Are London’s days as the global financial capital numbered?
Have bankers irreparably tarnished the reputation of this premier financial center?
Bank of England Governor Mervyn King put it best:
“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.”
Indeed, recent months have seen a trail of financial and banking scandals emerge, and their epicenter seems to be London. Worse, every scandal seems to be vying with predecessors to achieve fresh new heights in the amounts at stake. Deplorably, these scandals in London have had repercussions in other countries, mostly the U.S. It seems that other countries are paying the price for London’s ‘light-touch’ regulation of the financial services industry. The powers-that-be have been awakened, but it may be too late. The U.K.’s Financial Services Authority, created in 1997, is now under dissolution, and is being replaced by two regulators, steered by the Bank Of England.
It may be noted that the city played its own role in the perpetrating the financial crisis of 2008. It may be recalled that American International Group, Inc. (NYSE:AIG) and Lehman Bros were brought down by transactions booked primarily in London.
Earlier this year, J P Morgan’s Chase & Co. (NYSE:JPM) massive trading loss of $2 billion, as per initial estimates, originated out of trades initiated by a trader, nick-named the ‘London Whale.’ The bank is still grappling with the huge size of the trades, stated to be quite illiquid, and the extent of losses that may still flow from their closure.
The scandal pales in comparison with the scandal and manipulation of the hallowed financial rate, known as the London Interbank Offered Rate (LIBOR). Reputed banks conspired to rig the rate, responsible for settling derivatives in trillions of dollars across the globe, to suit their own purposes. Barclays PLC (LON:BARC) (NYSE:BCS) is already in the midst of making settlements that range in the hundreds of millions of dollars with the regulatory authorities. Other banks are being drawn into this mess, too.
In July, news broke that HSBC Holdings plc (LON:HSBA) (NYSE:HBC) allegedly helped drug gangs launder millions of dollars of drug money from Mexico into the U.S., between 2007 and 2008. According to a Senate investigation, the bank may have also provided services to Saudi Arabian, Al Rajhi Bank, known to have terrorist links. HSBC Holdings plc (LON:HSBA) (NYSE:HBC) may have to shell out almost £640 million in fines.
The latest in the line of banking scams is the alleged role played by Standard Chartered Bank, in cahoots with Iran, to launder an astronomical $250 billion pounds, by concealing these transactions from regulators by employing the wire-stripping stratagem. According to court documents filed by the New York banking regulator, “Standard Chartered PLC (LON:STAN) (LON:STAC) programmatically engaged in deceptive and fraudulent misconduct… on behalf of client Iranian financial instititutions that were subject to US economic sanctions, and then covered up its transgressions.”
Given this string of events, it is obvious that something is systemically wrong in London.