Tactics Without Strategy: Brexit And The Politics Of Conceit

With two million Conservative voters seemingly ‘undecided’ last week and Labour voters preponderantly pro-Remain but susceptible to no-shows at the ballot booth, it was tempting to presume before the vote that an event of this magnitude might be decided by something so quintessentially British as the weather. Come Friday morning, it was abundantly clear that was not the case. The gap between Leave and Remain was just under 1.3 million votes, far greater than can be explained by a June downpour. The outcome is humbling.

In due course the referendum defeat will become the textbook reference for political hubris. Cameron’s referendum campaign showed a fundamental underestimation of public mistrust with the political establishment when it committed taxpayers’ money to the production of Remain leaflets. Similarly an appeal to the eminence of its leading voices on the risks of Brexit – prescient though they were – might work when it comes to winning over fearful middle class swing voters in marginal seats, but alienated a large and sceptical cohort who had not done particularly well since the 1990s. This played to Leave’s strengths who were only ever going to run a populist campaign with immigration as the issue ‘the establishment wouldn’t touch’. The more establishment figures Remain wheeled on, the more remote they seemed.  

The referendum loss symbolises Conservative leaders obsession with tactics at the expense of strategy. They built a machine to be elected not govern, perfecting the art of winning small political skirmishes which embrangled them in increasingly intractable commitments. Eventually one intractable position was not going to hold.

So where does the referendum result leave things? Economically, we are in a difficult place. The EU will push for an early exit to reduce uncertainty in other EU countries. The longer negotiations are drawn out, the more turmoil will be inflicted on our major trading partners within the EU - there is a good chance they may move into recession, as seems unavoidable for the UK. It is sadly true that they also must make an example of us or risk giving hope to Leave movements elsewhere. Investment, already weak, will retreat until some certainty returns. This is happening in real time, with huge swathes of construction now put on hold. Financial markets are not as robust as we are led to believe and the £250bn injection promised by the Bank of England - presumably a bid to stave off a prospective wholesale run as bank stocks fell 30% – would seem to support that. We have yet to see the effects of a ratings downgrade and sterling devaluation on the economy. It is doubtful that the devaluation will benefit the export sector radically: in four of the last six major periods of devaluation there has been no impact at all. These are not the conditions under which the politics of optimism thrive.

This takes us to the Leave campaign. The campaign was built on an anti-establishment/anti-intellectual ticket led by an old Etonian and another Oxford graduate. It traded on the conceit that many of the UK’s problems could be solved by ‘taking back control’ – an organising metaphor abstract enough to galvanise a body of voters with quite different perceptions about what this meant. The usual accusations about Leave being ‘old, uneducated people in the North’ have already surfaced but the reality is much more complicated: 43% of ABs voted Leave, for example – that’s a lot of skilled workers and professionals. Similarly, the geography of the Leave vote is split between cosmopolitan centres like London, Bristol, Manchester and Liverpool on the one hand and smaller towns and rural areas on the other. The most important indicator of a Leave voter is value-based according to Ashcroft’s polling data: in other words, we are witnessing the reawakening of a particularly cynical, conservative English authoritarian personality which cuts across class and geography. ‘Taking back control’ in this context signalled a variety of things: release from the EU’s institutional sclerosis and immured power bases; rejection of the neo-liberal grip on policy formation; devolution and an improvement in accountability and sovereignty. But for many it primarily meant control of immigration. And the Leave campaign was happy to let people believe that this was precisely what we were voting for.

The problem now is that this puts Johnson and Gove in precisely the predicament of Cameron and Osborne.  The latter were outmanoeuvred tactically, but it is Johnson and Gove who have the larger strategic quandary. The flipside of the Leave campaign’s amorphousness is that all of its voting tribes will expect their vision of Brexit to be delivered: that is the risk with summonsing ‘end-of-truth-and-reason’ politics. Putting aside the inconceivability of honouring the £350m per week to the NHS pledge, they have a much larger problem regarding immigration. If they opt out of the pledge to stop free movement, as pro-Leave campaigner Daniel Hannan has already indicated, those who voted Leave believing it was a vote to control immigration will feel betrayed.

This is ultimately why I am pessimistic. If you lead a populist, anti-immigrant campaign on an anti-establishment platform, and then support an EFTA model that retains free movement, you will discredit yourself and the democratic process. Add to that a rapidly deteriorating economic climate and the resurgent nationalism you were complicit in stoking, and voters will begin to embrace the extreme right. It will take considerable political skill for Johnson and Gove to manage this next phase should they replace Cameron and Osborne. I am not sure it is within their capabilities. Both have a facility with the blunt instrument of populism, but they do not possess the political guile and sophistication to deal with the subtle intricacies of a perceived volte face in such a febrile climate. Farage, however, does have the necessary nous and aggression to point out their deceit.

Can the Left stop this? They are in a difficult position, not least because we are seeing the working out of the legacy of New Labour - its mishandling of the financial crisis and intransigence towards its heartlands. This instilled a sense of injustice, of powerlessness, of being cut adrift. Atavism fills the space left by the dismantled social and economic institutions that build solidarity and community. The Labour Party were correct to move to the left to reconnect with those communities as voters began to defect to UKIP, but they have the wrong leader to deal with the fight to come. The Labour Party needs a brawler, not a history teacher.

Whoever that might be, they will need to address some of the profoundly reactionary sentiments of their ex ‘core vote’. Anti-immigration is now a deeply ingrained and increasingly animating ideology that will be difficult to reverse. A politics of trust, tolerance and understanding to support vibrant communities of difference is needed. This requires a redistributive politics to fund the rebuilding of the economic and social institutions that embed harmony: better jobs, better public services, better social housing. That may grate with the business elites of London and other cosmopolitan centres, but social dislocation is not good for trade and growth either. As Duncan Weldon has pointed out: capitalism needs social democracy to function. The state now has a duty to stabilise capitalism by acting against the interests of its most vocal proponents and greatest beneficiaries. This is the challenge for Labour.

Stanley

Spaceship Finance And The Displacement Of Blame

I like Joris Luyendijk’s Guardian blog. And the latest revelations about Standard Chartered in the cavalcade of misdemeanour that is the financial services industry reminded me of one particularly pertinent post of his. In his February 17^th blog Joris described the peculiar world of ‘spaceship finance’: the world of elites working close to the clouds in the top floors of the tallest buildings in the square mile, with no allegiance to any particular national project and little regard for the opinions of the national populace. This was exemplified in his interview with ‘Phillipe’, a financial services headhunter who was asked a very simple question: “how can bankers live with themselves?”. This was his reply:

"They feel unjustly singled out…What I hear is: look, nobody would run a bank with the intention of wrecking it, would they? Banks lent to people who couldn't repay. But nobody forced these people to take out loans that they must have known were far beyond their means. Banks may have been enablers, but in the end it was reckless individuals who did this. But what politician is going to blame this crisis on his voters, some of who must have been among the reckless borrowers? Much easier to heap it all on the bankers….Then again, many of my clients simply don't seem to care a whole lot about what the general public think. These are extremely well-educated and multilingual professionals. Many are in mixed marriages with kids who have lived on two or three continents. These people don't belong anywhere and don't feel beholden to any national project. They want to pay as little in tax as they can, and they want to be safe. That's it. Rule of law is very important for them.”

It should be said that many within the industry accept something has gone seriously wrong in banking, and that behaviour must change. But the kind of alternative history expressed above which exculpates their own and implicates others still remains a powerful narrative within spaceship finance. 

It is, of course, beyond plausibility that those discussed by the interviewee did not sense the wrongdoing in their organisations: they may not have been familiar with the detail of those excesses, but they must have suspected that enterprise was a little loose in the engine rooms. It is, then, all the more perplexing that contrition is expressed only under duress in the public circus of the Select Committee or under the glare of the television cameras. Even here remorse may take the form of inoculation where a tincture of guilt is added to disarm critics and to make a more extravagant claim about banking’s national benefits appear more reasonable. Privately, it is clear that often no such remorse exists – indeed there is a deeply engrained sense of defensiveness and injustice within the banking sector. They view themselves as convenient scapegoats for a global crisis.

So how is it possible to be both aware of fast and loose play in your organisation yet remain so defensive about its culture? The simple and easy answer is delusion – that this is a group of people so wrapped up in their own self-interests that they cannot see the wood for the trees. Another answer is that it’s a smoke and mirrors tactic: bankers have a lot to lose if the propitious regulatory conditions and mindboggling innovation which create ample opportunity for enrichment within the sector are threatened. Both are undoubtedly part of the story. But from the few conversations I have had with friends, associates, and others working in the industry, I think there is another equally valid explanation, which brings us back to the issues around cultures and structures discussed elsewhere in this blog series.

For some in the industry, there seems to be a genuine internal conflict - the feeling of persecution is real. They feel they are blamed, yet also feel they did nothing wrong because they always obeyed the formal and informal codes of conduct within the organisation (or at least kept within acceptable deviations from those norms and codes). Their internal conflict here is born out of psychological dissonance when the reflexive ‘other’ changes, and individuals re-evaluate their cocooned, insular world of the spacecraft - with its own autochthonous understandings, explanations, history, culture and morality - in a different moral register. How individuals come to terms with those conflicting values plays out in different ways. Some, particularly those leaving the industry (often involuntarily), reject the banking industry culture as if they were leaving a cult and become major critics. The bookstores and blogosphere are full of poacher turned gatekeeper stories like those of Michael Lewis, Tetsuya Ishikawa, Yves Smith at Naked Capitalism et al. Others, perhaps the more instrumentally minded, find a bit of dissonance no problem, and life goes on. But a third group - like those in Joris’ extract – react in a very different way; one that reflects the peculiar parallel universe within which many bankers operate. They preserve inner coherence by defending their organisational culture and externalising blame.

This reaction should come as no surprise to psychologists and criminologists familiar with the work of Gresham Sykes and David Matza. They argue that those who engage in delinquent behaviour are not immune to the demands of social and moral conformity, but when accused, draw on certain framing devices to justify their actions. They term these devices ‘techniques of neutralisation’. These include: denial of responsibility ("It wasn't my fault"); denial of injury (“It’s no big deal”); denial of the victim ("They had it coming"); condemnation of the condemners ("They were just as bad"); and appeal to higher loyalties ("We did it in the interests of others”). These techniques reduce the social controls over the actor and allow the person to rationalise or justify transgressive acts, and so explain continued patterns of deviation.

If I were to summarise three explanations I have heard bankers use to justify or defend action in the financial services industry, they powerfully echo these techniques of neutralisation.

The first explanation is a familiar one about moral hazard, and the corrupt incentives produced by government and its regulatory exigencies. The second, and the one preferred by Standard Chartered’s own CEO Peter Sands, is that banks are overly-enthusiastic, waiters in a system where everyone was hell bent on getting drunk. The third, that everyone has blood on their hands, so no one can take the moral high ground.

The moral hazard argument is a classic case of 'denial of responsibility': bankers here represent themselves as playthings of the wind, tossed and blown from one act to another; inert agents responding mechanically and unthinkingly in a moral vacuum to the incentives created by someone or something else. It is those who produce the incentives, not the agents who act on them, who are to blame. This is the equivalent of saying that if you park near broken bricks, then it is your fault (not that of the thief) if your window gets smashed and your briefcase stolen.

The overly enthusiastic waiter argument is another form of displacement of responsibility, only here there is an 'appeal to higher loyalties' – that of their service to customers. Here fault and blame are loaded onto the clients or onto an impersonal ‘system’ who ‘make them do things’ they otherwise would not have done. The more cynical ‘everyone has blood on their hands’ argument is one that bankers use to blame the credit rating agencies, the central banks, Fannie and Freddie, the regulators, politicians and homeowners. 'Condemning the condemners' by questioning whether any actor has the moral high ground to judge is another powerful way of displacing their individual blame.

Blame displacement, and its allied hostility to reproach from outsiders, is a cultural feature of the financial services industry. This culture is hot-housed in an environment of late hours, high intensity work and ‘up or out’ competition. It produces an identity, a unity, a sense of ‘us’ and ‘them’. It also produces groupthink and confirmation bias. And those are particularly damaging in our core financial institutions because they encourage arrogance, detachment and disregard.

Those cultures, as we have previously argued, evolve in particular structures. When banks become loose federations of money making franchises, fast and loose activity can be expected when safety controls and oversight duties are dampened to maximise returns. The sense of invulnerability, of immunity from criticism, comes from those fluid organisational structures where small groups within silos lift large values. Here, power and status drifts inexorably to key traders or 'the bricoleurs', who subsequently become untouchable. The sense of invincibility is also caused by weak regulatory regimes which open out large spaces for autonomous action and privately advantageous (but socially useless) innovation. The absence of paranoia, of fear of moral judgement and legal redress that a more panoptic regime might bring, is a recipe for hubris. We should all be worried when more and more activity reaches for the shadows.

The result, as the headhunter in Joris’ extract later explains, is the hardening of a genuinely global elite with no connection to or regard for its national base:

“A highly educated professional in the City of London has much more in common with a peer in Hong Kong, New York City or Rio de Janeiro, than with a monolingual, mono-cultural teacher or nurse somewhere up in Birmingham or Manchester. Solidarity for the new global elite is not geography-based or tied up with a state”

I have heard this kind of rhetoric before; and not from within the pages of the Harvard Business Review or the Journal of Finance. This is the language of class. In form and language it is strikingly reminiscent of the kind of thing that would appear as caricatures in pamphlets of the Trotskyite left. Perhaps our politicians and regulators should begin to understand finance as finance sees itself?: less as a set of impersonal national economic institutions, and more a collection of densely networked individuals with shared backgrounds and interests whose temporary base for their spaceship is the jurisdiction which expresses the least resistance.  And although, as the Bischoff and Wigley Reports show, finance is particularly adept at mobilising the national imaginary when it suits their purpose, isn’t it now in all of our interests that we begin to think about how we exert greater democratic control over these elite networks? Banking culture will only change when we develop regulatory structures that are the equivalent of Bentham's panopticon: a space of open visibility and moral judgement that checks the power of unaccountable elites to work against the national interest.

Stanley

“As Taken Aback As Everyone Else”: The Salz Inquiry At Barclays

“The global review will assess the bank’s current values, principles and standards of operation and determine to what extent those need to change; test how well current decision-making processes incorporate the bank’s values, standards and principles and outline any changes required; and determine whether or not the appropriate training, development, incentives and disciplinary processes are in place. The review’s findings and recommendations will be published, based on evidence gathered through extensive engagement with all of the bank’s stakeholders and a thorough review of all pertinent documentary evidence. Any interested party is encouraged to provide input to the review by submitting a perspective or evidence via SalzReview@barclays.com”.

Thus, the Barclays press release announced that Anthony Salz is to conduct an independent review of Barclays culture which will conclude by next April. This is a fairly straightforward, low risk, defensive move by a bank which has sustained massive reputational damage in the past few weeks since it was fined for fixing Libor

First, the CEO and chairman have to go, as a kind of penance. Then Barclays performs a kind of corporate moving on. Hence the independent inquiry whose (not too onerous) recommendations can  be ostentatiously implemented.

The precautionary motives of Barclays now manifest themselves in two ways, through the terms of reference of the inquiry and the choice of the lead inquirer.

First, the inquiry’s terms of reference are narrowly defined as “ business practices” understood as “values, principles and standards of operation”. And that fits with an idealist and dematerialised definition of culture as “instinctive behaviour and beliefs” The investigation does not consider the Barclays  business model in retail and in investment banking. Salz will not ask whether expensive branches and free current accounts means mis-selling in retail to recover costs. Nor ask why investment banking is a joint venture which benefits bankers more than shareholders and generates a balance sheet larger than British GDP.

Second the inquiry will be led by a silver haired corporate lawyer who is one of their own. Salz is, a man with an “urbane manner and establishment background” according to the BBC ‘s Robert Peston who has known him “for donkey’s years”. Salz is well networked in investment banking via his role as lead lawyer on twenty years of M&A deals at the law firm Freshfields where he was senior partner until 2006. He is also one of the great and the good, with roles including senior positions on the BBC board, alongside Barclay’s now disgraced chairman Marcus Agius. Barclays chose this man Salz and not, for example, an awkward churchman with a conscience like Rowan Williams.

Salz has the track record, reputation and recent experience that fits him for this kind of independent inquiry into banking culture. Let's recall Money Week's profile of Salz in 2006. This looked back to the takeover deal which helped to make his name and from which Salz emerged stronger while others went to jail:

"In 1986, he advised Guinness on its bid to buy Distillers and “was as taken aback as everyone else by the wrongdoing that emerged”, says The Sunday Times. Salz claimed he had repeatedly warned directors of the illegality of their actions – a version of events that conflicted with that of Guinness chief Ernest Saunders. It was a nail-biting time, but Salz won the day and emerged from the episode stronger

And Money Week explained that Salz was the man to make sure that everything was within the law:

"Corporate lawyers are two a penny. What makes Salz so special? Clients claim it is his bold, imaginative approach that makes him a star. “Most lawyers tell you why not to  do something, but Anthony is creative,” says David Mayhew at Cazenove. “He will show you how to do it within the law. And he has a wicked sense of humour.” 

We would add that Salz has since 2006 has added experience of chairing inquiries. According to his profile in the Barclays press release 

(Salz) chaired the Independent Commission on Youth Crime and Antisocial Behaviour in England and Wales, which reported in 2010. He also chaired two review groups on press self-regulation on behalf of the Media Standards Trust (on which Board he sits), which published reports and recommendations in 2009 and in June 2012.

The failure of press self regulation  and serial misbehaviour by the tabloids of course led to Leveson. And this independent inquiry into Barclays under  Anthony Salz is a poor substitute for the Leveson for the banks which CRESC and others have been asking for.

Dyfal Donc

HSBC: Loose Control

The revelations about HSBC’s alleged indiscretions are sobering. What has emerged from the Permanent Subcommittee On Investigations to date is a tale of systematic and deliberate avoidance of anti money laundering (AML) programmes in the US. It is not an edifying read.

The central institution in this story is HSBC’s largest US affiliate: HSBC Bank USA or ‘HBUS’. HBUS is key because it provides HSBC’s overseas clients with access to dollar markets and the US financial system, which is important because the dollar’s role as leading trade currency makes it a prime target for launderers.

Perhaps most staggering is the finding that between 2007-2008, HSBC’s Mexican affiliate, HBMX, shipped $7 billion in physical U.S. dollars to HBUS, more than any other Mexican bank, even one twice HBMX’s size. According to the Chair’s report:

“HBMX operates in a high risk country battling drug cartels; it has had high-risk clients such as casas de cambios; and it has offered high risk products such as U.S. dollar accounts in the Cayman Islands, a jurisdiction known for secrecy and money laundering. HBMX also has a long history of severe AML deficiencies. Add all that up and the U.S. bank should have treated HBMX, the Mexican affiliate, as a high risk account for AML purposes. But it didn’t. Instead, HBUS treated HBMX as such a low risk client bank that it didn’t even monitor their account activity for suspicious transactions. In addition, for three years from mid-2006 to mid-2009, HBUS conducted no monitoring of a banknotes account used by HBMX to physically deposit billions of U.S. dollars from clients, even though large cash transactions are inherently risky and Mexican drug cartels launder U.S. dollars from illegal drug sales. Because our tough AML laws in the United States have made it hard for drug cartels to find a U.S. bank willing to accept huge unexplained deposits of cash, they now smuggle U.S. dollars across the border into Mexico and look for a Mexican bank or casa de cambio willing to take the cash. Some of those casas de cambios had accounts at HBMX. HBMX, in turn, took all the physical dollars it got and transported them by armored car or aircraft back across the border to HBUS for deposit into its U.S. banknotes account, completing the laundering cycle”.

This situation occurred because of the particular way HSBC is run. The report makes it clear that HSBC Group HQ in London instructed its affiliates to assume that every other HSBC affiliate met the group’s AML standards and so should be provided with correspondent banking services. HBUS merely followed this instruction, ignoring more stringent US law which requires due diligence reviews before any US account can be opened for a foreign bank.

In addition to the cross border movement of physical notes, it was also found that HSBC affiliates in Europe and the Middle East circumvented filters set up by the US Treasury Department’s Office of Foreign Assets Control (OFAC) to prevent the funding of terrorist organisations: references to Iran in $19bn worth of US dollar transactions between Iranian entities and HBUS or other US affiliates were stripped out of or omitted from paperwork in 85% of cases, in full knowledge of HSBC’s Chief Compliance Officer and other senior executives in London. There were similar allegations of negligence and cover-ups made regarding HSBC’s ties with the suspect Al Rajhi Bank; clearing travellers cheques for suspicious Russian used car business via a Japanese bank; and offering accounts to ‘bearer share’ corporations, which due to their anonymity are prime vehicles for money laundering and other illicit activity.

It is difficult to dignify such actions with the descriptor ‘neglect’. ‘Neglect’ suggests fault through casual disregard, carelessness or indifference. This kind of behaviour is not an accident; it is written into the DNA of banking in its current form. It is a culture borne of particular structures.

So what structures nurture this kind of behaviour? Two interesting blog posts are illuminating on this issue. The first, an interesting post by an ex-investment banker, Honestly Banking, outlines the problems of what he/she terms ‘loose control’ at HSBC HQ in London. HSBC encourage a quasi-decentralised system whereby relatively autonomous and highly paid 'International Managers' (IMs) are posted to the various HSBC affiliates in senior roles. According to Honestly Banking, loose control creates local mandarins: these IMs make critical decisions in those affiliates and have the right to accept or ignore the recommendations of the local compliance officers. It is unlikely that these IMs run their organisations autocratically, it is likely that decentralisation is replicated at the affiliate level. That is a very effective way of building an organisation that maximises returns from different regions, but it may also encourage accommodation and entanglement with all kinds of risky and unpalatable local operations.

The FT puts this outcome more directly: it is one where “the bank’s business interests trump its compliance obligations”. But that is to confuse the interests of the institution with those who stand to gain individually from this activity. We need to ask a more troubling question: was it really in the long term interests of the institution to behave like this? A second blog post by London Banker highlights this broader tension and the problem of decentralised management. Using the metaphor of a wooden ship, he/she describes a situation where the crew, oblivious to the history and craft of the vessel, are tasked with turning a profit individually, or face being turned ashore. The crew respond by pulling nails from the ship and selling them at each port, at each stage telling themselves that the Admiralty do not understand ships and had specified too many nails in the first place. This sets in train a disastrous set of consequences:

“They self-certify to their warrant officer, who self-certifies to the midshipman, who self-certifies to the lieutenant, who self-certifies to the captain, who self-certifies to the admiral, who self-certifies to the Sea Lords that every nail is where it should be and the supply of surplus nails remains adequate to meet unexpected reverses. And they turn a profit, so everyone is happy and the crew are given bonuses.”

London Banker’s post is concerned with residential mortgage backed securities. But the point applies. Loose control produces both the returns and the information that suites those who have most to gain; but loose control also gradually erodes the hull of the institution. And once the water begins to seep through the timber, all too often it is an emasculated compliance officer that is sacrificed; a most convenient firewall between the authorities and the mandarins in the absence of a paper trail.

Decentralised structures extend the option of informal direction to those in the upper ranks of an organisation and put a lot of people with much responsibility and little power between senior bankers and the regulators. Fining the institution does not begin to address this problem of how elite individuals navigate organisational structures to secure their position and means.

Stanley.

Banks: A Loose Federation Of Money Making Franchises

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 18^th 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 16^th, 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 29^th 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