Only a change in culture can clean up these banks

Banking, like most spheres of life, has never been populated entirely by angels. More than a century before Gordon Gekko strode into Wall Street, declaring that “Greed is right, greed works”, Anthony Trollope had viciously satirised the world of finance in his novel The Way We Live Now.

In that tale of the crooked financier Augustus Melmotte, one character observes: “Men reconcile themselves to swindling. Though they themselves mean to be honest, dishonesty of itself is no longer odious to them.”

It has been demonstrated all too often that the chance to make a great deal of money has the ability to soften people’s perceptions of what might be perceived as odious. In investment banking, the sums involved have become huge: it seems that they have been so enticing for some as to become the sole determinant of behaviour.

Goldman Sachs, the widely perceived embodiment of Gekko’s philosophy, was fined $550 million by the United States Securities and Exchange Commission in 2010 for misleading investors. If the organisation seemed relatively sanguine about the penalty for what it termed a “mistake”, it may have been because it had just booked profits of almost $13.4 billion for 2009. The average earnings at Goldman that year were $498,000. Even those on well below the average might have found their nostrils failing to twitch very sensitively at the odd whiff of dubious behaviour.

The term “investment banking” is now more ironic than descriptive of what goes on in these giant organisations. The transaction that earned Goldman its then record-breaking fine involved the sale of complicated mortgage derivatives, of the sort that made a major contribution to the financial crisis in 2008. It was far removed from the concept of raising investment for businesses that want capital in order to create jobs and grow.

That crucial role, the raison d’être of the merchant banks which were the forerunners of today’s investment banks, has now been overtaken in many of the houses by the creation of ever more sophisticated financial instruments and frantic trading activity. It is not without reason that critics of these organisations refer to them as “casino banks”.

Bob Diamond was an investment banker. Perhaps he should never have been chief executive of the entire business but, after the furore of recent days, it was clear he could not remain so.

Betting is legal in this country and it may be as legitimate for people to place a bet on the pricing of an interest rate swap as on a roulette wheel. But “casino banks” play with countries’ financial stability; their remuneration structures encourage the sort of problem gambling that would send sensible individuals off to Gamblers Anonymous. Even the chairman of the Financial Services Authority, Lord Turner, has dismissed some of their activities as “socially useless”. Now, perhaps belatedly, the scale of disquiet is such as to raise questions over their continued existence.

The Government is already pledged to implement the Vickers Committee’s recommendations for ring-fencing investment banking from the basic banking businesses that provide the financial backbone of the country. There remain areas of fuzziness about how the perimeters of the fence will be determined but the biggest question mark now is over the timetable.

The Government has remained insistent that the deadline should be 2019 but most banks have already been making preparations for the change and pressure is going to mount for it to be brought forward. The main driver for the change has been the determination that the retail banks and the taxpayer should be isolated from any losses incurred by the gambling arms. But while the retail banks have not been paragons of morality in the past, there is also a pressing argument for ensuring that the culture that appears to prevail in the investment banks does not pervade the retail business.