From BCCI to StanChart: a brief alternative history of investment banking


7:28 am - August 8th 2012

by Dave Osler    


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The Bank of Credit and Commerce International, which collapsed in 1991, was not widely known as the Bank of Crooks and Cocaine International for nothing.

True, the Bank of England was a bit sniffy about it, largely on account of its connections to the Middle East, and refused to grant BCCI full banking status. Neverthless, the regulatory authority of the day remained perfectly happy for it to act as a second-tier licensed deposit taker in the UK.

At its peak, BCCI controlled 400 branches in 73 countries, with around four dozen outlets in Britain. Many local authorities, attracted by generous rates of interest, became clients.

But even in the atmosphere of euphoria that overcame the City during the Thatcher decade, all the warning signs were there, at least for those who wanted to see them.

There were suspicious losses on futures and options trading, an unexplained decision to move treasury operations out of London to the Gulf, and a conviction in a Florida court for laundering Columbian drug money. A US senate investigation uncovered links with Panamanian dictator Manuel Noriega.

In 1990, auditor Price Waterhouse warned the Bank of England that the then-enormous sum of £1.5bn would be required to cover potential losses. Even then, BCCI was allowed to stay in business, and was only shut down after getting a tip-off that fraudulent activity was being perpetrated on a massive scale.

It subsequently emerged that accounts had been falsified for many years, transactions had been disguised, and that BCCI was insolvent, with debts that topped £10bn.

Those of us on the left who argued that this said something intrinsic about banking under capitalism soon ran into the one bad apple defence. The miscreants were obviously ‘rogue bankers’ and what they did was the exception rather than the rule.

But such was the public outcry that the Tories set up the Bingham Inquiry, to ensure that such malodorous occurences could never blacken the name of the UK financial sector ever again.

Supervision, the report concluded, had been far too lax.  The auditors did not pursue evidence aggressively, or pass on concerns as fully as they should have. Even when fraud was brought to light by other parties, the Bank of England did not investigate. Even when BCCI faced closure, the Bank of England tried to restructure it and did not take enough notice of the management’s lack of fitness and propriety.

Fast forward three decades, and it as if the British banking sector had adopted the slogan ‘we are all rogue bankers now’. Barclays is the first to be found guilty of fixing interest rates, although it will not be the last. HSBC – which was founded to handle the proceeds of Britain’s enforced sales of opium to China in the nineteenths century – has come full circle and is doing the same for Mexico’s drugs cartels.

Now Standard Chartered stands accused of acting as a coin op Laundromat for the sanctioned regime in Tehran. It is innocent until proven guilty, of course, but its very existence is now at stake. If it loses clearance privileges in New York, it might as well pack up and go home.

These are not fringe outfits set up in the 1970s by some dodgy foreign financiers; all have stood at the heart of the banking establishment for over a century.

As the old journalist joke goes, once is a shocker, twice is an astonishing coincidence and three times is a trend. It is impossible to shrug off multiple incidents of these dimensions in such a short spell of time as mere happenstance. It is as if the entire banking system is institutionally predisposed to play Russian roulette.

One important reason why top bankers are willing to take risks on such a scale is that they are incentivised to do so. As James Saft points out in a nicely-written blog post for Reuters, sorting out the banking affairs of sundry repressive theocrats and drug dealers generates huge profits, and huge profits generate huge bonuses. And if it all goes pear shaped, the taxpayer steps in to rescue the institution.

At the very least, Mr Saft suggests, banking remuneration should be restructured, making very long-term compensation and the possibility of claw backs the new normal. Publicly insured banks should be kept out of the investment banking business, he adds.

The sad thing is that even as the Labour is not ready even to be as bold as that. As the history of the last 30 years clearly proves, regulation alone is little more than a readily-circumvented joke.

Yet at a time when the need for public ownership of a least a major tranche of the banking sector is entirely evident – and even the Coalition has flirted with the idea of nationalising Royal Bank of Scotland – no prominent politician on the left feels able to articulate a popular demand. That is pure timidity.

 

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About the author
Dave Osler is a regular contributor. He is a British journalist and author, ex-punk and ex-Trot. Also at: Dave's Part
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Reader comments


Very good but “that is pure Timidity” is the understatement of the century. Grow some and tell it like it is.

Or, more accurately, US regulators are trying super-hard to smear and stuff their London competition on behalf of Walk Street.

Drug cartels only exist because American moralising created the context where they do exist. Since so-called illegal drugs should not be illegal anything or anyone who undermined successive US governments War on Drugs should be applauded.

” Now Standard Chartered stands accused of acting as a coin op Laundromat for the sanctioned regime in Tehran. ”

Of course the Americans believe everyone should just obey whatever sanctions they feel like applying to any country that annoys them. Otherwise known as their belief in global jurisdiction to enforce Pax Americana. A bank should not care whether they are dealing with the Iranian regime or the government of Belgium. They deal with amoral numbers on a screen not philosophy.

Excellent article.

I agree with you that more regulation will not solve our banking problems however your proposed solution of nationalisation will not solve them either. I think bost people understand this.

The only system that will work in the interests of the population in general is this one.

“During its time of free banking Scotland’s economy grew much quicker than England’s, which had a more regulated and failure-prone system. Even though England was in the midst of its first industrial revolution during this period, Scotland’s approximate per capita income went from half of England’s in 1750 to being virtually equal to it in 1845. Supported by a banking system marked by innovation, reliability, and stability, Scotland transformed from a poor agricultural and household economy to an advanced industrial economy specializing in iron production, shipbuilding, and engineering.”

http://economics.about.com/cs/moffattentries/a/scot_banking.htm

“At the very least, Mr Saft suggests, banking remuneration should be restructured, making very long-term compensation and the possibility of claw backs the new normal. ”

Had a look at how banking bonuses have changed over the last few years? The majority now being paid in shares with clawbacks?

Good, so we’ve solved the problem then, right?

@John b

Exactly. All these “revelations” have been found by Americans, and they’ve not been just doing it to the banks either, they’ve done it to our pharmaceuticals etc.

I’m not sure whether its primarily to do with “smearing” exactly though (though I don’t imagine they’d give two shits if that was a consequence); it simply might be in order to milk some cash out of foreign companies.

That’s Americans all over for you though I’m afraid; it’s a free market for us and for every

@John b

Exactly. All these “revelations” have been found by Americans, and they’ve not been just doing it to the banks either, they’ve done it to our pharmaceuticals etc.

Sorry for double post, didn’t mean to post the first one.

9. Richard Carey

@ Pagar,

I don’t think the Scots’ free banking was quite as good as you may believe, although I am all for free banking.

The problem I have with this OP, is that there’s a hole in the analysis. There is not enough recognition of the role played by governments and government agencies in the banking sector. BCCI is a good example. It was, amongst other things, a massive drug money laundering operation, but it was the many connections it had with ‘friendly’ Middle Eastern governments and government agencies, such as the CIA, which allowed it to keep doing what it was doing.

I don’t think the Scots’ free banking was quite as good as you may believe

Why?

You’ve not been reading Rothbard have you?

Free banking and the end of FRB would be the way forward. Of course, given where we are, it’s a wet dream.

11. Richard Carey

@ Pagar,

“You’ve not been reading Rothbard have you?”

If you read him early on, he praises the Scots’ free banking system, but later he writes that on examination it didn’t really measure up to the reputation created for it. From memory I think the case against included difficulty in redeeming specie and that it wasn’t quite as free as all that, being propped up at the base by the Bank of England.

@ 3. pagar

This is the paper you want to read if you are interested in the rather esoteric subject of free banking. To be consistent with your other views a preference for free banking is what you should support. However, free banking is always fractional reserve banking. When markets have been free to choose that has always been the model chosen. All 100 per cent reserve banking models have always been creatures of the state.

http://www.iea.org.uk/sites/default/files/publications/files/upldbook115pdf.pdf

The Scots free banking era was highly successful and was much more stable than the instability that was a regular feature during that era in much of the banking system south of around Manchester. A leftover from that era can be seen in three banks in Scotland still issuing their own notes. Instability and Bank of England jealousy because most of northern England would not use their notes seen privileges gradually being granted to the BoE. They were always a favoured child because they were bankers to the government.

BoE lobbying to be given a monopoly on note issuing resulted in banks in England within a 50 mile radius of Charing Cross being banned from issuing their own notes. Banks outwith the 50 mile radius could continue to issue notes until they merged or were taking over by another bank. Fox, Fowler, and Company were the last in 1921. That is roughly how we got to the current situation of the BoE being monopoly sterling issuers. Obviously the story is a bit more complicated but it really is a story about real problems and a vested interest asking for monopoly power to deal with the problems.

The big difference between our current model and free banking is the state is not there to act as lender of last resort. One may think that would lead to more instability and the potential for loss of faith in the system leading to bank runs. The free bankers claim that history has shown that the opposite is the case. In a free banking system banks have an incentive to bail out each other to prevent a loss of faith in the whole system. Therefore, they do not do not need to fall back on the state as a last resort. Bank runs were never features of free banking in Scotland, Canada or Sweden. Conversely they were features of the systems where the state implicitly or explicitly was thought to stand behind the banks in distress. Moreover, the free banking system is self-correcting against unsustainable credit expansion. The dynamics of the system means each bank puts a check on the credit expansion of each other. In our current system the only check on credit expansion is whether the central bank are doing their job effectively. Whether all this would work in the modern era I do not know.

@ Richard W

Thanks for the link to that paper and your comments on free banking.

As I said above, I think it is inconceivable that we can move from the kind of state-centric banking system we currently have to a free system. You ask whether it would work in the modern era- not sure but I know what we have isn’t working.

Actually, it may be technology that revives free banking as a concept with this kind of thing.

http://bitcoin.org/about.html


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    From BCCI to StanChart: a brief alternative history of investment banking http://t.co/zwS9JxR7

  2. Jason Brickley

    From BCCI to StanChart: a brief alternative history of investment banking http://t.co/Bvp7QFmh

  3. Rev Nev

    RT @libcon: From BCCI to StanChart: a brief alternative history of investment banking http://t.co/MMaDccPK

  4. leftlinks

    Liberal Conspiracy – From BCCI to StanChart: a brief alternative history of investment banking http://t.co/6mp8LboU

  5. BevR

    From BCCI to StanChart: a brief alternative history of investment banking | Liberal Conspiracy http://t.co/sjOM7Vu1 via @libcon

  6. marilyn

    From BCCI to StanChart: a brief alternative history of investment banking | Liberal Conspiracy http://t.co/OSQrq751 via @libcon





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