Did 1986’s stock market big bang make the financial crisis inevitable?

10th October 2011

There reforms saw the end of most open outcry trading – trading floors were computerised, and stock jobbing abolished among other practices deemed to be dominated by the old boy network.

It also marked a huge acceleration in a US invasion of the City of London.

US investment banks frustrated back home by Glass Steagall, which enforced the separation of retail and investment banking activities made a beeline to London. The Observer suggests that  Britain's laxer regime brought an influx of US firms, with their "chinos, booze-free lunch-breaks and bumper bonuses, helping to bust open the old City cliques".

But it quotes City veteran Tony Greenham of the New Economics Foundation thinktank saying that it also brought a dramatic shift towards short termism in the City.

"On the plus side, the Americans brought a more meritocratic culture. But they also brought the idea that, instead of being client-based, it was a transaction-based business. You change from long-termism to short-termism, from looking after the long-term interests of your client to making the biggest buck out of today's deal," he says.

He is particularly concerned that banks can now advise a company on a deal, issue the shares and even trade the shares in a practice known as proprietary trading.

However, the Chancellor at the time, Nigel Lawson defended his reform. "It was absolutely essential, because it was a way of bringing the stock market into the 20th century, and in particular making sure it was adequately capitalised. The Financial Services Act, which did regulation of the stock market, was the first time that it had been put on a statutory basis. It was an act of regulation, not deregulation."

Lawson blames Gordon Brown for creating the Financial Services Authority to oversee individual banks while the Bank of England oversaw the system.

The article has provoked a big debate on the comment boards but some who were there at the time do not trace the problems to so far back. Here is bill9651:

"I was a corporate treasurer in the 1980s and at that time the British banks and brokers were backward and staffed by overpaid public schoolboys. Most didn't have a clue about finance and the American banks were just so much more professional. It was at the time when corporate hedging products were being developed and all of the ideas were coming from 'across the pond'.

"The old school of British banks was just not able to compete and something had to change. The mistake was not to let the Americans in with their new ideas, but to let the industry consolidate by letting clearing banks takeover merchant banks and brokers. However, that wasn't Thatcher's fault since there was no legislation to prevent such takeovers.  The other mistake was worldwide and that was not to regulate the growing derivatives market. Initially these products were of great benefit to firms in hedging their interest rate/foreign risk, but they soon became much more complex and trading between banks started to turn the world market into one giant financial casino."

"Even if Michael Foot had been PM we couldn't have opted out of this. All major western countries were doing it but there should have been an international summit to set out rules and controls. As early as 1990 many of us could see the problem and also the growing laxity of banking controls and practices in pursuit of profit."

But 24thfloor agrees with the Observer.

"The old system worked better. The UK actually owned its Investment Banking industry, division of responsibilities, Stockbroker, Jobber, Investment Bank, Client created a better market. Open outcry markets are better at pricing and digging out fraud. Now we have a large gambling casino owned by Yanks that can go bust in one millionth of a second, many of Britains great companies have been trashed and sold off, GEC, ICI, Lucas, Dunlop all to generate one off fees. We can no longer afford to be guarantor for the Casino, time to close it down."

More from Mindful Money:

We need political – not economic solutions

All errors are human errors

Capitulation: Are we there yet?

To receive our free email newsletter sign up here

Leave a Reply

Your email address will not be published. Required fields are marked *