Chasing Alpha

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Philip Augar, The Bodley Head; £20

When Alistair Darling announced the conclusions of the London G20 Summit to the House of Commons, he highlighted the need for tighter regulation of the financial services industry. But the near total absence of controls on the City's financiers, gamblers and associated snake oil salesmen was no accident. It was a deliberate policy aimed at ensuring London's role as a centre for financial "services".

Philip Augar's book shows how, right from 1997, New Labour set about freeing the wealthy brokers and traders from rules, and from the risk of taxation too. In doing this, Gordon Brown and Tony Blair were carrying on a process of liberalisation begun by Margaret Thatcher and John Major. This enabled banks and hedge funds to deliver super-profits ("Alpha").

In separate chapters on various aspects of the industry - hedge funds, investment banking and private equity for example - the mechanisms by which fortunes were made are set out in detail. There's too much detail on occasion, with too little attention to what was going on in the real economy.

What Augar does show is how warning signs that all was not well with the system were ignored on a grand scale. He devotes a whole chapter to Brown's last speech as chancellor at Mansion House in 2007. Brown lavished praise on the assembled bankers, crediting them with a further period of projected accelerating growth. The whole British economy should ape London (for which read the City), Brown said, and "advance with light touch regulation, a competitive tax environment and flexibility".

The close relationship between Labour and the super-rich of the City is shown well, touching on Labour's reliance on hedge fund philanthropy to support academies, and the extent to which leading figures like Treasury minister Paul (now Baron) Myners were tied into the network of big money firms.

When it comes to blame, Augar is scathing about politicians: "There was no fully developed, enlightened and market oriented critique on offer from any of the parties." But the fat cats get off lightly. In the case of HBOS chef executive Andy Hornby, for example, Augar claims that Hornby was young, and couldn't have been expected to stand up to the shareholders. This leaves you asking what Hornby's 2007 pay and benefits package of £3.35 million was actually for.

What Augar does not explain is what created the market for dubious financial instruments in the first place. In one early sentence he points out that there were low returns from conventional investment - or, as we might say, a declining rate of profit - but this is not developed. So his solutions relate entirely to stronger regulation of the existing system, and get nowhere near a challenge to its underlying assumptions.