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 & Co.’s trading loss of at least $2 billion, the alleged $2.3 billion fraud at UBS AG and the investigation of at least a dozen banks including Barclays Plc 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,” Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview. “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 number one financial center by research firm Z/Yen Group Ltd., was where American International Group Inc. and Lehman Brothers Holdings Inc. 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 decade-long boom.
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.
“It seems to be that every big trading disaster happens in London, and I would like to know why,” Representative Carolyn Maloney, a New York Democrat, 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 & Co. 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,” Gensler said in a telephone interview yesterday. “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 at a news conference in London on 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.”
The U.K. economy has suffered from losses made in its financial-services industry. Of the country’s nine largest banks, four were nationalized or forced to take state aid during the financial crisis, costing the country more money than any other project in history outside of world wars. The government is imposing the biggest budget cuts since the 1945, and unemployment is at 8.2 percent.
Barclays, having avoided a bailout along with HSBC Holdings Plc and Standard Chartered Plc, last week admitted manipulating Libor and will pay a record $451 million fine.
U.K. lawmakers from the country’s two main political parties united in their condemnation of Diamond’s failure to prevent his bank’s manipulation of Libor at a Treasury Select Committee hearing in London on July 4.
Diamond, who was Barclays’s chief executive officer until July 3, ran a “rotten, thieving bank,” John Mann of Labour said at a committee hearing a day later, while Conservative Andrea Leadsom accused him of living in a “parallel universe.”
Diamond, 60, apologized for his bank’s actions and described the behavior of “a small number” of traders as “reprehensible” at the hearing. The Massachusetts-born banker stepped down after earning about 120 million pounds ($186 million) since joining the board in 2005, according to proxy voting agency Manifest Information Services Ltd.
The market abuses come four years after the financial crisis in 2008, in which London played a key role. AIG’s financial-products division, which insured subprime mortgage bonds, was based in the city’s Mayfair district. Lehman booked transactions to move debt off its balance sheet through its London office in Canary Wharf, according to its bankruptcy examiner Anton Valukas. Bear Stearns made similar trades in London, Gensler said.
The Libor settlement followed earlier mis-steps with customers. U.K. banks including Barclays, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc have set aside 6.4 billion pounds in compensation to customers who were mis-sold insurance for loans. The banks last week agreed to repay small and medium-sized businesses improperly sold interest-rate derivatives following a probe by the U.K. financial regulator.
Diamond and JPMorgan CEO Jamie Dimon “are known to be quite arrogant, and to have lectured politicians for not understanding finance,” said Philippe Lamberts, a Belgian lawmaker in the European Parliament’s economic and monetary affairs committee. “Well, I won’t take lectures from these kinds of people any more. If there’s one thing they’ve demonstrated it’s their inability to run their businesses.”
The Bank of England, which will take on additional responsibility for regulation as well as being the country’s central bank, was implicated in the Libor fixing scandal this week when Barclays published an e-mail written by Diamond in 2008. Paul Tucker, an official at the bank, told Diamond in an October 2008 phone call the government perceived Barclays’s Libor rates to be “high,” the e-mail said.
Tucker didn’t tell Barclays to reduce its submissions to the Libor rate-setting system, Diamond said July 4. The Bank of England declined to comment. Tucker has asked to testify in Parliament as soon as possible.
Eighteen banks are surveyed to determine Libor, a benchmark for more than $360 trillion of financial products globally. It is set by averaging out submissions in a poll of banks, who are asked how much it would cost them to borrow from each other for different periods of time.
U.K. Prime Minister David Cameron is dissolving the Financial Services Authority, which was created by Tony Blair’s Labour government in 1997, and replacing it with two regulators run by the Bank of England. The Labour government’s commitment to light-touch regulation helped fuel the financial-services bubble, he has said.
“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.”
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 number one and ahead of the U.S. at number 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 series of scandals haven’t yet impacted 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 Ltd., which oversees the government’s stake in RBS and Lloyds and is former U.K. chairman of Citigroup Inc. “People no longer hold their head up high when they have to say they are a banker.”
The public aren’t sympathetic to the bankers’ plight.
“I understand talented people deserve bonuses,” said Walter Philippson, 47, who works as a courier in London’s financial district. “But we’ve seen that not everyone in the City is that good. Some simply don’t deserve it.”
Barclays’s investment banking unit paid employees an average of 203,750 pounds each in 2011, filings show. The figure includes salary, bonuses and pensions. That’s almost eight times the average U.K. salary of 26,000 pounds, according to the Office for National Statistics.
“The City is ruled by the elites, by people like Bob Diamond,” said Rose Wynes, 53, a social worker and mother of five in Westminster in Central London. “We’re being tricked, conned and played by them. We’re sheep.”
To improve the city’s ethos of making a quick profit at the expense of customers, investors and national economies, the U.K. government needs to insulate retail banking from trading activities, regulate derivatives and encourage banks to more evenly distribute profits between employees and shareholders, Kirkwood said.
More important than new rules is an attempt to change London bankers’ attitudes, according to Moore. “There’s a culture, not just in the investment banks, but also the retail banks, that needs to end,” he said. “The boil is rancid, and we need to lance it.”