The manner of Bob Diamond’s departure from Barclays brings greater force to the argument that the size and complexity of banks creates structural impediments to their behaving morally and responsibly.
Mr Diamond’s defence of his position hinged on two points: first, that he didn’t know that rigging of LIBOR was taking place prior to the financial crisis and, second, that after the crisis struck everyone was doing it. During the height of the crisis, Barclays’ traders were systematically under-reporting the interest rate at which the bank was borrowing in order to hide the financial state that the bank was in. To have told the truth could have caused a complete loss of confidence in the institution.
The first argument accepts the problems of control that exist in large organisations. The second seems to say that the best way to be trusted was to lie. This explanation evokes all of the moral and logical confusion of the Liar’s Paradox.
All banks are, of course, in a sense, a confidence trick. We can’t all have access to our deposits at the same time. The model depends, crucially, on our not all wanting access simultaneously.
However, the behaviour of the banks in the case of the LIBOR scandal is illustrative of a serious problem in the way many financial companies look at the world. In an environment of extreme complexity, analysis becomes impossible. The only observable thing is the output: did you make money or not?
In this environment all that matters is whether what you did “worked”. Questions like, “Was it honest?”, “Was it too risky?” and “Did you really know what you were doing?” can be pushed to one side.
The overwhelming complexity of many financial products and resulting uncertainty under which market participants operate can serve to drive out moral questions. If we don’t really understand what a security is or does, how can we make a moral judgement about it?
The genius of markets is that they find solutions to otherwise intractable problems of coordination and optimization. They bring together many views and capabilities to produce an answer. They are useful because figuring out the means to an end is often too difficult.
The danger is that when they get too complex, we are unable to disentangle them even after the event. Very large financial organisations foster an environment in which complexity and opacity can go unchecked. When this happens, participants lose the ability to have insight and we all lose the ability to hold them to account.
Banks are too big to understand, too big to manage and they’re too big to fail. Their scale breeds complexity and, therefore, risk. What are the off-setting benefits that make these costs acceptable? It’s very hard to see. Size is at the root of the problem. Breaking them up is the only solution.
Chris Alexander is a Guest blogger for Theos, having worked in the City
