Professional Standards in the Banking Industry

Austin Mitchell Excerpts

Thursday 5th July 2012 Commons Chamber

[Austin Mitchell (Great Grimsby) (Lab)]

It is good that the debate has come to a calmer and more sensible level. The start demonstrated exactly why the House is incapable of conducting an impartial inquiry. With that degree of partiality and the petty debating points made by the Chancellor, it would be impossible to conduct a serious inquiry into banking.

Let us remember that we are talking not about who said what to whom in 2008, but about the professional standards of bankers. The Government have made a big mistake in trying to shift the blame for the LIBOR manipulation on to my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) and the previous Labour Government. It is inconceivable that a system of manipulation that lasted five years and which Bob Diamond—the man paid £20 million a year to know what was happening in his company—did not know about could have been caused by a word on the telephone from my right hon. Friend, my right hon. Friend the Member for Morley and Outwood (Ed Balls) or anybody else.

We have so far been silent on the real cause of these difficulties and manipulations. I refer to the problem of deregulation, which has made all this possible. The deregulation here—the big bang—was followed in the United States by the repeal of Glass-Steagall under Bill Clinton. That was the 1937 legislation that wisely enforced the separation of the utility, trading arms and the merchant-banking, casino-gambling arms of the banks. It made distinct entities of them. After its repeal, banks here and there began to come together, with the trading arms subordinated to the gambling-casino, merchant-banking activities, and that set the tone and the ethics.

The result was the end of the old neighbourhood banking system of friendly bank managers in cupboards advising us on what to do with our money and providing money for mortgages and small businesses. All that went, and we had the spectacle of the kind of gambling made possible by all these inventive processes, such as the slicing and dicing, and parcelling out of debt, securitisation, derivative gambling—a form of gambling without gambling tax—sub-prime mortgages and now LIBOR manipulation.

All those practices were made possible by the new ethics of the merchant banks. A new greed entered banking, and the only ethic at the top was greed. If people such as merchant bankers have too much power, it follows that they will abuse it. It follows that if they have too much power, they have to be regulated. It was the repeal of regulation and the passion of both parties—the Tories were more passionately anti-regulation than we were, but we still deregulated too much—that created the opportunity for this to break out into the mess that it did.

We have had a whole series of manipulations. I came across another one in 1992, when a young American trader with American Express bank came to me and said that points were being skimmed off foreign exchange transactions. Points that should have gone to the owner of the fund—the customer—were being taken by the dealers for themselves. We are talking about only a couple of points—one or two points—but added up over a long period, it came to huge sums of money, given the enormous numbers of transfers being made. Everybody pooh-poohed it. I took that trader to Eddie George, the Governor of the Bank of England, who told him, “No, it wouldn’t happen here. We’ve inspected the bank. Nothing like this is going on,” but it just was not true. It was going on, and now in America there is a lawsuit against New York Mellon bank for £2 billion that was skimmed off by traders in foreign exchange transactions. If that is going on in the States, it is going on here, and the only way to deal with it is through quite simple regulation to require time-stamping of all trading transactions.

Similarly, the ethics of the banks can be dealt with more effectively not, as Vickers puts it, by ring-fencing their two functions, but by driving them apart totally. That way, the neighbourhood banks—the local banks, the trading banks—can return to their old priority of serving the customer, the locality and local businesses, providing money for them and their transactions, while the merchant banking can continue its gambling elsewhere, I hope in a way that is more restricted by legislation and less prone to simple cheating. That is the only way to deal with these issues.

In conclusion, we have heard a lot of arguments about whether we should have a judge-led inquiry or a parliamentary inquiry. A parliamentary inquiry would be nice—it would allow us to play Perry Mason for a while and get a few headlines—but ultimately people will not have faith in it, because the Government have a majority and we have seen how they would react to the situation already. There is therefore no point in setting up an inquiry that people will not have faith in. We need a full and fair inquiry—a judge-led inquiry—to know what is going on and to tell the people.