Friday 9 December 2011

Is Cameron saving the City the right thing to do?

Probably not what you expected to see written here. I find it very interesting  the current set of negotiations in Europe and trying to disect the good and bad ideas when they are all jumbled up with masses of testorone thrown in too.

On the one hand, the Germans and French simply want to ignore democracy and railroad through their vision for Europe. On the other, as the only Countries who can save the other this realpolitik position is understandable.

Equally for the UK, why should we sign up to a Tobin tax that will only serve to move activities to Frankfurt, Paris and Singapore  - but which has little benefit for us. In the long-term a re-structure of the Eurozone is good for the UK, whereas closer integration knackers our export markets like Ireland for years to come.

But, AIG, ths business that blew up the world with Derivatives, was based in the UK. Zero hedge also has an interesting article on MF Global having its key operations based in the UK. Weak UK regulation of derivatives and the financial sector has indeed helped to create the current crisis - there can be no doubting that. However, the extra regulation now being imposed probably does balance this out a bit.

Moreover, a Tobin Tax is a good idea. I hate taxes and never normally recommend them. But in the world where hedge funds use supercomputers to trade over milliseconds, everyone else in the game is getting screwed. A transactions tax would rip up the business model for Algorithmic trading which now accounts for over 60% of NYSE trades and 50% of LSE trades. This computer gaming of the system is causing massive market volatility and wrecking chances of long-term investment.

Of course such a tax is a big hit on London, unless it is a globally enforced tax- the UK should have tried harder on this effort as now it would not be seen as such a blocker. Unregulated finance and extreme money has distoreted the world incredibly, being the only major Country to defend this is an unhappy place to be.

Lots more negotiation fun to be had today - but stay happy its Friday and the world might really end on Monday.....


Phil said...

I'm torn on this.

1) The city *clearly* needs much much stronger oversight. As CityU points out, the AIG unit that pulled down the US banking system was based here, the MF Global unit that has misplaced $1.2billion of customer money is here. The square mile is a tax haven unto itself that denies that whole swathes of UK law apply to it at all. We (that is, our government) ought to be extracting our pound of flesh in return for bailing the buggers out.

2) I can't help but feel that the Franco-German alliance would gleefully come in and stomp all over everything, would completely miss the real problems and blow up the functioning bits with their tax bazookas.

I'd rather Cameron had come out and said "We'd love a transaction tax, but it has to be international, so we'll do it if the US does too." Puts Obama on the spot & means he doesn't have to lift a finger unless it's clear that the net effect leaves the city in the same relative position in terms of competition with its peers as it is now. Unfortunately, it's pretty clear that (just like the Obama team) the Cameroons are effectively captured by the banking lobby intellectually. The Square Mile wins again...

Dan said...

The basic problem here does not lie in the City or with bankers at all; this is purely and simply a political problem. The Euro was once a vaguely useful idea but once the Colleagues in the EU got their hands on it, it turned into yet another corrupt facet of an endemically corrupt whole; pretty much every country that joined the Euro lied about meeting the convergence criteria and viewed it purely as free money, bought with Germany's reputation.

As constituted now, the Euro is non-functional as a currency. It is dying slowly only as a result of being too huge to keel over quickly, but as constituted at the present it cannot live. All the markets are doing is responding to outside pressures and working to relieve or hedge against these pressures; it actually doesn't matter how quickly the trades are done, only that the pressures to create these trades exist.

A Tobin Tax would only work if it were universal, and remained universal. When one was enacted in Sweden, it forced the vast majority of the trade to migrate elsewhere, and even when repealed, a lot of the trade didn't return. There is no reason to think that a European Tobin Tax would behave any differently to the Swedish one. The only reasons for advocating one here are economic illiteracy, financial stupidity and political double-dealing. As things stand, the London stock exchange and financials centre allows Britain to hit well above its weight in the world, and the EU governments would really like to see Britain cut down to size merely as a matter of pride (Yes, our sinking ship is bigger than the still-afloat British one! Yay!).

The best policy here is to stay well out of anything like a Tobin Tax. Asking politicians to tax you is in any case gibberingly idiotic; in my experience taxes never go away once enacted, and politicians always find an excuse to grab ever-more tax revenue over time. No, stay well away from this, and as with any great beast dying, it is advisable to stay well clear of the EU whilst it gets on with the painful process of dying by inches, lest one get hit by a flailing limb.

Sean said...

All this is twaddle. Its BSE time, blame somebody else.

The French people are not going to accept the loss of sovereignty, the political class might but unfortunately there is an election looming which, Md Le Penn is scoring 20% plus in the polls. Thats the real veto and the socialists are alarmed too for the first time in history of the EU.

Vickers has already been vetoed if you like by the EU, and thats quite mild, the euro banks cant live with it.

Tobin is an idiotic idea if you want to deal with PlayStation trading you can do it with other rules. it would make it worse not better.

For the first time in my life as a small time investor/punter ive understood what is happening and been able to make a tidy little sum, the trouble with you guys is you are too distracted by rumor.

Anonymous said...

The Tobin tax was simply political game playing aimed at drawing the UK into the discussions of something that really has nothing to do with us. It would raise almost no money, and probably push trade out of Europe altogther.

The fact is that the EZ looks really bad when you think that the UK is in the same situation is Greece but with none of the impact that Greece is having because UK PLC manages its own destiny whereas Greece is a serf of the EU. The EUrophiles are desparate to find a way of giving the UK a kicking or at least using it as a scapegoat for their own failed policies. I doubt that anyone will be fooled.

And if you don't like short-termism brought about by computer trading, why not go the whole hog and insist that share buyers must hold on to their shares for 5 years? Sure as hell they'd play much closer attention to corporate governance than they do at present. Fact is the LSE is making so much money doing trades that really shouldn't happen at all.

hatfield girl said...

What Cameron did wasn't the right thing to do politically, anyway. He should have reserved his position and come back to consult Parliament and Party. He might not have liked what he heard but it wasn't his to veto without asking. That sort of behaviour is precisely what we all object to in EU politics.

Sweden and the Czech Republic got it right; fancy having Hungary as your only friend.

Tim Worstall said...

"Moreover, a Tobin Tax is a good idea."

No, it ain't. Won't raise any new revenue, rather will lose it. Incidence isn't on the banks or the bankers but on pensions and workers' wages.

And, if you want the argument from authority, James Tobon himself thought it was a horrible idea. As do Diamond and Mirrlees, the Nobels who actually got their gong for the study of tax systems.

You don't want to tax intermediate inputs.

FTT is a complete dog's bollocks.

James Higham said...

To answer the question - yes, it is the right thing. the City does need containing but since when has it ever been? It is the Crown, after all . That's another issue altogether.

The UK will still trade with France and Germany - life doesn't end.

Anonymous said...

We don't need a Tobin Tax. We just need legislation to set the bonus pool for banksters at no more than 15% of after-tax profits. And stop casino banking with saver's money.

Anonymous said...

So can the CPS now charge Huhne and we can scrap all EU mandated 'green' targets too? And tear-up the 'umin-rights act!

Sackerson said...

Not saving the City so much as the Party and his job. The fudge is yet to come.

andrew said...

I am not sure a Tobin tax would really solve the problem.

From what I understand, these millisecond algo traders basically set and remove buy / sell orders in the order book v.v. quickly and make a micro profit by virtue of speed if the trade is made.

The Tobin tax will only apply if the trade is made.

If there is a Tobin tax:-

a) the algoritms will be changed so that they still make a profit - if a fixed amount - make the trades bigger - if a % make the trades cleverer

or / and

b) someone will
set up a dark pool where these people trade against each other and crystallise the net change (paying the tax on the change and spreading this across all participants) once every N seconds.

I look foward to an influx of German/ Parisian bankers as their financila centres are deconstructed and the cakes are v.v. nice :)

CityUnslicker said...

Great comments today all. eurofudge is not going to work and as everyone point sout the Tobin tax is not very efficient and only will work on a global basis - so I am really against it.

However, there are some real deep issues (see Phil in the first comment) that we are avoiding even talking about. it is not all about raising taxes, it is about stopping a run away financial system from destroying our modern economies - there is little more important than that.

Given eurofuddge part 76 will fall over next week or early in the new year, we are about to find out the costs..

BlackRaven said...

1) aig got into trouble because it was a highly regulated entity being an insurer, otherwise it would never have been allowed to build up so much leverage.
2) mf global's missing money is from its US accounts, european funds have been refunded.
3) whether you agree with a tobin tax or not, the receipts from a tax on an activity that occurs in the UK should go to hmrc not to the EU.
4) a tobin tax will only reduce valuations and indirectly tax private sector pensions more. if you want to speculate, 5bps is going to make naff all difference. whereas if you are going to be a liquidity provider its a huge difference.

lastly germany and france are pathetically trying to point the finger at london. it is their currency union that was poorly designed and their bureaucrats that created this mess. if you want to tax the causes of the euro crisis look no further than ez politicians.

Anonymous said...

So this time the criteria on budget deficits and borrowing levels are really, really going to be enforced on all Euro members. Really?

Budgie said...

There are two separate fundamental euro problems: a productivity imbalance between the PIIGS and Germany; and a sovereign (+ bank) debt problem in a number of countries.

The eurozone (+ others) Accord does not solve, even hardly addresses, these eurozone crises. So the situation is no different to what it was last week.

Antony said...


You misunderstand why and what went wrong with AIG and MFG. Hypothecation, and re-hypothecation are practices regulated in the US markets, but no such regulation exists over here. Brokerage contracts stipulated that any client funds could be moved anywhere within the company - including overseas subsidiaries. Hence US client funds ended up in London to be used in hypothecation, and re-hypothecation trades.

And they were all off the balance sheet.

Rumours are that lots of banks are exposed to this.

dearieme said...

It doesn't matter whether the Tobin Tax is a good thing. If the British PM says "HMG believes that this would be very bad for the UK so will you safeguard our position?" and the rest say "no" then the PM is right to use his veto because the rest of 'em have shown thay don't give a damn about the British view of British interests.

BlackRaven said...

@Antony, if US funds were better regulated why would they be here funding european client positions?

if you had a european account with MF you've already got your money back, whereas in the US you are still waiting

BlackRaven said...

@Budgie I agree, although I would say that productivity imbalance is related to fiscal indiscipline/solvency in a lot of cases.

Anonymous said...

"a productivity imbalance between the PIIGS and Germany"

Actually I think there is an even more fundamental problem than this. A problem that nobody really wants to talk about.

Just exactly how DO you compete with Germany? Given it has massive conglomerates like Siemens with 450,000 employees that are happy to use bribery and corruption to get their way, exactly what can you do? Currency variations at least acted as a curb on German economic nationalism.

When Siemens bought Italian telecom giant Italtel they utterly destroyed it. They simply gouge out the competition and the German government only really exists to give these massive German corporations new markets to exploit. The Germans (like the Chinese) consider capitalism as a zero-sum game. They intend to grow at the expense of others.

Alexp76 said...

I think Cameron made a brave choice last night. The better we can insulate ourselves from the flailing leviathan that is the Euro, the better in my opinion, on current evidence. It was a positive choice, not a forced decision, a display of leadership, or as close as we seem to get nowadays.

Whether it was the right choice in the long term, who knows? Tobin taxes will hit the pensions and disposable capital of the people who need to keep spending to keep the economy rolling. Traders would doubtless set up some new constructs where shares are placed into joint ownership or something to avoid the trading charges, or some other fantastical thing.

If nothing else, Britain's future is now more reliant upon our own ability to be more competitive. Cameron's decision is actually wholly in keeping with the coalition's (!) policies on regional devolution and economic development. Only time will tell if the country can deliver this.

hovis said...

I second what Anon 4.45 is saying -recently completed some compliance training, as an example of what you dont want in terms of cost in terms of money and reputation, the world record fine levied against a company for corruption and the winner is.... suprisingly not a pharmaceutical ( dont worry they're very close behind), but ...Siemens at over a $1.6bn

Budgie said...

Anon 4:45pm said: "the German government only really exists to give these massive German corporations new markets to exploit."

Yes, I agree in general with what you say.

If European nations had their own currencies this would be much less likely to happen because the Mark would rise and the Drachma fall. That is, the markets would even out the differences.

As it is Germany is using a cheap currency - the euro - to advance its own interests at the expense of the rest of Europe (ie mercantilism). The euro is in no one's interest except Germany's.

Antony said...


Precisely because the US is better regulated in this area.

In the brokerage contracts one of the conditions clients signed up to stipulated that any client funds could be moved anywhere within the company - including overseas subsidiaries.

This means the brokerage could use those funds to finance their own positions. Less regulation means bigger positions, more leveraging, more profits. All well and good until something goes bang.

BlackRaven said...

Antony if it is in a better position, why do they not have their money and us in europe do??

BlackRaven said...

should really have put the europe in inverted commas...

Anonymous said...

So the Markosy approach absolves us of any further bails outs of the Euro group? In fact, why don't we call in the loans we've already made? They don't want us OR our money, obviously!

BrianSJ said...

Max Keiser has a fairly clear view - well worth watching; get the message quite quickly.

Anonymous said...

Dan: "Asking politicians to tax you is in any case gibberingly idiotic;"

And fundamentally the wrong answer to the problem which is too much state spending.

Antony said...


I think depending on the type of UK account held with MF depends on account settlement. If you were, say, trading into a real market and MR were not the counter, then I think those trades were honoured before the account was transferred to an alternative broker.

The other aspect is that UK accounts are covered upto the FSCS limit and that KPMG have been efficient with getting these claims through.

The real problem is US based account assets transferred (as allowed) to MFG UK. This have pretty much disappeared into thin air.

A very interesting development / nightmare emerging tonight is HSBC is suing MF

"to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client."

Have MF been re-hypothecating a physical asset to cover liabilities? If so, then the physical asset you thought you owned and kept for safe keeping in a vault has been stolen without George or Brad ever setting foot in the place dressed in very snazzy suits.

If MF have been re-hypothecating physical, how many other brokers or banks have been doing the same? And what are the liabilities?

Who, exactly, owns what anymore?

Anonymous said...

I'm not clear why a transaction tax would reduce volatility. The relation between transaction volumes and volatility is if anything an inverse one, with trading volumes a lot lower now than they were in say 2007.

Anonymous said...

You Europeans just don't get it - you don't understand how the US system works - assumptions that a Tobin tax would get through the US house and senate are ridiculous. Cameron knows that. UK politicians have never met a tax they did not love. The only reason that Cameron has the cajones to "stand up for the city" on the Tobin tax is that he knows such a tax would never pass in the USA. He would have signed the treaty in a second but for Republicans in the US house and senate who would ultimately never condone a US Tobin Tax

Dick the Prick said...

@Anon - 5.33 - cool. Vetoes are cool, glad someone invented them. Hey hey! Have a great weekend folks.

WV: ovegie? Why aren't olives cheaper? Guess that can wait...

hovis said...

Anon 5.33am - no the only reason Cameron veto'ed is he knew he would have a serious threat to his position if he did not.

You are rather self regarding believing his view of the US was the major reason - one maybe but certainly not the only one.

He didn't do it because he had suddenly frown a pair. More because his hand was forced and it prevents him having to hold a referendum. He is still very pro EU, lets see if the UK position is worn down.

Anonymous said...

Let's face it Cameron was caught out because just a few weeks ago he was forced to promise to re-patriate powers from the EU to avoid a complete revolt by his own backbenchers.

Having made the promise within a very short time he found himself in a position where he had to find an excuse for not trying to repatriate powers, and used his veto on EU fiscal union to try and make out he had kind of repatriated powers that hadn't yet been transferred to the EU. Remember that what was at stake was not the Tobin tax per se - it was watered-down fiscal union that was on the table.

Cameron made the same cock-up over this as he did over Lisbon - he backed himself into a corner and within weeks found himself under heavy attack. He is an idiot. Now the papers are really gunning for him demanding complete withdrawal from the EU.

I think he will be gone within a year, the Tories will replace him with an anti-EU MP, the LimpDems will pull out of the coalition. Then the Tories will stand on an "out-of-the-EU" platform, will get the papers fully behind them and will probably win an outright majority with EU membership being consigned to history. Anyway, that's my prediction.

Anonymous said...

Tim Worstall on why financial transaction taxes are bad: