Only full separation will make our big banks safe

Barclays is to shed around 14,000 jobs in 2014, we learnt last week, more than half of them in the UK. These head-count cuts are largely about the on-going process of humdrum branch closures – not only in Britain, but also in Spain, Italy, Portugal and France. Such job losses are sadly inevitable, given the rise of mobile and on-line banking.

This Barclays announcement, though, was spun rather differently. Rather than discussions about banks’ reduced presence on the High Street, our airwaves were instead filled with tales of Barclays’ “courage”, as it distanced itself from “casino banking” in a “decisive break with the past”.
Some 2,000 of this year’s job cuts are in Barclays’ 26,000-strong investment banking division. More such posts are to go, the bank tells us, in 2015 and 2016.

“This is a bold Barclays simplification,” declared Antony Jenkins, the newish CEO. The bank, in his words, is to become “leaner, stronger and much better balanced”. The narrative is that under Jenkins – whose experience is largely in retail banking – Barclays will be very different animal than it was under his American predecessor, Bob Diamond, who was aggressively investment-bank focused. Diamond’s time at Barclays ended when he resigned over the Libor rate-rigging scandal, resulting in $450m of payouts and fines.
During the first quarter of this year, Barclays’ investment banking business saw a 28pc slump in revenue, reflecting slower trading in currencies, bonds and commodities. Less than a third of profits will stem from investment banking over the coming years, Jenkins says, compared to over a half under Diamond. Barclays will also set up a “bad bank” comprising some $115bn of toxic loans and assets, over four-fifths of which derive from investment banking activity.

The first to say is that, despite the mood music around this announcement, Barclays will remain heavily involved in investment banking. It retains the equities business it acquired from Lehman Brothers after the late-2008 chaos and there’s no mention of scaling it back. Even if all the non-retail job cuts announced go ahead, Barclays will still have an investment banking operation comprising 20,000 people.

Which brings me to the main point. Barclays act of self-restructuring, the warm and fuzzy new emphasis on “customer focus” and background briefings about “moving-on from the Diamond regime”, in no way negates the overwhelmingly pressing need to make a decisive spilt between high-risk investment banking activity on the one hand, and the utility banks serving ordinary firms and households on the other.

The bank lobby is desperate to suggest that it does. “The investment banking industry, for all intents and purposes, has disappeared,” said Morgan Stanley’s CEO James Gorman last week. “Large scale investment banks don’t exist now and won’t exist in the future,” he continued. The clear implication is that the current regulatory response is working and the banks are fixing themselves.

I just don’t buy it. As long as retail and investment banking are contained within the same group, governments will never let them go bust given the need to protect ordinary deposits. Such universal banks will always eventually lever-up, taking on more and more debt, and ever more risky bets, in the knowledge the bail-out will come.

The UK government argues that the Vickers reforms, designed to ring-fence investment banking activities while allowing them to stay within deposit-taking institutions covered by a de facto taxpayer-backed guarantee, are enough. But, as history shows, ring-fences soon become string vests. However many “retail bankers” like Jenkins are appointed to run our big banks, however much of a “nice guy” he is, when the go-go years return, it is always the bonus-driven, high-risk investing banking culture that prevails.

The only way to make our big banks safe, or as safe as they can be, is a full, line-in-the-sand, separation of investment and commercial banking – different institutions with different ownership and different business models. This is the Glass-Steagall divide, implemented in the US after the 1929 Wall Street crash. Glass-Steagall kept America safe from major, systemically-damaging bank failures for almost 70 years. Since it’s repealed in the late 1990s, the world has lurched from crisis to crisis. My 11-year old daughter gets it. And the only reason the banking lobby doesn’t is because, for obvious financial reasons, it doesn’t want to.

A recent report from the International Monetary Fund demonstrated the world’s largest banks still benefit implicit public subsidies of up to $590bn because of their “too-big-to-fail” status. UK institutions enjoy by far the most backing – $110bn – compared to the size of their host economy. Such analysis points squarely to the abject failure of post-crisis reforms designed to solve TBTF – despite a vigorous bank lobbying campaign claiming it’s no longer an issue. The spinning of Barclay’s retail banking job cuts into a statement about “rebalancing” and “stability” was the latest episode of that campaign.

But Barclays, my banking friends will no doubt be screaming while reading this, didn’t need a government bail-out, despite being a universal bank. Case against Glass-Steagall dismissed. Utter tosh, is my reply. Yes, the conventional wisdom, shaped by the banks, is that Barclays avoided a state-rescue under Diamond. But it was mighty close. Such a bail-out may well have been needed, had Diamond beaten Fred Goodwin’s RBS in the reckless race to swallow ABN Amro. And Barclays would definitely have fallen into the British taxpayers’ arms but for a $7bn rescue package from the Abu Dhabi and Qatar (much of which was, in fact, government money, even if dishonestly presented as “private investment” at the time).

The reality is that in the advent of another financial crisis, and in the absence of new reforms, Western taxpayers (and particularly British taxpayers) will still be on the hook for hundreds of billions of pounds, dollars and euros to support our bloated banks. The lack of meaningful reforms, in fact, has led to behave which, over the last 5 years, makes another “Lehman moment” more likely.

Does too-big-to-fail still exist? “Yeah, of course it does,” said Tim Geithner last week. Having served as Obama’s Economic Advisor, and before that as Treasury Secretary under Glass-Steagall repealer Bill Clinton, he should know. Geithner has a book to sell – which, perhaps, explains his new-found candour.

I have to say though, there are a string of extremely experienced ex-investment bankers who, having made their stash, then seek to brush up their memoirs by saying that ending Glass-Steagall was a mistake. Former Citibank bosses Sandy Weill and John Reed, together with Former Morgan Stanley CEO Phil Purcell and his Merrill Lynch counterpart David Komansky have all, since 2009, said it was wrong to get rid of Glass-Steagall.

On this side of the Atlantic, too, the implementation of a full banking split has many extremely authoritative and knowledgeable advocates – including Mervyn King, Lord Lawson, Former Labour City Minister Paul Myners and many others besides. Again, though, it’s striking that most of those with the guts to speak out, and gainsay the banking lobby are, with all due respect, either in retirement or towards the end of their careers. And as for leading academics saying what is obvious when it comes to bank restructuring – forget it. The prospect of consultancies and speaking fees is, for many, simply too tempting.

“Regulators will never succeed in regulating the universal banks, never,” Lord Lawson told me last month. “It’s foolish to think you can”. That remains true whatever cunningly-crafted “break with the past” claims last week came out of Barclays.

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