'Where has all the money gone?'
London Stock Exchange chief explains why voters – and protesters – should blame the politicians for much of our financial mess
Margareta Pagano is a former business editor of the Independent on Sunday who now writes columns and business interviews for a range of publications, including the Independent, Independent on Sunday and London Evening Standard.
Sunday 30 October 2011
Getting into the London Stock Exchange last week was trickier than usual.
The main doors in Paternoster Square were closed because of the protesters by St Paul's, so you had to go to the Newgate Street back entrance, where police cordoned off a "safe" area.
Eventually I made it to the seventh floor to meet the LSE chairman, Chris Gibson-Smith, whose office has the most stunning views across the City – from Smithfield to the north, to the Gherkin in the east and round to St Paul's Cathedral. You can't quite see the tents of the Occupy the London Stock Exchange protesters, who had to occupy the space by St Paul's instead when they weren't allowed near the LSE – the real object of their anger.
So, the first question which has to be asked of the chairman is, what does he think of them? He doesn't hesitate: "The exchange is a misplaced symbol; I think many of the protesters have confused capitalism with materialism, and that might be part of the problem of how they see the causes of the crash. Capitalism is self-evidently still the best and most efficient way of delivering wealth creation. We have seen that wealth has been created, and redistributed, around the world from China to Brazil, when you open up economies to the markets."
However, he adds: "There are unintended consequences of free markets. It's not capitalism that has been the problem, but irresponsible governments and politicians who have allowed the financial system to explode by permitting the build-up of ludicrous amounts of debt and leverage. No one ever said that free markets could or would be self-regulating. That's where people over the past few decades have got it wrong, and many are still in denial – look at Alan Greenspan, the [former chairman of the Federal Reserve], who is still defending free markets."
And it's the exchanges and regulators that are left clearing up the mess, or trying to. "Bringing order back to the markets is an awesome task, but that's what we, and the regulators in the US and Europe, are trying to do. There is the most unprecedented co-ordination going on to avoid regulatory arbitrage; it's being called conscience parallelism."
And the task really is awesome. If the numbers are right, then there is $600trillion or so of notional off-balance sheet swaps and other derivative products somewhere in the shadows – far bigger than the banking system.
Gibson-Smith says voters should blame the politicians for much of the mess: "How on earth did governments – here and in Europe – get away with spending so much? Just look at the last Labour government, which increased public spending every year from 1997, when it was£300bn, then another £100bn three years later and so on. Today spending is £710 billion and the deficit around one trillion. How did we let that happen?"
That's what the voters should be asking, he says, particularly when most of the spending over the past 20 years has gone mainly on two areas – health and welfare payments. "Even the education budget has hardly increased – one area where we should be spending more, instead of absurd tuition fees. Then they had to increase taxes to fund all this spending. That's why we got Gordon Brown's raid on the pension funds and on pensions – scandalous," he says. "Politicians, and the civil service, lost control of the system. Where has all the money gone?"
It's a good question and one which Gibson-Smith says business should be asking more: "Businessmen and women are constantly too polite to government. It's time for business and the job creators to be more vocal about what they really think of policies."
He's doing his bit. The way the tax system unfairly favours debt over equity fills him with despair, and the Exchange is still lobbying the Treasury for it to be changed. "It's extraordinary that there should still be tax relief on debt, but when you buy shares in a company ... you are taxed four times – corporation tax, dividend tax, share-trading tax and personal tax – at a time when we are trying to reduce debt. All this pushes up the cost of capital; our share turnover in London is much smaller than in Europe, where they don't have a share-transaction tax. Nobody here is interested in equity."
But using equity as an alternative form of finance has never been so important, as so many SMEs struggle to get bank finance. "There are many problems we need to deal with – the banks are building their capital base so don't want to lend. Many of the loans banks are offering are uncompetitive ... We need to fix the tax system if we are to encourage equity – and retail share ownership – which is so low compared to Italy and elsewhere in Europe."
Holding the fort at the exchange hasn't been the easiest of tasks; during his nine years in the hot seat, he's had to mastermind and defend a stream of takeover bids, the last being the rather bitter battle with Nasdaq. But it was his friendship with the Qataris that led to the QIA, the sovereign wealth fund, taking a big stake.
Then there were the glitches in new trading systems which triggered murmurs that Gibson-Smith has been running out of patience with his chief executive, Xavier Rolet, a notion which can be dismissed as he describes Rolet, and his team, as "brilliant". Some of the back-biting could be inspired by envy, particularly at the speed with which Gibson-Smith and Rolet are marching the LSE into new areas; the takeover of Turquoise Trading and Millennium, for example, and the tie-up with the Mongolian exchange.
Still, it seems to be working – the cash equities business – share trading – now contributes about 19 per cent of overall profit. And the LSE's own shares, which had their own mini-crash, are creeping back up, at £9.40.
And London is still the place to come – new figures out last week showed that there are 604 foreign firms listed on the LSE, more than on the NYSE or Nasdaq, and that the 21 companies floated last year made up 12 per cent of the world's IPOs. This year, firms have raised 35 per cent more new money, a total of £22.9bn. The LSE's half-year results, in two weeks' time, are likely to show another healthy increase.
Meanwhile, Gibson-Smith is "ready and waiting" for the new rules from Mifid on opening up the European derivatives market (now dominated by the new NYSE Deutsche Börse group), which will force open access and fundibility in derivatives clearing. Bad news for Deutsche Börse – but good for the LSE, which is itching to compete. But EU plans for a new financial transaction tax are "bad for all of Europe", he says. "I don't think it will get through."
So what next? How about doing a deal or joint venture with Hong Kong or the Nordic countries, natural stopovers for a global exchange such as London? "Stop fishing," he says. "We are always talking."
Final talks are indeed taking place over the purchase of LCH Clearnet, the clearing house for London's trades, which Gibson-Smith says will be a great deal for the capital. But he is still annoyed that the LSE's bid for the Toronto Stock Exchange was blocked by "parochial politicians and five banks who didn't want to lose control".
So what does he say to Big Bang critics who chose last week – the 25th anniversary of the reforms – to speak out against them? Is Terry Smith, boss of Tullett Prebon, right to say that opening up the City floodgates to US and foreign capital was a "colossal mistake", bringing a host of conflicts of interest that contributed to the crash?
He doesn't think so. "The City needed light shone into a closed system," he says. "Big Bang allowed London to thrive. Self-regulation and the closed sanctity of 'the club' made for an opaque system ... I am in no doubt that London and the UK's pre-eminent global role in supporting and nurturing international business has been in part due to Big Bang. Our economy has been the beneficiary of those changes and we should look to continue to capitalise on one of this country's best assets, our finance and capital-markets industry."
As a geologist, he's dived publicly into the climate-change debate because he was so fed up with the scientific illiteracy of what he had been reading and hearing in the press. It's not global warming we should fear, he says, because we are in an "ice age". The real crisis is one of resource depletion, which is why taxing 4x4 cars is "meaningless", and why punitive green taxes on business just make the UK uncompetitive.
On women in business he's equally forthright. "I'm gender blind, if that's the right expression," he laughs. "We are working on building up the numbers of women executives because that is the best way to get them to board level. At last, 20 per cent of our 50 top executives are women and it's rising. At British Land [he is chairman] we have appointed the ferociously clever Lucinda Bell as our finance officer. She was working part-time because of young children; we waited until we thought it was the right moment, and then approached her to work full-time. But the big issue for men and women is how we solve motherhood and childcare ... For most women it's not worth going to work, financially, but we need them in the workplace as they bring so much talent."
It's no surprise to hear that Gibson-Smith's wife, Marjorie, is a retired teacher who helped fund him through his PhD, teaching in Scotswood Road, Newcastle – the poorest area. One daughter is a paediatrician, the other an architect.
"The Government," he says, "can't just demand big social policies, such as encouraging more women into the workplace, and then expect the private sector to pick up the cost – childcare should be tax-deductible.
"Xavier and I were tossing across the table to each other the other day the idea of having a crèche here ..."
Babies in the Stock Exchange? Now that really would be a Big Bang.
Education: Chris Gibson-Smith has a BSc in geology from Durham University; a PhD in geochemistry from Newcastle University; and an MBA from Stanford University
1970: Joined BP as an exploration and production geologist
1983: BP's chief geologist
1992: European chief executive for BP Exploration
1995: Chief operating officer for BP Chemicals
1997: Group MD of BP, responsible for Asia, Africa and global technology
2003: London Stock Exchange, chairman
2007: British Land, chairman
Other professional interests
Sloan Fellow of Stanford Business School; Honorary Fellow of University College, Durham; director of the Qatar Financial Centre Authority; governor of the London Business School. Chairman of National Air Traffic Services (NATS) 2001–2005; director of Lloyds TSB, 1999–2005; director of Powergen from 2001-2002. Past chairman of the California Marine Mammal Center
He is married to Marjorie, a retired teacher. They have two children: Emma, an architect, and Sarah, a doctor. His interests include literature, music, art, skiing, shooting, and golf
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