EFTA Document EFTA01801110

From: Jeff <[email protected]> Sent: Monday, July 16, 2012 10:12 AM To: Jes Staley Subject: Fwd: Re: Sent from my iRad<=div> 9 July 2012 The British bankin= debate after Bob Diamond Summary =C24> Bob Diamond's resignation as Chief Executive of Barclays bank clearly marks a turning point in the po=itics of banking in the UK. =C24e The most significant political and regulatory outcome from these events will be to renew the deb=te about universal banking. Whereas to date this debate has focused on scal=, implicit subsidy and systemic risk, it will now focus on culture, persona= character and contamination from the values of the trading floor to the rest of a banking institution.&=bsp;Because these things cannot be regulated, the probability is that=politicians will focus on their proxies, especially pay. =C240 The gap between the inherent values and perceived risks of retail and investment banking ha= been further widened by the events of the last two months. For leaders of u=iversal banks, especially those who have risen through investment banking, c=osing this gap in the mind of political stakeholders poses a particular challenge. Mr Diamond'= belated 'citizenship agenda' at Barclays was well-conceive=, but fatally hobbled by this tension. EFTA_R1_00141617 EFTA01801110 =C240 By falling on his sword, Mr Diamond has created the possibility of a rapprochement bet=een his former bank and British political opinion formers. The bigger issue=for the bank he leaves behind and others like it is how — or if Q=804k it is possible after the crisis to rebuild political and regulatory confidence in the kind of financial markets busine=ses he dedicated his career to building and the people who run and profit f=om them. Bob Diamond's resignation as Chief Executive of Barclays bank cle=rly marks a turning point in the politics of banking in the UK. The announc=ment that Barclay's was to be fined E290mn as part of a settlement with the FSA financial regulator over its part in t=e fixing of the London interbank lending rate between 2005 and 2008 proved t=e tipping point for Mr Diamond. The Barclay's CEO has long been the=most controversial of Britain's bank leaders and had few political friends. Yet in the end, the trigger for his r=signation was not direct political pressure, but the FSA's intimati=n to the Barclay's board that unattributed threats from the top of B=rclays to the Bank of England had made Barclays' relationship with its regulator potentially toxic. Mr Diamond's departure and the LIBOR-fixing scandal will mark the start o= a new phase in the politics of the banking crisis in Britain. The suggesti=n that traders at Barclays and other banks were manipulating what is ultimately a key public benchmark for=pricing financial products compounds a run of mis-selling and tax planning c=ntroversies. With a Parliamentary enquiry now to take place on the LIBOR is=ue 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 po=itical and public disdain. The fact that the Bank of England's own c=nduct remains subject to question in some aspects of the LIBOR scandal will not deflect from this. It is safe to assume that the setting of LIBOR will now be moved into the=remit of the UK financial regulator. Brussels will tighten market abuse rul=s to apply criminal sanctions to tampering with indices like LIBOR. But the most significant political an= regulatory outcome from these events will be to renew the debate about uni=ersal banking. Where this debate has to this point focused on scale, implic=t subsidy and systemic risk, it will now focus on culture, personal character and contamination from the values of the trading floor to the rest of a ban=ing institution. Because these things cannot be regulated, the probability is that politicians will f=cus on their political proxies, especially pay. The return of Vick=rs The link between what has happened at Barclays and the uni=ersal banking argument is trust. Preserving the universal bank model relies=on public trust that the core retail functions of a bank and its trading ac=ivities can be properly and completely segregated. The UK Independent Commission on Banking chaired by Sir John Vi=kers proposed in 2011 that they could be preserved in a single institution b=t in separate entities, with the retail functions ringfenced with their own=higher capital levels. The Vickers Commission recommended that all derivatives services should be kept=outside this ringfence. The UK government accepted the argument that retail banks s=ould be able to maintain some simple derivatives functions such as products=for hedging currency risk for business clients. The Barclays experience is a=ready 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 that will inevitabl= be gamed by banks. 2 EFTA_R1_00141618 EFTA01801111 The UK government shows some reluctance to revisit its int=rpretation of the Vickers proposals. But if the British Parliamentary enqui=y into the LIBOR issue now concludes that the government has erred on the s=de of trusting banks, then the pressure for an outcome closer to the original Vickers recommendation, to b= written into next year's Banking Act, will be intense. The universal banking debate will take another serious twi=t if the new leadership of Barclays ultimately decides to break the bank up=into a retail bank and an investment bank and broker/dealer. As extreme as t=is sounds, the intangible costs in political and regulatory animus Barclays now attracts could suggest that=a clean break makes sense. An arrangement that gave existing shareholders a=stake in both new institutions might be acceptable. Barclays would no doubt sell such a split as a smart comme=cial move. But the political and regulatory subtext would be to undermine t=e case that such banking agglomerations are both necessary and useful. Alth=ugh the French and German commitment to their own universal banking systems is very strong, such a split would c=rtainly empower critics of the universal banking model in the EU and the US= The Liikanen Group inquiry is due to report to the European Commission on b=nk structure later this year. The Commission itself is then expected to issue its own recommendations on b=nk structure. Both will certainly draw on the Barclays experience.</=> The culture questi=n This bigger issue about the values of the trading floor is=going to prove hard to shake off. The role of securities divisions in drivi=g investment bank profits over the last two decades has predictably seen a g=neration of securities managers rise to the leadership of investment and universal banks. While it is perha=s unwise to generalise too much, most of these men have brought with them t=e directness and self-belief that comes with surviving a career on the trad=ng floor. They also bring with them a view of the market and of mark=t-making that is often at odds with the way most politicians understand the.. Watching Lloyd Blankfein of Goldman Sachs trying to explain to the US Sen=te in 2010 why it was legitimate for Goldman Sachs as a market maker to be both long and short in the US pro=erty market at the same time reinforced the point. There is a yawning gulf b=tween a trader's pragmatic view of financial markets and a wider po. itical and public audience who generally interpret the market maker's pragmatism as cynicism, detachment and=short termism, especially when it results in making a lot of money.<=p> Banks tend to be highly impatient with this public and pol=tical ambivalence. Most banks' response to efforts at greater regul=tion of securities markets have often been rooted in the argument that thes= markets are fundamentally a forum for free trade between consenting adults and should be treated as such. It is t=is argument that the LIBOR- scandal, with its taint of market fixing, and th= persistent flow of suggestions of contempt for customers and clients, does=so much to undermine. The events of the last two months have succeeded in cement=ng for good the idea that the banking crisis of 2008 was ultimately the res=lt of unethical, 'casino' behaviour on the trading floor. W=atever failings banks might have exhibited in their ethical standards here, the reality is that the banking crisis had it= roots in poor lending and risk standards, and poor management of loan book=funding, rather than wild gambles or duplicity in the securities markets. T=e Vickers Commission explicitly recognised this by focusing on raising capital standards at the retail bank= that make up the backbone of the British credit system. Recent huge losses in the Chief Investment Office at J P M=rgan and conduct like that of Barclays' traders have made thi= distinction far too subtle to insist upon politically. This may not matter=much in regulatory terms — regulators have already embarked on a wide range of securities markets reforms. But it will=help embed the persistent political idea that retail banking is inherently Q=8OQsafe' while investment banking and securities markets business=is inherently 'risky'. To which recent events have added the taint of suspect ethical conduct. 3 EFTA_R1_00141619 EFTA01801112 For universal bank leaders who have come out of the securi=ies world, this is likely to be part of the challenge of dealing with polit=cians and regulators over the next few years. Politicians actively question=d Mr Diamond's credentials to lead a retail bank when he was appointed Barclays CEO in 2011. His departur= leaves an even greater burden on universal bank leaders to understand the g=owing political gap between the skillset desired of retail bank management a=d the caricature of the men and women who make a living on the trading desks. Mr Diamond maintained a g=ass office on the trading floor at Barcap even after his transition to lead=rship of Barclays; a gesture heavy with meaning for his critics. Mr Diamond's instincts were to close this gap by c=ampioning a 'citizenship' agenda for Barclays. The main pro=lem with this is not the agenda, or the work that was done by the bank in i=s name. It was the persistent undermining of this message by the perceived conduct of the bank itself. Not just questions of culture a=d character raised by the admission that traders had sought to manipulate L=BOR rates for personal and institutional profit and the mis-selling of paym=nts insurance and interest rate hedges for small businesses. But also fundamental questions over the b=nk's business model, the way it rewards its highest earners includi=g Mr Diamond himself, its approach to its own tax affairs and the '=ggressiveness' of the tax services it provides to clients, irrespective of their legality. In this, obviously Barclays is f=r from alone. Politicians are at something of a loss as to how concretel= to address these issues of values and character and this poses a particula= challenge for banks. Culture is hard to regulate and the public have no re=l appetite or patience for reassurances that a renewed rigour from supervisors will fix the problem. The proxies fo= culture are going to be pay and senior accountability, and these are the t=o things that ultimately tripped up Mr Diamond at Barclays. Although m=ny in banking would like to argue that these things are beside the point, politically they are the point. Like much else in the current banking model, the case for r=muneration levels in banking is based purely on the logic and discipline of=the free market for financial services. Yet the bailouts of 2008 and the LI=OR-fixing scandal have further exhausted political and regulatory patience with the idea that banking exis=s in a free market. High levels of remuneration are also glaringly at odds w=th the wider economic context and the prevailing political climate. George O=borne, the British Chancellor, has tried to accommodate London-based investment banks by resisting the rat=er rigid rules inserted at the last minute by the European Parliament into t=e European CRD4 Directive applying ratios for fixed and bonus pay at Europe=n banks. But in doing so he is well aware that he is badly out of step with the public mood. The accountability problem is as simple and blunt as polit=cs gets. The massive market disruptions of 2008 and the ensuing economic cr=sis have created a latent political desire for personal accountability from=the banking industry that it has so far been unable to meet. In part this is because the most egregiously ma=aged institutions in the period leading up to 2008 have simply disappeared.=The survivors are generally not inclined to feel implicated in the industry=E244,s wider collective problems. Mr Diamond always seemed to hint at the indignation of an executive whose b=nk had survived the banking crisis without direct government support and wh= felt he had little to answer for, at least until his employees' ma=practice made this untenable. This is part of what made him such a lightning rod and figure of resentment for man= politicians. The political fall=ut How will this play out politically? The UK's Labou= opposition has clearly judged that there is mileage in a renewed campaign a=ainst the bankers. However, although Labour supports a tightening of the go=ernment's proposed rules on derivatives inside the ringfence for British retail banks proposed for 2013, its ultima=e aim is not a particular regulatory outcome but something closer to a mora= posture on capitalism. Labour leader Ed Miliband has broadly disowned the b=nking record of the Labour government before 2010 and has put a "better, improved capitalism•=80• at the heart of his election platform. This is achieving some resonan=e in the media. His aim is to use a moral and ethical 4 EFTA_R1_00141620 EFTA01801113 critique of banking a= a way of differentiating himself and the Labour party both from its own past and the Conservative- led Coalition government.=The Coalition government inevitably will be forced to cover the same ground= The Conservative party is much less inclined to make a mor=l issue of banking, still less of capitalism more widely. However, most of t=e very small number of genuinely forensic critics of the banking sector in t=e UK Parliament are Tories, and often individuals with financial services backgrounds. The Chancellor G=orge Osborne currently seems more inclined to use the LIBOR issue as an opp=rtunity to attack Labour's record in government, but if other banks=are fined and the Parliamentary enquiry is highly critical, then he will have to tack to stay close enough to the p=blic mood. His own backbenchers have already started to grumble that he has=misjudged the LIBOR scandal by playing it for politics rather than a questi=n of principle and policy. For an industry that is used to justifying its social role=largely in terms of taxes paid and jobs created, this is difficult territor=. Assuming that banks accept that there is a need seriously to tackle=and talk about internal culture, providing evidence of this response is not easy. It will require bank leaders who are=more visible, vocal and accountable, and internal management that is willin= to pit the long term interests of institutions against the short-term cult=re of the trading floor. For boards, and in particular the many non-executive board=members of banks charged with providing external oversight of institutional=conduct and compensation, this adds both additional responsibility and addi=ional exposure. It will require a keen political ear. But it will also require politicians and regulators t= engage in a more subtle debate about culture. And care by politicians that=their desire to curb unacceptable behaviour does not spill over into a thre=t to the existence and competitiveness of the banking sector as a whole. By falling on his sword Mr Diamond has created the possibi=ity of a rapprochement between his bank and British political opinion forme=s. The bigger issue for the bank he leaves behind and others like it is how=— or if — it is possible to rebuild political and regulatory confidence in the kind of financial markets busine=ses he dedicated his career to building and the people who run and profit f=om them. Ends Lord Mandel=on 5 EFTA_R1_00141621 EFTA01801114 Chairman=/span> <=, href="http://www.global-counsel.co.uk/" style="color: blue; text-decor=tion: underline; ">www.global- counsel.co.uk From: Jeffrey Epstein <[email protected]> Date: Sun, 15 Jul 2012 23:51:18 +010= To: Peter Mandelson what do you know of the libor scandal.. do you know the other sat bar=lay.. lets talk tomorow The information contained in this communication is confidential, may be attorney-client privileged, may constitute inside information, and is intended only for the use of the addressee. It is the property of Jeffrey Epstein Unauthorized use, disclosure or copying of this communication or any part thereof is strictly prohibited and may be unlawful. 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