Financiers Trashing UK PLC

Martin Cohen

A lot of time has been wasted speculating about the British government’s plan for Brexit. In just the period since the vote, it has been suggested to be a whole range of things from an off-the-peg solution ‘Canada plus’ or ‘Norway-minus’ solution to the ‘having your cake and eating it’ de-luxe option confidently presented by the Foreign Secretary and Old Etonian Brexiteer, Boris Johnson.

The time has been wasted because Prime Minister, Teresa May and her fellow Brexiteers stated early on that the UK will not accept European governance or supervision and so the only option left for Britain is to crash out of all the EU structures in 2019.

How could, say, the financial services industry still be in the single market yet not be bound by the European Court of Justice’s rules that govern the sector? Non possumus, as they say in courts like that one.

There is a plan and it’s none too secret either. It not only involves but stipulates massive disruption to both trading relationships and the financial markets.  For conventional politicians, such things: the possibility of the pound plummeting, of share prices collapsing, of market and political dislocations with dire and unpredictable consequences is the stuff of nightmares, but for Supreme Overlords, the same things represent not problems, nor risks – but big opportunities and easy money.

Market disruption is excellent news for them, and so will be any longer-term post-Brexit dislocation. The ‘real story’ of Brexit is that of how the poachers tricked the rabbits into letting them be the gamekeepers.

So why does the government insist that, post-Brexit, all will be fine and, in Boris Johnson’s words, that:

‘…there will continue to be free-trade, and access to the single market’ because ‘Britain is and always will be a great European power’?

The Man Who Would Have Been Prime Minster is often dismissed as a buffoon but the Woman Who Is seemed to make a bid for much the same thing by explicitly threatening the European Union with aggressive trade retaliation and deregulation measures if the bloc did not agree to allow the UK single market access on the UK’s terms.

Mrs. May’s thinking doesn’t seem to accept that the EU cannot – without self-destructing – accept countries creating their own rule books.

But then it is this authoritarian approach that essentially defines her. ‘My whole philosophy is about doing not talking,’ she told her preferred paper, the radically pro-Brexit The Telegraph (which, not entirely irrelevantly is owned by the billionaire Barclay twins, who have the kind of complicated tax arrangements the EU is always trying to stop).

During Mrs. May’s long stint as Home Secretary, which is the post European countries know as Interior Minister, she regularly ignored rules, let alone social values, in pursuit of what she saw as personal imperatives.

Prior to becoming Prime Minister, her main political achievements were:

  •  Creating a secret database on every person in Britain – entirely contrary to the promises of the Conservative manifesto. This was the heart of her Investigatory Powers Bill .
  •  Deporting tens of thousands of students. This was done in the most heartless and imprecise way, by relying largely on hearsay evidence, immigration raids at dawn and denying targets any opportunity to argue their case in court.
  •  Outlawing psychoactive substances. Mrs. May even outlawed substances that lawyers could not define, and probably did not exist.
  • Imposing onerous minimum salary requirements for immigrants to the UK. In this way, she randomly and brutally broke up families – ignoring the consequences just as she does for the families of European citizens living in the UK who are being denied permanent residency by the post-Brexit Home Office.
  • Running an advertising campaign, using the sides of buses, to warn immigrants that they were being watched and should ‘go home’. Like many of her actual polices, this campaign fell foul of the rules: in this case those of the Advertising Standards Authority.
  • Using the Prevention of Terrorism, repeat terrorism, Act to detain the partner of a Guardian journalist. This was for questioning about a Wikileaks story the journalist was working on.
  • Deporting a radical Islamist, Abu Qatada to Jordan, after a near-decade long battle. The delay was at least partly because he was not guilty of what he was being accused of, and in due course he was cleared – but she then used her position to deny his re-entry to the UK in any case.

Last and definitely not least, Mrs May successfully abolished all the European rules that related to national security – before then opting back in to the few she liked.

This is the model she now imagines for Brexit and trade regulations – but there is a crucial difference. Under the Treaty of Lisbon in 2007, negotiated by Tony Blair, the UK was granted a special right to opt out of all the police and criminal justice measures adopted under the Maastricht treaty and then opt in, sector by sector to the ones it wanted to be part of.

This is how it came to be that in 2014, acting then as Home Secretary, the Vicar’s daughter, Mrs. May notified the European Commission, non vi, sed verbo, (not by force, but by the power of the word) that Britain was striking out all 130 measures – but would then be opting back in to 35 measures she judged vital to UK security, such as the European Criminal Records Information System and (though this was on a separate legal basis) the European Arrest Warrant.

In this cathartic experience is a clue to what today in Mrs May’s mind, when she talks about her planned ‘Great Repeal Bill’ – a great British bonfire of EU law, to be followed by limited, sector-by-sector agreements. These are essentially sops to more conventional elements in the City of London, like the American firms that operate in the UK because they consider it as the gateway to free trade with the EU – although a similar pro-forma assurance was ludicrously offered to Nissan.

The plan, however, a fantasy, one that bears no relation to reality. The UK has no special legal rights to pick ’n’ mix in this regard. But Britain is, however, now in the hands of true political radicals, people who are indifferent not only to rules and long-standing conventions but to facts themselves.

Or, perhaps we should be more gracious to the Prime Minster of whom the London Independent has noted that she ‘prefers Jamie Oliver’s spontaneous style of cooking to the more rule-bound precision of Delia Smith’. 

Spontaneity is something that a slim majority of the UK population, minus European residents and young people, apparently voted for too on the 23rd of June 2016.

‘Out’ went the rule-based world of the European Union and ‘In’ came full control over its own affairs. Or so people were told.

For humdrum workers in industries that actually import or export products or materials to the EU, the ‘Leave’ vote only means more rules, plus higher tariffs and complicated paperwork. For bosses it means increased costs and uncertainty – and reduced investment.

But there is one group for whom it does indeed promise a splendid new dawn of ‘freedom’. This is the super-rich, who either work, or invest in, financial services in the City of London.

For financiers like these, the battle lines with the EU were drawn after the crash of 2007/8 which so nearly collapsed the entire Western banking system. If leaving the EU has seen a remarkable consensus between the two main political parties, with Labour joining the Conservatives in ramming the Article 50 Bill through the Houses of Parliament with no amendments allowed, there is at least this one other recent precedent: the political consensus in favor of ‘light-touch’ regulation of the City of London.

And we know how that turned out. A worldwide financial crisis. The authorities’ response, apart from pouring billions of taxpayer dollars, euros and yes, British pounds into the pockets of the injured speculators, via a windfall of cheap money that still continues to today.

The regulators’ particular target was casino finance, practiced by pension funds and High Street banks as well as things like those dodgy hedge funds… all of it driven by sky-high remuneration packages and epitomised by the impenetrable trade in financial derivatives.

Afterwards the regulators tried to prevent a repeat by tightening up the rules governing both investments – and rewards.

But the hedge funds in particular were hit with a wave of new rules after the financial crisis, targeting everything from their secrecy to how much individuals could pay themselves.

Unfair! The Alternative Investment Fund Managers Directive on its own meant that hedge funds’ costs were expected to rise by five per cent a year, according to a KPMG survey of hedge fund managers in 2011. For a fund with expenses of £5 billion a year, that was equivalent to a £250 million hit per year – enough to get financiers talking to politicians… and far more than enough to get politicians listening to them.

Yes, but could a few hedge funds really influence government policy? It’s estimated that London hosts nearly 500 such funds, including many European ones, managing $500 billion dollars a year. It’s not a coincidence that many of the key figures in the Brexit campaign are bankers and financiers – including many ‘value-trashers’ in the evocative City jargon.

Start with Matthew Elliott, chief executive, of Vote Leave, the organisation charged with presenting the case for Brexit, who said: ‘Far from the picture of gloom painted by the Government, it is clear the City of London would not only retain its pre-eminence as the world’s most important financial centre, but would also thrive after freeing herself from the EU’s regulatory shackles.’

Then there’s Richard Tice, co-chair of Leave.EU, another of the campaign groups for Brexit who promised that the transition could be pulled off without upending the economy. The former head of CLS Holdings PlC, a major property-investment firm, knowledgeably described leaving as a ‘very simple process’ in which the EU would negotiate a new accord with a separate Britain in one to two years, adding ‘I don’t think there’d be any disruption at all.’

People like Elliott and Tice must be either very stupid –or shameless liars – and I don’t suppose many millionaires can be stupid.

And then there’s Michael Hintze. The hedge fund manager, who is said to be worth around £1.2bn, and has given £3.2m to the Conservative party over the last 10 years.

In fact, according to T. J. Coles in a 2016 book aptly called The Great Brexit Swindle, Hintze made personal donations to all the Tory Brexit Minsters: Davis, Fox, Johnson and Mrs May herself.

Just fancy that! Hintze made his money as head of equity trading at Goldman Sachs in London before starting up the CQS hedge fund in 1999. This $2.8 billion fund profited from market jitters about first Brexit, but then even more from Donald Trump, to gain 30.4 percent in 2016.

To his annoyance, Hintze was caught up in the controversy that resulted in Liam Fox resigning as defence minister.

There’s Crispin Odey, the founder of Odey Asset Management, and another noisy backer of Vote Leave. He was more than happy to reveal in the Daily Mail how he had made more than £220 million from Brexit – a useful contribution to his wealth of around £900m. ‘What a day!’ he chortled.

There’s Michael Barron Farmer, a Tory treasurer who founded the £2.3 billion Red Kite Hedge Fund, and gave £200 000 to the Leave campaign.

And, let’s not forget (or forgive) Nigel Farage, the UKIP leader and the public face of the Leave campaign, despite being officially outside it. A millionaire (although that’s in the ‘low’ millions) former commodities trader at the London Metals Exchange, Farage successfully persuaded the general public that he represented their views on many practical matters. Do you know what the UK’s biggest export really is? It’s a little known fact but the biggest element (just a whisker under 10%) of UK exports is gold! This is ‘exported’ to Switzerland where it is melted down into smaller bars which are bought by Chinese and other Asian investors.

Of course, the UK has no gold of its own, but London is the centre of the global gold market, with bankers estimating that some 10,000 tonnes are held in the city’s vaults, including at the Bank of England, largely by investors and central banks. In fact, there’s more gold in the Bank of England vaults than there is at Fort Knox.

As it became clear the UK exit from the EU would prevail, gold surged, reaching $1,316.05 an ounce by 11.00 a.m in London. I don’t know how much Nigel or his fellow commodity traders gained but certainly George Soros (who counselled against Brexit) managed to make large sums of money out of the rise in gold following the vote, so it was a pretty open target for the rich.

Masters of the Universe like this have clear professional reasons why they wanted the Tory party to take the UK out of the EU: a dislike for what they regard as over burdensome – and profit-reducing – regulation.

According to one source close to the industry: ‘I think there’s a genuine conviction they have that all regulation is rubbish.’ But, he says, the profit potential from leaving is also a factor: ‘They love taking a view. Market dislocation is fine if you’re a hedge fund guy.

There were other ‘out’ campaigners with a special interest too, that came from a sector of the City not dissimilar to the hedge fund industry: spread betting. These firms also allow people to make bets on share price movements without actually owning the stock – and like hedge funds, can make a fortune from an economic shock.

Anti-EU supporters from the spread betting industry include Peter Cruddas, the founder and chief executive of the online trading company, CMC Markets, and Stuart Wheeler, the founder of rival spread betting firm IG Group.

Cruddas is a former Tory party treasurer, whose pitch is that ‘the EU’s approach to regulation now poses a genuine threat to our financial services industry and to the competitiveness of the City of London’.

Of course the Leave campaign was bankrolled by a ragbag of rich individuals, not just hedge funds – such as  John Mills, Chairman of JML a consumer goods company, as well as the Labour Party’s biggest private donor, and chairman of the official Labour Leave campaign, and  millionaire publisher Toby Blackwell, who – full disclosure! – I hold personally responsible for wrecking a company that produced some of my own books.

And policies that are bad for the pound are great for FTSE 100 Company Chairmen: most of these pay their bills in pounds and earn in dollars, so as the pound collapsed after the vote, not only did their share value go up but so did executive remunerations.

But back to Michael Hintze and that little local trouble. Back in 2011, the Daily Telegraph disclosed that Dr Fox’s personal assistant, Mr. Werritty, had been provided with ‘free desk space’ by him. It also emerged that Mr. Hintze had donated £29,000 to Atlantic Bridge, a charity kindly set up by Dr Fox ‘whose cocktail parties in the Carlton Club in London and Charlie Palmer’s steakhouse in Washington were high points of the transatlantic social calendar’ – and run by Mr. Werritty from his free desk.

It was a murky story which included Werritty attending meetings with an American general, a British ambassador and the Sri Lankan foreign minister but eventually Liam Fox would admit he had been in the wrong, saying: ‘Given Mr. Werritty’s defence-related business interests, my frequent contacts with him may have given an impression of wrong doing’ – and resigned.

Post Brexit, Mrs. May moved quickly to reappoint Fox as one of the ‘big three’ Brexit Ministers.

But then Mrs. and indeed Mr. May, are also City bankers, with Mrs. May’s work experience consisting of the Bank of England and the Association for Clearing Payment Service and Mr. May currently working for the American financial group Capital International.

‘Theresa May’s husband is a senior executive at a $1.4 trillion investment fund that profits from tax-avoiding companies,’ the British newspaper, the Independent, wrote, on 12 July 2016.

The First Gentleman also describes himself more dully as something to do with pensions, but if that never raised any eyebrows it should have done, as Mrs May was Shadow Secretary of State for Work and Pensions from 2009 to 2010.

Pensions these days are all about high finance and are as murky as anything. (I’m still waiting for a 2016 FOI response to the London Pension Fund as to why, in the terms of the Financial Times, ‘Many trustees were ousted’…) They are blamed for fuelling the taste among banks for developing the high-yielding, risky financial instruments of the kind that brought the world to its knees in 2008. 

And in his previous incarnation as the jolly, abseiling Mayor of London, Boris Johnson, plonked the £10 billion London pension pot into the hands of Europe-hating city financier Edi Truell, a substantial donor to the Tory party (known to have given nearly half a million pounds) who openly mocked the attitude to risk of conventional pension fund managers and had christened one of his own companies ‘Disruptive Capital Finance’.

Mr. Truell reassured anyone who would listen to him not to be afraid of ‘disrupting’ London’s finance industry, saying that it would be better off outside of the European Union, as the EU’s rules were restraining its growth. High-profile figures he persuaded to buy into his vision of ‘constructive disruption’ in the banking industry include Crispin Odey, the Brexit-shorting hedge fund manager.

And these are particularly cunning poachers. They started by patiently sowing distrust of the old gamekeeper. A constant Brexit complaint – TAKE BACK CONTROL! – has been that EU laws are made by people who are unelected – but it is simply not true. The vital levers of power in the EU remain firmly in the hands of the national governments.

Forget what you’ve endlessly been told by billionaire newspaper barons like Mr Murdoch or the Barclay Twins, that the EU is run by the ‘unelected bureaucrats of the Commission’. The Council of Ministers is and always has been ‘the main policy-making body’ as official documents make clear.

Within it, the usual faces of past and present UK governments negotiate European policy with their peers. For example, the policy the Brexiteers’ found particularly wicked of extending membership to the countries of newly liberated Eastern Europe, including the much-vilified Poles, was a UK government initiative successfully pushed through by ministers.

In 2002, the then Tory MEP Roger Helmer, who went on to defect to UKIP, the political party that would in due course push the Conservatives into Brexiting, put it like this:

‘Tory policy on enlargement is clear. We are in favour of it, for three reasons. First, we owe a moral debt to the countries of central and eastern Europe, which were allowed to fall under the pall of communism after the second world war. Second, by entrenching democracy and the rule of law in eastern Europe, we ensure stability and security for the future. Third, an extra hundred million people in our single market may be a short-term liability, but long term will contribute to growth and prosperity.’

But no one is interested in how the EU really works, or even really in the silly stories about bent bananas and uniform condom sizes made up by Boris Johnson during his times as Brussels correspondent for the Daily Telegraph. And so gripes about regulations gave way to much more potent lies about new waves of immigrants.

Scary leaflets, sent to every household in the country with the heading ‘Official Information’ warned that countries including Turkey, Syria and Iraq were lined up to join the European Union. A map showed these new members of the EU in lurid red. DANGER!

At a time when thousands were indeed fleeing the Middle East to Europe, it certainly didn’t matter that the claims were flat lies, instead the cry to ‘stop the ‘migrants’ fell well for the Leave campaign, and certainly distracted from tiring discussions about the economic effects of leaving the European Union.

It didn’t matter that, as Tony Blair has patiently reprised, in reality, the numbers of people who ‘might’ fit the derogatory label ‘migrants’ entering the UK is tiny – perhaps 30,000 a year – an irrelevant few amongst the many educated, hard-working, cultured workers vital to many areas of British life, from industry to schools and the NHS.

And all the time that false claims about migrants were moving the Brexit needle, Mrs. May was ostensibly campaigning FOR the European Union and ‘Remain’. But her influence was quite the reverse.

In her speech to the 2015 Conservative Party conference she left the country in no doubt about her views on immigration. Her controversial address, echoing Enoch Powell’s ‘Rivers of Blood’ speech, blamed immigrants for problems with public services and warned that ‘millions’ wanted to come to the UK.

‘There are millions of people in poorer countries who would love to live in Britain, and there is a limit to the amount of immigration any country can and should take.’

She argued that immigrants would make society less ‘cohesive’.

‘When immigration is too high, when the pace of change is too fast, it’s impossible to build a cohesive society.’

She blamed immigrants for pressures on public services.

‘It’s difficult for schools and hospitals and core infrastructure like housing and transport to cope.’

She repeated claims that immigration pushes down wages.

‘We know that for people in low-paid jobs, wages are forced down even further while some people are forced out of work altogether.’

She claimed, contrary to almost all economists’ analyses, that there was ‘close to zero’ benefit from immigration.

‘While there are benefits of selective and controlled immigration, at best the net economic and fiscal effect of high immigration is close to zero.’

Specifically, Mrs May claimed EU immigration was ‘unbalanced’ and ‘unsustainable’ – and that the rules had to change – particularly the freedom of movement one, that is also one of the four pillars of the European Union. Finally, to close on a note likely to get applause, she claimed a significant number of asylum seekers were ‘foreign criminals’.

Responding at the time, Simon Walker, director general of the Institute of Directors, said Mrs. May was peddling ‘nonsense myths’ and ‘vilifying migrants’. Even the Daily Telegraph protested, saying she was ‘dangerous and factually wrong’. Which only underlines how true the old adage is, a week is a long time in politics!

The irony is that the UK is totally dependent on foreign money – on what the governor of the Bank of England (himself a migrant!) has called ‘the kindness of strangers’. The British financial system is extremely dependent on external financing. This is the Achilles Heel for an economy that relies so heavily on the City of London, and has a current account deficit above 5pc of GDP – the highest in Britain’s peace-time history

The level of debt coming due over the next 12 months is 755pc of the country’s external receipts, the highest for all 131 sovereign states rated by S&P – more than double that of the United States, the next most exposed.

Speculators see the dangers very clearly. They’re licking their lips! The financiers behind Brexit have already made easy profits betting against the pound and the next big win for them will be the pound losing its status alongside the dollar, the Japanese yen, and the much maligned euro as a reserve currency.

The pound’s use as a reserve currency has tracked London’s growing role in the world as a financial centre, and it will follow London down equally fast too. Then, the UK’s huge and unprecedented national debt and continuing high trade imbalance (current account deficit) which relies on these foreign currency inflows – on other countries being prepared to ‘buy’ pounds – will balloon and the only tool left for the government will be steep hike in interest rates piling pressure on mortgages.

At this, consumer confidence collapses- and businesses fold under a triple whammy of higher costs, lower sales and reduced investment. A vicious circle sets in that becomes a rout as house prices finally collapse.

Yet Mrs. May continues to insist that the UK is some kind of giant on the world economic scene.

It’s true that in recent years the UK has accumulated more then $1 trillion (thousand billion) of foreign direct investment. Nearly 500 multinationals have regional or global headquarters here, more than twice that of the rest of Europe combined! So what need has the UK of Europe? But the firms are not here to sell to the British – they want to trade freely with the EU. The UK is, and for many years has been, an off-shore base for multinationals operating in the EU. It’s business-friendly regulations and use of the world’s business language sealed the deal, but EU access was always the starting point.

Reluctant Brexiteers reassure themselves by saying that the Commonwealth now has more potential purchasing power than the EU – the IMF itself has said so! – and clutching charts like this which show how, in the last ten years or so, exports to non-EU countries have taken over from those to the EU.

UK Office of National Statistics chart on Value of Goods and Services

The chart misleads though, as the UK is not exporting, as in the words of Andrea Leadsom, May’s sometime rival for the Tory crown, not homemade jam but rather complicated products like motor cars.

In 2013, for example, 91% of R&D on motor vehicles in the UK was undertaken by foreign-owned businesses who likewise contributed the vast majority – 84% – of added value to the motor vehicle industry.

Exports of financial services are again an international affair, and what’s worse, dependent on EU rules. Specifically, as much discussed, on so called ‘passporting rights’ and the presence of the big US banks in London operating not only to agreed EU standards, but within the supporting framework of EU institutions. The ones Mrs. May is determined to set Britain off from.

It is Andrea Leadsom, runner-up in the bid to become Conservative Prime Minister, day job being the minister for the environment, food and rural affairs, and night-time occupation being the official opposition to Mrs. May, who mocked that Britain’s post-Brexit trade strategy will be primarily based around the export of jam, biscuits and cheese.

Britain, she said, with an eye on Mrs. May’s Vicarage connections, was in danger of becoming the world’s largest church fête.

But the situation is much more serious. Under the Brexiteers, UK PLC is about to be systematically stripped down, or ‘value trashed’ – partly for private profit and partly because for them disruption is an end in itself.

The only thing you need to know about the people behind Brexit is that they make money out of uncertainty and volatility.

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Martin is an author, philosopher and social scientist with a particular interest in social justice issues. He was an early commentator on the significance and consequences of the Greek Crisis and his recent book Paradigm Shift: How expert opinions keep changing (Imprint Academic 2015) includes a discussion of the lessons of the financial crisis, 2007–9.