Keep it real, boys!

And girls. But mostly boys, and that’s not surprising. (“Mine is bigger than yours!” kind of forces at work here). But the side effects will be very damaging down the line..

Return of the gravy train – did the crash really change the City at all?
Mega–bonuses are back, banks are offering huge packages to poach staff and reforms are running into the sand. Are the bad old days back already?

* Dan Roberts and Phillip Inman with additional reporting by Elena Moya
*, Wednesday 24 June 2009 23.06 BST

From the crowded bars of Canary Wharf to the corporate hospitality village at Wimbledon, memories are fading fast. Less than a year after the collapse of Lehman Brothers brought the banking system to its knees, London’s financial community is shaking itself down and getting back to the business of making money. “We are like goldfish,” says Jon Macintosh, a Mayfair hedge-fund manager. “We swim once around our bowl and when we complete the circle everything looks new.”

In the offices of Goldman Sachs staff have been briefed to expect one of its most profitable years ever. Headhunters also report the return of poaching raids, as banks like Barclays and Nomura hire star employees from firms unable to keep up with the new bonus boom. Barclays alone is paying out an estimated £730m to some 410 of its employees this month after successfully selling its fund-management arm.

But soaring trading profits are doing more than just wiping bad memories away. The growing optimism is also encouraging those who want to slow down the reform process which began last autumn. To the alarm of policymakers, a number of regulation initiatives have not just stalled but are being actively rolled back. “There is a danger because we are now seeing some signs of positive things … and because of the exhaustion of driving through changes there could be some drawing back from the degree of radicalism we require,” warned Adair Turner, chairman of the Financial Services Authority, in Westminster this week.

Lobbying large

As if on cue, on Tuesday the International Swaps and Derivatives Association (ISDA), a once-influential industry lobby group, proved his point by issuing a ­heavily critical response to the FSA’s attempts to clean up the derivatives market. Financial instruments of this type were widely blamed for contributing to the banking crisis by obscuring the investors exposed to toxic assets, such as US subprime mortgages. Initially almost all parties involved after Lehman Brothers went bust agreed there had to be huge changes to make these markets more transparent. But ISDA believes the bigger risk today is that regulators will over-react and kill off an industry which is again generating substantial profits for London. “We would suggest that there is no little danger of demonising credit derivatives, which remain a useful risk management tool,” it says.

If there cannot be agreement on reforming something as central to the crisis as credit derivatives, what about other aspects of the so-called “shadow-banking system” that were less directly implicated? Hedge funds and private equity firms, in particular, are lobbying hard against attempts to bring them into the pan-European system of regulation currently being discussed in Brussels.

Hedge funders argue that although they were major players in the credit market few have blown up quite as spectacularly as the banks and therefore they do not pose the same “systemic risk”, or potential to cause pain for anyone other than their own investors. Private equity firms are quieter, having been implicated in the collapse of a number of companies overloaded with debt, but they too are resisting calls to be treated in the same way as more public institutions.

More surprising is the degree of support this argument is receiving in mainstream parts of the City. Despite the calls for a co-ordinated international response that followed the G20 meeting in London, most City chiefs regard the Brussels regulatory initiative as little more than a land-grab designed to take advantage of the current weakness in Anglo-Saxon markets. “You ought to take it as a given that Paris and Frankfurt are always plotting to cut London down to size,” said the chairman of one of Britain’s largest banks yesterday.

The campaign against pan-European regulation is drawing public support from influential commentators such as The Financial Times and even private support from the Treasury, which is concerned that lucrative sectors, such as the hedge fund industry, will not contribute to economic recovery if they are are saddled with too much regulation.

Indeed, the need to repair Britain’s battered public finances now seems to have replaced longer-term financial reform as the main priority for some in government. This can be seen most vividly in the decision this week to award lucrative share options to Stephen Hester, the new chief executive of Royal Bank of Scotland, which could bring his total package since joining the bank to £15m. Despite the huge public backlash which followed news of the pension paid to his predecessor Fred Goodwin, RBS was willing to risk further controversy because its main shareholder – the British government – was a keen supporter.

One senior City figure involved in recent bank rescues summed up the prevailing mood in Whitehall and the City: “If Stephen can get the share price of RBS to 70p then he will have made billions of pounds for the British taxpayer, rescued us all from a deep hole and would deserve more than just a big pay cheque – he ought to get a knighthood and a plinth in Trafalgar Square with his statue on”.

Old tricks

So is the City just getting back to its old tricks? Some argue that what is happening is even worse than going back to normal. Lib Dem MP Matthew Oakeshott is one of a number of critics who fear the conditions are being put in place for an even bigger bubble next time. His concern is that banks are being encouraged to take big risks again because they know the taxpayer will always bail them out if it goes wrong. Even those that have not taken government money, such as Barclays, can trade more aggresively than ever – safe in the knowledge that the government guarantee is not just a theoretical insurance policy, but a very real competitive advantage.

There is still plenty of reform going on. The FSA in particular is newly energised, judging from Lord Turner’s performance before the Treasury select committee this week. But what has vanished is the unanimity that characterised previous discussions. Two months ago there was still remarkable agreement about the need to shake things up. “Bankers have made an astonishing mess of the financial system,” concluded MPs on the Treasury select committee, who have led the public postmortem process.

A few green shoots later, and the tone has changed markedly. In his Mansion House speech last week Alistair Darling went out of his way to compliment the City, insisting it remained “an immense asset to our country” and deserved protection.

—–[End of article]——-

Ok, the following REALLY excellent article is about the US, but it sure puts it into perspective, this..