A decade after the banking crisis, Barclays proves little has changed in the City

“There was a period of remorse and apology for banks. I think that period needs to be over.” The words of the Barclays chief executive Bob Diamond in front of the House of Commons’ Treasury Committee in 2011 bear repeating. Let’s briefly summarise what has occurred to Barclays since that statement of defiance, that instruction for us all to move on.

In 2012 the bank was fined £290m by US and UK regulators for rigging the Libor interest rate for profit between 2005 and 2008 – something that prompted the board of Barclays to fire Diamond (although only under pressure from the Bank of England). In 2013, Barclays was fined $453m in the US for manipulating electricity prices in California. In 2014 there was a £26m penalty in the UK for a Barclays trader rigging the gold fix price.

This was followed in 2015 with a fine of £284m, the largest UK financial penalty in history, after Barclays traders were shown to have illicitly manipulated foreign exchange markets between 2008 and 2013. The same year Barclays was fined £72.3m for failings on money laundering controls in 2011 and 2012.

And now we learn that the current Barclays chief executive, Jes Staley, last year attempted to unmask an internal whistleblower – despite being explicitly informed that this was not permissible (for obvious reasons). Regulators are investigating.

By coincidence, a recording from 2008 unearthed by the BBC also today shows a Barclays manager telling a junior to massage his Libor submission during the financial crisis, claiming these instructions came from the Bank of England – something that the Bank has repeatedly denied.

This is very unlikely to be the end of it. An investigation by the Serious Fraud Office into Barclays’ 2008 emergency fund raising is due to conclude by the end of next month, amid claims the bank illegally lent $3bn to the Qatar sovereign wealth fund which was then used to buy its own shares. Barclays has failed to cooperate with the SFO, refusing to voluntarily disclose documents.

Barclays is also being taken to court by the US Department of Justice for allegedly misselling mortgage bonds in America prior to the financial crisis – something for which it could well ultimately face a multibillion dollar fine. Unusually, Barclays is fighting the DoJ. In addition, there are ongoing investigations and court cases – all exhaustively catalogued in the bank’s 2016 annual report – into claims of rigging of markets in precious metals, plus more money laundering allegations and a host of other alleged misdemeanours.

An end of apologies? An end of remorse? You must be joking. The Archbishop of York last week claimed that Cadbury’s omitting Easter from the name of its annual egg hunt was like spitting on the grave of its Quaker founder. Perhaps, if his blood pressure will withstand it, John Sentamu should consider how the Quaker founders of Barclays would react to what has become of their own once-reputable institution.

Some things have certainly changed in banking in the past decade. There is more regulatory box-ticking, plenty of additional compliance officers, lots of fine speeches about ethics. But for all the comforting words about a new ethos of responsibility, Staley’s actions raise questions about whether the culture at the top of these institutions has really been transformed in the way we’re led to believe.

Four ex-employees of Barclays were sent to jail last year for rigging Libor. But no bank has lost its licence. None of the senior executives who presided over a rotten culture of fraud have been barred from the financial services industry, let alone prosecuted. Bob “no more remorse” Diamond is now back in the City of London with his investment vehicle recently acquiring a small stockbroker.

“Without penalising the perpetrators and their seniors we will not get better behaviour,” concludes Robert Jenkins, a former Bank of England policy maker. The internal governance mechanisms of banks still look far from adequate. John McFarlane, the chair of Barclay’s board (which has said Staley retains its “unanimous confidence” despite his whistleblower witch hunt), last year complained about the size of the fines levied on Barclays, blaming them for the fact that the bank had been forced to cut its dividend to shareholders.

“The societal cost of excessive penalties is very real,” McFarlane lamented. Perhaps it would have been more honest of him to have echoed Diamond and simply said that the period of fines for proven wrongdoing by Barclays needs to be over.

#Barclays #BobDiamond #SeriousFraudOffice #whistleblower #financialcrisis

Higher wages could help solve our economic woes

Which comes first: the chicken or the egg? Productivity growth or wage increases? Most economists generally assume that the chicken of productivity growth comes before the egg of workers’ wage hikes. In this mental model, productivity (the amount of output that the economy produces per hour of labour) rises thanks to technological advances or more efficient ways of working. This boosts firms’ revenues and profit margins. Companies are then able to pay their workers more and everyone is better off.

The general view of most policymakers and analysts is that if firms, in aggregate, increase workers’ wages before there has been an increase in national productivity, the result will simply be a damaging burst of economy-wide inflation as too much money chases too few goods and services.

This is the kind of description of the way the world works that one can find from economic authorities such as the Bank of England and the Office for Budget Responsibility. This is why there’s so much emphasis given to policies and schemes designed to increase our economy’s productive potential. “Raising productivity is essential for the high-wage, high-skill economy that will deliver higher living standards for working people,” is how the Chancellor Philip Hammond summed it up last year.

But is this story entirely right? What if wage increases for workers did not always need to follow productivity growth, but could precede it, perhaps even cause it? What if the egg came before the chicken? Some fascinating research posted on the Bank of England’s Bank Underground blog by Alex Tuckett last week provides some evidence that wage-led productivity growth may indeed be a possibility.

Tuckett takes a dive into the data of wage growth and output growth in each broad industrial sector of the UK economy. “A careful analysis of the sectoral data suggests that the relationship between productivity and wages is not simple, and that causality may run in both directions,” he concludes.

This is an important finding given the UK’s current economic condition. Productivity growth has collapsed since the financial crisis. So has wage growth. Real average wages in the UK still languish some five per cent below their level in 2008 (despite the overall growth of GDP in that time). And the Brexit-related slump in the pound has pushed up inflation, meaning real wages are falling once again. On the basis of the OBR’s projections, we are on course for the weakest decade of real wage growth since the Battle of Trafalgar.

Under the dominant economic story, the collapse of productivity growth is the fundamental reason wages are on the floor and to rectify the latter productivity needs first to be fixed. Attempts to bypass this are often criticised as counterproductive. In his summer 2015 Budget George Osborne mandated a chunky hike in the minimum wage. This drew the disapproval of many economists who argued that low wages for those at the bottom reflect their low personal productivity and that significantly increasing their wages by government diktat will merely increase unemployment.

But if the chicken follows the egg, perhaps wage increases will prompt higher productivity in firms that employ low-wage labour. Perhaps, in order to protect their profit margins, managements will be spurred into increasing the efficiency of their operations. Perhaps they will invest in more capital equipment to enable their workforce to produce more per hour of their time. Think of a hand car wash installing automatic equipment but retaining the same amount of staff, retraining them to operate the new machinery, and doing more business. This would make minimum wage increases positive for productivity.

And perhaps this is true on a macroeconomic level too. Simon Wren-Lewis of Oxford University has hypothesised that there exists a significant “innovation gap” in the economy, which has built up since the financial crisis due to pessimism about future levels of consumer demand (made worse by George Osborne’s deep capital expenditure cuts after 2010). “Most firms…[could be] using out-of-date production techniques which are too labour intensive,” Wren-Lewis suggests.

If output and wages were given a positive shock, by government fiscal stimulus for instance, perhaps the overall productive capacity growth rate of the economy would rise in response because some companies would be prompted to step up their capital investment and also research and development programmes.

And this investment might create positive spill-overs. Economists in the US have reasoned along similar lines, suggesting that aggregate supply could be dragged up by stronger aggregate demand.

Economic history strongly suggests that, in the long-run, productivity growth does indeed determine wage growth. And the idea that doubling everyone’s pay overnight would double our productivity is obviously fanciful. Yet it’s not mad to suspect that looser government fiscal policy and higher wages for workers could help shake us out of our almost decade-long economic funk.

And after many years of productivity growth forecast disappointments it’s surely time we took the respectable hypothesis of wage-led and aggregate demand-led productivity growth more seriously – and that economic policymakers summoned up the courage to put it to the test.

#BankofEngland #productivity #wages

If you’re a law-breaking company in Britain you can buy your way out of prosecution

Imagine you rob a bank. The police catch up with you. But taking inspiration from Donald Trump you suggest a “deal”. You say: “Instead of prosecuting me for breaking the law, how about I pay a fine and promise not to do it again?” How far would that get you?

Now imagine you own a bank which is caught defrauding customers in order to inflate your profits. The Serious Fraud Office (SFO) knocks on your door. But you have a nice deal for them: “Instead of you prosecuting us for breaking the law, how about I pay a fine and promise not to do it again?” 

Would that wash? Well quite possibly it might. Because we now have “Deferred Prosecution Agreements” (DPA) for UK corporations which enable firms to do precisely that: buy their way out of criminal prosecution.

Tesco just agreed one yesterday with the SFO. The supermarket will pay £128m in exchange for avoiding prosecution for its false accounting in 2014. Rolls Royce also concluded a DPA in January worth £497m to settle claims of extensive overseas bribery by employees of the multinational engineering giant.

The justification for offering DPAs is to save public money in the administration of justice. When they were introduced in 2013, ministers claimed they would financially incentivise companies under investigation to co-operate with the authorities. Thus, they could avoid the public expense of a long and complex trial and, in particular, the risk that big firms with access to expensive legal advice would get off, perhaps on a technicality.

The DPA’s fines are supposed to act as a deterrent to future wrongdoing by companies. Shareholders are expected to police management more carefully. But while £128m might sound like a lot of money to most people it’s less than 0.3 per cent of Tesco’s total 2016 operating expenses of £53.6bn. As recently as 2014 Tesco was making annual profits of more than £2bn.

Even Rolls-Royce’s larger fine represented only 3 per cent of its 2016 operating costs. And the fine will be payable over four years. Tellingly, Rolls’ share price spiked by more than 4 per cent on the day the DPA was announced. “We see their commercial value to companies under suspicion” admits the head of bribery at the SFO.

It’s important to note that judge Brian Leveson, when he signed off on the Rolls-Royce DPA, stressed that it did not mean that the door had been closed on future criminal charges for ex-managers at the company.

We shall see, though it’s notable that in America, from where the concept of DPAs was imported, no executives from the many companies that have used them have ended up facing prosecution, let alone jail time.

There is room for practicality in the application of the law. In magistrates courts the prosecutor and the defence can agree that a defendant will plead guilty to one charge on the understanding that the prosecutor will drop the remainder. That also saves public money. Yet such plea bargaining only takes place well after the prosecution is underway. There’s no option for an offender to effectively buy themselves out of the system before the wheels of justice properly start turning.

The wider social and political context is relevant. As even regulators complain, no senior UK banker has been prosecuted for the concatenation of fraud and malfeasance that took place in the years leading up to the 2008 financial crisis, a disaster that imposed a severe toll on the living standards of every person in Britain.

The remuneration of senior executives of large UK firms has soared while average wages have been stagnant for years. A populist firestorm is raging across much of the Western world, partly fuelled by a sense that an economic elite play by a different set of rules from everyone else. Special legal privileges for law-breaking corporations send the deeply unfortunate message that there’s something to that belief.

#deferredprosecutionagreement #Tesco