan promoted much wider share ownership (a fundamentally good idea) they failed to see that politicians like Larry Summers and Gordon Brown (long very close to parts of the investment banking industry) would rig the market against the owners of capital. If the financial sector is once again to provide huge value to the economy, and to its shareholders, then it needs to return to its pre-1997 market and shareholder-orientated structure.
Breaking up the banks — some form of Glass-Steagall-style separation of super-risk-taking and deposit-taking — is likely to be unavoidable given that the creditworthiness of nations will increasingly depend on how they protect themselves from banks deemed ‘too big to fail’. Rather than a threat to London, the City will benefit from reversing the consolidation trend of the past 20 years. Encouraging smaller and specialised firms may enhance the competitiveness of London.
It is to the credit of George Osborne that he was one of the first senior politicians to realise the importance of banking reform. Conservatives should own the issues of financial sector reform and shareholder rights. Thatcher created the first City Big Bang by recognising the need to reform the vested interests and increase competition. The Cameron government should show the same determination and create Big Bang II.
Mark Bathgate is an investment analyst and managing director of Tweeddale Advisors.
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