By Ian Fraser
Published: The Sunday Times
Date: 23 August 2009
Author Philip Augar warns that reform of financial services may not happen and calls for a full independent enquiry. Photo copyright Jiri Rezac and used with permission (www.jirirezac.com)
Given their near-death experience last autumn, one might have thought Britain’s financial services industry and the City of London would feel some contrition or even some shame at their self-destructive tendencies. One also might have thought there would be a more vigorous debate about the future of capitalism — and even what an economy is for.
However, Philip Augar, who wrote The Death of Gentlemanly Capitalism, The Greed Merchants and Chasing Alpha, is not surprised that neither of these outcomes has occurred. In a talk at the Edinburgh International Book Festival last week he said that “free-market politicians” and financial services industry insiders are trying to close the waters on this debate.
He said that, having patched up the financial system, their primary goal was to see a return to business as usual. “What they’re saying is, ‘We’ve learnt the lessons, now just leave it to us to behave responsibly.’ I think that would be a mistake, because then we wouldn’t get the forensic re-examination of business models that is required if we are to proceed safely in the longer term.” He said that, after a spate of half-year results in recent weeks, the financial industry has gone back to its usual game of saying the rest of us should leave it all to them.
But Augar added: “We really do need to ensure that financial institutions are kept in their place. We need to challenge free-market economics. We’ve got to do as much as possible to keep the debate running.” He suggested a full independent inquiry is required. The inquiry’s remit should be to understand how the capitalist system changed from the 1980s and how that gave rise to the current crisis and what the solutions are. He concedes that the chances of such an inquiry being ordered by government are minimal.
So at least the festival event — at which he shared the podium with Paul Mason, the BBC Newsnight economics editor — gave Augar a chance to explain why he thought the crisis had occurred. He partly put it down to the unchallenged faith in free markets that have permeated business schools, universities, governments, business and finance.
Augar is a credible commentator on such matters. He worked as an analyst in the City of London from 1978 to 2000, latterly as group managing director at Schroders, before its sale to Citigroup. Since then he has penned five books including The Death of Gentlemanly Capitalism, the Greed Merchants and Chasing Alpha, based at his home in Cambridge. These mainly focus on exposing the self-centred behaviour, structural problems and conflicts of interest that, much to his chagrin, have come to characterise the City.
“The business model in the City changed as a result of Big Bang [when the rules governing the London Stock Exchange were radically overhauled in 1986] and the arrival of the Americans. Before that, every part of the industry had its own specific role and did just that. Each part was separate and there were no conflicts of interest — and the general understanding was you put your clients’ interests first. Flip forward 30 years and all those activities are integrated, and I still think that conflict of interest is the elephant in the room which no one talks about. And it seems to me that financial institutions now put the interests of their bottom line ahead of their clients, and that seems to me to be a pity.”
The question-and-answer session at the end of the talk provided a forum for Augar, Mason and session chairman Iain MacWhirter to explore ways of building a more equitable financial services industry in the wake of the crisis. Augar said: “One thing we need is a reordering of corporate priorities. At the moment, it is shareholder value number one, number two and number three and the other stakeholders are not even granted a place on the podium. We need executives to understand they have responsibilities to other stakeholders, including customers, employees, suppliers and perhaps even to the economy at large. There needs to be a difference in the governance model.”
Last October there was a great deal of rhetoric from politicians about reining in the City. Ten months on, Augar said, this has pretty much evaporated. He added: “The politicians have understood that to introduce legislation to curb bonuses and banks’ risk-taking is harder than it looks. They have also been subjected to very skilled lobbying by the financial services industry in Britain and in America.”
William Hopper, a former Morgan Grenfell director, author of The Puritan Gift: Reclaiming the American Dream amidst Global Financial Chaos, and another festival speaker, agreed that investment banks became self-serving after Big Bang. “Investment banks have changed; they no longer see themselves as working for their clients,” he said. “The result is that a lot of the transactions they engage in have nothing to do with the capitalist cycle — they are about swapping assets. And the result is people who are clever make a lot of money and stupid people lose a lot of money; it does absolutely nothing to create wealth for society.”
Where remuneration is concerned, Augar believes the real problem is not bonuses but banks’ excessive profits, without which obscene payouts would be impossible. “The issue we need to understand is what it is about the financial system that enables institutions to generate the massive profits that make the bonus culture possible. And we need to break up the integrated financial model, because it gives institutions too much power.”
He said at other momentous times for the global economy, including the crash of 1929 and the end of the Bretton Woods agreement in 1971, it took years before alternative models emerged. “That’s why it’s so important we don’t allow the waters to prematurely close.”
- This article was published in The Sunday Times on August 23rd, 2009. To read it on Times Online click here