Just over a year after his arrest, Kweku Adoboli’s case has finally reached court. He is in the dock nominally for fraud and false accounting, but actually for losing his employer, Swiss bank UBS, around $2.3bn. Now at last, Adoboli’s defence lawyers have the opportunity to make his case. Which is: that the bank had turned a blind eye to Adoboli and fellow traders exceeding their risk limits so long as they continued to make money. That was the custom and practice at UBS, as it was at Société Générale when Jérôme Kerviel lost them over $6.5bn, and earlier at Barings when Nick Leeson lost them $1.3bn and their independent existence.
Trading in deliberately opaque securities is not based on detailed analysis of fundamental values for which the banks, having acquired special expertise, might be responsible. Decisions are made fast, on the basis of the trader’s personal conviction. If they get it right they are rewarded for their “talent”, if they get it wrong often enough, as Adoboli did, they are designated “rogues” and risk getting locked up. In an unregulated market, there’s no time for hierarchical control or responsibility to be exercised. If a trader had to get formal approval from on high before closing deals, they would quickly cease to compete. So the banks delegate responsibility to the front line, where the culture of irresponsibility rules. Much as it has among the Libor traders which Barclays and others enjoyed. The only reason there aren’t many more ‘rogue traders’ is because the vast majority of trades are now fully automated, and three quarters of them of the ultra-fast variety. Even if Adoboli isn’t locked up, he and many of his former colleagues are certainly redundant.
Investment banks (and many other intermediaries) have made massive profits out of the deliberately opaque swaps and derivative ‘products’, inevitably and deliberately creating speculative bubbles. While those bubbles are inflating, money is sucked out of the real economy of manufacturing and non-financial services, from which returns are relatively mundane and long term. The economy thus becomes unbalanced while the bubbles inflate, with the real being preyed on by the synthetic. And when the bubbles burst, the real economy suffers massive destruction. Under the current UK regime, it’s the banks which are bailed out at huge cost to the taxpayer, not the manufacturers. So real jobs are laid waste.
The Americans who share the ideology are, for all their wild Tea Party excesses, less naïvely committed to it in practice. Lehman Brothers was allowed to go to the wall, while General Motors was bailed out. Successive UK governments allowed its motor industry, among many others, to go to the wall, while bailing out its dodgy banks.
Investment banking’s culture of irresponsibility has gone viral, far beyond the financial sector. Neoclassical free market ideology dominates important parts of the academic, political and industrial nexus. Conservative Party treasurer, Lord Fink, is apparently not embarrassed to argue that Britain should aim to compete with tax havens so as to create more jobs in the City of London. Nor is he widely regarded as a total buffoon for making such a suggestion that would obviously speed up our race to the bottom, with ever more of UK manufacturing laid waste and the City accommodating ever more of the world’s financial parasites.
It really is time for a change of direction. The first necessary steps to rebalancing the economy are fairly obvious, though as noted a few weeks back, the madmen in authority may be reluctant. See http://www.gordonpearson.co.uk/06/our-madmen-in-authority-the-bullingdon-intellectuals/