Another missed opportunity for reform

The West's politicians had failed to anticipate the sudden collapse of Communism, and did not know how to react. The investment banks were quicker off the mark. They saw the vacuum and moved in. Populations that had rejected communism but had not thought through what they wanted instead were presented with the ready-made free-market solutions — open markets, privatisation, free trade — that are the investment bankers' stock in trade.

This may or may not have been the right answer — it certainly caused considerable short-term trauma in those countries where most businesses became uncompetitive overnight. This rapid adoption of an untempered free-market system certainly removed any possibility of serious political adjustments by the West to meet the new arrivals halfway — a lack of sensitivity that is now blamed for many of the problems to have emerged in Europe since, and in particular the poor relations with Russia.

The point, however, is to underscore not only how the investment banking community is tuned to react faster to events than almost any other part of society, but also that when there is a sudden discontinuity in politics or markets, it uses this ability to turn events to its advantage.

If the collapse of the Wall was a once-in-a-generation event, so was the financial crisis of 12 months ago. Again the politicians were unprepared, and again the financial community reacted first and shaped the new world to its old agenda.

Its success in doing this is the more astonishing because the banking sector was financially disabled by the crash, and had its credibility shredded. Nevertheless, it was the bankers who caused the crisis who were invited by the politicians to come up with ways in which to solve it.

In so doing, they have successfully closed down the debate so that the only solutions on offer are those which leave banking intact and allow bankers to carry on as before. There are other possibilities for the financial world but they just don't get on the agenda. Anything that remotely impinges on banking as we know it immediately gets drowned out by a hurricane of threats and protests.

The politicians have been cowed, and the public are disenfranchised. Indeed, the only two people in this country who are consistently holding out for genuine and meaningful reform are Financial Services Authority chairman Lord Turner and Bank of England Governor Mervyn King, both of whom in their different ways are fighting to stop the bankers having it all their own way.

In a sane world, such experts would be listened to. But it is a sign of the times that instead, both are subject to innuendo and whispered criticism whose sole purpose is to undermine their credibility and in so doing to draw the sting from their proposed reforms.

The lesson from the retrospectives on the fall of the Berlin Wall was of a unique opportunity that was lost. So will it be in finance — except that we are unlikely to have to wait two full decades to find out the cost of this squandered chance of reform.

Kraft's game is hard to explain

There is normally a reason why intelligent people do stupid things. Goldman Sachs this weekend used the pages of the Sunday Times to proclaim that the firm employs the cleverest people on the planet, and is an unalloyed force for good. Presumably, it thought people would believe it.

Similarly, we must presume that Kraft had a good reason for launching a bid for Cadbury yesterday, though it was below an earlier indicative offer which had already been dismissed as inadequate. Unfortunately, while one can see Goldman might simply have been tripped up by its arrogance, it is much harder to envisage what game Kraft seeks to play. One explanation might be that it knows that it cannot afford to pay enough to win this time, and is therefore trying to engender some discontent among the shareholders which it could tap into in the future.

Perhaps it is trying to raise shareholder expectations now, the better to disappoint them in a few weeks when the bid lapses.

If the Cadbury shares then fall steeply, it could create a pool of disgruntled shareholders who might welcome Kraft back much more warmly if it returned with yet another offer some time next year.

It is a long shot, but no longer than the one from Nasdaq when it sought to buy the London Stock Exchange with another low-ball offer. Its planned follow-up bid was thwarted when the LSE used the interlude to bring in two big long-term supportive shareholders, a failure which underlines that this is a high-risk strategy.

However, given that Kraft wants Cadbury but can't afford to pay a fair price, it may feel it has no choice.