A god that failed us all
meee | 23.06.2002 10:38
A booming financial services industry grew out of the Thatcherite revolution, and was enthusiastically endorsed by New Labour. But now it has let us all down, says Frank Kane from the Observer
but will they apologise, don't hod your breath
A god that failed us all
A booming financial services industry grew out of the Thatcherite revolution, and was enthusiastically endorsed by New Labour. But now it has let us all down, says Frank Kane
Sunday June 23, 2002
The Observer
Pensioners have been told they will have to work until they die; endowment policies will not yield enough to pay off mortgages; small shareholders have been particularly badly hit by two years of declining stock markets; the value of savings dwindles in a low interest rate environment.
Welcome to Britain 2002, nearly 20 years after the Thatcherite 'revolution' - endorsed by New Labour after 1997 - that was supposed to ensure the well-being and wealth of Britain by transforming the financial services industry into the engine of the economy. It is apparent, after the crises that have hit pensioners, investors and mortgage-holders in recent years, that the industry has let us all down.
But it has not let itself down. On the contrary, the financial services industry, virtually synonymous with the City of London, has paid itself handsomely in the good years, without apparently foreseeing that the good times could not last forever. At least, if financial practitioners - the analysts, fund managers and investment bankers - did sense there was a downturn ahead, they did little to alert the investing public.
One expert, formerly an investment banker who lived through the good times and got out of the City before the decline, says: 'The financial services business has failed the three basic tests - fund management returns are falling, mergers and acquisitions have been shown not to work, analysts' forecasts nearly always turn out to be wrong. How can they claim to have added any value to the well-being of the nation after all that? It's a bloody scandal.'
The 'bloody scandal' was born in the mid-1980s, when the Thatcher Government decided it was time to unleash market forces on Britain. The programme of privatisation of state-owned industries followed, accompanied by the City's own revolution - the Big Bang, the enforced liberalisation of the Square Mile's antiquated merchant banking and stockbroking establishment. The City, in effect, was opened up to the bracing wind of US-style free-marketeering.
It worked. The 1980s' financial boom, fuelled by privatisation proceeds, gave us a whole new lexicon of wealth - yuppies, Sids and loadsamoney. The recession that followed was painful, but the main effects were felt outside the financial services sector. The City's money-making momentum slowed only temporarily before launching into the 1990s and the biggest bull market in history.
The flip-side to the opening up of financial markets was the establishment of a new regulatory framework designed to prevent the wilder excesses of rampant capitalism, and so was born a raft of new specialist watchdogs - SFO, SFA, TSA, Imro, Lautro, Fimbra, PIA. It seemed as though the City was drowning in a sea of acronyms.
None of these failed to prevent some of the biggest financial scandals in our history - Blue Arrow, Barlow Clowes, Guinness and Maxwell. Despite the new legislative and regulatory set-up, investors were still exploited in share scams, frauds and market manipulation. In particular, the City never got rid of the curse of insider trading, which was not even illegal until the mid-1980s and so much a part of the share-dealing culture it was often called an essential feature of a free financial market.
And all the time London was fast establishing a reputation as the money-laundering capital of the world. The BCCI scandal in the early 1990s showed how easy it was for unscrupulous businessmen to use the City to recycle their dirty cash. A few years later, the Barings collapse showed how vulnerable the City's oldest and best-regarded institutions were to the actions of the 'rogue trader' operating thousands of miles away in a satellite office.
Barings also proved how even the most honourable could be distracted by the prospect of easy profits, and this was a theme that continued throughout the Roaring Nineties. What did it matter if a few pensions were mis-sold, or banking charges were stratospheric, as long as markets kept on showing double-digit growth each year and house prices were going through the roof?
When Labour came to power in 1997, it was not inclined to tinker with the mechanism that had by then been enriching people for five years, and which was to continue into the most incredible period the British investor has ever seen - the great internet boom of 1997-2000.
The old rules of finance were ripped up and thrown out. Companies did not have to actually make money any more for their shares to be given vertiginous ratings. All you had to do was add the suffix 'dotcom' and the cash came pouring in from investors desperate not to miss the boat. Companies like Amazon and Yahoo were valued at billions on the strength of their (non-profit-making) business model.
Small shareholders were lured into the market - often trading over the internet as well as investing in it - and for a while showed very respectable returns. But in March 2001 it all came to an end, and the collapse of the dotcom sector ushered in the current bear market.
This was the ultimate failure of the financial services industry, and the one from which all current problems flow. Most of the City, from the teenage scribblers through to the grey-haired investment bankers, had believed its own hype about the new paradigm, and had failed to alert investors that share price levels were unsustainable.
The fall in the stock market over the past two years has hit household wealth in the UK by roughly 4 per cent, and led directly to pensions and endowments time-bombs. But, after a decade of raging bull markets, why has a two-year share fall led to a collapse of the UK pensions industry?
The answer, according to the ex-City man, is that we have all been taken in by the power of markets: 'All of us, including the Government, have been seduced into thinking that the markets are God, and if you do that, you get very nasty shocks.'
A god that failed us all
A booming financial services industry grew out of the Thatcherite revolution, and was enthusiastically endorsed by New Labour. But now it has let us all down, says Frank Kane
Sunday June 23, 2002
The Observer
Pensioners have been told they will have to work until they die; endowment policies will not yield enough to pay off mortgages; small shareholders have been particularly badly hit by two years of declining stock markets; the value of savings dwindles in a low interest rate environment.
Welcome to Britain 2002, nearly 20 years after the Thatcherite 'revolution' - endorsed by New Labour after 1997 - that was supposed to ensure the well-being and wealth of Britain by transforming the financial services industry into the engine of the economy. It is apparent, after the crises that have hit pensioners, investors and mortgage-holders in recent years, that the industry has let us all down.
But it has not let itself down. On the contrary, the financial services industry, virtually synonymous with the City of London, has paid itself handsomely in the good years, without apparently foreseeing that the good times could not last forever. At least, if financial practitioners - the analysts, fund managers and investment bankers - did sense there was a downturn ahead, they did little to alert the investing public.
One expert, formerly an investment banker who lived through the good times and got out of the City before the decline, says: 'The financial services business has failed the three basic tests - fund management returns are falling, mergers and acquisitions have been shown not to work, analysts' forecasts nearly always turn out to be wrong. How can they claim to have added any value to the well-being of the nation after all that? It's a bloody scandal.'
The 'bloody scandal' was born in the mid-1980s, when the Thatcher Government decided it was time to unleash market forces on Britain. The programme of privatisation of state-owned industries followed, accompanied by the City's own revolution - the Big Bang, the enforced liberalisation of the Square Mile's antiquated merchant banking and stockbroking establishment. The City, in effect, was opened up to the bracing wind of US-style free-marketeering.
It worked. The 1980s' financial boom, fuelled by privatisation proceeds, gave us a whole new lexicon of wealth - yuppies, Sids and loadsamoney. The recession that followed was painful, but the main effects were felt outside the financial services sector. The City's money-making momentum slowed only temporarily before launching into the 1990s and the biggest bull market in history.
The flip-side to the opening up of financial markets was the establishment of a new regulatory framework designed to prevent the wilder excesses of rampant capitalism, and so was born a raft of new specialist watchdogs - SFO, SFA, TSA, Imro, Lautro, Fimbra, PIA. It seemed as though the City was drowning in a sea of acronyms.
None of these failed to prevent some of the biggest financial scandals in our history - Blue Arrow, Barlow Clowes, Guinness and Maxwell. Despite the new legislative and regulatory set-up, investors were still exploited in share scams, frauds and market manipulation. In particular, the City never got rid of the curse of insider trading, which was not even illegal until the mid-1980s and so much a part of the share-dealing culture it was often called an essential feature of a free financial market.
And all the time London was fast establishing a reputation as the money-laundering capital of the world. The BCCI scandal in the early 1990s showed how easy it was for unscrupulous businessmen to use the City to recycle their dirty cash. A few years later, the Barings collapse showed how vulnerable the City's oldest and best-regarded institutions were to the actions of the 'rogue trader' operating thousands of miles away in a satellite office.
Barings also proved how even the most honourable could be distracted by the prospect of easy profits, and this was a theme that continued throughout the Roaring Nineties. What did it matter if a few pensions were mis-sold, or banking charges were stratospheric, as long as markets kept on showing double-digit growth each year and house prices were going through the roof?
When Labour came to power in 1997, it was not inclined to tinker with the mechanism that had by then been enriching people for five years, and which was to continue into the most incredible period the British investor has ever seen - the great internet boom of 1997-2000.
The old rules of finance were ripped up and thrown out. Companies did not have to actually make money any more for their shares to be given vertiginous ratings. All you had to do was add the suffix 'dotcom' and the cash came pouring in from investors desperate not to miss the boat. Companies like Amazon and Yahoo were valued at billions on the strength of their (non-profit-making) business model.
Small shareholders were lured into the market - often trading over the internet as well as investing in it - and for a while showed very respectable returns. But in March 2001 it all came to an end, and the collapse of the dotcom sector ushered in the current bear market.
This was the ultimate failure of the financial services industry, and the one from which all current problems flow. Most of the City, from the teenage scribblers through to the grey-haired investment bankers, had believed its own hype about the new paradigm, and had failed to alert investors that share price levels were unsustainable.
The fall in the stock market over the past two years has hit household wealth in the UK by roughly 4 per cent, and led directly to pensions and endowments time-bombs. But, after a decade of raging bull markets, why has a two-year share fall led to a collapse of the UK pensions industry?
The answer, according to the ex-City man, is that we have all been taken in by the power of markets: 'All of us, including the Government, have been seduced into thinking that the markets are God, and if you do that, you get very nasty shocks.'
meee
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