Back in late-2008, in the immediate aftermath of the sub-prime crisis, those of us calling for a new “Glass-Steagall” split between commercial and investment banking were dubbed “Neanderthals” and “hot-heads”. Spool forward four years, and much has changed. But, maybe, not yet enough.
The desirability – nay necessity – of imposing structural reform on the Western world’s banking sector, is fast becoming conventional wisdom. Meanwhile, the “banking titans”, desperate to protect the status quo that has been so profitable for them but so disastrous for taxpayers, are clinging on by their expensively manicured fingernails.
This shouldn’t depress or surprise. This is how powerful vested interests behave. What should definitely depress us – and even make us angry – is that rapacious banks are assisted in their defence of the indefensible by the Chancellor of the Exchequer and the leading candidates to become the next Governor of the Bank of England.
The Glass-Steagall divide between commercial banks (that take deposits) and investment banks (that take big risks) was removed in the UK and US during the late 1980s and 90s. Ever since, financial markets have lurched from crisis to crisis. No other single act did more to cause “sub-prime”, and transform it from a banking crisis into a broader fiscal and economic crisis.
Once the depression-era Glass-Steagall legislation was repealed in America in 1999, Wall Street investment bankers were able to use taxpayer-backed deposits to take ultra-risky bets, knowing they would be rescued if their bets went bad. In doing this, they were following and competing with their City counterparts, the UK having earlier removed its “informal Glass-Steagall” – the split between commercial banks and the old merchant banks – as part of the 1986 “big bang”.
Re-imposing the separation would prevent investment banks from betting with government-guaranteed deposits, so exposing them to the full force of the market. At a stroke, our banks would be far safer and the “too big to fail” issue largely resolved.
All this is anathema, of course, to the “hot-shot” bankers who’ve relied on state hand-outs for survival and from whom politicians, in turn, receive campaign donations and cushy jobs in their dotage. That’s why Glass-Steagall “hot-heads” like me have been subject to ad hominem attacks by the banking lobby and their craven media chums.
Yet our deeply corrosive banking sector status quo is now being seriously challenged. Bank of England Governor Mervyn King is openly advocating a formal Glass-Steagall separation. So are Sandford Weill and John Reed, the two US bankers who relentlessly pushed the Clinton Administration into repealing the split, back in the late-1990s.
Former Labour City Minister, Lord Myners, is arguing for “complete separation”. So is Professor John Kay, one of the UK’s very few world-class academic economist. Terry Smith, a City denizen with a deserved reputation for speaking truth to power, backs Glass-Steagall. So did the late Sir Brian Pitman, probably the most successful and respected UK retail banker of the last 30 years.
It is deeply significant that Lord Lawson, who as Tory Chancellor in the mid-1980s oversaw the “big bang”, is an eloquent Glass-Steagall supporter. Peter Hambro, too, scion of the old British merchant bank, feels the same way.
Investment banks should live on their wits, Hambro recently argued, without the corrupting influence of a government-funded safety net. “It’s the unlimited liability that made merchant – or investment – bankers more circumspect in the past because they put their balls on the block,” he said. “Most of today’s financial problems are because the investment bankers, using the balance sheets of the retail banks, don’t share the pain. They don’t lose anything – and their culture has infected retail banking. They should never have been together and now they should be split, completely.”
The people mentioned above aren’t “Neanderthals” or “hot-heads”. They are individuals of massive experience and expertise, some of the Western world’s leading financial practitioners. Their views strike me as extremely compelling, not just because of who they are, but because they amount to common sense. It appears, though, despite the head of steam that has built up in favour of a Glass-Stegall split, that the UK is about to sleepwalk towards another devastating banking collapse in a few years’ time.
The Parliamentary Commission on Banking Standards, chaired by Tory MP Andrew Tyrie, has lately been hearing from some key witnesses. Sir John Vickers told Tyrie’s committee that he stood by the conclusions of the Independent Commission on Banking, which he chaired, to “ring-fence” retail and investment activities within the same institution, avoiding structural break-up of our banking monoliths.
Paul Tucker, the favourite to become Bank Governor when Sir Mervyn steps down next June, last week agreed with his rival Vickers, saying the government should implement the “ring-fence” without delay.
More experienced witnesses who’ve appeared before Tyrie’s Commission, such as the Former Federal Reserve Chairman Paul Volcker, have been rather more direct – not least because their careers in public life are almost over, so they can speak the truth.
“Ring-fences tend to be permeable and if you really want to separate operations very clearly and decisively, you put them in different organizations,” said Volcker. “In my experience, you don’t put two functions in the same organization and say that they cannot talk to each other or interact”. Of course you don’t. Anyone with even a modium of financial nous gets knows that to be the case.
Sir Mervyn, too, last week told the Commission that he “always thought total separation was the way to go”. Using strong language, the Governor made clear that the banks would be able to circumvent any ring-fence, if the interpretation of the separation depended on near-constant discussion between the banks and the regulators – as it would under the Vickers measures.
“If the judgment turns into a negotiation there will be only one winner,” warned Sir Mervyn. There was a “clear risk”, he said, that bankers would be able to “pull the wool” over the eyes of watchdogs.
Of course that is true. Everything that we have seen in the City and Wall Street over the last decade confirms it is true. The banks must be presented with a clear line in the sand, an explicit, institutional separation between retail and investment banking, that everyone can see. Only that will protect taxpayers, and the broader economy, from another banker-induced crash.
Despite all this, Tucker challenged Sir Mervyn, replying “not completely” when asked by the Commission if he agreed with the Governor. Tucker said this, of course, because he has long been the “bankers’ choice” to run the Bank of England, and because he knows that the person who will ultimately decide if he gets the job – George Osborne – himself doesn’t want to rock the bankers’ boat.
During the Chancellor’s appearance before the Tyrie Commission last week, he claimed that “aggressively” breaking up banks would do little to benefit the UK, insisting that the “ring fence” would make the financial system safer – even though the government has put forward legislation that makes the feeble Vickers plans weaker still, while delaying their implementation until 2019.
Tyrie is a laudably independent thinker and is backed by some impressive Commission members. I can only hope that Osborne’s insistence that the Commission should, in essence, hurry up and rubber-stamp the Vickers proposals stiffens their resolve to join the “Neanderthals”, by recommending that, in fact, the proposals don’t go nearly far enough.