Ring-fencing isn’t enough, casino banking must be reined in

The real lesson of the alleged Kweky Adoboli fraud at UBS isn’t that the Vickers reform requiring ring-fencing between the retail and investment arms of banks should be implemented far quicker than 2019 – though that should certainly be the case. It’s rather that Vickers, after 18 months’ investigation, missed the point. The central problem is not that taxpayers should be protected against any bail-out of wild, speculative and greedy investment traders – though obviously they should be – but rather that such activities within investment banking must be tightly regulated or prohibited outright. Capital is scarce, and the wasteful and reckless dissipation of it in highly risky and speculative betting by investment bankers is something the nation simply cannot afford when capital is desperately needed for job creation and revival of the manufacturing economy.

To the rogues’ gallery of sub-prime mortgages, now add exchange-traded funds. It is astonishing that Vickers, conducting the official inquiry into the colossal financial crash of 2008-9, never even mentioned derivatives trading (as I commented on in my blog 3 days ago, on the 13th), even though that was overwhelmingly the main cause of the collapse. Now, just 4 days after their report was published, this monstrous omission has come home to roost. Exchange traded funds, which Adoboli dealt in, are highly complex financial instruments intended to mimic market movements. Instead of using FTSE 100 funds that tracked the index by containing all the shares in the index, a FTSE 100 ETF might not hold all the shares in the index and might include derivatives and other complex financial instruments. Equally they could be based, not on the FTSE 100 index at all, but on commodity prices (which are very volatile) or any other financial products chosen. Adoboli himself worked on a delta-one trading desk where tiny differences in prices are exploited to make big profits (or losses).

Is this a kind of banking which we should tolerate at a time of austerity and dangerous economic breakdown, or indeed at any time? Britain is now in such a critical state that control over the money supply needs to be vested once again in the Bank of England so that its utilisation can be prioritised for key national needs which at present are certainly house-building, infrastructure improvement, building a digital economy, and the urgent revival of manufacturing. At present we are in the absurd situation where the only way that the money supply can be expanded is by bank lending to businesses and homeowners which of course increases the national level of indebtedness.

The real lesson of the UBS scandal is that wild speculation by the investment banks should be urgently halted, the money supply returned to the Central Bank, and an expansion of credit determined not by casino players but by the overriding business and social priorities of the nation.