Can the City of London survive the economic shock of leaving the European Union? Former banker Oliver Kamm recalls the hedonism and allure of the Square Mile, and asks what next for the suits – and their six-figure bonuses.
The City will thrive as it adapts in the post-Brexit age. That is the prediction proffered this week by Rishi Sunak, the chancellor. His message is only slightly more subdued than the prime minister's assurance on Christmas Eve that the trade deal with the EU will enable the City to "get on and prosper as never before". Are they right? Well, up to a point. The City is disadvantaged by the Brexit deal, but it has inherent strengths that mean it will remain a global centre of finance. The wider question is how far this will benefit the rest of us. And on that point, there are grounds for scepticism.
The activities conducted in the square mile known as the City of London are one part of a thriving financial services industry that contributes some £132 billion ($250 billion) to the British economy and employs well over one million people. Nor is the sector just a London affair. There are important regional concentrations in asset management in Edinburgh and in insurance in the southwest of England, and big cities such as Cardiff and Leeds also have substantial financial services activity.
There is no doubt in my mind that the sector overall, like the wider economy, will be damaged by Brexit. The agreement with the EU doesn't make provision for financial services firms. British providers of financial services have lost automatic "passporting" rights to sell their products throughout the EU. That's just a fact. There will be additional regulatory hurdles that didn't apply while Britain was part of the single market.
At the same time, I accept the judgment of supporters of Brexit that the City will retain certain inherent advantages as a global financial centre, in the specialised services it offers. It will lose some business at the margin, such as settlement of euro-denominated trades, but will remain significant and perhaps dominant in activities such as foreign exchange and securities trading, asset management, law, accountancy and other fields. And there are lots of ancillary businesses that depend on the City remaining strong.
Is that a good thing? If you answer yes – and I would – then you need to accept some dispiriting consequences. The segment of the financial services industry that will emerge relatively stronger from the economic shock of Brexit will be concentrated in the City, rather than outside it, and the beneficiaries will be those who already reap substantial financial rewards. If City institutions want to flourish outside the EU, the obvious recourse will be to bid up the price of a global workforce. A few years ago, in response to the financial crash of 2007-09, the EU introduced a cap on bankers' bonuses, limiting these to 100 per cent of salary or 200 per cent with the approval of shareholders. Mark Carney, the former governor of the Bank of England, envisaged that this restriction on the City could be lifted after Brexit. He saw it as an advantage. Many will not – especially those who have watched the recent BBC drama Industry, about a group of millennial City bankers in the 2010s.
The programme's popularity has already secured it a second series. It's compelling viewing but not a pretty sight. The storyline depicts sundry ritualistic humiliations for its aspiring masters of the universe, amid a culture of late nights, sex, drugs, misogyny and the prospect of huge financial rewards.
City bankers will dispute its accuracy. As to that question – well, it depends where you are. I spent more than 20 years in the City before giving it all up to become a writer and join The Times. I started my career at the Bank of England and then worked on both sides of the securities industry: asset management and investment banking. My experience is remote from what appear to me the agonies of life as depicted in the programme. I prefer a more discriminate hedonism, which in lockdown amounts to a good book and a glass of malbec.
But I can't dispute that I saw people who led stormier lives of excess. I never worked on a trading floor, as my functions were investment strategy and business management, but I could immediately tell from their manner and behaviour whether someone had a drugs habit to help them (so they saw it) maintain the alertness to follow market movements. And the conspicuous consumption, both of possessions (especially fast cars) and of food and drink (especially drink), was obvious around the City. Everything came down, ultimately, to the annual bonus round. It was standard for senior employees to have a basic salary that by any normal standards was huge (commonly £100,000/$190,000), but for total compensation to depend on bonuses that were several multiples of this. That's what inevitably will reoccur in the City now that Britain has left the EU, and it has a social cost.
The prevailing culture of the investment banks from my experience would be something along these lines: enjoy the fruits of your industry but don't do so in such a way to draw attention, let alone scandal. In the late Nineties, a group of young traders at one investment bank attracted notoriety by calling themselves "the Flaming Ferraris", after a cocktail they were partial to – a mix of rum, Grand Marnier and green Chartreuse. They were sacked by their bank and eventually banned from the City for attempting to manipulate prices in the Swedish stock market. One of them was James Archer, the son of Lord Archer. I got to know another of them quite well when he did consulting work for my institution. I liked him: he was intelligent and sharp, and would have been successful (and probably is) in any other career.
I miss that world not at all. I had the good fortune to be able to take up another career in midlife and jumped at it. A few weeks after I joined The Times, in my first and only job in journalism, the entire western banking system collapsed. The hubris, cupidity and recklessness of top bankers became a subject of fierce controversy and near-universal condemnation, in which it may seem self-serving of me to join – for I got out before the deluge. But I think it gives me a perspective on what went wrong and what can be put right. And it won't be put right by restoring the status quo ante just because, post-Brexit, it becomes possible.
I can honestly say that I enjoyed almost all my City career, though the relish palled in the final years, and the subject retains intellectual fascination for me. Yet one of the oddities of finance as a field of study is that Nobel prizes have been awarded for this specialised branch of economics, yet its body of research raises big questions about the usefulness of much of the work that goes on in high finance.
It's not just a problem in the City of ethical standards that are, to various degrees, elastic. A great deal of effort is devoted to activities of marginal usefulness, or outright destructiveness, including ceaseless efforts to devise complex financial products that enable investors to circumvent the tax regime (or, to use a euphemism, are "tax efficient").
It's a common accusation that the City has an excessive focus on short-term financial returns at the expense of creating long-term value, and that the financial services industry is "bloated". There's a reasonable reply, which is that the evidence of "short-termism" is hard to pin down and that policymakers shouldn't attempt to pick and choose the sectors in which an economy specialises. If a sector is successful and profitable, and especially if it generates overseas earnings, then (so the argument goes) this is all to the good. But I'm doubtful, in the end, that this is true.
I can't shake off the suspicion that the City is a net drain rather than a net gain, in a way that isn't really measurable in national accounts data. Part of this is cultural and hence remediable. The City has, to be fair, been working on it. A couple of years ago, I chaired an event where one of the speakers was Bob Diamond, the former Barclays boss, who was forced out of his post in 2012 amid a scandal over fixing a market interest rate. He was candid and expansive about the failings of his tenure and of the City generally. While in his post, he'd warned that "our culture, and that of the industry overall, needs to evolve".
Well, he was right. And a vignette of that time illustrates it because it affected a unique institution. Perhaps the most famous banker of recent times, after the disgraced Fred Goodwin of Royal Bank of Scotland, is Paul Flowers, who served as non-executive chairman of the Co-operative Bank from 2009-13. He resigned as the bank stood on the brink of financial collapse, and he was banned from the industry a few years later for having used company equipment to send sexually explicit messages and organise his drug habit, and to access premium-rate pornographic phone lines. In testimony to MPs, I thought that he showed an almost total lack of financial knowledge.
According to a book by financial journalist Alex Brummer (and I have had it confirmed since), Flowers and his senior management team held an event at a country house hotel in the northwest where Bank of England officials grilled them on the financial accounts. Afterwards, they all had dinner, and the Bank of England attendees noted that Flowers ordered the most expensive bottles of wine, then sent them away as not of a quality that he demanded. The Co-op Bank is an institution with a declared commitment to ethical policies and roots in the co-operative movement, yet even this institution had become infected with the ethos of conspicuous consumption.
Even so, the City has cleaned up its act, and in my work I became practised at explaining the value of high finance in an efficient economy, and the social as well as private benefits of the sort of work I did. Where scarce resources are allocated to businesses that can make most profitable use of it, society as a whole can take on more risk and become wealthier. Deep and liquid capital markets connect companies that need capital with investors who want a return on it. A sophisticated securities industry can help both these types of client meet their objectives. That's what I did for a living, in investment research, asset management and business planning. I got great satisfaction out of it, and met some brilliant people.
Indeed, the talent in the City is one reason for my scepticism now. Because the structure of rewards in the Square Mile is unlike anywhere else, lots of people want to work there. Firms can take their pick and will, unsurprisingly, select a high proportion of impressive candidates. Lots of people in the City are intelligent, and most of them gravitate towards highly paid roles that are hard to fill. Not all of them fit this stereotype, admittedly. In my first job, as a graduate trainee at the Bank of England, I was mentored by Andrew Bailey, who has remained a close friend. He has one of the finest minds I've come across, yet he never went into the private sector where he could have earned fabulous sums, and is now governor of the Bank. Although biased, I consider it exceptionally fortunate for this country that it was him, and not one of the more "political" but less qualified candidates, who took office in Threadneedle Street just as the coronavirus crisis broke.
It's other brilliant people, whose names are unknown to the public, that I'm more concerned about. I worked with many who held doctorates in physics or maths and whose working lives were devoted to devising complex financial products that would slightly reduce the cost, or diversify the risk, of borrowing or investing in the capital markets. It was a commitment of ingenuity that might have been expended instead on biotech, or renewable energy, or some other goal. It's no criticism of them; I didn't go down that route either. But they would have been really good at it.
The gravitational pull of the City is not only an opportunity cost, in which talent that might be invested in other areas never comes to fruition. It's worse than that. Some segments of the industry are a monumental waste, of which the preeminent one is in asset management. Among the findings of academic finance – those Nobel laureates I referred to – is just how hard it is to outguess the market and beat it. The analysts and fund managers who try to pick stocks that will outperform may know plenty of things, and be fluent in reading financial statements, but they genuinely don't know how to do that. The implosion of the fund management operations of Neil Woodford in 2019 is a cautionary tale. Once hailed absurdly by the BBC as "the man who can't stop making money", Woodford turned out to justify this description only in the sense that he took huge sums from the business, paid for by investors, even while his funds were dramatically underperforming.
It takes a certain mindset to do that – an invincible self-regard that will not countenance the possibility of error. At its extreme, it will see the world as an obstacle to be trampled on. In my own City career I got to know one of the captains of industry, a household name who is abrasive and litigious (not Sir Philip Green), who was abusive not only to his own lieutenants (who could, I suppose, have walked away) but to secretaries and waiters. Even for decent people, a working life of commercial calculation can be corrosive. Getting and spending, we lay waste our powers, wrote Wordsworth – and there is some truth to this when we become inured to the type of getting and spending that almost nobody else, in other walks of life, enjoys.
For many years, my commute would involve walking between the City and my home in east London. The route encompassed an area of immense wealth and, along Whitechapel Road in Tower Hamlets, an area of deprivation and a home through generations for immigrant communities. The contrast is vast. Hampering the City, let alone driving its activities from these shores through isolationism or bad policy, won't help improve the economic position of poor communities in London or any other part of Britain. Yet its prominence in our economy, which I'm certain will be reinforced by Brexit, is not an unalloyed gain and the tax revenues it provides come at a cost. For those fictional young bankers portrayed in Industry, it causes attenuation of the soul. I suspect it did for me too.
Written by: Oliver Kamm
© The Times of London
