On Mon, Jul 16, 2012 at 4:59 AM, Peter Mandelson wrote: > I know as much (little) as anyone else. Who others at arc ays o you mean= e t or sti t ere ? > > Global Counsel did an Insight note a week ago. Pasted in below for ease of=reading. > > > 9 July 2012 > The British banking debate after Bob Diamond > > > > Summary > > § Bob Diamond's resignation as Chief Executive of Barclays b=nk clearly marks a turning point in the politics of banking in the UK.

§ The most significant political and regulatory outcome from these e=ents will be to renew the debate about universal banking. Whereas to date t=is debate has focused on scale, implicit subsidy and systemic risk, it will=now focus on culture, personal character and contamination from the values o= the trading floor to the rest of a banking institution. Because these thin=s cannot be regulated, the probability is that politicians will focus on th=ir proxies, especially pay.

§ The gap between the inherent values and perceived risks of retail a=d investment banking has been further widened by the events of the last two=months. For leaders of universal banks, especially those who have risen thr=ugh investment banking, closing this gap in the mind of political stakehold=rs poses a particular challenge. Mr Diamond's belated 'citi=enship agenda' at Barclays was well-conceived, but fatally hobbled b= this tension.

§ By falling on his sword, Mr Diamond has created the possibility o= a rapprochement between his former bank and British political opinion form=rs. The bigger issue for the bank he leaves behind and others like it is ho= — or if — it is possible after the crisis to rebuild polit=cal and regulatory confidence in the kind of financial markets businesses h= dedicated his career to building and the people who run and profit from th=m.

Bob Diamond's resignation as Chief Executive of Barclays bank clea=ly marks a turning point in the politics of banking in the UK. The announce=ent that Barclay's was to be fined E290mn as part of a settlem=nt with the FSA financial regulator over its part in the fixing of the Lond=n interbank lending rate between 2005 and 2008 proved the tipping point for=Mr Diamond. The Barclay's CEO has long been the most controversial o= Britain's bank leaders and had few political friends. Yet in the e=d, the trigger for his resignation was not direct political pressure, but t=e FSA's intimation to the Barclay's board that unattributed=threats from the top of Barclays to the Bank of England had made Barclays0=80, relationship with its regulator potentially toxic.

Mr Diamond's departure and the LIBOR-fixing scandal will mark the start of=a new phase in the politics of the banking crisis in Britain. The suggestio= that traders at Barclays and other banks were manipulating what is ultimat=ly a key public benchmark for pricing financial products compounds a run of=mis-selling and tax planning controversies. With a Parliamentary enquiry no= to take place on the LIBOR issue in the UK, and the issue likely to ripple=across other jurisdictions and produce both litigation and possible prosecutions, banks in the UK are confronted with new levels of political and publi= disdain. The fact that the Bank of England's own conduct remains s=bject to question in some aspects of the LIBOR scandal will not deflect fro= this.

It is safe to assume that the setting of LIBOR will now be moved into the r=mit of the UK financial regulator. Brussels will tighten market abuse rules=to apply criminal sanctions to tampering with indices like LIBOR. But the m=st significant political and regulatory outcome from these events will be t= renew the debate about universal banking. Where this debate has to this po=nt focused on scale, implicit subsidy and systemic risk, it will now focus o= culture, personal

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character and contamination from the values of the tradi=g floor to the rest of a banking institution. Because these things cannot b= regulated, the probability is that politicians will focus on their politic=l proxies, especially pay.

The return of Vickers

The link between what has happened at Barclays and the universal banking a=gument is trust. Preserving the universal bank model relies on public trust=that the core retail functions of a bank and its trading activities can be properly and completely segregated. The UK Independent Commission on Banking=chaired by Sir John Vickers proposed in 2011 that they could be preserved i= a single institution but in separate entities, with the retail functions r=ngfenced with their own higher capital levels. The Vickers Commission recom=ended that all derivatives services should be kept outside this ringfence.

The UK government accepted the argument that retail banks should be able t= maintain some simple derivatives functions such as products for hedging cu=rency risk for business clients. The Barclays experience is already leading=politicians and commentators in the UK to argue that simple derivatives may=be an oxymoron. Trying to define them may be a futile exercise, and one tha= will inevitably be gamed by banks.

The UK government shows some reluctance to revisit its interpretation of t=e Vickers proposals. But if the British Parliamentary enquiry into the LIBO= issue now concludes that the government has erred on the side of trusting b=nks, then the pressure for an outcome closer to the original Vickers recom=endation, to be written into next year's Banking Act, will be inten=e.

The universal banking debate will take another serious twist if the new le=dership of Barclays ultimately decides to break the bank up into a retail b=nk and an investment bank and broker/dealer. As extreme as this sounds, the=intangible costs in political and regulatory animus Barclays now attracts c=uld suggest that a clean break makes sense. An arrangement that gave existi=g shareholders a stake in both new institutions might be acceptable.

Barclays would no doubt sell such a split as a smart commercial move. But t=e political and regulatory subtext would be to undermine the case that such=banking agglomerations are both necessary and useful. Although the French a=d German commitment to their own universal banking systems is very strong, s=ch a split would certainly empower critics of the universal banking model i= the EU and the US. The Liikanen Group inquiry is due to report to the Euro=ean Commission on bank structure later this year. The Commission itself is t=en expected to issue its own recommendations on bank structure. Both will c=rtainly draw on the Barclays experience.

The culture question

This bigger issue about the values of the trading floor is going to prove h=rd to shake off. The role of securities divisions in driving investment ban= profits over the last two decades has predictably seen a generation of sec=rities managers rise to the leadership of investment and universal banks. W=ile it is perhaps unwise to generalise too much, most of these men have bro=ght with them the directness and self-belief that comes with surviving a ca=eer on the trading floor.

They also bring with them a view of the market and of market-making that i= often at odds with the way most politicians understand them. Watching Lloy= Blankfein of Goldman Sachs trying to explain to the US Senate in 2010 why i= was legitimate for Goldman Sachs as a market maker to be both long and sho=t in the US property market at the same time reinforced the point. There is=a yawning gulf between a trader's pragmatic view of financial marke=s and a wider political and public audience who generally interpret the mar=et maker's pragmatism as cynicism, detachment and short termism, es=ecially when it results in making a lot of money.

Banks tend to be highly impatient with this public and political ambivalen=e. Most banks' response to efforts at greater regulation of securit=es markets have often been rooted in the argument that these markets are fu=damentally a forum for free trade between consenting adults and should be t=eated as such. It is this argument that the LIBOR-scandal, with its taint o= market fixing, and the persistent flow of suggestions of contempt for cust=mers and clients, does so much to undermine.

The events of the last two months have succeeded in cementing for good the=idea that the banking crisis of 2008 was ultimately the result of unethical= 'casino' behaviour on the trading floor. Whatever failings=banks might have exhibited in their ethical standards here, the reality is t=at the banking crisis had its roots in poor lending and risk standards, and=poor management of loan book funding, rather than wild gambles or duplicity=in the securities markets. The Vickers Commission explicitly recognised thi= by focusing on raising capital standards at the retail banks that make up t=e backbone of the British credit system.

Recent huge losses in the Chief Investment Office at J P Morgan and conduc= like that of Barclays' traders have made this distinction far too=subtle to insist upon politically. This may not matter much in regulatory t=rms — regulators have

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already embarked on a wide range of securiti=s markets reforms. But it will help embed the persistent political idea tha= retail banking is inherently 'safe' while investment banki=g and securities markets business is inherently 'risky. To=which recent events have added the taint of suspect ethical conduct.

For universal bank leaders who have come out of the securities world, this=is likely to be part of the challenge of dealing with politicians and regul=tors over the next few years. Politicians actively questioned Mr Diamond4=804bs credentials to lead a retail bank when he was appointed Barclays CEO=in 2011. His departure leaves an even greater burden on universal bank lead=rs to understand the growing political gap between the skillset desired of r=tail bank management and the caricature of the men and women who make a liv=ng on the trading desks. Mr Diamond maintained a glass office on the tradin= floor at Barcap even after his transition to leadership of Barclays; a ges=ure heavy with meaning for his critics.

Mr Diamond's instincts were to close this gap by championing a 4e=804ecitizenship' agenda for Barclays. The main problem with this i= not the agenda, or the work that was done by the bank in its name. It was t=e persistent undermining of this message by the perceived conduct of the ba=k itself. Not just questions of culture and character raised by the admissi=n that traders had sought to manipulate LIBOR rates for personal and instit=tional profit and the mis-selling of payments insurance and interest rate h=dges for small businesses. But also fundamental questions over the bank40.99s business model, the way it rewards its highest earners including Mr Dia=ond himself, its approach to its own tax affairs and the 'aggressiv=ness' of the tax services it provides to clients, irrespective of t=eir legality. In this, obviously Barclays is far from alone.

Politicians are at something of a loss as to how concretely to address the=e issues of values and character and this poses a particular challenge for b=nks. Culture is hard to regulate and the public have no real appetite or pa=ience for reassurances that a renewed rigour from supervisors will fix the p=oblem. The proxies for culture are going to be pay and senior accountabilit=, and these are the two things that ultimately tripped up Mr Diamond at Bar=lays. Although many in banking would like to argue that these things are b=side the point, politically they are the point. > Like much else in the current banking model, the case for remuneration lev=ls in banking is based purely on the logic and discipline of the free marke= for financial services. Yet the bailouts of 2008 and the LIBOR-fixing scan=al have further exhausted political and regulatory patience with the idea t=at banking exists in a free market. High levels of remuneration are also gl=ringly at odds with the wider economic context and the prevailing political=climate. George Osborne, the British Chancellor, has tried to accommodate L=ndon-based investment banks by resisting the rather rigid rules inserted at=the last minute by the European Parliament into the European CRD4 Directive=applying ratios for fixed and bonus pay at European banks. But in doing so h= is well aware that he is badly out of step with the public mood. > The accountability problem is as simple and blunt as politics gets. The ma=sive market disruptions of 2008 and the ensuing economic crisis have create= a latent political desire for personal accountability from the banking ind=stry that it has so far been unable to meet. In part this is because the mo=t egregiously managed institutions in the period leading up to 2008 have si=ply disappeared. The survivors are generally not inclined to feel implicate= in the industry's wider collective problems. Mr Diamond always see=ed to hint at the indignation of an executive whose bank had survived the b=nking crisis without direct government support and who felt he had little t= answer for, at least until his employees' malpractice made this un=enable. This is part of what made him such a lightning rod and figure of re=entment for many politicians.

The political fallout

How will this play out politically? The UK's Labour opposition has=clearly judged that there is mileage in a renewed campaign against the bank=rs. However, although Labour supports a tightening of the government8

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