Dear David Cameron: Entrusting economic policy to ex-investment bankers is no solution

September 7th, 2012

When David Cameron reshuffled his cabinet earlier this week, the arrival of a trio City of London bankers and consultants at Her Majesty’s Treasury went almost unnoticed.

The three men are Paul Deighton, a former Goldman Sachs partner and chief operating officer for Europe (pictured above), Sajid Javid, a former global head of credit trading at Deutsche Bank, and Greg Clark, a former consultant at Boston Consulting Group.

Cameron promoted Javid,  who was first elected as conservative MP in May 2010, to economic secretary to the Treasury, and Clark, who has been a Tory MP since 2005, to the role of financial secretary to the Treasury. Most significantly, however Cameron appointed Deighton, who isn’t even an elected politician, as commercial secretary to the Treasury. While Javid and Clark start at the Treasury with immediate effect, Deighton — who will ennobled as Lord Deighton, giving him the ability to sit in the House of Lords — doesn’t start until January.

The media coverage of Deighton’s appointment, what little there was, highlighted his successful tenure as chief executive of the London Organising Committee of the Olympic and Paralympic Games (LOCOG), the body that oversaw the 2012 Summer Olympics and Paralympics Games between 2006 and today (see for example The Guardian). That was perhaps understandable given both the games are widely deemed to have been a huge success, the sums raised from sponsors and the rest.

But the lack of attention given to Deighton’s 22 years (1983 to 2005) at Goldman Sachs in London and New York — where he reportedly made a £110m fortune when the firm was floated on the New York Stock Exchange in May 1999 — was surprising. The only paper that grasped its significance was the Evening Standard. Its City diarist wrote:-

Phew! Just when Goldman Sachs looked to have lost its influence in the corridors of power after that embarrassing “we treat our clients as muppets” episode earlier this year, an alumnus of the Vampire Squid investment bank has landed a plum job in government.

Remember last November, when the former Goldman Sachs International adviser Mario Monti became Italy’s prime minister, hard on the heels of the appointment of former Goldman Sachs vice-chairman and managing director Mario Draghi as president of the European Central Bank? There were fears that allowing a single investment bank, with its well-known trading agenda, to have so many implants (and yes there are plenty of others) in top roles in the corridors of European power might not be a particularly idea. As Stephen Foley put it in the Independent:-

“The ‘Goldman Project’ is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest… Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman…. Shared illusions, perhaps? Who would dare test it?

In earlier blog posts I too have warned about the risks of having a “revolving door” between the Wall Street/the City and government/civil service.  Former bankers (and in the UK we also have Stephen Green, former chairman of HSBC, whose name was besmirched following his bank’s involvement in money laundering for drugs barons, terrorists and pariah regimes, as trade minister,  Sir Jeremy Heywood, a former Morgan Stanley investment banker, as cabinet secretary, and Oliver Letwin, a former Rothschilds investment banker as minister in the cabinet office, among others) generally adhere to a particular world view, including the belief that masses of debt is good, and can have have a tendency prioritize the interests of the financial sector over and above those of the real economy or the wider public.

When combined with financial sector funding of political parties, widespread secondments to the civil service, regulators and quangos, etc, a rapidly spinning “revolving door” along these lines can lead to a form of ‘corporatocracy’, in which the policy-making apparatus gets hijacked by a special interest group. Possible consequences if bankers are in power, or too close to power, include giving high-level ‘white collar’ criminals immunity from prosecution and ensuring that plans for financial reform are watered down, delayed or killed off. This is allegedly the sort of thing that happened to the EU’s internal market directorate under commissioner Charlie McCreevy.

Conservative MP David Davies recently gave an insider’s eye view of the problems of “crony capitalism” in an article published in Prospect on February 22nd:-

It doesn’t matter which department you choose. Their approach is too often dominated by the concerns of big business. The Ministry of Defence’s disastrous record in public procurement is partly a product of an overly cosy relationship with a few suppliers. The Department of Energy and Climate Change’s clumsy environmental policies stem from close contacts with half a dozen enormous companies … Wherever you look in Whitehall the government is too close to big business and has been for decades. If it is not addressed, Britain’s crony capitalism will inflict huge damage to our interests, economy, industry and society.

The degree of capture still seems less pronounced in Britain than in the United States, where there  has been a long and ignoble history of ex Goldmanites including Robert Rubin and Hank Paulson becoming US Treasury Secretary, from where they can liberally dispense policies favourable to their chums on Wall Street, including ensuring light touch regulation and bailouts when they screw up, before waltzing back into the world of finance or academe. That’s why the firm is nicknamed “Government Sachs” (as well as a few other things).

Now don’t get me wrong. Not all ex-Goldman Sachs executives are market fundamentalists who are addicted to neoclassical economics, an ideology that ought to have been consigned to the dustbin of history as a result of its own manifest failings, and who would do everything in their power to further the interests of their ex-colleagues and former employers in the event they reach high office. The existence of other ex Goldmanites who are committed to alternative economic approaches, like Raphie de Santos, ‘The Left Banker’, is testimony to that. Somehow I doubt whether Deighton is in that camp, however.

Overall, I find Cameron’s recent reshuffle perplexing, disturbing and not a little retrograde. If the prime minister really believes that entrusting economic policy to former investment bankers — whose culture is invariably one of short-term profit maximisation, the churning of assets and trading at clients’ (aka “muppets”) expense — will put Britain back on the path to long-term economic sustainability, he’s more deluded than I thought. As my colleague Dick Winchester points out, it proves that notions of rebalancing the economy are a lost cause.

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Posted by Ian Fraser on Sep 7 2012. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry