ll over the world governments have written a blank cheque to rescue failed banks through cash injections, loan, guarantees and toxic debt insurance. The US has committed $24 trillion and the UK has committed nearly £1.4 trillion. There is an urgent need for durable reforms. The newspapers and air waves are full of good ideas for reforms, but ministers only have ears for corporate elites. In the words of the UK Chancellor Alistair Darling, "I've made it very, very clear on a number of occasions that we believe that banks are best run in the commercial sector and privately owned, properly regulated and supervised. That's the best place for them to be and our policy hasn't changed one bit". The government agenda is now driven by corporate elites, all connected with failed institutions. This is illustrated by three recent reports, all of which have received approving nods from government and opposition politicians.
The first of these, published in March 2009, ‘The Turner Review: A regulatory response to the global banking crisis', was drafted by Lord Adair Turner, chairman of the Financial Services Authority. From 1995-99, he was director general of the Confederation of British Industry. From 2000 to 2006 Lord Turner was vice-chairman of the US investment bank Merrill Lynch Europe, an organization which recently got into financial difficulties and with the support of the US Federal Reserve has been absorbed by Bank of America.
Merrill Lynch has not been a stranger to excesses and a number of its executives were alleged to have aided and abetted Enron to commit frauds. A 2008 report by the US Permanent Subcommittee on Investigations was critical of Merrill for developing, marketing and implementing a ‘variety of abusive dividend tax transactions to enable its non-US clients to dodge payment of US taxes on US stock dividends'. In 2005, it was fined $14 million by the US Financial Industry Regulatory Authority for violations relating to sales of shares. In 1999, Merrill Lynch was fined £6.5 million by the London Metal Exchange over its involvement in the Sumitomo copper market scandal and the allegations that it assisted clients to manipulate the copper market. The second report, published in May 2009, ‘UK international financial services - the future', is written by Sir Winfried Bischoff, a former chairman of Citigroup Europe and carries the full personal endorsement of Chancellor Alistair Darling.
Sir Win joined Citigroup in 2000 and became its chairman in December 2007 and must bear some of the responsibility for the bank's toxic assets and precarious financial position. Citigroup has been bailed out not once but three times by the US authorities. A 2008 report by the US Senate Subcommittee on Investigations criticized Citigroup by finding that it knowingly crafted transactions ‘to enable its offshore clients to dodge US taxes on their stock dividends'. In 2005, Citigroup Global Markets Limited, the European investment banking arm of Citigroup, was fined £13.9 million by the FSA for failing to conduct its business with due skill, care and diligence. With government approval, Sir Win has been appointed chairman of the Lloyds Banking Group. The UK government owns 43% of the bank.
The third report, published in July 2009, ‘A review of corporate governance in UK banks and other financial industry entities' is written by Sir David Walker. He is former chairman of Morgan Stanley and worked at the bank from 1994 to 2006. He is also a former Deputy Chairman of Lloyds Bank and Chairman (1985-1988) of Johnson Matthey Bankers, a bank that attracted adverse publicity in the mid 1980s. His association with troubled banks should be a matter of public concern, but has enjoyed considerable political patronage. From 1988 to 1992, he headed the Securities and Investments Board, the precursor to the Financial Services Authority.
In the current crisis, Morgan Stanley has been bailed out. The bank has also been attacked by the US Senate Permanent Subcommittee on Investigations for peddling tax avoidance schemes and helping clients, from 2000 to 2007, to dodge payment of U.S. dividend taxes of over $300 million. It has also had many brushes with the regulatory authorities and paid fines.
Lord Turner's report contains 28 recommendations. Turning failed banks into co-operatives or mutuals is off the agenda. The suggestions include the need for a higher capital adequacy, reducing financial leverage, improved supervision of banks, deposit insurance, good governance of credit rating agencies and possible controls on executive remuneration.
The report does not provide much detail about how any of this is to be achieved. In this model, there are no additional rights for depositors, borrowers or purchasers of insurance, savings and pensions plans to appoint directors and thus check the excessive risk-taking impulses of directors. Neither are these stakeholders to have any right to vote on executive remuneration.
The report makes some noises about conflict of interests at credit rating agencies but again contains no worthwhile proposals. For example, it could have recommended that credit rating agency functions be performed by not-for-profit organizations. The report offers no way of understanding or checking the fast-buck culture of financial conglomerates.
The Bischoff Report is even worse and takes a swipe at the mild criticism contained in the Turner report. Bischoff isn't keen on regulation through the EU and is not keen on any major regulatory change at home either. Despite the biggest financial crisis of all times, he says, the "existing principles, rules and practices should only be replaced with proper justification". Isn't the economic turmoil and £1.4 trillion bailout justification enough?
The neglect of science, manufacturing, research and development has been one of the biggest failures of the UK economic policy. The huge social, economic and political investment in financial services has made the UK economy lopsided, but Sir Win recommends that the ‘Government and the industry should collaborate in order to maintain and expand the UK's central role as a finance portal for the rest of Europe and the world'. He opposes any need to separate the UK retail banking from the speculative side, i.e. no equivalent to the, now abolished, Glass-Steagall Act and does not like progressive taxation either and recommends that the UK ‘taxation policy should be mindful of the wider aim of maintaining and expanding the UK's central role as a financial centre'. The Walker Review focuses on the internal governance of banks and wheels out the tired and failed policies. These include the suggestion that shareholders need to be more active in monitoring companies and their boards. Non-executive directors need to be more vigilant, particularly in deciding pay arrangements for top earners. The review recommends revisions to the Combined Code of Corporate Governance. Such Codes do not give enforceable rights to any stakeholder and remain voluntary. Walker isn't keen on the introduction of legally enforceable rules. Apparently chaps can continue to regulate chaps. There is no explanation of why the previous Codes have failed and why employees, creditors, depositors, taxpayers and local communities continue to be excluded, even though they have all suffered from the follies of the current corporate governance arrangements. The above three reports are prepared by individuals associated with a bankrupt industry. There was no input from fleeced customers or the taxpayers. The elites are setting the agenda for reforms but their own organisations were hardly model entities. If the shortcomings of the banking sectors were evident to them then why did their own organisations not lead the way? Even so they are keen to preserve the privileges of the industry and have failed to develop any radical agenda for reforms. The three reports have been enthusiastically embraced by ministers. They confirm how corporate elites have colonized the state.
Their preferences masquerade as policies of the state. Rather obligingly, in a one-sided bargain the state has eliminated the downside risks and made banks bankruptcy proof. This has not led to rights for stakeholders, changes to internal governance of banks or even robust regulation. Bankers have the best of all worlds and are not going to embrace any major change. This is the inevitable outcome of a close and corrosive relationship between the state and major corporations. Corporate executives are seconded to government departments and civil servants complete the journey in the other direction. The same companies provide jobs and consultancies for potential and former ministers to ensure that their private interests shape public policymaking. The absence of any meaningful reforms will lead to even bigger financial scandals.