Enemies of the People: Part Two - The Corruption of the Financial-Industrial System. Why is Change so Difficult?

The global banking system was the direct creator of the financial crash that bankrupted millions and that is still affecting economic and earnings growth.

The reckless orgy of lending to people who had no chance of repaying mortgage loans is but one of the litany of scandals, rip-offs and destructive behaviour that have shamed the banking sector.

It is quite clear that the disasters that culminated in the crash of 2007 have not resulted in effective action to reform the banking and financial systems. And it appears that regulators are colluding with banks. International action is required, The EU is the best guarantor of reform.

Here is the latest disgrace:

From The Guardian

Vince Cable, UK Liberal Democrat leader condemns regulator for failing to expose alleged role of bank’s management in treatment of small businesses.

Vince Cable blasted the UK Financial Conduct Authority for not publishing a full report into RBS case.

Vince Cable has attacked the City watchdog for failing to publish a full report into the mistreatment of small businesses by the Royal Bank of Scotland, as MPs lined up to condemn the bank in parliament.

The leader of the Liberal Democrats expressed “disgust” that passages of a damning report by the Financial Conduct Authority had not been released, four-and-a-half years after he first referred the case to the regulator during his time in the coalition government.

The FCA published most of its report into RBS’s global restructuring group (GRG), which is alleged to have driven small firms to the wall in pursuit of profit, but left out a section about the bank’s management team.

Cable used parliamentary privilege to name former RBS employee Nathan Bostock – who is now chief executive of Santander UK – as one of the bankers “responsible” for a policy that unpublished passages of the report allege management would, or should, have known would lead to the mistreatment of customers.

“If the reported passage from the full report is correct, then questions have to be raised over the management who were responsible for GRG. The FCA must also then disclose who they think is responsible,” he added.

Labour MP Clive Lewis called for the public debate in parliament on Thursday over the issues at the bank, which first arose several years ago. Ahead of the debate, the Treasury committee published a memo called “Just Hit Budget!” sent to GRG staff in 2009 and released by the bank to MPs.

The memo referred to struggling companies – many of which had been damaged by the banking crisis – as “basket cases”, while staff were told in a section of the memo headed “Rope” that: “Sometimes you need to let customers hang themselves.”

Treasury minister John Glen said he would “stop at nothing” to help small businesses “failed” by RBS and other banks, while Nicky Morgan, the chairman of the Treasury Select Committee, warned information had to be “dragged out of” the bank.

Lewis said the practices at GRG were perhaps the “largest theft anywhere, ever”, while MPs also heard that the unit was “more like an abattoir” where firms were taken apart.

Denial by bank

A spokeswoman for RBS said the City watchdog confirmed that the most serious allegations against the bank had not been upheld?? The FCA said it was supported in its decision not to release the passages of the report by an independent reviewer, Andrew Green QC??

A spokesman for the GRG business action group, which represents 500 firms put into financial distress by the bank, said: “[The] debate reveals the widespread and justified anger amongst politicians at the conduct of RBS’s rogue bankers. It’s time the government – the majority shareholder in the bank – sat up and listened.”

After the 2007 Crash

After the global banking disasters of 2007.....?, there have been many brave noises about reforming the banking system, and some action taken by the Bank of England to sanitise the balance sheets of banks to prevent future collapses. Whilst It certainly appears as though a carbon copy of 2007 is unlikely, it seems that the banking sector is up to a new set of tricks regarding personal lending that could spark a “mini”-2007.

After the 2007 crash, little effective action has been taken to rein in the power of banks and huge corporations. The reasons for this appear to be the power of the finance industry and its symbiotic partners the large quoted companies. Their power and reach have assumed massive proportions, to the extent that as a result of political contributions and control of most of the media they are more powerful than the mass of the population and elected governments in Britain and America.

Public money was used to bail out the banks that were deemed to be “Too Big to Fail”. Central banks have pumped enormous amounts of cash into the banks in the form of “Quantitative Easing”. The intent behind this was to pump money into the economy to stimulate growth, using the banks as the chosen investment vehicle.

Disgracefully, hardly any of this has got anywhere near the “real “ economy, instead circulating within the banking system, funding a housing bubble, and personal and consumer debt, bolstering the bonuses of top bankers and bulking up banks’ balance sheets. As a result, economies most exposed to the financial system have remained anemic since the crash, economic recovery is frail, and real investment remains very low. While this situation continues, the risks of further recession are high and the banks continue to speculate with public money.

Lending large sums of money into the property market pushes up the price of houses along with the level of personal debt. Interest has to be paid on all the loans that banks make, and with the debt rising quicker than incomes, eventually some people become unable to keep up with repayments. At this point, they stop repaying their loans, and banks find themselves in danger of going bankrupt.

As the former chairman of the UK’s Financial Services Authority, Lord (Adair) Turner stated in February 2013:

“The financial crisis of 2007 to 2008 occurred because we failed to constrain the financial system’s creation of private credit and money.”

This process caused the financial crisis. Straight after the crisis, banks limited their new lending to businesses and households. The slowdown in lending caused prices in these markets to drop, and this means those that have borrowed too much to speculate on rising prices had to sell their assets in order to repay their loans. House prices dropped and the bubble burst.

Governments have failed to rein in the power of the global banks, which essentially remain free to trade in shares, make mortgage loans, manage retail banking and engage in the whole range of investment banking activities.

So, after the 2007 Crash Britain and America are left with:

The collapse of management, the decay of values - corruption spreads....

To cap the worries of those who lie awake wondering what the banking sector will get up to next, here is some material, by Professor Aeron Davis of Goldsmiths University, London. The essences of his thesis are twofold:

Davis says, quoting David Bailey, then a company chairman, who has worked in the financial markets for over 30 years:

“Everything has become more complex and fast-moving. Governments and regulators cannot keep up. Investment banks do not know what their employees are up to, or how to manage the risks their employees were building up. Non-executive directors and fund managers know nothing about the businesses they “control”. And it has leached out into the wider sphere of major companies. The fund managers are in charge, but none of them know how to run a business.

But most of all, no-one seemed to be in control or to be taking responsibility for what is happening. Nobody is an owner. Everybody is an employee, and they’ve all got an incentive to pay each other more. This is made worse by the fact that deregulation has made the City riven with conflicts of interest, enabling insiders to play all sides.

Ultimately the City is driven by greed and ruthless self-interest, but without personal responsibility.

The logic of neo-liberalism is as potentially destructive to the financial-industrial establishment as it is to the rest of society. After decades of erosion the flaws and contradictions of the system are becoming too large to deal with. Once a time, there was an inter-connected “Establishment “, members of which knew who they were and which strings to pull to make things happen. Now, this is breaking down under the pressures of change in the system.

A final irony pointed out by Davis is the fact that the new regime - for all its individualistic and anti-state rhetoric – still depends on the state .Elites require the rule of law, security, transport, an able workforce and social stability to function. But neo-liberalism promotes an even smaller state and a poorer, less able employee pool, and nods through corporate and super-rich tax evasion on an industrial scale.

When the system of venal self-interest and fundamental incompetence finally breaks down, the task of “Draining the Swamp” will be truly enormous.

Postscript 1

An Insight: Wonder why some members of the UK political elite are vehemently opposed to the EU?

By now two things should be perfectly clear:

Action should therefore be led by international bodies such as the European Union and through EU influence, the IMF. The EU is a strong economic and increasingly coherent political influence not dominated by governments, like Britain's, that ever bought into market fundamentalism. The influence of Germany, France, the Netherlands and some of the Scandinavian countries mean that British resistance to reform can be overcome. The EU also has considerable influence over the IMF and is strong enough to stand up to pressures from the banks.

Further reading

One of the major obstacles to change is the prevailing culture of the industry. Much of the finance industry, including investment banks, Hedge Funds, Institutional Investors and large parts of the insurance industry share similar values.

For a dramatic analysis of the prevailing psychology of the banking industry, see below:

The Personality of the Financial markets.

Joel Bakan, in his book 'The Corporation', characterises large companies as individuals without a moral guidance system. He claims that the behaviour of corporate 'individuals' is driven by a single-minded pursuit of profit. Any outward manifestations of corporate social responsibility, claims Bakan, are the result of the conviction that a perception of the corporation as a responsible citizen will enhance opportunities to maximise profits. When it comes to a real crunch, and a direct conflict arises between profit and a significant restraint of profit for the public good, profit wins every time.

It is perfectly clear that investment institutions in London dominate the industrial agenda and exercise enormous influence over management. This thought coincided with a chance meeting with a business psychologist from a clinical background who had worked for a large investment bank, first on the trading floor and then as an investment banker on corporate deals. In the end she moved back to her first love, business psychology.
In discussion, it became clear that she had a fascinating story to tell, made more powerful because of the insights generated from the world of psychology.

This is her story......

"The following essay represents a link between my own observations, experiences and many rich memories from investment banking and a more recent interest - that of financial scandal, fraud and white collar psychopathy - and the cultures that perpetuate those behaviours. I continue to work in the capacity of a business psychologist with financial institutions, psychology being my first love.

Psycho-pathology in Organisations

What is a psychopathic organisation? There is a range of general pathological symptoms that we may observe in humans. I have taken these symptoms and propose here how they may manifest themselves in an organisational context. Then through a discussion of my own experiences and some of the recent scandals it will, I hope, become clearer what we are cultivating in today's financial markets by rewarding amoral behaviours, turning blind eyes and condoning short-termism.

Psychopathic Symptoms Commonly Manifested in the Financial Markets.

Grandiose self-centerednessLack of interest in a wider environment, variability in success - great success with huge dips. Internally referenced belief in own importance and rights to high rewards. 'Inappropriate' expenses.
Lack of moral sense, irresponsible, asocial tendencies and behaviour. Emotional immaturity, lack of empathy.Profit justifies risk, legality pushed to the boundaries. No sense of wider impact. Views and welfare of a wider community ('Society') are peripheral and unimportant.
Difficulty in forming meaningful relationships, relating to others superficially.Short-termist, transactional approach. Kow-towing to the most immediately powerful influences and stimuli rather than taking a balanced view of the long term future of employees, community and general stakeholders.
Inability to control impulses, manipulative.Culture of disregarding policy and procedure as and when it suits. Policy viewed as unwanted restraint rather than empowering in other regards e.g. supporting development.
Unable/unwilling to accept responsibility for consequences of own actions, lack of learning from experience.Lack of public apology. Blaming individuals rather than tackling the culture/system for misdemeanours.
Accept and impose social pressures to conform, punish those who step out of line.Herd behaviour, unreasoning belief in the latest 'craze', unwillingness to learn from outside immediate environment, aggressive behaviour towards 'recidivists'. Lack of challenge to generally accepted ideology.
Inability to feel remorse, little change in behaviour after punishment.Serial repeats of scandals, fraud and legal problems.

Psychopathology and Investment Banking - How we are Bred

Many people ask me how a psychologist came to be working on a trading floor and then in corporate finance. There are three reasons. First, the herd instinct of the markets and the sociable nature of the work seemed to make it a natural choice for a somewhat mercenary, fun-loving psychology graduate who had been told to get industry experience by business psychologists and wanted to pay off a bit of student debt. Second, British degrees have never been that vocational.
Finally I showed some flair about my skiing style in an interview.

Six months in to the job the first round of bonuses were announced. In my performance appraisal I had rated myself with Bs and Cs. My manager told me to re-rate higher as everyone else would give themselves A's regardless. A paltry £500 was given to most first year grads in other occupations, which in most circumstances would have made me quite happy. Already highly paid for a graduate, but essentially still learning and riding on the back of a Tier One bank's reputation and money, I soon felt as hard done by as everyone else. I was reassured by more senior colleagues that I deserved a token £10-15 k at the very least. Our graduate programme had all been about technical skill and becoming big swinging dicks, nothing much about deeper purpose, meaning or values. So we whined and we bitched. We talked about moving to the bigger payers. I'm not sure it once occurred to us that the world and the bank didn't owe us a favour, or that most other friends were surviving on a third of the amount. Of my intake about 70% had left within two years to go to other banks or get out.

After a year or so I was becoming bored. My naturally precocious, assertive style was flourishing and encouraged. I was a gremlin - quick, defensive, reactive, all mouth. No different from many colleagues. I decided to try something else in the bank so made the move to Corporate Finance. At first I found it all a little too pedestrian, lacking in the immediate dramas of the trading floor. Where were the screens?
But in its own way it was a little more interesting. I actually considered marginally more information beyond that day's share price and what the Federal Reserve was doing with interest rates. But we certainly were not encouraged to have any deeper sense of values around the client - we just had to know more history.

However, all non-financial/economic elements were still ignored. It's no small wonder a huge percentage of mergers and acquisitions fail. Hopefully someone else was employed to do check the other bits (what the long departed CEO Carly Fiorina of Hewlett Packard called the 'squishy bits'), though much to my chagrin I know many such transactions continue with little or no money put aside for managing change until the change is upon a company. Even then lip service is paid to it. When will senior executives realise that the difficult part is not making an acquisition, but all the 'soft' stuff that follows?

The Consequences

There is something rotten to the core about what has been going on in investment banking. Yet as I have already mentioned, many of the activities are technically legal yet from a client or market perspective are nefarious and damaging - fees that sap value, mergers that advance on the base of rigorous financial due diligence but with minimal consideration of the harder to handle but equally important factors (people, products, market etc). Narrow legality becomes the measure of acceptable or even desirable conduct.

The markets are obsessed with narrow technical and financial concerns -constant fiddling with balance sheets, debt equity ratios, capital raising, returns on capital rather than a broader more balanced understanding of companies and markets - as if spreadsheets were the panacea to answer all questions and cure all ills. At what point are stakeholders in companies (and I say stakeholders NOT shareholders on purpose) going to stand up and actually ask ... all this and to what end? What difference is it making to our end product, our efficiency, our culture, our customer service, our employees, our community? Ultimately you can put lipstick on a pig but it's still a pig. Investment bankers are the most highly paid beauticians with an audience of ready and willing pigs - the CEOs and CFOs anxious to do deals that make a mark on careers defined by ever decreasing tenure".

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