Im writing this blog from Bintan Indonesia where Im currently stranded awaiting a break in the ash cloud over the UK. Distance does provide perspective and it was interesting to see UK Prime Minister Gordon Brown jump on the Goldman Sachs story referring to moral bankruptcy. In my 25 years of working in the City I cant recall a single business conversation within my peer group about morals. Acting with integrity, putting clients first and following the rules yes. Morals no. Ill informed comments by politicians are probably inevitable during a general election campaign but my sense is that the political steam is rising, not abating. Across Europe and the US politicians continue to ratchet up the pressure on the big banks. In Asia they watch, wait and concentrate on growth. Singapore, incidentally, last week announced GDP growth of a staggering 13% in Q1 2010.
I suspect what politicians misunderstand most is the complexity of the big investment banks. The potential Volcker Rule exemplifies the point. Separation of proprietary business and client business may be an attractive concept but for a global investment bank its simply not achievable. These are hugely complex organizations. Ferraris and fire-engines are both red but theyre also very complicated: you cant turn one into the other.
An alternative solution is to re-establish the separation of function that was the norm 20 years ago. Those of us old enough to remember Big-Bang in London in the late1980s will recall that the market consisted of the buy-side (a term unknown at the time) serviced by brokers, jobbers and merchant banks. Competition was minimal, prices were high and business was very comfortable. However everybody knew everybody elses role. There was much less scope for moral bankruptcy.
Is this what we want to return to? I very much doubt it. But if the politicians want a simpler landscape that they can understand, maybe separation of function could work. Banks would need to create clean standalone business units with limited scope and a separate balance sheet. Relationships with other divisions of the same bank would need to be much more clearly defined Chinese Walls would become Berlin Walls. Will this happen? My guess is its more likely than not. Investment banking and the securities markets today are unrecognizable compared to what existed 25 years ago. We should assume the next 25 years will also see a transformation.