Magazine article The Spectator

Whatever Happened to Shame?

Magazine article The Spectator

Whatever Happened to Shame?

Article excerpt

When I arrived in the City of London in 1961 to work for White, Weld & Co., a New York investment bank, I was armed with a piece of frivolous advice and a list of names - both supplied by my father, who had opened the first London office of the firm in 1933. His advice was that it was only permissible to wear a soft collar on Mondays, as it was presumed one had returned from a weekend in the country. The list of names of friends and associates I was to look up included comments such as 'have lunch but don't deal with him' or, conversely, 'very boring but straight as a die'. In the case of one old friend, he told me a longer story.

The friend in question, an Austrian, was one of many talented bankers who had migrated to London fleeing the Nazi menace. He ran a small merchant bank dealing in Continental stocks and bonds. His firm was caught violating German exchange controls; a heavy fine was imposed and the affair drew considerable publicity. My father ran into him in Throgmorton Street and offered embarrassed condolences. 'My dear,' said the banker with a charming Viennese smile, 'we made three times the fine in profits on the transaction.'

My father was deeply shocked. His own firm - of somewhat puritanical Boston origin - considered reputation was all, and profits secondaiy. Easy for them, of course; most of the partners (sadly, not my Russian émigré father) had 'old money' fortunes and were hardly dependent on annual partnership profits. Such was also the case with the old London merchant banks and stock-broking firms before the 1986 reforms known as Big Bang. But the story has a certain relevance to the climate that now prevails in London and New York, which between them control 90 per cent of the world's wholesale financial activity. Enron and other corporate scandals, mis-selling of this or that, abuse of investment research in primary offerings, you name it: whatever the transgression, the regulatory response is a fine accompanied by a nolo contendere plea accepting conviction but not admitting guilt - and protecting the offender against civil suits from aggrieved clients which might otherwise lead to crippling damages.

The fact that fines are virtually the sole weapon left in the regulators' armory is due to several evolutionary factors, most importantly the consolidation which has taken place in the financial industry. So concentrated are the main strands of activity in the hands of a few conglomerate firms that the traditional sanction of loss of licence now carries 'systemic' risk. In other words, if one of the main operators in wholesale banking, capital markets, insurance and fund management were to be closed down for non-compliance, the impact on international markets could have serious economic and political consequences. So the regulators' ultimate sanction has become a nuclear option, impossible to use.

Occasionally, a national regulator will shut down the business of a multinational within its jurisdiction. The Japanese authorities did so recently with the private banking arm of Citigroup, the US conglomerate. The bank made a public apology in Tokyo for its violations; but the business it forfeited was an inconsequential part of its global operations.

In the late 1950s, the US Justice Department brought a celebrated anti-trust action against Wall Street, known as 'US vs Morgan Stanley et al'. The government charged the Street with conspiracy and criminal intent to control and price-fix primary issues. Seventeen firms snared the dock. The largest, Morgan Stanley, had a 9 per cent share of the market. There was a struggle to be part of this prestigious group of defendants. Of the 17, only five survive today, but those five have a much higher collective market share than the 17 had. More significantly, after the abolition of the Glass Steagall Act which separated investment and commercial banking, they control substantial customer deposits through banking operations and money market funds. …

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