I detected a tone of relief when I rang round some old hands in the City of London this week to ask about the financial turmoil unleashed by Kwasi Kwarteng and Liz Truss. For once, the reckless gambler causing chaos was not one of them.
The chancellor addressed them in September to explain that he backed the City, believed it was crucial to increasing UK growth and wanted to unleash a second “Big Bang”. He was referring to financial deregulation, but it turned out to be the government’s approach to markets.
The investment banks that gained a reputation as casinos in the 2007-08 financial crisis were not the institutions that had to be supported by the Bank of England this week. Instead, it was pension funds subjected to a squeeze by the “mini” Budget. Who is the rogue trader now?
After the pound fell and bond yields jumped, there were various strained efforts to pin the blame on the usual suspects. “Fury at the City slickers betting against UK plc,” exclaimed the Daily Mail. Crispin Odey, the Brexit-backing hedge fund manager who has shorted sterling, identified “Remainers [in the City] who just decided that they hate this government.”
But as one banker observed, “It’s your choice whether you want to swim far out to sea, but if you do, the sea’s in charge.” The fiscal statement lifted the EU-imposed cap on bankers’ bonuses and pledged big tax cuts for those earning more than £150,000 a year, but Kwarteng’s favour was not returned.
He should have anticipated the City’s ruthless lack of loyalty from his time working for Odey’s hedge fund after his doctorate in economic history. His former employer is “very optimistic about the UK” but that did not prevent Odey profiting from the pound’s woes.
Business is business, even if traders must have experienced some mental whiplash as they calculated how much wealthier the government wanted to make them individually, while trading heavily against this position. If some felt the temptation to show mercy, they resisted it.
That is how they were trained, after all: trading under the sway of emotions such as greed or fear is an obvious way to lose money. As a study of City traders’ efforts to remain dispassionate concluded, “Effective emotion regulation seems to be a critical success factor in trading.”
“If I feel I’m trading emotionally, I will walk off the desk, have a glass of water, walk up and down the street and then come back and make decisions when I’m hopefully not emotional,” one trader said. Plenty of them would have needed to take a very long walk to remain calm this week.
Apart from the economic toll, the debacle is awkward for the City itself. It has focused attention on the pay of those who work there, while sabotaging the credibility of its chief advocate. Kwarteng placed financial services “at the heart of the government’s programme for driving growth”, which is not a great place to be seen now.
Most of what the chancellor calls “Big Bang 2.0” has a purpose that goes beyond pay, and this threatens to distract from it. The 1980s Big Bang was a deregulatory push enforced on unwilling institutions by Margaret Thatcher’s government; much of this one is endorsed by the City.
It is less of a bang than an effort to use the freedom afforded by Brexit to rationalise the plethora of rules imposed since the financial crisis by the EU and UK governments. Some parts, such as changes to the EU’s Solvency II regime for UK insurers, remain controversial, but others are agreed.
The bill to bring it into law is in parliament, but political uncertainty could affect that too. While volatility tends to boost trading profits, financial institutions are not happy about facing it themselves. Like other industries whose interests have been sidelined since Brexit, they want more predictability and fewer convulsions.
They especially crave what Brexit diminished: the ease of movement that helped to lure bankers to the UK after the original Big Bang. None admitted to seeking tax cuts themselves — “Maybe they should be generous to people who need the money and will spend it right away,” said one — but they all hope for London to be a magnet.
These days, the City sounds far more sober about financial risk than the government. The CityUK trade group pressed for “growth and international competitiveness” to be added to the objectives of financial regulators. But its bankers still support “consumer protection and financial stability” remaining the primary one.
For this government, stability lags a long way behind kick-starting growth as a priority. Given the week’s crisis, it is as well for the chancellor that he heads the Treasury, not a bank. “Reckless misconduct in the management of a [failed] financial institution” became a criminal offence in 2016 for those whose conduct falls “far below what could be reasonably expected”.
He could do probation on a trading floor. “People think if you have a PhD you will be very good . . . but this is not always the case and you tend to overlook things,” said a manager in the trading study. This one overlooked a lot.
john.gapper@ft.com
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