By Alan Miller, Chief Investment Officer SCM Private
Trust in banking, and the financial services industry, has hit rock bottom. The industry has an uncanny knack of shooting itself in the foot with scandal after scandal revealing it as motivated by self-interest, self-preservation, arrogance and greed.
It was Warren Buffet who said "it's only when the tide goes out that you learn who has been swimming naked." In the last five years we have all witnessed just how exposed the financial services industry has been; with one scandal after another.
On LIBOR the tide has only just turned on the scandal and as the waters have started to recede we have already learned that Barclays had left its Speedos at home. We also know that regulators are looking into the kit bags of RBS, UBS, JP Morgan Chase, HSBC, Deutsche Bank and Citigroup. But this scandal is in another league. As many as 20 banks have been named in investigations or lawsuits alleging that LIBOR was rigged in the US, the UK, Canada, Japan, Switzerland and the EU. The Chief Executive of one multinational bank has called the LIBOR scandal "the banking industry's tobacco moment" referring to the acrimonious battle that cost America's tobacco industry $200 billion in 1998.
One might ask why does the rigging and attempted rigging of LIBOR matter? Because it is one of the World’s most important indicators designed to provide an objective assessment of a bank’s borrowing costs, tied to an estimated $800 trillion worth of securities contracts. According to the World Bank the combined GDP of all the World’s economies is just $70 trillion.
But while the rate was being rigged, the regulators were asleep at the wheel. The Financial Services Authority (‘FSA’), for example, knew as long ago as 2005 that something was not quite right with LIBOR, but it and the Bank of England did precious little about it. Timothy Geithner, the US Treasury Secretary has released emails from his time as President of the New York Federal Reserve stating that he was aware that LIBOR was rigged and that he had sent a memo to the Bank of England to alert them. The Deputy Governor of the Bank of England, Paul Tucker, held telephone conversations with Barclays that were interpreted, or misinterpreted, as an instruction to lower their LIBOR submissions.
While the good times rolled, few people really cared how the financial services industry conducted itself, and fewer still about interbank lending rates. The industry was a giantmoney making machine, and providing more came out at the end than went in at the beginning, everyone was happy. The industry fostered a culture where individuals were handsomely rewarded for their "creativity" in devising new and ever more complex products designed to take money out of their clients’ pockets and put it into their own.
In the good old days banking and finance was perceived as being “dull” and run by dull people. But there was a level of trust, honesty and transparency encapsulated by the trustworthy custodians of customer’s money. The Big Bang in the City was a watershed. The industry became sexy and its custodians became superstars with supermodel partners, superstar salaries and enormous bonuses. Recently the FSA has,belatedly,acknowledged this and admitted that mis-aligned remuneration practices have been behind many of the recent scandals.
Some in the industry have started to acknowledge its short comings. In a recent speech to the Confederation of British Industry (‘CBI’) in Scotland the boss of Lloyds Banking Group António Horta-Osório said that scandal after scandal had demonstrated that the banking industry had done itself no favours and in order to restore trust “the industry must change”, and that “banks should be simple and they should be boring”.
When I founded SCM Private with my wife Gina three years ago, we did so with an absolute commitment to transparency and fair dealing with our clients. We have tried not to be a lone wolf in the industry and have continually invitedthe industry to follow these principles. But our conviction has made us more enemies than friends. Irrespective of this, we firmly believe that if the City wants to rebuild its reputation then it must put aside self-interest and look to the longer term. It is time for robust laws and regulations to govern the industry and bring an end to these shoddy practices.
At last, some are recognising that these practicesshould have no place in a modern financial system. LIBOR’s days are numbered (at least in its current guise). The Government has commissioned a review, headed by Martin Wheatley the new Managing Director of the FSA, soon to be the FCA. He has already set out his thinking stating that LIBOR is “not fit for purpose” and that it needs to be replaced by the actual market rates paid by banks instead of the self-interested “guestimates”. That review should present its conclusions by the end of this month. Let us hope Mr Wheatley has woken up to the need for transparency, fair dealing and is prepared to act rather than his predecessors who swept countless scandals under the carpet. If he does then hopefully the next time the tide goes out (and rest assured it will) we won’t have to discover quite so many people swimming naked.
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