19-June-2009:

‘Investment banking is a great business … if you’re an investment banker.’ What that old City joke reminds us is that the supposedly ‘sexy’ business of investment banking often handsomely rewards its employees rather than the shareholders of the parent bank or indeed society. That is because when you put together a bunch of smart, greedy, ruthless people in a financial institution they will find clever ways to make themselves as rich as possible irrespective of the long-term implications for everyone else. This basic truism helps explain why at Wednesday’s annual Mansion House speech, in which the Chancellor addresses City grandees, Alistair Darling was both right to say that a different boardroom culture is required but wrong to backtrack somewhat on the need for much tougher regulation.

The boards of the big banks whose actions almost bought capitalism to its knees certainly need to take a long hard look at themselves. When the money seemed to be rolling in from complex derivatives dumbass executives didn’t ask any tricky questions because, as the former head of Citigroup said in July 2007 just before the proverbial hit the fan, ‘as long as the music’s playing, you've got to get up and dance.’ Simply put, people do not question success (even if it later proves bogus) and so, despite fusty old board members not having a clue what a CDO or CDS was, they were happy to meet up every few weeks around some vast oak table and rubber-stamp every complex new innovation whilst greedily licking their greasy lips. They didn’t care about ‘long-term prospects’ and other such dull considerations because their bank’s spoddy finance director would proudly show them that their quarterly earnings figures, after some imaginative accounting, had once again gone up and it is those appreciating numbers that would justify their ever-increasing bonuses to their shareholders.

Darling is therefore right that boards who vaguely understand what their banks actually do are required. However, unless they’re somehow not part of the self-serving club that benefits from short-term, illusory profits then self-regulation will not prevent further abuses. It would be like getting a gang of vampires to run a blood bank and then asking them politely to restrain their natural urges!

This is why we need stricter banking regulation and although the Labour spin doctors tried to market Darling’s speech as ‘a tough message’ to bankers it falls short of the speech made by Mervyn King, the Governor of the Bank of England, at the same dinner. King complained that the regulatory powers of his institution need to be strengthened big-time and that if ‘banks are too big to fail … then they’re too big’. Frankly, Darling’s tame speech has meant my City contacts breathed a sigh of relief though their celebrations were diminished by the fact that the Tories seem to favour King’s approach. Still, the hedge fund boys in Mayfair welcomed the moderation of the current Government’s attitude towards them whilst investment bankers were happy that their banks aren’t going to be broken up imminently. However, whilst champagne glasses are being clinked by formerly worried City boys I’m guessing the Wall Street massive might be sleeping a little less easy tonight. That’s because President Obama announced two days ago specific proposals which will dramatically increase the regulation of hedge funds, derivatives and banks’ risk-taking.

All politicians want to make out they’re going to be tough on the greedy bankers who caused this crisis. Some, like President Obama, look like they’re going to put their money where their mouth is whilst others, like Darling, look like they’ve once again fallen victim to smart lobbying by fat cats who’ve convinced him that City boys will leave the Square Mile in droves if Britain gets tough. The question Darling needs to ask himself is this: what’s the bigger risk … a few bankers buggering off to Zurich or another banking-related recession that might just result in blood on the streets?