How can banking still be a source of scandal so long after the crash?

There are alarming signs that people are behaving as if there were nothing really to learn from the bubble years.

Andrew Rawnsley
The Observer, Sunday 24 November 2013

Former Co-operative Bank chairman Reverend Paul Flowers in front of the Treasury select committee. Photograph: /PA
Sex, drugs, money, video, religion and politics. That’s the beauty of this scandal. The tale of the Reverend Paul Flowers, alleged “crystal Methodist”, and the Co-operative bank is a gift that gives to everyone. If you are a television current affairs producer, you can set items about the affair to the soundtrack of Breaking Bad. If you are the Tories, it is an opportunity to try to dirty up the Labour party by association with the movement that holds its overdraft, gives it donations and sponsors its MPs – though possibly not for much longer. If you are of some leftwing flavours, it provides a reason to denounce all banking, even that which calls itself “ethical”, as an inherently cronyistic and corrupted business.

If you occupy a certain kind of bully pulpit of the moralising right, you can try to build out of this one lurid saga a more general theory about the debauchery of the liberal-left. If you can see the tragedy in this sorry business, you can reflect mournfully on the withering of the mutual tradition that grew out of the self-help ethic of the Victorian working class. If your taste is for painful paradoxes, you can dwell on the irony that the Co-op has now fallen into the hands of hedge-funds. American hedge-funds to boot. Whatever you want to say, you can say it with Mr Flowers.

David Cameron wants it to say something about his opponents. The prime minister describes the fallen reverend as the “man who has broken a bank” and “trooped in and out of Downing Street under Labour”. We can all see what he is trying to do here. When it comes to this sort of stuff, Mr Cameron does not operate at a very subtle level. He draws with a crayon. The Tories are gleeful that “Labour’s bank” is the site of a scandal.

They are rather too obvious in their hope that the inquiry ordered by the prime minister will make Labour squirm and inflict collateral damage on the issue of financial competence on the Eds Balls and Miliband. If the boot was on the other foot – if we were talking about a scandal at a bank closely associated with the Tories – Labour would likely be doing something similar. But there are some perils here for the Tories too. Mr Flowers was approved as the bank’s chairman in the final weeks of the last government and his Labour links appear to have helped him into a role to which he was so spectacularly unsuited. Even before his arrest over the drug allegations, he was not a fit person to be entrusted with a piggy bank, never mind a high street one. That doesn’t look great for Labour, but then it doesn’t look so wonderful for the current government that he then stayed in post until the summer of this year.

Mark Hoban, then Treasury minister, reportedly had 30 meetings or telephone conversations with executives at the bank during its abortive attempt to purchase Lloyds branches just before a huge hole was discovered in its balance sheet. The Financial Times has revealed that George Osborne trekked to Brussels to try to persuade other finance ministers to waive capital requirement rules to help the Co-op bid for the Lloyds network. In the end, I suspect all the political name-calling and blame-gaming will cancel itself out.

It is the implications for the future financing of Labour that potentially pose the most serious threat to the party. The Co-op Group, of which the bank is a part, has been a vital lifeline for Labour. It has made substantial donations, sponsors 32 MPs and has kept the party’s head above water with £18m in loans on generous terms. As we report today, the bank’s new management plans to dramatically reduce, possibly terminate altogether, the support that it gives to Labour.

As my colleague Daniel Boffey also reveals, two former advisers to David Cameron are working with the bank’s new management, which will deepen the apprehension in Labour’s ranks. This threat that Labour will lose the support of the bank comes at a time when some of the union bosses are on a donations strike over Ed Miliband’s attempt to reform the union-Labour link.

For the rest of us, the most important question is why, five years on from the Great Crash, banking is still a source of such scandal. Never again. That is what they all said, politicians of every stripe, when the bubble burst in 2008. Yet here we go again.

Ministers will say that the reverend was approved as the chairman of the bank under the old system run by the now defunct Financial Services Authority. They will go on to contend that the new regulators apply more rigorous vetting. Clearly it is not a tremendous idea to have a bank chaired by someone as astonishingly ill-qualified and with such interesting predilections as Mr Flowers, but that alone does not explain what went wrong at the Co-op. I’d be cautious about putting all my confidence in superior qualification tests. They would have been passed by the authors of some of the most spectacular banking failures of 2008. Fred Goodwin was an accountant and no one ever accused the former chief executive of RBS of consuming mind-alterating substances – unless you count over-inhaling his own ego. He nevertheless presided over the ruination of the Royal Bank of Scotland.

That was a much more serious event by several orders of magnitude than the troubles at the Co-op; RBS was the greatest corporate bankruptcy in British history. At least the Co-op case is not going to require the taxpayer to stump up hundreds of billions of pounds to save the economy from bankers’ follies, as was the case then.

I almost feel sorry for Mr Flowers, arrested and humiliated, when I compare his fate with that of those responsible for much graver and more dangerous banking failures.

The men who led some of our biggest banks to ruin and took Britain to the edge of a financial apocalypse leapt clear of the wreckage with the fat proceeds of salaries and bonuses accumulated during the boom years and their vast pension pots. Regulators have dished out fines for the Libor fixing scandal, but no one has yet been put in a dock. No one has even been much shamed for the roles they played in the Great Crash. A couple of the bankers were subsequently stripped of their knighthoods and that was it.

There is an increasing number of alarming signs that people are behaving as if there were nothing really to learn from the bubble years and nothing much to remedy in the banking system. Personal indebtedness in Britain has risen back to pre-crisis levels. Mortgage lenders are once again offering 95% loans, encouraged by ministers eager for the tax revenues from stamp duty and hoping to create a deceptive feelgood factor generated by a boomlet in property prices. Once again, Vince Cable is a rather lonely prophet worrying where this will lead, but this time a voice of warning somewhat muffled by collective responsibility. Once again, other politicians shrug off his cautions and dismiss him as Dr Doom.

The Bank of England’s base rate remains at the historically unprecedented low level of 0.5% and has been there for so long now that people have started to treat the abnormal as the normal. At some point, interest rates will start to rise and with it the mortgage payments of millions of people. When that happens, a lot of voters are going to be in for a nasty shock. The chancellor’s essential gamble is that the governor will hold down the base rate until May 2015 is safely behind him and David Cameron.

City bonuses are still structured in a way that rewards and incentivises short-term risk-taking. The law lacks serious penalties for reckless or fraudulent trading. Five years on from the Great Crash and the legislation to reform financial services has still not got on to the statute book. It is only this week that the banking bill will reach the report stage in the House of Lords. That could be the site of a lively battle between ministers and those who find the legislation highly inadequate because it fails to implement or dilutes some of the key reforms proposed by the government’s own banking commission.

Among several crucial recommendations that the government doesn’t want to follow, ministers have resisted a licensing regime that would subject senior bankers to an annual competence and integrity test, though that would clearly have been very useful in the Flowers case. Another vital issue is the separation of the retail and investment, high street and casino arms of banks. The commission wanted this fence to be “electrified” by giving regulators the power to intervene if they found that a bank was “gaming the system”. Members of the commission, including the archbishop of Canterbury, are well-represented in the Upper House. This week’s Lords debate will be one of the last chances to put some sharper teeth into banking regulation.

By turns entertaining and horrifying, the Flowers affair has shown that Britain is great at laying on a scandal. What we don’t do so well is prevent them.

Observer 24/11/2013

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