People sometimes ask whether the City today is a more honest place than it was 20 years ago. The answer is probably no, but the nature of the lapses has changed. In the past, the institutions had integrity but some of the people working for them did not. Today it is the people who have integrity, and the firms that lack it.

It has coincided for the most part with the growth of principal trading — the move from firms acting as agents for clients to acting for themselves. Under the old system, the client came first; under the new system, the firm comes first.
This does not mean the firms act illegally — they employ too many highly paid lawyers for that. But what they do might not pass the ethics tests devised by the Securities & Investment Institute. How it fits in with all the high-minded principles of the Financial Services Authority about treating customers fairly and doing to others as you would be done to yourself is debatable.

Consider the case of Merrill Lynch and Greycoat, a saga that has been rumbling on for years, but one the FSA has refused to investigate on the grounds that nothing illegal has taken place. Former City figure Tony Solomons, who for many years ran the bank Singer & Friedlander, takes the opposite view — not least because he, or at least his pension fund, has been relieved of several hundred thousand pounds as a result.

Judge for yourself. The story in essence is quite simple. In 1999, Merrill Lynch created a shell company and financed it to buy Greycoat, which was a listed property company. All the equity was successfully acquired, and the bid went through. But no bid was made for a tranche of bonds issued by Greycoat that were also publicly listed.

In the year of the bid, the accounts showed Greycoat to have net assets of £306 million, enough to cover the bonds six times. Over the following four years, the properties were progressively sold off by Greycoat, which was of course now a subsidiary of the shell company. The proceeds of the sales were loaned up to its parent, which used the money to pay off the debt to Merrill, taken on to finance the making of the bid in the first place.

This continued until all the properties had gone, all the money had been loaned up and there was nothing left in the original Greycoat.

Now legally, the bondholders ranked ahead of the equity and were protected by the assets. However, over the period, those assets changed from being tangible properties to being an inter-company loan given a parent that itself had no assets. These loans were included in the balance sheet at full value — which some, though obviously not the auditors, might find a challenging assumption.

Shortly after the last property was sold and all the property assets had been sucked out of the company, Greycoat defaulted on its bonds. The inter-company loans proved worthless (because the parent had used those funds to repay the initial loan to Merrill Lynch and had also distributed the profit). Insufficient money had been set aside during the running-down of the company to repay the bondholders. They took a massive loss.
Solomons asked the Financial Services Authority to demand compensation from Merrill Lynch on two grounds. He alleged market abuse in that Merrill left the quoted bonds outstanding and did not provide for their redemption. He also cited the FSA's more general duty to protect investors. Neither got him anywhere.

The FSA has refused to get involved, on the grounds that Merrill has done nothing wrong. The individual parts of the chain of actions are all legal, even if collectively they have severely damaged the bondholders.Nothing illegal perhaps, but readers will no doubt form their own view on the ethics of such behaviour and what it does for trust in the institutions of the City.

Buffett bet may be a little hasty

On one level, you have to admire Warren Buffett's opportunism in investing $5 billion in Goldman Sachs at a share price that is cheap compared with anything seen in recent years, and which has the further bonus for him of a tranche of warrants that will give him even greater profits if the shares recover.

It is also an investment which at first glance seems to be entirely consistent with the philosophy that has served him so well down the years — buying the best names with the best franchises when, for whatever reason, the shares are much cheaper than they should be.

Yet to be realistic is to have doubts. A few years ago, the shares of Salomon Brothers were at rock bottom as the business reeled from a scandal where it had been caught rigging the monthly auction of US Treasury bills. It is now part of Citigroup but Salomon then was an independent firm that was as dominant as Goldman is now.

However, Buffett got out after a few months, in essence because he could not cope with the way the individuals in the firm paid themselves, and how their interests seemed to come so far ahead of the interests of shareholders.

One might well ask what has changed, and there is a further point. Buffett's other great mantra is only to invest in businesses he can understand, but can he really understand all that financial engineering within Goldman? If not, his marriage made in haste could easily be one to repent at leisure.