City must change its ways to survive

Anthony Hilton
1 Sep 2009

One of London's best-known investment bankers once told me that he thought much of what he and his colleagues did was little more than levy a tax on the investor. What he meant was that much of investment banking had no useful economic or social purpose other than to transfer wealth from one pocket to another — from ours to his. His remarks were private and quite emphatically off the record.

In a similar vein, one of his competitors, also a respected and influential figure said in a conversation which took place in those golden days before the collapse of Lehman, that in 20 years' time people would look back in disbelief and amazement at the money paid to the current generation of City people. They would wonder how it was that society at large tolerated it. His remarks, too, were private.

At the other end of the City's social spectrum I share a commute in from Essex with one of the thousands of Sun readers who work on City trading desks. He does not like the work particularly but he does it for the money. He considers himself tremendously lucky to be paid as much as he is for doing what he does. He cannot believe it will last.

Last week, chairman of the Financial Services Authority Lord Turner said for the record what many thinking people in the City, including these three in their different ways above, have already privately acknowledged: a lot of what happens in financial services is neither economically beneficial nor socially useful.

Admitting this is not to attack the entire financial services industry. It is surreal to think that eliminating the self-serving element of City transactions, which serve no purpose other than to line the bankers' and traders' pockets, will undermine its competitiveness still less destroy the City as a wealth-creating engine. A mature society ought to be able to see this. An ability to admit it and discuss it would, if properly handled, lead to a stronger financial services sector.

Nevertheless, the great and the good of the City reacted as if it they had been stabbed in the back. But in saying this Lord Turner was running true to form so perhaps they have not been paying proper attention. The inaugural Economist City lecture, which Lord Turner delivered back in early spring, was devoted to a succinct analysis of the causes of the financial crisis. Most people, including many in the City, still consider it to be the best and clearest yet produced. Yet in that analysis Turner said at one point while much of what the City did was of value, “it would be no great loss if the formula which explained how to create a CDO squared derivative were misplaced and never found.”

None of the people who have been queuing to lambast Lord Turner in the past few days had the nerve to challenge him on this comment at the time, although at least some of those heavily quoted attackers were not only in the audience but at the private dinner afterwards.

Once we accept that a lot of what is done is not useful, we can then perhaps challenge the other flawed assumption, which is that the City has to pay vast sums of money to attract the talent it needs to drive the financial services engine. Again there are some people on the inside prepared to enter the debate. A fund manager wrote in a letter to the Financial Times last week, that in his experience people working in mainstream business “can take any of us financial folk to the cleaners in sheer intellect. On average financial professionals are neither the best nor the smartest. Just very greedy,” he added.

The truth is that the City pays vast sums because it can afford to do so, and it can afford to do so because it grossly overcharges for what it delivers — which is a sure sign that its own internal market does not function properly and there is some kind of monopoly being exploited.

Efficient and liquid markets do aid the wider economy, but that benefit comes at a hugely inflated price whether that is extracted in commissions and spreads in trading in fees for handling capital raisings, for huge cost and little value added in fund management, or for extortionate sums charged for merger and acquisitions advice.

As another City figure Robert Pickering also wrote in an FT letter: “The real marvel is that customers, both corporate and institutional, continue to be willing to pay so much for essentially commoditised services … thus generating these outsized profits.”

Back in the Seventies, trade union leaders abused and exploited their monopoly position to such an extent that they crippled the economy and alienated society. That provoked the Thatcher backlash which stripped them of their power and influence, in part at least because they had become so arrogant that they failed to recognise the depth of resentment against them.

For trade unionists then, read bankers today. In this decade financiers forgot that they were meant to serve the economy not exploit it. If they want to survive and prosper they will need to be more adept than yesterday's trade union dinosaur leaders in understanding that they have to change.