The LIBOR fixing affair continues to throw up new
information and insights which are mostly entirely predictable. Consider two of last week’s front page news
stories:
(1)
The FT
led with a shock, horror story about collusion in fixing Euribor (the
European equivalent of Libor) because a named Barclays trader Philippe
Moryoussef had allegedly organised
collusive rate fixing with three other named individuals at Credit Agricole,
HSBC and Deutsche. We did not before reading this story know the names involved
in this new scandal. But the nature of the LIBOR (and Euribor) reporting
process was such that we did already know that any kind of rate fixing must
have required collusion between traders at several banks (and such collusion of
course must then raise questions about the involvement of middling and senior
management).
(2)
The Wall Street Journal
led its front page on Wednesday 18th with a political analysis of
the Bank of England. Mervyn King had appeared before the Treasury Select
Committee and explained that the Bank of England was not suspicious about LIBOR
rate fixing because nobody had formally told the Bank: “The first I knew of any
alleged wrong doing was when the reports came out two weeks ago….we’ve been
through all our records; there is no evidence of wrong doing or reporting of
wrong doing to the bank”. This absence of curiosity is entirely predictable. From
the Guinness stock manipulation affair in the mid 1980s to LIBOR rate fixing in
2012, wrong doing is uncovered by
American investigators who, in effect, oblige the uncurious Brits to take
action.
There is something about the reporting of such news stories which
connects one world of behaviour which is very English with another world of judgement
which is New York Jewish. Mervyn King’s testimony to the Select Committee brings
to mind that refrain from the Paul Simon song: “when something goes wrong, I’m
the first to admit it and the last one to know”. Or, as Paul Simon’s
psychoanalyst might put it: “how is it possible for these English elite
technocrats to be so clever and yet lack all knowledge of self and others?”.
And, of course, though the news stories are different each year, there is then
nothing really new about that disabling absence of self knowledge and worldly curiosity
in English elite figures who, like our prime minister, aspired to the top job
because he thought he would be rather good at it.
But, to be fair, we
have learnt something new last week. The learning was about the internal
organisation of banks from other witnesses who testified on investment bank rate
fixing before the Treasury Committee and on money laundering in a US Senate
hearing. We are already indebted here to anthropologists like Joris
Luyendijk and Karen
Ho who have described the processes of selection and acculturation which
produce a dangerously conformist mentality inside banking firms which operate
like silos. But last week’s public testimony by senior bankers In London or New
York highlights larger questions about how the organisation of giant banks
makes them unfit for purpose. Here we are taking up some of the issues which
Joris raised some in his
blog about out of control banks.
Let’s begin with some generalities which should be familiar
to anyone who has done an introductory course in organisation studies. A firm is a space of bureaucratic coordination
which requires internal hierarchy and division of labour which implies expectations
and rules about what can and cannot be done at different levels, and runs partly
on active instructions and permissions de haut en bas. Any organisation then
requires individual and group initiative because rules and instructions cannot
be complete and improvisation is required. But such improvisation operates
within procedural limits so that, for example, authorisation of expenditure or
breach of standard procedure usually requires some kind of signing off and a paper
trail.
All this is a mixed blessing. The firm or any other large
organisation is for bureaucratic reasons typically an inflexible, unreflective economic
and social actor with a limited capacity to respond to how things have gone
wrong or indeed to recognise that things have gone wrong or will go wrong.
Think about BP’s succession of accidents and environmental disasters after the Browne led mergers had created a much larger firm where operating control was
a major unresolved problem; or, worse still, think about how hierarchy allowed
the Catholic Church to cover up child abuse in many jurisdictions.
But the investment bank illustrates two different problems
which make investment banks like Barclays or retail banks like HSBC positively
frightening, not just poorly controlled like BP or unintentionally collusive like
the Catholic Church. On the basis of last week’s testimony in London and New
York, the present day investment bank is a thoroughly informal organisation
where many things, including gross rule breaking at middling levels, can go on
without formal authorisation. The bank actively institutionalises the
insouciant lack of concern passively manifest in elite English individuals.
On Monday 16th, Jerry del Missier, the recently
departed chief operating officer of Barclays appeared before the Treasury
Select Committee and gave an account of how Barclays came to ‘lowball’ its
Libor submissions in the aftermath of the phone call of 29th October
between Paul Tucker of the Bank and Bob Diamond at Barclays, which led Diamond
to produce an email note. There was, to put it neutrally, a misunderstanding at
this point about whether the Bank was instructing Barclays to lowball (because
of the public interest in making Barclays look sounder than it was).
The interesting point is that, along the internal chain of
command at Barclays, all the instructions were verbal, even though the
instruction was for Barclays to do something irregular at the (second hand
reported) invitation of the Bank of England.
The internal chain in Barclays ran from Diamond to Jerry del
Missier as co-head of investment banking to Mark Dearlove as head of the money
market desk. “ Yes it was” an instruction said del Messier in last week’s testimony when
he claimed he had “passed on the instruction as I received it” And how did Del
Messier receive it? The FT reported: “in
a phone conversation the day before he received the email note” from Diamond which
did no more than report another phone conversation with Tucker.
Let’s pause here. Barclays is clearly not an organisation of
the staid, formal kind which most academics will be familiar with. Let us hypothetically suppose the nearly unthinkable.
Some senior authority outside our University (for whatever reason) wants to
adjust the academic grades on our degree programmes. That would require written orders down the
chain, then a series of committee meetings so that all those affected could
discuss any concerns about issues of authority and implementation. And the
committee chairs would be expected to have a written instruction from an external
point of origin after, for example, the university’s academic registrar had forwarded
an outsider’s direct and explicit email instruction to fix the grades (rather
than the registrar’s recall of a phone call).
The investment banker’s counter argument is that such formal
bureaucratic safeguards are quaintly inappropriate in the fast moving world of
banking: “just do it” because there is no time for all this procedural stuff
which still regrettably clutters up the hierarchical public sector. But that
raises a serious question. What protects economy and society if the investment
bank (as organisation) does without the bureaucratic safeguards which in other
cases protect us from compounded misunderstandings and active malpractice? Because,
in this world of informality, junior bankers at desks will simply follow verbal
orders from their team leaders and their seniors may have a very limited
knowledge of what is informally going on at the lower levels.
The social protection is supposed to be supplied internally
by a bank’s internal compliance department which enforces standards and polices
wrong doing. But, the ineffectiveness of such arrangements were dramatized on
Tuesday last week when senior HSBC executives appeared before a US senate
hearing to explain how and why HSBC had, despite repeated US regulatory censure and internal whistle
blowing, continued to allow drug proceeds from Mexico to be laundered through
the bank and allowed terrorist financiers to obtain US dollars.
David Bagley, HSBC’s chief compliance officer since 2002, admitted
to the US Senate that his position lacked any power. As the
FT reported, on his own testimony, David Bagley did not control compliance
in national affiliates like Mexico because his job was only “to set policy and
to escalate issues that were reported to him”. This was front page news partly
because of Bagley’s tactical resignation from the job on the day he testified.
But, the largely unreported parallel Senate testimony of
Paul Thurston, HSBC chief executive for retail banking and wealth management, was
even more devastating; not least because it described an
absence of control and rules in retail banking where customers and regulators
would quite reasonably expect them. The key exchange
was with Senator Levin:
Sen. Levin: Why did these things fester for so many years at this bank [HSBC Mexico]? This isn’t something discovered in hindsight, this is something that people knew was going on at that bank. Why was it allowed to continue?
Thurston: The business model was complicated and decentralized. It was very difficult for the center to get controls.
The difficulty of central control was separately explained by
Thurston:
“It
became apparent that decision-making process concerning Anti Money Laundering
were not satisfactory [at HSBC Mexico]. Over time, it also became clear that
this was not only a question of process and technology, but that the underlying
business model needed to be examined. Branch managers operated as local
franchise owners, with considerable autonomy and a focus on business
development, reinforced by an incentive compensation scheme which rewarded new
accounts and growth, not quality controls.
Banks and banking are defined in most dictionaries in terms of
business conducted and services offered. In organisational terms, after last
week’s testimony, it might be fairer to describe a bank as a loose federation
of money making franchises (with always troubling and sometimes dire economic
and social consequences).
Dyfal Donc
