London now faces calls to cull its bonus culture, rein in risk-taking and beef up a regulatory system that fueled a decadelong boom but also led to bad trades by Lehman Brothers, AIG, JPMorgan Chase and now the Libor interest-rate scandal.
London risks losing its status as the world’s top financial center as the $360 trillion interest-rate fixing probe follows a series of market abuses by banks that eroded trust in a city already shrinking faster than rivals.
JPMorgan Chase’s trading loss of at least $2 billion, the alleged $2.3 billion fraud at UBS and the investigation of at least a dozen banks including Barclays for rigging global interest rates all happened in London in the last year. The effect is taking a toll on the capital of a country enduring its first double-dip recession since the 1970s, which fired more financial-services workers than any other country in 2011 and again this year.
“My heart sinks every time there is a scandal and the perpetrators are in London, even if it is not always the U.K.’s responsibility, it is under our noses,” said Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee. “There is an effect on the U.K.’s reputation, and it reinforces the view that even after all the apologies there is much to do.”
London, ranked as the world’s No. 1 financial center by research firm Z/Yen Group, was where AIG and Lehman Brothers booked transactions that helped lead to their downfall. This week saw Bank of England and U.K. government officials tied to the interest-rate fixing scandal that cost Robert Diamond, London’s best-known banker, his job at Barclays. With the European debt crisis on its doorstep, London now faces calls to cull its bonus culture, rein in risk-taking and beef up a light-touch regulatory system that fueled a decadelong boom.
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The danger for London is that Europe is preparing to set up its own regulator for banks, which may exclude the U.K. or disadvantage firms based in the city. Domestically, the industry is losing longstanding political support from both Conservative and Labour parties — as well as the public.
Home to about 250 foreign banks, London is the world’s biggest center for foreign-exchange trading and cross-border bank lending and trades $1.4 trillion of interest derivatives daily, according to the Bank for International Settlements. Financial services are the U.K.’s largest export and pays 12 percent of the country’s tax receipts.
“Happens in London”
“It seems to be that every big trading disaster happens in London, and I would like to know why,” U.S. Rep. Carolyn Maloney, D-N.Y., said at a June 19 U.S. House Financial Services Committee hearing into the JPMorgan’s loss and the so-called London Whale trader.
AIG, Lehman Brothers and Bear Stearns all traded swaps in London that led to their bankruptcies or bailouts, Gary Gensler, chairman of the Commodity Futures Trading Commission, which is pushing the Libor investigation, said at the hearing.
“I think in the JPMorgan chief investment office matter, it’s really a stark reminder about how in derivatives trades booked offshore, risk can be brought back here,” said Gensler this week. “And yes, they were booked in London, specifically in the branch of JPMorgan Chase’s bank, and those risks are very much a part of the bank here.”
Bank of England Governor Mervyn King said change is needed.
“Everyone now understands that something went very wrong with the U.K. banking industry,” he said June 29. “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, we can see that we need a real change in the culture of the industry.”
“In New York they have attorneys general who are dead keen on prosecuting people,” said Paul Moore, who was fired from his job as head of risk for HBOS Plc for warning the bank’s bosses that its growth plans could threaten its stability. HBOS almost collapsed in 2008 before it was bought by Lloyds.
“We never prosecute” in London, Moore said. “You can be a rioter and steal a water bottle and get put in prison, but if you are a director of a company that systematically mis-sells payment-protection insurance to people you can monetize it.”
Ranking at risk
The latest revelations may influence the U.K.’s ranking in the Corruption Perceptions Index, according to Chandu Krishnan, executive director at the U.K. arm of Transparency International, which produces the measure. The U.K. was the world’s 16th least corrupt nation in 2011, behind New Zealand at No. 1 and ahead of the U.S. at No. 22.
“It seems we haven’t learned enough from the problems in 2007 and 2008,” he said. “It’s hurting London’s reputation as a financial center.”
The scandals haven’t yet affected London’s ranking as the world’s top financial center ahead of New York, according to Mark Yeandle, senior consultant at Z/Yen Group, which compiles the list.
“The events could easily have taken place elsewhere and New York has not been free of scandal itself,” he said. “What could affect the perception of London’s competitiveness is how the regulators and legal authorities here deal with the guilty parties.”
Banks based in the city, which is hosting the Olympic Games this month, have fired 10,000 workers this year, almost half of the global total, according to data compiled by Bloomberg. U.K. banks cut almost a third of the 200,000 employees who lost their jobs last year.
“There’s a mood of significant introspection,” said Michael Kirkwood, 65, a board member of U.K. Financial Investments, which oversees the government’s stake in RBS and Lloyds and is former U.K. chairman of Citigroup.
“People no longer hold their head up high when they have to say they are a banker.”