2013-05-24T13:02:26-04:00 Fleur Brading http://www.huffingtonpost.co.uk/author/index.php?author=fleur-brading Copyright 2008, HuffingtonPost.com, Inc. HuffingtonPost Blogger Feed for Fleur Brading Good old fashioned elbow grease. tag:www.huffingtonpost.com,2012:/theblog//3.1762334 2012-08-09T18:40:26-04:00 2012-10-09T05:12:04-04:00

Fleur Brading http://www.huffingtonpost.com/fleur-brading/
Conspiracy theories that this new action against a UK bank represents a growing US regulatory crack-down, aimed at weakening the City of London and the UK's national banking reputation, is at odds with alternative reports that speak of the anger of federal regulators in relation to the actions of the DFS. It has been reported that the Department of Justice, the Federal Bureau of Investigation, the Federal Reserve, the Treasury Department and the Manhattan district attorney's office have all been pursuing sanctions investigations against Standard Chartered for up to two years, and that Standard Chartered offered to pay a $5m settlement fee for the $14m of "U-turn" transactions that it agreed were prohibited by US law, a few months ago. This offer was rejected by the DFS. Some have questioned the vigilantism of the Head of the DFS, Benjamin Lawsky. Others have wondered whether the DFS' activism is the result of trying to "prove" itself after only existing for 10 months.

The row over Standard Chartered is compelling because of its marked change from the investigations involving HSBC and Barclays. Standard Chartered have come out fighting and have denied the scope of the accusations against them. This contrasts hugely with the self-effacement of the Barclays senior team in the wake of the Libor scandal. It is also a potential risk for the management at Standard Chartered: the longer the scandal goes on, the longer Standard Chartered's share price will suffer. And if Standard Chartered lose their defence, they risk being stripped of their New York banking license in addition to the further reputational damage of being found guilty.

The scandal at Standard Chartered again highlights the challenges of corporate governance for large, multinational institutions. In this case, on a par with Libor, the misdemeanours are alleged to have gone on for a long period of time. The argument goes that, accordingly, it is harder to point to individual malpractice or to say definitively which perpetrators were involved: they may have moved on from the bank, they may have been briefly involved before moving role, or they may even have been unaware of their own complicity. In Standard Chartered's case, the DFS has alleged that a senior executive from the London team told a New York colleague in 2006 that the Americans did not possess "the right" to dictate matters of international financial governance. This is a conversation, it is claimed by the bank, that no one remembers. This may well be true 6 years on. Or it may be the case that those involved - or innocent bystanders who overheard such an attitude expressed - would not risk current employment to turn informant. The benefits are not immediately compelling, not least if you do not possess an ardent desire to prevent Iranians from developing WMDs.

On Wednesday, the BBC published an interesting feature on American law and its relationship to non-US companies. The report detailed the increasingly defensive position of the US, show-casing the evolution of extraterritorial legal actions that have seen major companies pursued by US law and foreign nationals extradited to the US for fraud. This question of protectionism, and the increasing battle for finance and its governance, a result of the crisis of 2007-2008, adds more layers of intrigue to the Standard Chartered affair.

Some questions therefore:

Is Lawsky, the DFS Head, a lone vigilante acting outside of the usual parameters of the US regulatory community?

Is the case against Standard Chartered part of a larger conspiracy against UK banking?

Will any individuals be found responsible, or whole banking teams indicted?

Will the CEO and Chairman be implicated and forced to resign, like Diamond and Agius before them?

To answer these questions, everyone is hanging on Standard Chartered's testimony before the New York regulatory body on August 15.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1671576 2012-07-13T12:51:57-04:00 2012-09-12T05:12:11-04:00

Fleur Brading http://www.huffingtonpost.com/fleur-brading/
The subject of Jenkins' focus was banking regulation; specifically, whether there is too much of it and whether it is damaging for banks and the economy. In turn, he laid out the logic of holding more capital for riskier banking activities (a system of "risk-weighted assets") and the historical precedent, and new proposals, for reforming the capital that banks are required to hold.

The shock that he delivered to the Worshipful Company of Actuaries was that, in contrast to bankers' opposition to the 'over burdensome' regulatory requirements being introduced, banks are still only required to hold less than 1.4% of loss absorbing capability for the extremely leveraged positions that caused the financial crisis of 2007 / 2008, and that their total leverage will be capped at 33 times. Jenkins also highlights that the new rules being introduced on banking will not even come into effect until 2019.

The facts make for shocking reading, not least when studied beside Martin Wolf's article. Wolf reflects how "crises occur when what was thought to be low risk turns out to be very high risk." By comparison, Jenkins draws his audience's attention to two related subjects: the CDOs and innovative securitizations at the heart of the credit crunch, which were rated AAA by the leading credit agencies, and sovereign bonds, which Jenkins tells us may still be registered as "zero risk", despite the turmoil that has engulfed the Eurozone over the past two - three years.

So what is Jenkins' solution? He believes that all banks everywhere should be required to raise their equity capital to 20% of assets, a rate deemed optimal by many economists.

Wolf's article presents a somewhat pessimistic (aka realistic) view of banking reform: that bankers are unlikely to change fundamentally and that retail banks, despite their relative position of superiority over investment banks, in an ethical sense, also "misbehave". As a result, Wolf makes the case for methods that overcome "managerial insouciance" - the introduction of greater transparency - and which limit fallibility, that is to say, procedures that lower leverage. His is a case for a ring fence between retail and investment banking, to separate savings deposits and the capital required to finance investment banks, but not an all-out separation of retail and investment.

Jenkins' 20% ratio is a radical position, but one which, given the huge pain of the past 5 years and the lack of hope that things are going to get any better any sooner, is refreshing. I don't believe anyone buys the argument anymore that the financial services sector can self-regulate, or that the "free" market can adequately protect itself from the "hubris hungry and error prone" practices of the human race when it is at banking. It is time for serious proposals that clearly define what is permissible, but which are also implemented across national boundaries. Can you imagine a world in which ring fences were imposed for all retail and investment banking procedures, and in which the capital ratios were increased, internationally, to a level that precluded tax-payer bail outs of national financial institutions?

One thing is certain, the boom and bust of the financial services sector will go on. It is part of the ingenuity and creative re-birth of capitalism. Nevertheless, there must be a way to prevent the failures of individuals' judgment from becoming the national pain of millions of others. It is time to fight back against the argument that minimal controls "damage the economy". An overly regulated system is not the answer; smart regulation that is seriously implemented, is.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1654172 2012-07-06T11:37:03-04:00 2012-09-05T05:12:07-04:00

Fleur Brading http://www.huffingtonpost.com/fleur-brading/
Nevertheless, the recent scandal involving Barclays, in which the bank manipulated inter-bank lending rates (raising them to increase profitability and lowering them to give an impression of systemic health) has provoked quite a different reaction. The global complicity and public ramifications for rigging the Libor rate have shocked many. The affair has led the UK business secretary, Vince Cable, to state its "biblical proportions" and to comment that "Incompetence, corruption and greed have been endemic in British banking."

The potential damage for the banks - both internationally and with customers at home - is a cause of great concern. Despite how it might seem at times, the wheels of capitalism do not turn autonomously, but rather depend heavily on the workers, consumers and business relationships that keep them oiled.

The public's relationship with capitalism is fraught with complications. The system is viewed as both productive and predatory: applauded for providing jobs and innovation while harangued for promoting risk-taking and the pursuit of profit. So, too, the public's response to a variety of corporate scandals is also somewhat uncertain. It is not clear when the needle of public opinion will swing from "tolerated" to "unacceptable" for any given action. Many are clear that the Libor affair went too far. But it is harder to say why other scandals - identified or widely publicised as such - have not led to criminal prosecutions or, at the least, the firing of senior figures within business.

America is much better at criminal prosecution than the UK. The US Securities and Exchange Commission (SEC) brings hundreds of civil enforcement actions against individuals and companies each year for violation of the securities laws. Typical abuses include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. Furthermore, the SEC offers an attractive 'whistle blowers' programme that uses financial incentives to engage investors themselves to provide information on fraudulent practices: those who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered can expect to receive between 10% and 30% of the money collected.

The UK Treasury select committee hearing, which took place this week, threatened to implicate the Bank of England in the Barclays affair. It was suggested that the deputy governor, Mr Tucker, advised Barclays to lie over its Libor submissions. This aspect of the case was down-played by Bob Diamond, Barclays' CEO, when he faced cross-examination from the parliamentary committee. Nevertheless, the accusation caused the UK media to pose yet more questions about the complicity of our national institutions and served to highlight the lack of authority that the FSA and other governing bodies possess to impose criminal sanctions for market manipulation.

All these are issues that need addressing. However, at their core, a question over moral ambivalence needs to be answered. Seemingly, there exists a perennial tension between asking a company to pursue success, financial gain, and to ward off its competitors while also demanding that it be mindful of sustainability, ethical considerations and good behaviour. Many commentators have reflected that our system of business ethics has been seen to fail, with banks unable to self-regulate and with a shift in business from Adam Smith's principle of utility maximisation to the modern pursuit of profit maximisation. But is this true? It would be easy to put forward an alternative argument: that there was no true system of business ethics in place prior to this latest scandal, or the larger financial crisis, and that this is at the root of all that is going wrong.

A serious "market failure" has occurred when, as a result of fraud and unethical company behaviour, a lack of trust has developed in lending markets, between business and the public, and between businesses themselves. This is the bottom line for capitalists to understand if they want the system to succeed again: far from the market being too free, it has been taken hostage by those who sought to manipulate it for their own gain. For as long as this continues, whether displayed in crony capitalism or some other distortion such as manipulated lending rates, the case against business and its practices will remain.]]>