There’s been a common misconception doing the rounds in Europe – namely that whatever is good for Brussels and Frankfurt must by extension be bad for the City of London, that small incorporated area of London known as the Square Mile that is uniquely powerful and at once unaccountable. The basic premise behind this flawed assumption is that with the creation of a single supervisory mechanism for all of Europe’s disparate banking sectors, including the UK – set to occur at the end of October – the City’s see-no-banker-evil, hear-no-banker-evil regulatory environment will lose much of its appeal.
However, as I reported previously (here and here), the stone-cold reality is that the EU’s new banking regulation is primarily aimed at increasing the concentration and consolidation of Europe’s financial sector, to the obvious and exclusive benefit of Europe’s biggest banks, including British banking behemoths such as HSBC and Barclays. In its ongoing negotiations for the Transatlantic Trade and Investment Partnership (TTIP), the European Commission is doing everything it can to water down banking regulations on both sides of the Atlantic, in the process even outdoing its U.S. counterparts.
All of which will naturally benefit the City of London. After all, when it comes to the art of passing voluminous folios of toothless financial regulation riddled with gaping loopholes, no one – not even Washington – can hold a candle to the City’s servile watchdog, Westminster Palace.
The New “Guard”
To make sure that the EU’s upcoming package of banking regulations is to the City’s liking, the European Commission’s new president Jean Claude Juncker – the man who ran the banker’s paradise that is Luxembourg for 20 uninterrupted years before falling foul to a very dodgy but quickly hushed-up spying scandal – has appointed a Brit as Europe’s new Finance Commissioner. And not just any Brit: the new man in charge, Jonathan Hill, is the co-founder of financial sector lobbying group Quiller Consultants, whose clients conveniently include the City of London and HSBC. Hill’s appointment still awaits ratification by the European Parliament, and there were rumors that it might reject his appointment.
Naturally, the City is delighted with Hill’s appointment.
“This is a strong statement from the European Commission that a successful financial services sector remains a priority for Europe and the Single Market,” said Chairman of Policy at the City of London Corporation Mark Boleat. “Lord Hill’s expertise in this area and knowledge of the City of London will be crucial to ensuring the longevity and stability of Europe’s banking sector, as well as the extension of the Single Market in goods and services.”
Ostensibly meant as an olive branch to the UK’s Tory government, Hill’s appointment is a clear indication of the direction in which the Commission and the European Central Bank (headed, lest we forget, by a Goldman Sachs alumnus) want to take Europe’s bloated and effectively stone-broke banking sector. In a write-up for the Daily Telegraph, the gushing EU-phile Hugo Dixon proclaimed that the name of the game is to massively expand Europe’s capital markets.
The European Union suffers from underdeveloped capital markets. Everything, from shares and company bonds to venture capital and securitisation (where bank loans are packaged up and sold on the market), is a fraction of the size of its American equivalent. The goal of capital markets union is to build up these sources of finance so that they can play a bigger role in funding jobs and growth.
This “securitisation” was the main cause of the 2007-08 subprime crisis in the U.S. Now this “much-maligned” financial instrument, as The Economist called it, is making a massive comeback – and in particular in Europe:
Europe stands to benefit most from securitisation’s return. Lenders across Europe are under pressure to improve the ratio of capital they hold to loans made. One way of doing this is to stop extending credit, which is, unfortunately, what many banks have done. If they instead slimmed themselves through securitisation, by bundling and repackaging loans and selling them to outside investors such as insurance firms or asset managers, they could lend more money to credit-starved companies. That would have the added benefit of spreading risk away from wobbly banks.
That’s right: spreading risk away from the banks into the unsuspecting wider economy. What could possibly go wrong?
The Definition of Madness
It is almost as if our elected – or in the case of the European Commission, unelected – representatives have undergone a collective lobotomy. They have, it seems (at least at first glance), learned nothing from eight years of global financial crisis.
Simply put, their current thinking is the definition of madness. By its logic, the problem of ever greater risk-taking can be solved by ever-increasing securitisation (which effectively magnifies the risk-taking). Likewise, the threat posed by the increasing interconnectedness of the financial system can only be addressed by – yeah, you guessed it – even more interconnectedness. Meanwhile, the lack of competition in the financial sector will be magically fixed by increasing the consolidation and concentration of the sector, in the process creating fewer but much bigger too-big-to-fail banks.
And now the Commission’s greatest minds have decided to hand over the keys to Europe’s financial markets to the financial engineers of the City of London – a place which served as the nexus of almost every single global financial scandal of the last eight years, among them: Libor, JP Morgan Chase’s London Whale, HSBC’s money laundering for drug cartels and arms dealers, the Gold Fix…. Expect further debt crises, bank collapses, bailouts, and bail-ins.
And when they occur, our (read: the banks’) representatives will once again play dumb. “How could we have known?” they will plead with pitch-perfect mock-innocence.
It will probably work, as it has worked in the past: the threat of pure, unadulterated financial chaos is always enough to rally the people around the need for new heretofore unthinkable measures to shore up the system, rather than fix it. And so the mad merry-go-round goes round…. By Don Quijones. An exclusive for Wolf Street.
Negotiations behind closed doors are under way to water down financial regulation on both sides of the Atlantic via the Transatlantic Trade and Investment Treaty. Leading the charge: not the US government, but an unholy alliance between the European Commission, Wall Street, and the City of London. Read…. A Dark Alliance: European Union Joins Forces With Wall Street