Banks should leave UK if they want, says US author
"If the banks want to go because they are worried about being regulated properly, then let them. I say call their bluff."
That's the view of American analyst and author Michael Lewis on the veiled threat that some banks might leave London if reform leads to their break-up. But Lewis is critical of what he thinks is an empty threat.
He said: "Imagine you had a corporation making pots of money in London that was poisoning the water, and people are getting sick. Do you not regulate the water supply because you're afraid the company poisoning it is going to leave? No, go poison someone else's water.
"If some other country is fool enough to introduce that sort of instability into their financial system, well, it will happen.
"But I don't think they will leave. If someone took leadership in financial reform, others would follow. If London ended up being a really well-regulated place, people won't leave. You'd have the idea of good reform spreading round the world. Show it's politically possible, that it works, then everyone will follow."
Lewis, 50, examined the financial crisis in The Big Short: Inside The Doomsday Machine, published last year. He was in Canary Wharf last Thursday to promote its paperback launch. The former Salomon Brothers banker is keen to see the big banks broken up to avoid a repeat of the crisis.
"It's a great idea," he said. "At the moment taxpayers in the western world are essentially underwriting hedge fund-like speculative activity, and it's insane. Bob Diamond at Barclays runs a hedge fund in the States, and he uses customer deposits here to fund it. It's crazy.
"The markets don't work if failure isn't permitted, but when banks are as big as they are now failure isn't permitted. They've got to be shrunk.
"Of course they are going to defend their interests, but what I don't understand is, given the role of the big Wall Street firms in the crisis - how much capital they destroyed, how they wouldn't exist if the state hadn't intervened - why anybody cares what they think about reforming them.
"You could just do it by edict, saying assets can only be so big or such a percentage, but there's a very natural division to be made inside the big investment-come-commercial banks. The division between being a middle-man and being a principal.
"Crudely, it would be a good general rule if firms were not allowed to make bets with their own money in securities they are advising customers to buy and sell. The conflict of interest is crazy and it leads naturally to what happened in the last four or five years.
"If you introduce that distinction the risk taking part of the enterprise would go one way, and have not even a whiff of taxpayers support behind it. If it fails, it fails. You would then have these utility-like intermediaries, that would probably be quasi-state institutions."
Lewis's clear-thinking has made him a go-to man for some of America's most senior politicians, a situation he finds staggering.
He said: "There's still a lot of that. They want to be briefed. I tell them if they are calling me it's a very bad sign.
"It's a reflection of the moral vacuum in the financial world. If you are elected to be a senator and you don't really know anything about Wall Street, but there's no-one there you can trust completely, they end up calling the author.
"There are plenty of people in the business who can provide better advice than I can, but they don't know who they are. I point them in their direction."
Anger at bonuses for bailed-out banks is still strong in the UK, and it's a feeling reciprocated across the Atlantic, where the public were traditionally more accepting of financial rewards.
Lewis said: "The anger in response to the bailouts was unbelievable. I brought my book out in March last year, and did a tour. Normally when I go into a bookshop, if there are 50 people there it's a nice, polite little thing.
"There wasn't a crowd smaller than 500 this time, and they were pissed. They didn't have pitchforks with them, but they might as well have. They were looking for someone to lynch.
"You could see the connection between the crisis and the Tea Party. It's like it violated some basic notion of fairness in people, that these people were allowed to do well for themselves at the same time they were building failing businesses drove people crazy.
"Americans have a much greater taste for financial inequality than Brits do, and much less actual concern about how big the bonuses are.
"But the minute those bonuses were paid to people who should have been out of business, it drove people crazy. It's sort of like socialism for the capitalists and capitalism foreveryone ele. It really angered people.
"If you had to pick one cause for the energy in the Tea Party, it would have to be that.
"However, the issues are complicated. How you actually reform the system. People sort of lost interest in the details, and what you've got left - like the Cheshire Cat's smile - is just the anger, and the anger is finding all kinds of weird places to go.
"If you ask all the same people about Wall Street, they are still angry, but they are now kind of more generally angry than they are specifically."
Lewis believes a second financial crisis is on the horizon, and this time there won't be bailouts from the governments.
He said: "I might be wrong about this, but for any further reform to happen there's going to have to be a lot more economic pain. Another crisis wouldn't hurt.
"It will be a state crisis. What happened is all these bad debts were accumulated on a massive scale, and rather than being reckoned with directly they were all taken onto government balance sheets. In the States, they are in some cases on the state balance sheets.
"The last time around, the reason the crisis was resolvable was the state was there to resolve it. Once the state is the object of the crisis, then there's nobody there to resolve it.
"I imagine that what will happen is that in some form, and I don't know what that would be, but much more virulent than what's going on now with the peripherals in Europe. There would be a sort of convulsion in the market for sovereign debt.
"If all of a sudden people didn't want to lend to Germany or to the US, because they think they won't pay it back. If credit spreads blow out, and so on and so forth, you will have big, big problems.
"What you get is lower standards of living. Historically the economic cost are proportional to the size of the crisis. This was a really big financial crisis, and we seem to be sort of spreading out the costs over a longer period of time, rather than a sharp, quick response or reversal. It's longer and slower.
"The politics of that are different. It's not a revolution in the streets. It's a slow boiling anger."
The Big Short: Inside the Doomsday Machine by Michael Lewis is published by Penguin, priced £9.99.