“The best-laid schemes of mice and men go oft awry, and leave us nothing but grief and pain, for promised joy!”
Robert Burns
People are inclined to see the great institutions of the City of London and Wall Street as the ultimate symbols of corporatism and financial power; but, as in all walks of life, what lies behind those shining towers and ivory walls are real people. During this past week, there has been one to remember for the best of reasons: Brian Winterflood, the veteran market maker who has made such a huge contribution over the past sixty years, and who died on 29th June. His particular focus was on helping to finance small businesses, and he contributed significantly to the formation of the City Group for Smaller Companies (Cisco), now the Quoted Companies Alliance, supporting it from 1992 until 2010.
Meanwhile, if you were watching BBC Newsnight on Thursday 6th July, you’d have heard the sorry story of Tom Hayes, the former city trader who initially received a 14-year jail sentence for his part in rigging LIBOR money-market rates, and whose convictions have now being belatedly referred to the Appeal Court.
Two human stories, one speaking of immense achievement, and the other a tale of what increasingly looks like real injustice.
To hear more about Brian Winterflood, please visit our three programmes produced over the past nine years which featured him: ‘In my experience’ (recorded in February 2017), ‘Track Record’ (recorded in September 2015), and Simon Rose’s interview with Brian and myself on 9th December 2014.
The LIBOR (London Inter Bank Offered Rate) scandal had its direct roots in the 2008 financial crash, but you really have to go much further back to the introduction of ‘dual-capacity’ trading in 1986, in order to discover its real foundations.
Throughout its long history prior to the mid-1980s, the London market was governed by single-capacity trading: your business was either a ‘Principal’, for trading your own positions, or an ‘Agent’, acting on behalf of your customer: that is, keeping buying and selling in your own self-interest separate from acting in your customer’s interest.
The pressure for merging these roles was intense, driven by powerful financial institutions who saw no need for their business to be introduced to market-makers such as Brian Winterflood by their stockbroker. The then Conservative Government accepted the argument, and dual capacity was introduced in the ‘Big Bang’ on 27th October 1986.
What followed was an immense scramble among the banks to equip themselves for combined Principal and Agent trading. The old disciplines, about being clear about your motives, were swept aside, and greed took over. The banks undertook an orgy of product development and marketing which finally ended in disaster in the 2008 financial crisis. The first sign of this was an article in the Wall Street Journal, suggesting that some banks ‘may have understated borrowing costs’ which they reported as LIBOR rates during the 2008 credit crunch, thereby misleading others about their financial strength.
The details of this are summarised in Wikipedia, and they will no doubt be pored over in the forthcoming appeal hearing for Tom Hayes, who suffered years of personal distress — including not being there for his son throughout the critical early development years. It’s worth noting that the Bank of England, along with senior investment bank directors, was implicated in the alleged scapegoating of traders such as Tom Hayes, as reported in the Newsnight programme on Thursday 6th July.
If we fast forward again to the Bank of England’s current struggles over setting interest rates designed to cope with rising inflation, we can see that this legacy of rate-setting needs to be borne in mind in assessing what's happening now: hence our inclusion of the Treasury Select Committee's inflation investigation on 5th July in our programme schedule.
Central banks have struggled hard with deflationary and inflationary pressures since the financial crash. They've resorted to quantitative easing to cope with the former, buying far too many Government Bonds at very high prices (i.e. low yields); and they are now attempting belatedly to introduce quantitative tightening, setting off those Bonds at excessively low prices (i.e. high yields). They’re also not immune from inflationary pressures themselves: over the past year, the number of Bank of England staff earning over £100,000 p.a. has risen by 14% to 537, as stated in their annual report.
Meanwhile governments across the free world have gone way over the top in leveraging their public sectors: in the United States national debt is now over $31 trillion, while in the United Kingdom the Treasury has had to resort to comprehensive and untargeted restrictions on any discretionary spending, while one person in every six is now caught in the 40% bracket for higher-rate taxpayers due to fiscal drag.
The world has become wholly addicted to excess borrowing, and we have to find a way out of it without incurring another financial collapse — but that won't be easy.
So it may now be thirty-seven years since that the combination of Principal and Agent capacities back in October 1986, but I believe — and I think Brian Winterflood, who stayed true to his Principal trading role throughout his career, would agree — that we can trace all these disasters right up to the present day back to that legacy. Of course, the human spirit needs freedom to soar — but there's a clear role for market rules and regulations, and we dispense with them at our peril.
Gavin Oldham OBE
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