I once worked at the bank Merrill Lynch. During the tech-boom, one of Merrill’s analysts, Henry Blodget, an expert on technology companies, would write equity research – essentially buy or sell recommendations – that the bank’s stockbrokers would use to recommend securities to their clients.

However, while he was publishing reports saying that certain securities were instant buys, he was also sending internal emails ridiculing what “dogs” they really were. Meanwhile, there was pressure from the retail banking side, which invariably wants to capture cash deposits and provide servces to businesses for large fees.

I saw this often during my time in the City.

In the years since the Big Bang, these practices led to a series of spectacular market failures, with securities vastly overvalued before the market could correct itself. The consequences have been devastating.

Labour’s failure to intervene during its 13 years in power was unforgiveable and a prime reason for their 2010 General Election defeat. Without the banking crisis and recession, the party could still be in government.

Under Labour, the Financial Services Authority was simply not fit for purpose. Bankers I know say duping the FSA is simple – for a number of reasons. The FSA has no systems perspective; it has been too obsessed with small areas and could never see how ridiculous the overall system was becoming.

Second, the bankers are usually brighter and more ingenious than the regulators. Third, the regulatory regime almost forces the FSA into believing that Chinese Walls and the eagerness of bankers to comply with the law will work. That has never happened and it probably never will.

There is no reason for a retail bank to own an investment bank and a stockbroker. Bankers can talk about efficiencies and rationalisation, but all I saw were grotesquely large institutions engaging in self-congratulatory rounds of payouts to senior executives.

It is time to start separating out these entities so they can do what they do best free from the temptation to find shortcuts, and regulate them properly.

We should reverse the Big Bang and split up retail banks, stockbrokers and investment banks. This will end the farcical Chinese Walls and allow for a diverse and competitive City that relies on innovation and quality service to differentiate it from its competitors, not on who can come up with the most elaborate ruse to evade the rules.

Over the past 20 years, we have permitted the creation of a financial sector that is both too big to fail and too big to succeed, and is riven by internal contradictions. We are right to blame the banks for the return to boom and bust after Gordon Brown’s prudent macroeconomic management as Chancellor.

Even having seen the symptoms, Labour was comfortable to sit back and be intensely relaxed about the financial sector.

To regain the trust of the electorate, the party must now apply the same dogged understanding of problems, radicalism of solutions and pragmatism of implementation that is at Labour’s grassroots to the monumental sickness at the heart of the British economy.

—
Originally published in Tribune magazine, which features a longer version

Reader comments

1. Liberal Conspiracy

   Labour must pledge to heal the sickness at the heart of our economy http://bit.ly/b7WxBO

2. Oliver Cooper

   RT @libcon Labour must pledge to heal the sickness at the heart of our economy http://bit.ly/b7WxBO <- They're going to abandon socialism?

3. Elly M

   RT @libcon: Labour must pledge to heal the sickness at the heart of our economy http://bit.ly/b7WxBO

4. Andreas Paterson

   RT @libcon: Labour must pledge to heal the sickness at the heart of our economy http://bit.ly/b7WxBO

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