DISCUSSION The part of the financial services industry we could usefully do without

by Mark Goyder _______19th June 2018

Since the Lord Mayor’s Mansion House debate I have been reading and thinking about trust and the City of London. This has strengthened my feeling that the real issues extend beyond retail mis-selling, or getting boards to focus on culture. The elephant in the room is the role of the City, the relationship between trading and wealth creation, and the validity of the claims made about the City’s importance. This represents a challenge that neither the Lord Mayor, nor the regulator, the Financial Conduct Authority nor City UK (the City’s trade association) should duck.

On Monday, under the heading ‘The Mystery Trader who roiled Wall Street’ the FT ran an in-depth piece about Akshay Shah, a trader who was until recently based in London as MD of the US Blackstone Group’s CSO fund. To anyone who hasn’t been living and breathing hedge funds the credit default swap (CDS) was quite hard to understand. In essence, Shah was making money by a scam now known as ‘the manufactured default’. GSO would buy a CDS contract on a struggling company from a hedge fund. This meant that GSO was betting that the company in question would default on a debt. GSO would then approach the struggling company, and offer it finance on the basis that it achieved a technical default (e.g. by late payment of interest on a bond). That would trigger the very event on which GSO was betting. The hedge fund had to pay up.

Commenting on the trade, Aitan Goelman, former head of the US Commodities Futures Trading Commission, compares it to match fixing in sport – bribing players to throw games. The added difference here is that the future of real companies employing ordinary people is in the hands of the gamblers. The FT describes the bankruptcy of paper manufacturer Norske Skog 18 months after it was used as a gambling chip in GSO’s gaming ploy.

There were many comments on ft.com from FT readers. Views were divided. A few condemned the regulation which allowed such gambling to take place, and questioned what real value was created by any of this. A larger number argued the other way. What do you mean by ‘real value’? these people asked. If it made money and was legal, that’s all that matters.

Shah has now left GSO group and set up Kyma Capital in London. So here is a challenge to all those who want to strengthen the City of London’s reputation for trustworthy behaviour, including the Lord Mayor and indeed City UK. Are they prepared to condemn Akshay’s Shah’s previous ploys? Do they want the City of London to be known for being a welcoming host to people like him? Or, in the post Brexit world towards which we are heading, would they prefer to state clearly the difference between trades that are technically legal and trades that are acceptable on ethical grounds?

If we are asking the government to go in to bat for the City of London during the Brexit negotiations, some of us who don’t work in the City would be interested to know which parts of the City we are so anxious to protect. Personally I would be delighted if the government, the City Corporation and the FCA all made it clear that people like Akshay Shah are not welcome if they continue with the destructive casino moves that have made them so notorious. Then we would have a smaller City that was more obviously dedicated to channelling money and financial instruments into helping real companies make and sell real products.

That would be a real step towards rebuilding trust in financial services.