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From BCCI to Standard Chartered: a brief alternative history of investment banking

The Bank of Credit and Commerce International, which collapsed in 1991, was not widely known as the Bank of Crooks and Cocaine International for nothing.

True, the Bank of England was a bit sniffy about it, largely on account of its connections to the Middle East, and refused to grant BCCI full banking status. Neverthless, the regulatory authority of the day remained perfectly happy for it to act as a second-tier licensed deposit taker in the UK.

At its peak, BCCI controlled 400 branches in 73 countries, with around four dozen outlets in Britain. Many local authorities, attracted by generous rates of interest, became clients.

But even in the atmosphere of euphoria that overcame the City during the Thatcher decade, all the warning signs were there, at least for those who wanted to see them.

There were suspicious losses on futures and options trading, an unexplained decision to move treasury operations out of London to the Gulf, and a conviction in a Florida court for laundering Columbian drug money. A US senate investigation uncovered links with Panamanian dictator Manuel Noriega.

In 1990, auditor Price Waterhouse warned the Bank of England that the then-enormous sum of £1.5bn would be required to cover potential losses. Even then, BCCI was allowed to stay in business, and was only shut down after getting a tip-off that fraudulent activity was being perpetrated on a massive scale.

It subsequently emerged that accounts had been falsified for many years, transactions had been disguised, and that BCCI was insolvent, with debts that topped £10bn.

Those of us on the left who argued that this said something intrinsic about banking under capitalism soon ran into the one bad apple defence. The miscreants were obviously ‘rogue bankers’ and what they did was the exception rather than the rule.

But such was the public outcry that the Tories set up the Bingham Inquiry, to ensure that such malodorous occurences could never blacken the name of the UK financial sector ever again.

Supervision, the report concluded, had been far too lax.  The auditors did not pursue evidence aggressively, or pass on concerns as fully as they should have. Even when fraud was brought to light by other parties, the Bank of England did not investigate. Even when BCCI faced closure, the Bank of England tried to restructure it and did not take enough notice of the management’s lack of fitness and propriety.

Fast forward three decades, and it as if the British banking sector had adopted the slogan ‘we are all rogue bankers now’. Barclays is the first to be found guilty of fixing interest rates, although it will not be the last. HSBC – which was founded to handle the proceeds of Britain’s enforced sales of opium to China in the nineteenths century – has come full circle and is doing the same for Mexico’s drugs cartels.

Now Standard Chartered stands accused of acting as a coin op Laundromat for the sanctioned regime in Tehran. It is innocent until proven guilty, of course, but its very existence is now at stake. If it loses clearance privileges in New York, it might as well pack up and go home.

These are not fringe outfits set up in the 1970s by some dodgy foreign financiers; all have stood at the heart of the banking establishment for over a century.

As the old journalist joke goes, once is a shocker, twice is an astonishing coincidence and three times is a trend. It is impossible to shrug off multiple incidents of these dimensions in such a short spell of time as mere happenstance. It is as if the entire banking system is institutionally predisposed to play Russian roulette.

One important reason why top bankers are willing to take risks on such a scale is that they are incentivised to do so. As James Saft points out in a nicely-written blog post for Reuters, sorting out the banking affairs of sundry repressive theocrats and drug dealers generates huge profits, and huge profits generate huge bonuses. And if it all goes pear shaped, the taxpayer steps in to rescue the institution.

At the very least, Mr Saft suggests, banking remuneration should be restructured, making very long-term compensation and the possibility of claw backs the new normal. Publicly insured banks should be kept out of the investment banking business, he adds.

The sad thing is that even as the Labour is not ready even to be as bold as that. As the history of the last 30 years clearly proves, regulation alone is little more than a readily-circumvented joke.

Yet at a time when the need for public ownership of a least a major tranche of the banking sector is entirely evident – and even the Coalition has flirted with the idea of nationalising Royal Bank of Scotland – no prominent politician on the left feels able to articulate a popular demand. That is pure timidity

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