:: Farrukh Dhondy

Sticking to law can be a sticky affair

By Farrukh Dhondy

"You questioned me,

I purred the lies;

God questioned me —

No berth for Bachchoo in the skies!"

From All the Lovers, All the Time by Bachchoo

Civilised societies have to follow the rule of law even though it hurts. Britain has this week been hurt on several counts by the necessity to stick to the law and the restraints which keep it "civilised". The adherence to the letter of law leads to manifest absurdities. Let us count the ways:

Even as Gordon Brown flies out to Washington to consult President Barack Obama and come up with a joint strategy to save global capitalism, the British newspapers are beginning to point the finger at former Chancellor Brown for the mess that British capitalism finds itself in. There is no doubt that the crisis in banking and lending is a global one and that the banks of every country have joined in the game of speculation and gambling that has precipitated the present crisis.

Even so, it is becoming increasingly evident that the culture of the City of London and of the capitalist global enterprise in general was accepted and condoned by Gordon Brown and that the regulatory instruments the government used on financial institutions during his time as boss of the UK economy were totally inadequate.

The case of Sir Fred Goodwin has to be the most spectacular. This gentleman was a director of the Royal Bank of Scotland (RBS) and the head of equity finance and corporate banking till late last year.

RBS was one of the banks to fall in the deluge. The British government bailed it out with billions of pounds of the taxpayers’ money. The bail out was worth 70 per cent of the bank’s equity and though the bank is not by statute nationalised, the national exchequer owns 70 per cent of it. Fred Goodwin, the chief architect of the bank’s failure, who it is said made wild, speculative deals and purchases between 2001 and 2005 and virtually single-handedly engineered the bankruptcy, left RBS in October 2008 after the failure became public. By the time he left, the government had already committed public money to RBS and yet the severance deal for Sir Fred was left to the former Board of the bank whose Chairman Sir Tom McKillop and Chair of the Remuneration Committee Bob Scott (how long before Gordon makes him "Sir" Bob?) signed off a deal for an annual pension of £690,000 for Sir Fred. The total pension pot that Sir Fred will get for ruining RBS is £30 million and that will be over the next years paid from the taxpayer’s bail out that Gordon Brown has agreed.

This payment and all the bonuses paid to the failed bankers despite their proven responsibility for the failure to protect investors’ money, have caused widespread public condemnation. The Deputy Leader of the Labour Party, one Harriet Harman told the media that she would see that Sir Fred was legally stripped of this unjust "reward" for profligate management. It may have been her bid for popularity and a move to position herself as a successor to Mr Brown if and when he is forced from the leadership of the Party, but it was a foolish thing to say. Ms Harman is a lawyer herself and should have known that any retrospective move to legislate against the contracts that awarded Sir Fred this piratic sum, would bring the British law of contract tumbling down like a house of cards. Sir Fred will take the money and run as the law entitles him to do, however asinine it may seem.

To safeguard the billions of pounds that the government is about to spend to shore up the British banking system, the Chancellor has appointed a shadowy outfit called UK Financial Investments (UKFI) which should oversee the management of the banks in which the taxpayer has a massive stake. This overseeing body failed to spot the bonanza with which Sir Fred was decamping from RBS and at the same time failed to regulate the pension pot of Peter Cummings, another banker who was corporate head of HBOS, a bank which had to be bailed out by the government. Mr Cummings got a severance deal of £5.9 million despite the fact his division of HBOS had in the previous year lost £7 billion.

Again, there is nothing legal the government can do. It’s shovelling money into the pockets of these shameless sharp operators.

This is not the only side of murky dealings in which the government is willy-nilly involved. Gordon Brown’s choice for the chairmanship of UKFI which is supposed to oversee the probity of British banks to which the taxpayer has given money is one Glen Moreno. The media now reveals that Moreno was an executive of financial institutions in Lichtenstein which specialised in assisting British corporations and individuals to dodge tax. The revelations have caused Moreno to resign.

Gordon Brown and his Chancellor, Alistair Darling have now brought in Sir David Walker to chair an enquiry into the governance of British banks. The magazine Private Eye now reveals that Walker was the Chairman of Morgan Stanley for years and under his leadership the MS empire set up two British companies called Bayfine UK and Bayfine UK Products which entered into equal and opposite derivative contracts with the Bank of America.

The game was simple. If one company gained the other would lose and in the end it turned out that the loss for Bayfine UK Products was £120 million. This loss was then offset against MS’s other gains and became tax deductible.

The gains that the other company made were not taxable so the net profit accruing to MS, charged in the end to the British exchequer and taxpayer was at the rate of 30 per cent of profits which MS didn’t pay to the Inland Revenue: £36 million. This Sir David did through the simple expedient of circulating money. Perfectly legal and the sort of loophole that all banks and capitalist institutions have been guilty of.

The question is whether Brown and Darling should appoint a person who has milked the country’s treasury in this way to regulate the banks.

There is the old saying that one sets a thief to catch a thief but the proverb is faulty in that it doesn’t take into account the thickness of thieves that may cause them to stick with each other or, at the least, excuse the methods by which they get rich in crooked ways, quick.