Greed, aftermath of financial collapse
By Arthur I. Cyr
July 29, 2012, 12:05 am TWN
“Greed is good,” declared corrupt out of control investment banker Gordon Gekko in the hit film “Wall Street.” However, the Bible, Shakespeare and other influential sources argue to the contrary.
In the ongoing aftermath of the global financial collapse, destructive results of unchecked greed are undeniable. Scandals continue to erupt in different sectors of the vast banking and financial industries.
The latest involves manipulation of Libor, an acronym for London Interbank Offered Rate. This is the estimated average interest rate charged major London banks which borrow from other banks. In turn, Libor is an established benchmark guide for other institutions in managing interest rates.
Headline investigations in both Britain and the United States are focused on collusion among traders and bankers to manipulate Libor. Bob Diamond, chief executive of Barclay's Bank, has resigned under pressure and the corporation has agreed to pay a fine of US$450 million.
London is central to today's 24/7 worldwide financial markets. “The Big Bang” is the term for the dramatic financial deregulation in the 1980s by the government of Prime Minister Margaret Thatcher, expanding Britain's roles.
The leadership of British companies in this realm reflects history, geography and more intangible factors. Many established firms are hundreds of years old. They enjoy durable customer relationships and institutional memories reaching back exceptionally far in time.
Geographic location means early bird traders and executives can begin work dealing with counterparts in Asia, where high-volume afternoon markets are unfolding, and later in the day focus on the just-opening American markets.
British finance also generally has had a carefully nurtured reputation for integrity. This precious asset is now ruined for some and at risk for many.
Current legislative hearings in both the British Parliament and the U.S. Congress predictably are acrimonious. During July 25 testimony before the House Financial Services Committee, Obama administration Treasury Secretary Timothy Geithner received harsh Republican criticism for not addressing the problem during his earlier tenure leading the New York Fed.
The difficulty of preventing corrupt interest rate manipulation was discussed in a July 24 policy speech by Lord Adair Turner, chairman of Britain's Financial Services Authority, a central oversight body. He is a candidate to succeed Sir Mervyn King as head of the Bank of England. Presumably his remarks reflect sentiments of the British banking establishment.
Lord Turner emphasized control of financial products at the wholesale level rather than attempting detailed regulation of use of derivatives and other instruments in more retail terms. Banning some forms of complex financial derivatives could prevent at least some reckless behavior. Unfortunately, he did not emphasize separation of commercial and risky investment banking.
This brings up Paul Volcker, a remarkably accomplished senior public servant who chaired the Economic Recovery Advisory Board in the Obama administration. Earlier, he headed the Federal Reserve. His “Volcker Rule” would return the United States to earlier practice of strictly segregating commercial and investment banking.
This separation, which dates from the Glass-Steagall Act during the New Deal, was abolished during the Clinton administration. A version of the Volcker Rule was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law in 2010.
The enormous volume of email among traders collected by authorities reveals a culture of arrogance and disdain for customers, reminiscent of the fictional Gekko. The factual Paul Volcker provides the standard against which actual leaders should be measured.
Arthur I. Cyr is Clausen Distinguished Professor at Carthage College in Wisconsin and author of “After the Cold War” (NYU Press and Palgrave/Macmillan). He can be reached at firstname.lastname@example.org