Transcript: The Next Big City Scandal

Published in Investing on 15 August 2011

David Kuo talks to Geraint Anderson, aka Cityboy.

You can listen to or download this podcast here.

 

David:

This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, and today we are going to delve into the murky world of finance, the side of the financial world that you and I have very little concept of, because it's hidden behind our prying eyes, behind oak-panelled doors and mirrored windows. But I know a man who knows what goes on behind those closed doors, and he is with me today. He is Geraint Anderson, otherwise known as City Boy, and author of Just Business, which the Times newspaper has described as, "engaging, timely and important." So, welcome back to Money Talk, Geraint.

Geraint:

Thank you, David – very nice to be here again.

David:

Absolutely, yeah. You really stirred up the podcast the last time you were here, so I'm hoping you'll do exactly the same. Now, I have to say, Geraint, whether you're writing in the papers as City Boy, or whether you're publishing books, you don't paint a very glowing picture of what the City and the financial world looks like. Why are you trying to put people off going to work in the City?

Geraint:

Well, you know, first of all on that point, one of the most extraordinary things is that my first book, City Boy, was definitely a warning about how nice, gentle, dare I say it, moral individuals like myself, became quite corrupted by the City. Because it is all about money, you talk about money, you deal in money, you have lots of money, and it can corrupt even gentle souls like myself.

David:

You called it Beer and Loathing in the Square Mile, Geraint!

Geraint:

Exactly, but I definitely changed when I was working there, but one of the tragedies is that, at the end of that book, I gave my email address, and every single email I get is from a young man, between about the age of 16 and 25, saying, "Can I get a job in the City? – it sounds wonderful! You have Michelin-starred meals, you earn £300,000 by the time you're 28, blah, blah, blah ..." It's an extravagant, wonderful, sort of luxurious life. So despite my efforts to warn people away from going into the City, let me tell you right now, everyone still wants to go in there, and the financial crisis has not put them off. In fact, when they've realised how much people are earning, they're actually quite excited about going in there.

But in my opinion, there is a lot of very greedy, ruthless people in the City, who are doing things with scant regard for the impact that they have on society as a whole. I believe the financial crisis proved that to some extent, because those guys who made those financial products that exploded, in my opinion, were aware of the fact that they had a short shelf life, but they didn't care, because they knew that they would earn big bonuses prior to them exploding. So I think we do need to be warned about the City; we need to be warned about the City boys. I'm not saying they're all bad, but there are quite a few tricky ones out there.

David:

But I think your first book, we'll come onto your second book later, but your first book, you tried to, as I said, put people off going into the City, but it had the opposite effect. In fact, it was very seductive, and in fact people who read it, including my son, found it very very seductive. He is now at university; he's just finished his first year studying a natural science course at Cambridge, and he is enticed by going into the City. He is saying that, oh, can you you get me an internship, or some kind of job in the summer, working in the City. Maybe you should have a word with him, and give him some counselling and say, please don't! – don't go into the City!

Geraint:

Well, you know, that's what a lot of the emails I get as well, are from people saying, can you get me an internship? – and I'm saying, look – I don't have any friends in the City any more. I've just written this book -

David:

Not any more, anyway!

Geraint:

- not any more! I've just written this book telling everyone that they're a bunch of corrupt so-and-sos, and that that they engage in insider trading, and they spread false rumours, and they avoid their tax and they manipulate markets in order to line their own silk pockets, and they don't care if that has a bad effect. So one example I give of dubious behaviour is when the tsunami happened in Japan. I spoke to some fund managers, ex-clients of mine, and they were talking about how they were going to make money out of this. Some of them were going to buy bonds in TEPCO, because they got hit very hard (this is the nuclear company that was responsible), and that it was going to get nationalised, and once that happened, the bond would therefore go up. Other guys were buying gold, because they knew that was a safe haven in times of troubles. Others were selling yen short, and all these things were going on, and I was like, I suddenly realised these people had no concept that this was a human tragedy, and they were just seeing it as a money-making opportunity.

Likewise, when 9/11 happened, I remember clearly the next day, when I was in the bank, people were going, okay – so, we need to sell short airlines, insurance companies; we need to go long on armaments companies, because there's going to be a war about this. We need to go long on construction companies, because there's a lot of building to be done in Manhattan. It is quite ... how can I put it? – shocking.

David:

But why should it be shocking, Geraint? Surely the whole idea is, that is the way people should be thinking? Nobody criticises Warren Buffett to go out and buy shares when everybody is panicking – that is part of his mantra, "Be fearful when the market is greedy, and be greed when the market is fearful."

Geraint:

Absolutely, and was it Rothschild who said, "Buy when there's blood on the streets", and so forth. It's not so shocking that money has no morals or ethics; it's shocking that people are completely distant from the human tragedy, and that when I'm talking to them about, oh Japan – isn't that awful? – maybe ten thousand or so people died – that is quickly brushed aside, and what is looked at is how to make money out of it.

David:

But that's called capitalism?

Geraint:

It is, but you see, this is the problem with capitalism – if it's left without being in any way ...

David:

Unchecked?

Geraint:

... unchecked, if it's being uncontrolled, as it has been, as we've had greater and greater deregulation, which of course helps explain the financial crisis, there is no warmth there, there is no human heart. It is just about making money. That is, I think, something that makes us less human, if we engage in that long enough.

Just to give you one example: I believe that the fiduciary duty of most corporations is to act like a psychopath, and I've seen a documentary on this. If you think about psychopaths, they are without remorse; they have no compassion; they are very single-minded in their behaviour; they just do anything they can in order to fulfil their ambition, and that is what companies have to do. They just have to make quarterly earnings figures go up each year, and they do it without any thought about the impact their behaviour has on others. Therefore, I'm afraid this world is run by a bunch of psychopaths who are raping it of its natural resources, and ultimately, if left unchecked, will also make our grandchildren's home a very unpleasant one.

David:

So what were you like when you were in the City, then? Were you a cuddly capitalist, or were you somebody who was just like those people you've described, who are ruthless and will take advantage of any situation that arises?

Geraint:

I certainly became less cuddly over the course of my twelve-year career. I went up the greasy pole quite successfully, and I, for example, one thing that I'm not particularly proud of, but is completely rife in the City, is what I'd call very very very ruthless office politics, and that means stabbing that guy in the back, blowing your own trumpet, stealing people's thunder.

David:

It's called office politics?

Geraint:

That's office politics, but in the City, in my opinion, it is much, much worse than any other place, because of the bonus system. If I can say that David over there, he's been soft-pedalling, he hasn't really been doing his work.

David:

You know me too well!

Geraint:

That's right! That's just what I heard from your office just now, to be honest with you. It could mean that I get thirty grand of your bonus. If I can then say, and you know that thing he takes credit for, that particular project – well actually, that was my work, and so forth and so on, it really is big numbers that you're talking about. Therefore, the one aspect ... I never was engaged in insider trading or other criminal activities; I can lay my hand on my heart and say that. However, I was quite vicious with office politics, and actually six out of my twelve bonuses were guaranteed because I either left the bank or threatened to leave the bank, which again was not particularly pleasant behaviour.

David:

Okay, so let's have a look at your new book now, this new book called Just Business, before actually move on to the wider financial world. In that book, a lot of the stories are centred around money laundering. How bad is the problem of money laundering in the City?

Geraint:

I think that ... and I'm not just saying this because it's partly the subject of my book, but I think it could be perhaps one of the next big scandals to hit the City, and I say this because, with the Arab Spring occurring as it has, I think we're going to find out that a lot of those deposed despots from Tunisia and -

David:

Libya?

Geraint:

Libya, well maybe Libya, yes.

David:

Not deposed yet.

Geraint:

Egypt ... but we're going to find that they've squirreled away a lot of their money in supposedly reputable British banks. The City has got past previous on this as well. When Abacha, the Nigerian extremely corrupt gentlemen who's now dead, but who used to run Nigeria, when his several hundred millions of pounds were discovered in British banks, and he had corruptly gained this money by essentially squeezing his people and the resources of his people. I have found that already there are a lot of British firms who are very happy dealing with these bloodthirsty tyrants. I think to some extent, with the financial crisis, they were willing to deal with anyone.

So I believe that we will find that British banks have been heavily involved in taking money that has been gained by criminal means, ie corruptly pillaging their countries, and that this could be something that comes out over the next year or two, as we discover these despots ... the Libyan investment authority own 3% of Pearson, which is the owner of the Financial Times. What is the moral compass here? Who are you willing to deal with? They'll always say, well, if London doesn't deal with Gaddafi, then New York or Geneva or Zurich will. So I genuinely believe it's a scandal, and it's one that will become a little bit more important after perhaps some of the current troubles have moved away.

David:

But the UK government, including governments outside of the UK as well, have put a lot of measures in place, Geraint. You can't even deposit more than five thousand pounds' worth of cash into an account here in the UK without the HMRC being notified. So if all of these things are going on, why is it not working? Why is money laundering not being stamped on?

Geraint:

They are very, very sophisticated, the people who are doing it. It's like insider trading – there's lots of rules and regulations against insider trading, yet it is completely rife. All five companies that were in my UK utilities sector that were taken over in the last few years of my tenure there were subject to massive insider trading. Likewise, there are lots of rules and regulations in place, but if you do this cleverly, you can take the dodgily-obtained money, you disguise its whereabouts, and then you put it in; or, in the case of these corrupt tyrants, you don't even need to do that, because the government allows it, even though that money has been garnered from dubious means. They'll say, well, if we don't deal with Gaddafi, or we don't allow you to deal with the Egyptian guy, Mubarak, then who else don't we let you deal with? It's a grey area essentially, how these guys have got their money, but they have got the money. They've got twenty-odd billion, that Mubarak, I think, has supposedly had. So my question is, do we allow this to continue going on, or do we take a moral stance? I can understand that, to some extent, why you wouldn't take a moral stance. We need all the money we can get in this country, and the City is one of the few great industries that this country still has.

David:

But where you have money, you have an audit trail. So therefore it is possible to follow that money from the source to its final destination. Now, if you can do that, why isn't it working? Surely all it really needs is for some investigator to have a look and say, this money started here, and it ends up in Libya, so therefore it must belong to somebody in Libya?

Geraint:

Because first of all I think, in terms of the Libyan situation and so forth, I think they say, well, how can we prove that this money was garnered from illegal means? It's not just the Gaddafi family taking it; they are the rightful directors of the Libyan oil companies, and therefore it is a legitimate source of money, so that's one thing.

The second thing is, they are very sophisticated, these people doing it. For example, what they do is, they over-invoice. They do these very very clever tricks.

David:

There are probably lots of people listening to this now, probably some despot somewhere saying, oh, ah – is that how it's done?

Geraint:

Well, one of the classic ways of doing it is, you get your firm in the Cayman Islands, which is about two people sitting by a phone, and you make an order for something, and you basically pay four times the amount its actually worth, and then you take the money that is laundered for you. There's just lots and lots of different ways of doing this, and unfortunately the financial system has become so absurdly complex that a clever, sophisticated criminal will be able to make criminally-obtained cash appear legitimate. In fact, there's a recent case, the Wachovia Bank, where I think Mexican drug cartels were suddenly discovered to have laundered something like 1.4 billion dollars. They did it in quite a simple way – they did it using what is effectively bureau de change in Mexico, and they used a bunch of people they called the Smurfs. Smurfs are not little blue friendly fellows; the Smurfs are when you have a large criminal organisation who uses hundreds and hundreds of individuals to put amounts under, in that case I think, under ten thousand dollars, and you do that ten thousand times, and you get quite serious amounts of money.

David:

So are you saying that the problem is almost intractable?

Geraint:

No, I think that one issue: we don't put enough resources towards, I suspect; two, we need to take a view on how okay it is, dealing with despots who have obtained their money by corrupt means. It's such a fine line, but I would certainly be a bit more moral than the City currently is.

David:

Okay, let's widen the discussion a little, to talk about banks in general. Banks have been bailed out to the tune of billions of pounds, and yet at the same time, City bonuses are still very lucrative, which was what we talked about right at start of the podcast. Loads of people still want to work in the City, because they see this pot of gold if they worked in the City. Now, why are governments so reluctant to clamp down on bonuses?

Geraint:

Yeah, it's a tricky one. First of all, capitalism, laissez-faire capitalism – we don't have in this country things like pay caps, salary caps, and nor do we have in America. It's deemed to be undemocratic, uncapitalist.

David:

Capitalistic, yes.

Geraint:

We won the war against the Commies, and we allow people to get as wealthy as they can, and that's fair enough. The main reason, of course, that we don't have these caps though, even if we had a Labour government and so forth, was that basically the old argument is pulled out every time, that these guys will just go off to Zurich or Dubai.

David:

But it's true, though.

Geraint:

And there's some element of truth to that, but I think that the fact of the matter is that it's wheeled out every time there is any sort of potential bonus tax, or some further regulation of the banks, or maybe splitting up the casino activities with the so-called normal borrowing and lending activities of the bank. Actually, London should have a bit more confidence in itself. There have actually been very few people left since the minor efforts that have occurred so far, and you certainly don't want to kill the goose that lays the golden eggs. But in reality, people are angry, because bankers made this last year 14 billion pounds in bonuses, and remember their salaries have gone up a lot as well, because they're trying to avoid giving bonuses of such large amounts, so they just put the basic salary up, which is rather naughty. They have a right to be angry, because the bankers, in my opinion, did cause the crisis. One of the reasons they're making such huge profits is because of 0% interest rates, or virtually 0% interest rates, and finally, they wouldn't even have jobs had they not been bailed out to the tune of possibly a trillion pounds – it depends how you look at it.

David:

But we wouldn't have an industry, had they not been bailed out to the tune of a trillion pounds?

Geraint:

Yeah, so therefore what we have is a situation where they are banks that are too big to fail. So they can act with complete impunity and arrogance, knowing that they can never be closed down, and what you then get is something called moral hazard, where you know that the downside is limited, so therefore you behave in an outrageously egotistical, arrogant way, which is exactly why the financial crisis occurred. What's particularly outrageous in some ways is that, one of the reasons why the City makes such large returns and such high profits, is because it benefits from this unpaid-for and unofficial insurance policy, which no other industry has. It allows them to take bigger risks; it allows them to gear themselves up, and get more highly indebted than they would otherwise do and so forth, because they have that cushion underneath now, and that makes them able to make the huge profits they do, because actually I don't think there's any legitimate reason why the return on equity of these companies is so vastly high. They're not populated by geniuses, let me tell you. I used to work there, for God's sake!

David:

You were very smart, because you got out! That must be a genius move.

Geraint:

No, it looked like I was really smart, then suddenly bonuses came back, after about a year. I mean, it was 19 billion pounds handed out in bonuses in 2007 – that was my final year. It was the biggest, the peak, and then it went down, and it's back up to 14 now, and salaries are higher. So actually, although I looked like a minor genius for a bit, the best timed trade in my life, as I used to say. Now I'm not looking quite so clever.

David:

So will the government have any opportunity, any chance whatsoever of reforming the banks here in the UK?

Geraint:

Yeah, thankfully so far it's been all talk and no trousers really, in the sense of, lots of things have been discussed, but really what have we had? We've had a bonus tax, we've got a continuing tax that garners about £3.5 billion a year off the banks. We have got changes to the bonuses, so they're more given in equity and they're deferred and so forth, although notably they are not able to be clawed back, which I think would be the principal thing that would actually make people stop gambling so recklessly, and make them think a little bit more longer term.

One thing they now are proposing is a firewall between the casino activities and the normal borrowing and lending activities of the bank, and I do think that that's probably quite a sensible approach. The simple fact of the matter is that those casino activities still benefit from this unpaid-for insurance policy, and they shouldn't. It should be mainly just for the normal borrowing and lending activities.

David:

Now, at the moment, lots of people are very suspicious of bankers, and what bankers get up to. What can bankers themselves do to make us less suspicious of them?

Geraint:

You know what, I don't think they can do anything. I wrote this article recently in which I said how, in this country, we have decided to hate nearly every single group. We've had Catholic priests, because they're paedophiles; we've had bankers, because of the financial crisis; we've had politicians, because of the expenses crisis; we've now got journalists, and police, because of what's going on at News of the World. Then you've got all the general, anti-immigrant – it's like, is there a group in this country that is not somehow being demonised and stigmatised by the press? But when it comes to bankers, I'm afraid they were always unpopular, but now I believe that whatever they do, and they feel this themselves, they can never redeem themselves, so their attitude is, well, who cares then? We might as well just continue acting like we do.

David:

Right, okay. But it's not just investment bankers and the high street bankers that people take a dislike to. People are also very suspicious of central bankers at the moment, because if you have a look at the central bank here in the UK, the Bank of England, they seem almost unable to control inflation. Then you have the European Central Bank – they seem unable to handle the debt crisis; then you have the Federal Reserve in America – they don't know how to get the American economy moving again. Why do you think central bankers are so ineffective in the current crisis?

Geraint:

Yeah, it's interesting. When you look at who to blame for the last financial crisis, and I personally think it's the bankers, particularly those guys in structured finance.

David:

Some people say it goes further back than that.

Geraint:

Well, this is what I was going to say, yeah. I'd say structured finance, and those guys making these dodgy financial products that were doomed to explode. Other people say the regulators are not doing their job, or politicians are not doing their job, other people say, the rating agencies. But quite a few people say it was the central bankers for putting interest rates so low, making debt so cheap, that everyone went out and maxed out their credit card: individuals, companies – everyone did, and the party had to be over, and when it finished, there was going to be one hell of a hangover. So I think they can be blamed, to some extent, for their role in creating a large financial crisis, and in terms of the current euro crisis, you do think to yourself ... again, I'm not going to pretend to be an expert here, David, because I'm not. Although I pretended to be an expert for twelve years of my career, I stopped that in February 2008, when I left the City. No, I would say that, as far as I can see, the Germans and the Dutch want banks to play their part in sorting this out, and pay some cash towards it; whereas some other countries are less inclined, and there's a bit of a battle going on between France and Germany. Angela Merkel said yesterday, they are not going to give us a spectacular solution, which is a bit worrying, because what this requires is decisiveness and a spectacular solution, in a sense, because if we just do two-thirds of a solution, we'll have to come back in a few weeks' or months' time, and do even more. So we just need to put the nail in the coffin, the final nail, try and sort this out. I personally don't believe that we will see the euro completely fail, but then take my opinions with a massive pinch of salt. I personally think, there are no exit clauses, there are no mechanisms. The ensuing chaos is so impossible to almost envisage, even for British companies and British banks who've got euro-denominated partners and customers and clients and people have been buying off them, that you feel that the governments will do what is necessary. However, having said that, the lesson from 1992, when we were forced to leave the exchange rate mechanism is, you can't buck the market, as Margaret Thatcher says. If the governments keep trying to do clever things, and the market's saying sorry – this isn't the way it's going to work, then they're going to fail.

David:

Okay, now, I'm going to end with three very quick-fire questions, Geraint. The first one is, do you think that there will be as many banks in Europe in five years' time as there are today?

Geraint:

No. There'll be some more failures, definitely. I think that some of the smaller ones, they'll merge, definitely. I think it highly unlikely there'll be more, and I would bet that there'll be less.

David:

Okay. The second question is: do you think Europe will be stronger in five years' time than it is today?

Geraint:

Well, it's so weak today, that it's difficult to envisage it getting much weaker. But I'm going to say, yes. I'm going to be positive about Europe. I want Europe to succeed, and I may be conning myself, but I think we're in a dip at the moment, and after another year or two of dodginess, things are going to be sorted out.

David:

Okay, and the final question then is, do you think inflation will be higher in a year's time than it is today?

Geraint:

I am worried about inflation, yes - I think it will be.

David:

I think you and me both. I'm very concerned about inflation – I think it's going to run out of control.

Geraint:

Yep – I'm afraid you're right.

David:

Okay, so thank you very much for coming in today, Geraint. I just have a couple of housekeeping chores to perform before we end. The first is to give away a signed copy of your book to a listener who can answer me this very simple question, and the question is: Geraint, also known as City Boy, was a weekly paper columnist between 2006 and 2008, but which newspaper did he write for? Please email your answers to moneytalk@fool.co.uk for your chance to win a signed copy of Just Business, Geraint's latest book.

Now, I end with a quote of the day, and today's quote is about greed, Geraint. It is from a man called Anon, and Anon says: "He who buys what he does not need is stealing from himself" – a very clever man, Anon. Okay, so thank you very much, Geraint, for coming in today.

This has been Money Talk, I have been David Kuo, and my guest has been Geraint Anderson, author of Just Business. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk. If you have a suggestion for future shows, please email me at moneytalk@fool.co.uk. Until next week, happy investing!

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Back2Value 16 Aug 2011 , 5:15am

Well, if they were selling Yen short after the Tsunami, they got their comeuppance - the Yen's done nothing but strengthen since then.

I wish they had been right, though...

B2V

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