Posted by Jake on Sunday, July 22, 2012 with 5 comments | Labels: Article, banks, Big Society, British Bankers Assoc, inequality, pay, regulation
The summer of 2011 saw the London riots in full view of local, national, and closed circuit television. Heedless of their audience ordinary Britons smashed and grabbed. Over the ensuing months thousands of convictions and punishments were handed out to citizens who had never faced a magistrate before and will probably never do so again. It takes an extreme hooligan to kick in a shop window. But once the window has been kicked in, it seems there are thousands of us who would step through and snatch stuff.
Corporate Britain saw the windows kicked in back in the 1980s when financial services were de-regulated. We quickly saw what well bred city gents turn into when nanny isn’t around. Bankers and traders leading the scramble for loot were followed over the years by the other professions. Some dashed through immediately while others waited a decade or so to see if anything would be done to stop the looting. Eventually, finding that lawmakers, regulators and public opinion were indolent and impotent, they too stepped over the line. Financial Services were joined in the looting by Energy, Insurance, Transport, Telecommunications and others. It wasn’t just the direct looting of us ripped-off Britons individually. The looters stepped into public services. Defence procurement, IT projects, the outsourcing to the private sector of policing, health, education and infrastructure build. The looting continued through decades of Conservative and Labour governments. Successive politicians, many of whom grew mightily wealthy, have a simple question to answer:
Please Tick: Were you a Fool or a Knave?
_ Fool and Knave
The ‘Big Bang’of 1986 was the sound of kicked glass shattering, and the echoes continue to reverberate today.
Like rioters in a court, the summer months of 2012 exposed a great deal about corporate culture.
- Barclays became the first of many big banks to have its Libor tricks declared by the Governor of the Bank of England and the Chairman of the US Federal Reserve to be fraudulent, exposed and punished.
- British banks, censured by the FSA, faced paying billions in restitution for scamming businesses into Interest Rate Swaps.
- HSBC was forced to apologise to the US government for laundering drug money, putting profit before probity.
- GlaxoSmithKline was fined US$3billion for selling dodgy drugs and bribing doctors to prescribe them.
- Traders were caught out rigging the market for oil and petrol.
- G4S left the Olympics inadequately guarded because they were more focussed on counting their profits than accounting for their guards.
Much was exposed, but was anything learned? The following exchange between the MP Jesse Norman and Bob Diamond, when Diamond was giving evidence to the Treasury Committee, suggests not:
-they will see it in the context of the [interest rate] swap scam [ripping off business customers], PPI [ripping off retail customers], Protium [ripping off investors], this Brontos tax evasion transaction [ripping off the taxman] that was undertaken in Italy last year with UniCredit. That is the context. They are going to say, "This is a culture that was deeply flawed, deeply corrupted, and that is where it went wrong."
I hope we’ll look at this in the context of the decisive action that was taken, as a sign of the culture and the willingness that when there is a problem, we are going to get to the bottom of it; and within the context that there is a broader industry issue; and, lastly, I do hope, Jesse, that we will look at this as having been a number of years ago, not today.
The assertions rolled out repeatedly by rogues and scoundrels over the decades to excuse all sorts of atrocities don’t change much:
- “It happened years ago.” As it takes years for an offence to get to court it is generally true that the offences happened "years ago".
- “It was just a few rogues.” I don’t know who said this first, but I quote: “add a pint of sewage to ninety nine pints of milk and you have one hundred pints of sewage”. It is for the good of those ninety nine pints that the one pint must be eradicated.
The “culture at HSBC was pervasively polluted for a long time”, said the chairman of the US Senate subcommittee on investigations. It has indeed been a long time since companies learned the formula for continuing business as usual:
a) Co-operate fully with the investigation
b) Pay large sounding fines (which are actually tiny fractions of profits)
c) Send a few executives into the wilderness with a thick wad of banknotes for consolation
Bob Diamond (former CEO of Barclays) reckons culture is about “what we do when nobody is looking”. Diamond missed the point. Culture is what we do whether people are looking or not. It is what we do without worrying whether we are being watched or whether we are hidden. Culture is what we do because it is what we are.
So are we all culturally looters? Do we just need the opportunity to be high and the cost to be low before we too will snatch something?
The answer is perhaps “yes”. It happened in the London riots of 2011 ago, but it’s not just us 21st century Britons. In the past it has happened on a scale far more vile and more widespread. The 20th century saw apartheid in South Africa, and extermination camps in Nazi Germany. The 19th century saw the extermination of American Indian populations and thriving slave plantations in the USA. It happened in the British Empire where across centuries the sun never set on British commercial abuses of the natives.
The point is not that these examples were evidently terrible. The point is that whole civilised populations participated. If someone else would just kick in the window, many of us will march through and take the loot while most of the rest of us stand by acquiescing.
Are we proud of this cultural trait? Well, in hindsight we are not. But at the time was empire not glorious? Culturally we may be looters, even though most of us don’t want to be. When the window is broken we find the temptation to reach through and grab something irresistible. Some do resist through fear of punishment, some because it’s just not right. But we don’t only do the things we think are right. Chickens don’t deserve to be slaughtered in their billions for our food, but I still eat chickens because they taste so delicious when properly prepared.
Light touch regulation assumes the regulated are people of good will. They have proved not to be. The Free Market requires strong consumers as well as strong companies. Companies are well organised, consumers are not. Adam Smith, the capitalists’ icon, realised this:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
Adam Smith ( , Vol. I, Ch. 10, pt. 2.)
Ordinary Britons in particular, being culturally a solitary breed, seldom meet together at all except to drink beer. Organising us is a feat for titans. Individual Britons separately withdrawing their custom and swapping suppliers is just a case of jumping from one frying pan to another frying pan. Britons, being determined democrats, hope to exert their strength by their votes. Sadly, British politicians only fight for Britons when they are in opposition. Knowing that while in opposition they can’t be expected to do what they promise they flex their rhetorical muscles: “With no responsibility comes great power”.
People loot because the incentives are higher than the disincentives. The answer to looting is not stronger windows. If the incentive is high enough looters will always find away through or around the windows.
We have been gulled for decades with the idea that high pay brings high performance. Perhaps so, but the high performance is not in our interests. The figures show it doesn’t make us all better off, it just enriches the ‘high performers’.
The key to control the inclination to loot is to weaken the incentives and strengthen the disincentives.
a) Excessive pay encourages the looters to try for one big heist. One heist big enough to put them in clover. If they can get away with that then they can retire in comfort. On the other hand, if they get away with it then they can try for another heist knowing their nest is already feathered if they get fired. If companies' management are not inclined and companies' shareholders are not empowered to restrain pay, then perhaps it is down to the taxman to confiscate it.
b) Penalties on firms need to be extended to penalties on individuals that actually hurt. Taking £1million in fines from a man who has £100million means nothing. The one thing all individuals have to the same measure is time. Individual penalties need to include jail time.