Friday, 27 July 2012

The hand that rocks the cradle.

It is 2007/8. The world financial system is melting and about to collapse. Everyday headlines are about massive losses, banks' collapses, jobs losses, etc. Everyone is shiting their pants. Out of fear and survival instincts management at certain troubled institutions begin lowering their submissions to Libor in order to contain fear and contagion and keep afloat. Other banks, that have easily realised of the strategy, join the party and do the same as soon as their own hull begins cracking and water coming in. The first time you do it you hold your breath, the second and third are easier and so on. Subtle and indirect calls, meetings and emails between management of these institutions and global regulators touch the topic of the apparently lower submissions. However, their apparent indifference and even promotion of the Libor rate for their own purposes strengthen your believe that they don't care or even support your behaviour. And then is when the party really begins.

So far the submissions have been made in controlled manner and for a specific purpose of saving your own ass, however after a while it seems that the behaviour is perfectly legitimate. Naturally, traders seeing that their positions are collapsing call the Libor submitting employees and ask them for a small favour: a submission, let's say, 0.3 lower or higher. It is not that much really, both think, and anyway we have been doing this for a few months now, everyone else is doing it and we cannot get behind, moreover regulators are aware but not getting nosy about it, etc, etc, so why not? Shortly, the practice extends almost to everyone and staff from different institutions begin commenting on the fact that it seems free buffet when it comes to Libor. The look at the dark and gloomy economic horizon and think: "why not I scratch your back and you scratch mine". It may not be the right thing to do, but regulators and management are behind us, thousands of bankers are being fired here and there and my time might come soon so let's pack our pockets now. You can blame the traders for their horrible behaviour, and they are certainly guilty, but when the rout of hungry wolves kill the goat regulators must ask themselves what level of guilt they share for having turned a blind eye to the slaughter feast.

Of course this is just a imaginary scenario and we do not know yet all the details (we will never know, probably), but it is very easy for politicians and regulators to blame the banks and get away with it. Regulators and governments undoubtedly have some level of guilt in this affair however, so far, no one has raised their hands yet and say sorry. This fact shows what kind of integrity and honesty most regulators have: none. If they truly have some moral fibre they should apologise and be more carefully in the way they criticise banks.

Friday, 6 July 2012

The FSA double standards.

The Wall Street Journal reports today (see the article here) that the FSA missed warnings and signs in relation to the Libor scandal and did not act to prevent the rigging. Curious, I would say the least, that I can recall many FSA enforcement actions where a key argument held for launching an investigation and eventually imposing hefty fines was (yes, you guessed it!), that the individual should have known better or should have acted earlier.

For example, Barclays, in relation to LIBOR fixing:

“Barclays should have ensured that the systems and controls around its submissions processes were adequate”

Or Mr. Einhorn, in relation to Greenlight Capital and Punch Taverns:

“Given Mr Einhorn’s position and experience, it should have been apparent to him that the information he received on the Punch Call was confidential and price sensitive information that gave rise to legal and regulatory risk.”

There are many other examples where the FSA took action based on expected behaviours and not on clear breaches of rules. It has become normal for regulated firms and individuals to live in an regulatory environment where behaviours need to comply not only with the letter and spirit of the rules but also with the conduct expected by the FSA. However, the FSA asks for integrity to financial sector players and forget to act with integrity itself.

All this should make some politicians and the public ask themselves a few chilling questions: Does the FSA have any accountability? Is it hypocrisy, recklessness, dishonesty or arrogance what makes the FSA ask the financial sector to comply with certain standards of conduct it does not apply to itself?

Thursday, 5 July 2012

In defence of Bankers.

I work in bank and I can proudly say that the vast majority of individuals working in banks are honest, hard-workers, strive for success and personal improvement, do their utmost to provide the best possible service to their clients, follow the highest standards of professionalism and a code of ethics that permeates everything they do in their work. Most of us at banks are just normal blokes who like to enjoy a pint after work at our local pub with some friends or spend time with our families. Most of us don't earn massive salaries and bonus. London Tube drivers earn more than many of us. Most of us are not greedy, or at least not more greedy than most people is. Of course I want a bigger salary or bonus, but everyone does. Whoever is free of sin cast the first stone. Most of us do not break basic ethical principles and morals to get a quick buck.  And no, not all of us go out every night to Gentlemen clubs drinking expensive Champaign and smoking fat cigars. Personally, I'm happy to go back home every day after a long day of work to see my family and read a good book.

And yes, certainly there are those who are a bit cheeky and try to push the boundaries. I am a compliance officer and I have to deal with them every day, but it makes me proud that most people I have ever worked with always come to reason and realise that it is beneficial for everyone to play within the rules. Finally, you have the rotten apples. Although I have never met anyone of them I'm sure they do exist. They do in any country, any sector, any industry and any company and they should be punished to serve as an example for others with crooked intentions. But there is no relation or link between a small group of criminals and discussing culture change in a organization like a bank that employs thousands of people where most of them are good intentioned individuals.

But some may argue that it is the bank's culture that nurtures the appearance of these criminal minds. Well, so far I have worked in three City banks in the last 5 years and all of them inculcate a top down approach to ethics and culture, have strong internal codes of ethics and treat very seriously any breach of them. It may well be a smokescreen you may think but most of us know very well that if we do not act according to the highest level of morals, ethics and professionalism, clients will go to our competitor or ruin our career. I have seen many disciplinary cases during my live as compliance officer.

So, when Tories and Labour, journalists, regulators, central bankers and the public in general claim that banks and bankers need a cultural change, I do not understand what all this furore is about.  The 90's are long gone and banks' culture has improved significantly since then. Nowadays, most banks promote and are involved in social activities and care about their neighbour. My employer organises regular days out where a bunch of us participate in social activities, matches our personal contributions to charities and supports working experiences for children from less well off schools. So, again, I don't understand. You may think I'm blind because I'm an insider and this rant is just self-interested. Perhaps it is, but it is undeniable that culture in banks or the culture of most people working at banks is not rotten, regardless of the empty demagogy of politicians.

What is even more distressful is that most of those people claiming a culture change do not have any authority to talk about morals. When government, parliament, the press, regulators and central bankers have all been tarnished by scandals rooted in low ethics and a rotten culture I personally laugh at their authority to even mention banks culture. It's like a drunkard telling me off for having a beer. It is hypocrisy. In my humble view, what this country needs is a culture change starting from politicians, regulators and other top public officials who should sort out their own house first and set the example to follow.

Monday, 2 July 2012

On banking scandals.

1. Banking culture:

I don’t buy the clamour for changing culture in banks as a panacea for banks’ wrongdoing. There are, there have been and there will always be immoral individuals committing crimes and defrauding others. The role of the State is to police these individuals and prevent their actions but not interfering with the culture of private organisations. The idea behind changing banks culture in essence means more government control over private activities. It is reminiscent of the culture shaping exercise initiated by the Nazis. Striving for the Utopia by indoctrinating the grassroots. Creating the perfect mix for the dictator to arise.

2. Libor scandal:

Scandals like the Libor rigging are nothing new. Similar scandals happened in any country, in any sector, in any industry, and in any company. If someone commits fraud or breaks the law, judges and tribunals should punish them. But we do not need more regulation or government intervention. No regulation, even the strictest one, can ever stop collusion. Nothing can guarantee that fraud will not happen again. It always will.

The real interest rating rigging scandal is the Bank of England and other Central Banks continually manipulating interest rates and therefore making worse off or better off specific sectors of the population. That is unrestricted, centrally planned, biased and unjust rigging of the general economy and so our individual pockets. Furthermore, politicians and regulators force and manipulate the entire economy to make it behave in predetermined ways which, again, benefit some and punish others. I have not yet seen politician, regulator or central banker resigning over such scandal.

3. Interest Rates Swaps scandal:

We need to reform the concept of miss-selling. The details are not clear yet but if, as it seems, some bankers within some banks did indeed force, lie or misled their customers in order to sell them an Interest Rate Swap, they must be punished. However, the concept of miss-selling is generalist, imprecise, far-reaching and misleading. It induces to blaming an entire sector instead of the actual wrongdoers.

IRS are not complex products. If interest rates go up banks pay you, if they go down you pay the banks (or vice versa). A quick look to Google would easily explain that.

Buyers need to assume responsibility for their decisions. Nanny State cannot and must not remove from individuals decision making and the responsibility it brings. This removal of individual responsibility for decisions is done directly in authoritarian states and subtly and indirectly in neo-socialist states such as the UK. The State must not save us from our own ignorance.