What happens when money “never stinks”?

| July 23, 2012 | 0 Comments

Boris Johnson is the upper-class mayor of London. A former school mate of prime minister David Cameron, he’s considered a likable buffoon who might some day go on to lead the country. Here’s an excerpt from a recent interview with the Financial Times in which he discussed the impact of the Olympic Games.

The mayor will be spending much of his time during the games seeking immediate investment returns during what he calls a “schmoozathon” of international investors. They will be shown a scale model of London “with flashing lights of all the opportunity areas”.

A chance to flog off bits of London, then? “A great chance to show our wares,” is how he puts it.

And is he happy to press the flesh with anyone, even business people of dubious reputation? “As the Emperor Vespasian said when he taxed the urinals outside the Colosseum, ‘pecunia non olet’ [money does not stink] is our view when it comes to attracting [investment] – within reason.”

Money doesn’t stink, and suitability is an afterthought. Is this the unofficial motto of the world’s financial capital?
Johnson has always defended the importance of London’s financial sector. It’s a pragmatic stance for the steward of an economy that’s extremely reliant on financial services. Here’s what he wrote to a Guardian columnist in 2010:

You want a “more diversified” London economy. This may or may not be a good thing, but I am not sure how you achieve it. The financial services industry contributes about 9% of GDP, and every job in the sector is estimated to add £117,000 to the London economy.

The taxes generated by the hedge funds and private equity alone are enough to pay for 200,000 nurses or 165,000 teachers or the entire Olympic budget. How else are you going to find that money [...]?

Yet one can’t deny that London has also had a leading role in many of the most recent financial scandals. These include:
  • LIBOR collusion. The London Interbank Offered Rate, now at the heart of an $800 trillion scandal, was born in Britain and is managed by the British Bankers Association.
  • The London Whale. Former JP Morgan Chase trader Bruno Iksil, responsible for the bank’s $5.8 billion trading loss, operated out of London.
  • The fall of Lehman Brothers. Lehman’s London subsidiary used an accounting gimmick that was illegal in the US in order to disguise its weak financial position until the bitter end.
  • The implosion of AIG. AIG’s downfall was caused by a unit called AIG Financial Products…headquartered in London.
London has been a beacon to the financial industry ever since Margaret Thatcher’s Big Bang deregulation drive in the 1980s. Until that point its capital markets had been losing ground to foreign competition. The Big Bang loosened restrictions and made the city more attractive to financial institutions from all over the world. It certainly succeeded, but perhaps a little too well.
With new regulations in the aftermath of the financial crisis it remains to be seen whether London will retain its competitive edge. Some say that financial institutions will continue to shop for the lightest touch regulatory regime, and that Asia is primed to be the next center for regulatory arbitrage. Here’s hoping that authorities there will have a better sense of smell.

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Category: Regulation

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