By William K. Black
Bloomington, MN: December 16, 2014
On June 20, 2012 the UK Commercial Secretary to the Treasury, Lord Sassoon of Ashley Park gave a speech to the British Bankers Association – the group the U.S. government (i.e., the FDIC) found to have helped organize the world’s largest price rigging cartel and fraud in the form of rigging Libor. The financial crisis occurred under the “new” neo-liberal Labour when its championing of the three “de’s” – financial deregulation, desupervision, and de facto decriminalization – combined with modern executive and professional compensation and the effective elimination of “joint and several liability” to make the City of London the most criminogenic environment in the world for financial “control frauds.” Naturally, the Tories have decided that the answer to this disaster is to double-down on Labour’s embrace of the three “de’s.” Indeed, the first words in Lord Sassoon’s prepared speech were “Thank you Philip [Hampton].”
Sir Hampton prepared the notorious report, for Tony Blair in his neoliberal heyday, that called for dramatically increasing the three “de’s” – in every regulatory context. Sir Hampton, after holding a senior position with one serial criminal enterprise Lloyds, was at the time of Lord Sassoon’s talk, the Chairman of the Board of an even larger serial criminal enterprise, RBS. The UK government, which owns 80% of RBS after bailing it out, turned to Sir Hampton to help run one of the many banks he did so much to destroy.
On February 3, 2012, a few months before Lord Sassoon’s speech to the bankers, Sir Hampton made the English front pages for these comments: “top bankers had ‘creamed it’ by hauling in high pay, while shareholders had received ‘diddly squat’ for ten years.” That too was a consequence of Sir Hampton’s anti-regulatory architecture. His hostility to vital regulation (of bank compensation) meant that “top bankers” had made tens of millions of dollars for looting “their” banks while the fraud epidemics they led caused the Great Recession that led to shareholders receiving “diddly squat” and borrowers being left with huge losses and debts. As late as February 3, 2012, he continued to oppose any regulation of executive compensation. Sir Hampton claimed that it was necessary for RBS to pay huge bonuses to its CEO in order to get the “best people” even though he had just seen a full decade in which such bonuses led to the worst people being made wealthy while they looted the UK’s largest banks and tanked the economy.
Lord Sassoon continued to push the mantra that the City of London needed to win the global financial regulatory race to the bottom.
“Now I would like to focus this evening on some of the work that has been done – and the work that still needs to be done – to secure the future of the UK as the world’s number one financial hub. And what we need to do truly to bring about a new Golden age for British banking – one that is some improvement on the pre-2008 model.”
Lord Sassoon said that the UK should learn some (unstated) regulatory “lessons” from the financial crisis brought on by the three “de’s.” That crisis devastated the UK, but Lord Sassoon claimed that the UK’s critical need was to aggravate the three “de’s” to ensure that the City of London continued to “win” the regulatory race to the bottom.
“[I]t is also important that we do not allow regulation to worsen the existing problems that Europe faces.
I carefully read the BBA’s own Banking Industry report, published last month, which rightly drew attention to the negative effect that global regulation and the uncertainty around it was having on the industry.”
The senior UK bankers, of course, are delighted that the City of London wishes to continue to create the criminogenic environment under which they were guaranteed to “cream it” while shareholders got “diddly squat” and borrowers and customers were bankrupted or suffered huge losses. The bankers championed the three “de’s” before the financial crisis and after the financial crisis.
Lord Sassoon then emphasized how total the Tories’ commitment to the big UK banks was – no matter how many frauds the senior bankers committed while looting “their” banks, no matter how many unsophisticated customers they ripped off through the sale of unsuitable investment products, and no matter how many small businesses were denied credit or ripped off through exotic derivatives (swaps) – the Tories would “of course, plough on” in support of the bankers. Lord Sassoon did express exasperation that the bankers failed to make it easier for the Tories to help them by ending the practice of having a huge new scandal disclosed every month.
“However it may feel at times to you in the industry, this is a government that wants to see a thriving banking industry. Not just to support the rest of the economy but to be a world leading, successful industry in its own right.
Now, you still don’t always make it easy for us – or for yourselves – every board pay dispute, every new misselling scandal, every deserving SME refused credit, complicates our shared agenda – but we will, of course, plough on.”
On every regulatory issue that could impair the City of London’s determination to retain the weakest financial regulation, Lord Sassoon made it clear that the Tories were firmly in the bankers’ corner. Lord Sassoon was so firmly in the bankers’ corner that he said that if it were a choice between “innovation” and avoiding a financial crisis (“stability”) the Tories would pick financial crises.
“We must not allow innovation to be stifled in the name of stability. So, we are strongly resisting the Commission’s proposals for a Financial Transaction Tax. A proposal that would harm growth, increase market volatility and drive business away from Europe is insane.
Similarly, we are challenging the ECB’s location policy in the European Courts. Because it is not acceptable for a body that is meant to promote single market principles to force clearing houses dealing with large Euro based transactions to locate within the Eurozone.
The recent proposals from the European Parliament that variable remuneration [bonuses] should be limited to no more than fixed pay are also of concern.
Capping variable remuneration in this way will inevitably lead to an increase in fixed costs as banks increase fixed pay. This means that much of the progress made in recent years to align risk with reward, through deferral and claw backs, will be lost.
The proposal, if enacted, would also make it more difficult for banks to retain capital in a stress scenario, and would also make it harder for financial institutions to claw back pay in cases of poor performance – reducing the alignment of employee incentives and risk.”
The UK has not “align[ed]” “risk with reward” in its compensation and bonus plans. Indeed, it has chosen to make it very difficult to claw back even massive bonuses that prove to have been based entirely on inflated reported income.
Lord Sassoon’s speech admitted that effective financial regulation is actually critical to maintaining bank safety.
“A well regulated sector is key to competitiveness, reassuring customers that they can have confidence in the markets they are using. A strong and proportionate regulatory system is an essential platform for the success of the City; not a hindrance to it.”
The reality, however, is that he knew his audience was composed of bankers – not banks. Bankers know that vigorous banking regulation is good for honest banks, which is why they strive so mightily to prevent vigorous banking regulation. Lord Sassoon followed those remarks with this ode to the three “de’s.”
“And on the PRA [the then newly proposed Prudential Regulator division of the Bank of England] side, I want to read an extract from what Sir Mervyn King said in his Mansion House speech a year ago because I found it hugely encouraging. This is what the Governor said:
“The style of regulation will also change with the PRA. Process – more reporting, more regulators, more committees – does not lead to a safer banking system.’”
More financial reporting and regulators are essential in the UK because they would lead “to a safer banking system” if they were used competently and vigorously. The UK had far too few regulators and needed much better information systems that would draw on “more reporting.” King was a failed regulator, yet the Tories were “hugely encourage[ed]” that he had abandoned none of his anti-regulatory dogmas despite the financial crisis. The Tories picked the Bank of England to be the new regulator to ensure the continuation of weak regulation and supervision – and the de facto decriminalization of financial fraud by elite bankers – while creating the political illusion of change by moving financial regulation from the equally neo-liberal FSA. Unsurprisingly, the Tories also substantially reduced the Serious Fraud Office’s (SFO) already grossly inadequate budget and staff to ensure that it remained a paper tiger. (Libor, and the SFO’s unwillingness and inability to take on even the fraud “mice” eventually became such a political embarrassment that the SFO was forced to start an investigation of the mice and the Tories found it politically expedient to provide a budgetary supplement to the SFO to fund a modest investigation.)
Lord Sassoon was so enamored with the three “de’s” that he emphasized that the Tories’ answer to the financial crisis was a reduction in the number of regulators and the information they received from the banks.
“I believe that we can operate prudential supervision at lower cost than hitherto by reducing the burden of routine data collection and focusing on the major risks to the system. It is vital that we collect and process data only where the supervisors have a need to know. Targeted and focused regulation, allowing senior supervisors to exercise their judgement, does not require ever-increasing resources.”
This point is subtle and I will expand on the point in many future articles, but the most abused and dangerous word in destroying effective regulation is “risk.” It has become the weapon of choice to try to justify that which has proven catastrophically harmful to the public – and a goldmine to corrupt CEOs. The word “risk” is used in a financially illiterate and anti-scientific manner to pretend that imposing the three “de’s” for the purpose of deliberately crippling what criminologists refer to as our “system capacity” to detect, investigation, and sanction the most damaging white-collar crimes. Proponents of “risk-based regulation” have consistently created Kumbaya regulation systems in which the most severe risks are ignored under the disingenuous rubric of “risk-focused regulation.”
The con works like this: (1) the Kumbaya proponents assume (contrary to reality) that industry members rarely engage in serious misconduct, (2) therefore, a pittance of regulators can, if they “risk-focus” on the rare “bad apple,” regulate an entire industry successfully. Conversely, the same Kumbaya proponents claim that (3) there are innumerable lesser violations, (4) those lesser violations are unimportant, even cumulatively, (5) so the failure to sanction white-collar criminals for minor violations of the law is no big deal (no “broken windows” in white-collar spheres where we’d have to arrest CEOs) or even desirable, and (6) the regulators will never have enough resources to sanction all of these lesser violations because such violations are so numerous – and it would be a waste of societal resources to sanction large numbers of lesser violations.
The proverbial bottom line is that regulatory resources might as well be slashed and we should regard the fact that violations of the laws by elite white-collar perpetrators will rarely be sanctioned as a great leap forward. This bottom line is a superb means of maximizing the risk of producing a criminogenic environment and multiple “Gresham’s” dynamics. That means that the Kumbaya proponent’s faux “risk-focused” rubric has, recurrently, dramatically increased the risk to the public and the gain to elite criminals.
Lord Sassoon noted to the bankers that winning the regulatory race to the bottom was an explicit or implicit mandate of the UK’s financial anti-regulators.
“We agreed with the Vickers Commission and introduced an amendment to give the FCA a competition objective. We don’t, though, see the need for an explicit international competitiveness objective. We believe that it is getting the substance right – proportional, fair, transparent regulation – which will lead to a more competitive London and UK sector – not the introduction of a further competitive markets objective of an ill-defined kind.”
It is insane for financial regulators to have “a competition objective.” It is, however, nirvana for corrupt senior bankers. The City of London, net, caused the UK enormous harm. Its culture is corrupt and it functions as a parasite that saps the real economy rather than an “engine of growth.” All the UK’s major parties agree with Lord Sassoon that this sentence from his speech is sensible – which reveals how widespread that insanity is among UK elites.
“While other Western financial centres have lost their competitive edge, London has strengthened its position as number one in the global index. Key players across the sector are locating here.”
That sentence is very bad news. The City of London was already the financial cesspool of the world, the most criminogenic environment for financial fraud, and the cause of immense losses of jobs and wealth by tens of millions of people of the UK. The City of London is actively working to race even further to the bottom, and the politicians from all the major parties remain eager to help make the City of London ever more corrupt at the expense of the public.