Turner Plan on ‘Socially Useless’ Trades Make Bankers See Red

[Joanne98]

Jan. 8 (Bloomberg) -- Sitting in his London office, Adair Turner is a study in gray eminence. A charcoal wool suit complements his silver fringe of hair, and he’s framed by a window that looks out to a leaden winter sky punctured by steely skyscrapers. The towers are home to Barclays Plc, HSBC Holdings Plc and other lenders Turner watches over as chairman of the U.K. Financial Services Authority, Britain’s financial regulator. The setting belies Turner’s growing reputation in the City, London’s financial district, as a troublemaker.

Turner, a former director general of the Confederation of British Industry, or CBI, the main U.K. business lobby, might have reasonably been expected to act as a bureaucratic booster for banks and investment firms reeling from the global recession.

Instead, since taking the job in September 2008, he’s used his time as regulator to scold the financial services industry for growing too large on the back of risky products that he says offer little value to society, Bloomberg Markets magazine reported in its February issue. To reduce the appetite for speculative risk, Turner is promoting a levy on financial transactions to divert money to the poor and support efforts to address climate change. The so-called Tobin tax is named after the late U.S. economist James Tobin, a Nobel laureate who proposed a surcharge on currency trading to deter speculation.

“I believe in markets; I believe in enterprise,” says Turner, who numbers Franklin D. Roosevelt and British economist John Maynard Keynes among his personal heroes. “But I have always believed that market economies will not of themselves combine that with environmental sustainability or with a reasonably just and good society. I believe that capitalism needs to be saved from itself.”

Pinstriped Provocateur

Turner -- a member of the British House of Lords and head of the country’s Committee on Climate Change -- seems to enjoy his role as a pinstriped provocateur, casually remarking that he also supports the decriminalization of drugs.

“I very strongly believe that society is best served by not having shibboleths, areas where we can’t go,” he says.

Turner’s public campaign has helped nudge British lawmakers into getting tough on banks. U.K. Prime Minister Gordon Brown told a Group of 20 nations meeting in November that he supported a global transaction tax. Then, on Dec. 9, Brown’s government imposed a temporary 50 percent levy on bank bonuses, which applies to awards over 25,000 pounds ($39,800) issued from that day to April 5. The charge will be paid by banks instead of employees.

‘Core Issue’

Turner is using his post and influence to ask that bankers consider what purpose they serve in society.

“To say that in Britain, in London, as head of the FSA, is really something one would not expect,” says Tommaso Padoa- Schioppa, European chairman of Promontory Financial Group, a regulatory advisory firm. “He addressed a core issue: that the size of finance may have grown beyond what is serving a useful purpose for the economy,” says Padoa-Schioppa, who was Italy’s finance minister from 2006 to 2008.

Turner is lambasting an industry still smarting from the credit crisis. Financial services accounted for 10.1 percent of the U.K.’s gross domestic product and 27.5 percent of corporate taxes in 2007, according to statistics from the U.K. government and PricewaterhouseCoopers LLP. More than 1 million Britons were employed in financial services that year, according to the U.K. Office for National Statistics. The London-based Centre for Economics and Business Research estimates that City firms have cut as many as 50,000 jobs since the beginning of 2008.

Covering Risk

In the wake of the global recession, Turner’s FSA is proposing that U.K. banks at least double the amount of capital they set aside to cover the risks of proprietary trading and bolster the level of shareholder equity available to absorb potential losses from activities such as lending. The FSA also wants to require big banks to draw up so-called living wills to guide regulators on how to wind up their operations the next time a disaster strikes.

Turner triggered controversy in August when he first floated the transaction tax idea and criticized the size of the U.K. financial sector in an interview in Prospect, a British journal. At a black-tie gathering of financial executives in London on Sept. 22, Turner said banks should move away from products, such as complex derivatives, that don’t benefit society.

“Some financial activities which proliferated over the last 10 years were socially useless, and some parts of the system were swollen beyond their optimal size,” he told the gathering.

‘Appalled, Disgusted, Ashamed’

Turner’s remarks have been condemned by executives who say it’s ridiculous to introduce a moral dimension to regulation.

“Quite honestly, I am appalled, disgusted, ashamed and hugely embarrassed,” wrote Howard Wheeldon, a senior strategist at BGC Partners LP, in an August note. “How dare he?” Wheeldon now says. “Markets will decide if something is too big or too small. It’s not for an individual, however powerful, to slam and damn nearly 1 million people.”

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http://www.bloomberg.com/apps/news?pid=20601109&sid=aKeO6gsaeQ_M&pos=11

Now we need someone on our side of the pond to say the same thing.