“We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it.”
Gordon Gekko, the cigar-chomping anti-hero of Oliver Stone’s Wall Street (1987), understood that the dominant element of the art of speculative finance is the bamboozle; the draping of a blanket of complexity over all the acres of dirty linen.
When the first gusts of the global financial storm began to be felt exactly a decade ago, it began with a babble of mind-numbing jargon. The business sections of newspapers spoke of something called a “credit crunch” and ran long features on troublesome “subprime mortgages” and “special investment vehicles.” Before too long though, as Adam Tooze has described, ordinary savers were forming queues outside branches of Northern Rock in Britain’s first bank run in 150 years. It was plainly serious, but what had happened? Something to do with the Rock’s reliance on “securitisation,” we were told. Bankers playing some sort of complicated games with money, pulling rabbits out of hats.
Then, a year later, the tsunami hit land and Lehman Brothers tumbled, triggering the biggest financial crisis in history. The financial system’s heart attack caused a sudden stop in world trade. Investments everywhere were cancelled. Stock markets plunged. And households ceased spending. Still, even as we slammed shut our own wallets, most of us were baffled by the cause. We have been feeling our way through the wreckage to the truth about what happened ever since. All those “Collateralised Debt Obligations” and “Credit Default Swaps” that peppered coverage 10 summers ago turn out to have been a red herring. This complexity was not the source of the disaster, only the cover. All that jargon and financial engineering merely covered the greed of investment banks; camouflaged the corruption of credit rating agencies; assisted with the capture of the regulators and politicians.
"The slowness of the political classes to grasp they were living in an utterly changed world was astonishing"The chief immediate source of the crisis was not really penurious Americans being sold mortgages they couldn’t afford, or the slicing up and re-selling of those loans, or the proliferation of complicated derivatives contracts. It was the global banking behemoths, which were funding their enormous balance sheets almost entirely with debt—or, in plainer parlance, their habit of gambling with other people’s money. Grotesquely under-capitalised, even relatively minor losses were enough to wipe them out. We learned the bitter truth of John Maynard Keynes’s satirical definition of a sound banker as one who “when he is ruined, is ruined in a conventional way along with his fellows.” The biggest banks in the world were indeed all ruined together—delivering a lethal collapse in confidence in the entire sprawling system.
But this irresponsible over-leveraging was itself the symptom of a rotten culture—slowly but surely, a moral as well as an economic crisis of finance began to come to light. The crash was like turning over a rock to reveal a morass of corruption. As lawyers, regulators and the media investigated the behaviour of failed financial institutions they soon found themselves knee deep in revelations of clients and customers being ripped off in the long years before the crisis. Pension funds were flogged securities that were designed to fail. Useless insurance, the now notorious Payment Protection Insurance (PPI), was pressed on households. Small firms were tricked into signing interest rate derivative contracts that ended up ruining them.
Evidence of sharp-elbowed shysters was everywhere, and before long it was supplemented by evidence of outright criminality. Crucial benchmark interest rates—the briefly famous Libor—were rigged by trading desks. We have learnt of the facilitation of money laundering for drug gangs and terror groups. We have learnt of industrial-scale tax dodging services, epitomised in HSBC’s Swiss operation, which was doling out bricks of cash. Court papers revealed that the bank told clients not to wire money in order to avoid creating a paper trail. And all this was for the sake of higher profits and bigger bonuses for bankers.
"Slowly but surely, a moral as well as an economic crisis began to come to light"The slowness of the political classes to grasp they were living in an utterly changed world, even as banks came begging for state support, was astonishing. While parliamentary committees did grill the bosses of the failed lenders such as Royal Bank of Scotland (RBS) and HBOS (and some of them even managed to sound contrite) nobody in the industry was being prosecuted, and if any of the top brass were fingered as “the guilty men” that was mainly by the media, not our political leaders. Indeed, in 2012 when the government finally stripped an honorary knighthood from Fred Goodwin, the man whose hubris and incompetence had destroyed the venerable RBS and thereby also blown a direct hole in the public finances, Alistair Darling, the former Chancellor warned against “[going] after people on a whim.” Periodically, the call would arise from parliament’s back benches, from City of London grandees or in the business pages of the media for an end to “banker bashing.” But as the years went by and the charge sheet of financial malfeasance kept rising, such pleas became less and less frequent. We are all banker bashers now.
And with reason. Regulatory fines and forced redress payments for conned customers from major UK banks now amount to some £40bn. That’s more than all the additional capital these institutions were forced to raise in the wake of the crisis. That means the money coming in to shore up the system, mostly from taxpayers, has essentially flowed straight out the back door to pay for past misdeeds. And there are more legacy costs to come; around £18bn according to the Bank of England. This means we are probably looking at total misconduct fines and redress equivalent to around 3 per cent of UK GDP. Globally, banking fines since the crisis have been estimated to amount to more than $320bn. But the biggest bill comes from the colossal economic disruption. The total cost in foregone global output from the crash has been tentatively estimated by Andrew Haldane, the chief economist of the Bank of England, at $60-200 trillion. That’s between one and five times the planet’s GDP.
Gordon Gekko went to jail. But back in the real world, there has been vanishingly little personal accountability for bankers after a full decade in which their destruction has been laid bare. In June, John Varley, the former Barclays Chief Executive, was charged with conspiracy to commit fraud during a 2008 round of capital raising after a Serious Fraud Office investigation—a case that is notable for its rarity. No other heads of banks that failed in the crisis have had any charges levelled against them, and no other senior executives that presided over cultures of malfeasance and corruption have been brought to book either. None have even been barred from working in finance.
Some have thrived. A former chief operating officer at Goldman Sachs, Gary Cohn, is now Donald Trump’s chief economic adviser and is leading a shameless assault on post-crisis financial regulation in the United States. Matt Ridley, the former chairman of Northern Rock, still opines from the lofty berth of the Times comment pages. Scores of others are living quietly and comfortably off years of bonuses awarded from dubious profits.
A former UBS trader, Tom Hayes, was sentenced in 2015 for 14 years for rigging interest rates. But he insists his superiors were well aware of what he was doing. “Either senior management knew what was going on or they did not,” says one former regulator. “If they knew, then they were complicit. If they did not, then they were incompetent.”
Ten years on and the reckoning for the great western banking disaster remains elusive. The question is no longer how the hell they did it—instead it’s how the hell they’ve managed to get away with it.
