When Mervyn King was Governor of the Bank of England, I went for lunch with him there. It was a surreal experience.
Liveried staff took me to the Governor’s Dining Room. It was in the bowels of the Bank, seemingly a long way from the outside world. The room was devoid of any modern accoutrements – there may have been a telephone in a corner, but that was all. Uniformed staff looked after us. An antique clock ticked away loudly. Of a markets trading screen, a TV (even switched to mute) showing the latest news, a flickering terminal, there was precious little sign.
Currencies could have been crashing, stocks could have plummeted, the financial system might have been in meltdown – but we pressed on with our salmon and new potatoes. I’m being unfair – it was a totally convivial affair, and Mervyn was terrific company. I assume, too, that if the heavens had descended, a flunkey would have slipped in to hand him an urgent note or a mobile phone.
Nevertheless, it did say something to me about the Bank. The atmosphere was one of, well, detachment. There was a restrained, calm air about everything – in sharp contrast to the scenes on trading floors across the City.
King was an academic, who liked to analyse and ruminate. One of his favourite occasions was when he had a regular gathering of similarly minded friends and they would play “what if?” They would look back at an event from the past and imagine what would happen if it occurred again.
Likewise, a story did the rounds that when the news broke on the TV nightly bulletin that Northern Rock was in trouble, the Governor was amazed to see shots the following morning of people queuing outside Northern Rock branches to withdraw their money. Rapid response and human nature were perhaps not King’s strongest suits.
That was true as well of some of his predecessors. There was always this feeling of two worlds where the Bank and much of the City were concerned. It sat in the middle of the Square Mile, but lofty and removed. Elsewhere, the City wide boys were doing their worst. I often wonder what the officials made of Liar’s Poker, the best-seller by Michael Lewis that first laid bare the culture of “big swinging dicks” and reckless speculating.
They would meet the boss class, of course they would. But just as the Bank was all chandeliers and French polished furniture in its hospitality rooms so would they be treated to a smart executive room, complete with an oil painting or two of the founders. What the high-ups from the Bank did not do was get down and dirty with the lads and lasses from the trading floor.
So when the financial world did hit the buffers, and credit crunched, and banks folded, I was not in the least bit surprised the Bank had not seen the catastrophe coming. If the bank chiefs themselves professed to not knowing or understanding what employees were doing in the corporation’s name, what hope was there that the regulators would be on top of the problem?
We were promised, though, in the fallout, that all this would change. From now on, we were heading into a different era, in which supervisors were across everything.
To that end, in this country, we reformed our regulatory system so that the three-legged stool of the Treasury, Bank and Financial Services Authority, became, where banks were concerned, two.
It was a recipe for absolving responsibility. Indeed, during the banking crisis I had a heated discussion with a senior executive at what was then the FSA. It wasn’t their job, he said, to test the balance sheet of Northern Rock.
But the Bank and Treasury say it had has nothing to do with them. So whose responsibility was it? He shrugged. He’d no idea.
The three legs went, and we’re now down to banking supervision resting with the Treasury and the Bank. Structural reform, however, is one thing. But have the actual lessons been learned? How do we prevent banks and their workers from acting improperly?
Sadly, it would appear that despite everyone on high claiming to have absorbed the lessons from the collapse, little really has changed. I refer to the surprise expressed by the forex traders interviewed as part of the Bank’s inquiry into whether its staff knew of currency-rate rigging. The traders’ quizzical reaction to the proceedings, reported by Bloomberg, should press panic buttons.
The traders were prepared to answer questions probing into the culture that led to the rate-fixing. They were appearing voluntarily and could speak openly without danger of self-incrimination. They were expecting to explain how they worked, how they made their money, to describe the ins and outs of the market, the atmosphere of the dealing room and their relationships with traders at other firms.
Instead, they were shocked that Anthony Grabiner QC, the lawyer leading the investigation, largely confined his questioning to just one meeting. That was in April 2012, at which Bank officials apparently told dealers it was okay to share information about customer orders with traders at other firms – a practice that enabled rate manipulation to occur.
There was a warning as to how the Bank might be proceeding. In March this year, Paul Fisher, the Bank’s then markets director (he’s since moved within to become deputy head of the Prudential Regulation Authority and executive director for Supervisory Risk and Regulatory Operations ), told the Treasury Select Committee “it isn’t our job to go hunting” for market wrongdoing. Despite evidence suggesting that rates were being rigged as far back as 2006, the Bank said it only became aware of the most serious allegations of collusion in the £3 trillion a day market in October 2013.
Of course, Grabiner’s review may be designed to go through the motions, to take a classic “Sir Humphrey” approach and to clear the Bank’s staff. Or, at the very least it’s intended not to highlight the Bank’s inadequacies. There again, it may be that the Bank simply cannot be bothered.
The previous Bank Governor, Mervyn King, never saw it as his job to get under the skin of the markets and City. But unlike King the new broom is a seasoned banker, ex-Goldman Sachs (only last week I was hearing how smart they thought he was). He must have a fair idea of the tricks of the trade, must know how traders think and behave. It’s in the ether in the City, in the dealing rooms, in the bars.
King’s problem was that he never stepped out and smelt the air; would not dream of getting into the gutter and finding out what the traders were really up to. I expected better from Mark Carney.
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