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The City of London has prospered considerably down the years from its willingness to allow what is illegal elsewhere, and in particular when the laws that are being skirted round are those of the United States.
The Kennedy administration's decision in the early Sixties to put a ceiling on how much interest could be paid by banks within the US was instrumental in spurring them to open branches in London so they could operate in the Eurodollar market.
The participation of US houses in Big Bang, the deregulation of the London Stock Exchange in 1985, was the more enthusiastic because they were allowed to combine commercial banking and securities operations in one business in a way the Glass-Steagall rules forbade back home. More recently, the heavy-handed Sarbanes-Oxley response in 2002 to the accounting failures of Enron greatly increased the attractiveness of a London stock-market listing for international companies. UK listings of international companies overtook those of America for the first time in the years following.
Thus the typical City response to news of yet another US regulatory initiative is the discreet but gleeful rubbing-together of the hands at the thought of more business being displaced across the Atlantic to the advantage of London. But this time it may be different, and that response may not be thought appropriate.
The announcement late last week by President Obama of an intention to restrict the size of US banks, to stop them trading on their own account and to ban any investment in private-equity and hedge funds is a difficult call for the UK authorities, committed as they are to an internationally co-ordinated regulatory response to the crisis.
For the first time, it may be that they do not actually want to see more American financial activity move to London because the regulatory regime is lighter. Or perhaps they do but they don't want it to appear too obvious - not least to UK voters who have been totally disenchanted by the behaviour of the banking industry since its mass rescue by the taxpayer. Nevertheless, it poses a fundamental question for Government: Do we copy, or do we seek to take advantage?
It could go either way. In its search for a way to prevent future crises, Government thus far has seemed to favour more intrusive regulation, in particular regulators with a greater understanding of international and systemic issues on the one hand and heavier capital requirements on the other. The belief is that requiring the banks to hold significantly more capital in support of trading activities would render much of the riskier and less worthwhile trading no longer economic.
It is also flirting with the idea of a transaction tax to provide a fund for bailouts and a separate levy that would be payment for the Government's implicit guarantee of their solvency. But while thinking all these things, Government has fought shy of breaking up the banks partly because it fears making the UK less attractive as an international banking centre, and partly because it does not want further to undermine the value of the banking assets such as RBS which are now taxpayer-owned.
However, there is likely to be considerable support for the thrust of Obama's measures even while the detail remains sketchy. Bank of England Governor Mervyn King has publicly warned that drastic reform is needed if we are to avoid a repeat of the present crisis in a few years' time. Professor John Kay has advocated splitting the deposit and lending activities of banks from the casino or trading activities. Roger Bootle of Capital Economics suggested last week that Big Bang should be reversed, by which he meant that those who act on their own account by making markets in securities should not also be allowed to act as agents for clients in those same markets - something which Big Bang permitted for the first time. Such a move would emasculate the trading activities of the investment banks but probably make the markets a lot more honest.
It is perhaps no coincidence that a ban on acting both as agent and principal was the main recommendation to arise from the Pecora hearings held in the United States after the 1929 crash. Inexplicably, however, Glass-Steagall - which was designed to enact the Pecora package of recommendations - separated investment and commercial banking but did not tackle the agent and principal problem.
Eighty years on, Paul Volcker, architect of the Obama proposals, seems to have this in his sights, because with his proposed ban on proprietary trading he hits at the most egregious example of conflict of interest between the firm and its clients, but retains the scope to follow through later into other areas.
This, too, lies behind the supposed attack on private-equity and hedge funds. Here the issue is not whether these were much of a cause of the present crisis, because the general view is that they were not. Rather, the point is that without such new curbs, the investment banks would simply get round the proposed restrictions by funnelling the banned activities into captive private equity and hedge-fund businesses and carrying on as before.
As in chess, Volcker is thinking several moves ahead.
