21 April 2010
Gordon Brown has condemned Goldman Sachs for defrauding buyers of a toxic CDO yet has condoned similar activities by British banks for years
Gordon Brown’s response to the US civil action against Goldman Sachs over the Abacus 2007-AC1 scandal reminded me of the actions of Capitaine Renault in the movie Casablanca. The whistle-blowing cop professes to be “shocked, shocked” to discover that gambling has been going on in Rick’s Cafe — before quickly snaffling his winnings.
Brown didn’t remind me of Renault because of any personal post-crash profiteering but because he professes to be so deeply shocked by what Goldman Sachs is alleged to have done, despite the fact Brown’s government has tolerated, condoned and even promoted (as well as, latterly, sought to cover up) similar wrongdoing in the UK market for years.
As Andrew Hill, Lombard columnist in the Financial Times, explained in the Financial Times, Brown’s faux outrage is somewhat transparent pre-electoral window-dressing. “As last week’s FSA fines on two former Northern Rock executives indicated, there are plenty of home-grown allegations of unsavoury pre-crisis banking for the regulator to investigate, from HBOS, now under Lloyds’ ownership, to RBS. Unless there’s something juicy and UK-based in the American files, the FSA shouldn’t waste much time before concluding this Goldman case is the SEC’s business after all. If such an announcement comes on May 7, it will be no surprise.”
In case Brown’s double standards are not immediately apparent to you, I’ll spell it out here.
Brown created a near regulatory vacuum in the UK’s financial sector by removing bank supervision from the Bank of England in 1997. Ignoring the recommendations of the Cruickshank report, he topped this up with a further dose of deregulation. He was persuaded by heavyweights in the City of London that Britain was more likely to remain a leading global financial centre if regulation was loosened. If this meant transforming London into the ‘Wild West’ of finance or even Guatantanamo Bay (for US banks), then so be it.
The free-for-all promoted by Brown, in which banks were barely supervised and systemic risks ignored was bound to come unstuck sooner or later (and it’s fair to see the Tory opposition was even more obsessed with deregulation at this time). Yet even after the US subprime market, in which many UK banks were participating, went into meltdown in March 2007, Brown was oblivious to the gathering storm.
Hedge fund managers Jim Chanos and Paul Singer warned Brown and his fellow G7 finance ministers at a meeting in Washington DC in April 2007 that massive over-leverage, abuse of off-balance-sheet vehicles and securitization in the banking sector was about to bring global systemic meltdown. But Brown and the other six finance ministers of G7 were resolutely uninterested.
After a one-hour presentation on how the banks’ accumulations of “toxic, radioactive securitizations that they could never sell” meant liquidity would seize up and spell economic Armageddon, the assembled finance ministers were more interested in their journeys home and the much more important matter of how to regulate hedge funds. Jim Chanos said that after his presentation: “The German finance minister who was chairing the meeting thanked me politely and then thanked Paul and said ‘so what do you think about Hedge Funds?’“
Brown, his government and the FSA received plenty of other warnings that widespread false accounting, malfeasance and fraud in the UK banking sector meant the system was at risk. But these went unheeded too. Instead, Brown’s government and the FSA ploughed on with their “see no evil, hear no evil”, “light touch, limited touch”, approach to the financial markets and sat idly by for a further 20 months as the UK’s banks drove themselves further into the ground.
And incredible as it may seem, Brown’s chancellor of the exchequer, Alistair Darling, even drafted in none other than one of the architects of the fiasco, former HBOS chief executive Sir James Crosby — a man who wouldn’t understand a risk if it slapped him in the face — to join the FSA’s board and later advise on the future of the UK mortgage market!
Brown was only too happy to enjoy the proceeds of the bankers’ manipulation of financial markets, carefree attitude to risk and insane gambling on property and toxic derivatives, in the shape of tax revenues, so long as the good times rolled. And when everything went pear-shaped for the bankers, Brown was happy to sort them out, unilaterally committing to ploughing some £1.3 trillion of UK taxpayers’ money into salvaging what was left of banks like HBOS and RBS on October 13, 2008. Then, rather than seeking to promote amended behaviour, Brown and his government encouraged state-owned banks to revert to “business as usual”, to continue gambling along similar lines to what they had been doing before.
Nor did he promote or seek justice for the customers who were defrauded or who had their assets stolen by out-of-control banks such as HBOS, Barclays and Royal Bank of Scotland during the boom (for a more detailed piece on this sort of behaviour, read Banking’s Abu Ghraib). Instead, Brown and his government were complicit in the banks’ attempts to cover up and whitewash such behaviour
Despite all the protestations about caring for small and medium-sized enterprises, Brown really doesn’t give a damn where the banks reinvest the virtually limitless supply of chips he handed them through the flawed policies of bailouts and quantitative easing. Most is just going towards propping up the stock market, the inflation of further asset price bubbles and, naturally, bonuses for bankers.
Obviously the banks themselves must bear some responsibility for their own actions. But one of the main reasons they were in a position to bring their own institutions and the UK economy crashing down in 2007-09 was because their dodgy practices were tolerated, indeed positively encouraged, by Brown, by the New Labour government’s he co-led with Tony Blair and the FSA in the previous years and particularly in the period 2003-08.
If anyone is morally bankrupt here, it’s Gordon Brown.
For further reading on Gordon Brown’s hypocrisy re: bank regulation:-
- Simon Johnson’s Goldman Sachs: Too Big To Obey The Law (from The Baseline Scenario)
- My earlier piece Darling acquiesces in return to debt-fuelled casino