Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Tuesday, 7 August 2012

Stunned Chartered Employs Bob Diamond's Tactics

The sands seem to have run out for Peter as New York Department of Financial Services (DFS) brings an end to the schadenfreude reflected in the half-yearly results. The statements of Sir John Peace, the Chairman and Peter Sands, the CEO of Standard Chartered were distinctly smug when released 6 days ago.

Sir John Peace: “In recent weeks, issues have surfaced around governance and behaviour in banking. At Standard Chartered, we believe it is not just about what we do, but how we do it. Our culture and values continue to be a source of strength and a competitive advantage. Strong corporate governance and an obsession with the basics of banking remain key areas of focus for our Board.”

Peter Sands: “Amidst all the turbulence in the global economy and the apparently never-ending turmoil in the world of banking, we remain consistent in delivering strong performance…These results are not a bounce-back, nor flattered by big one-off items. They are just our tenth consecutive first half of record profits.”

Now of course they stand accused of being a “rogue institution”. Forget the possibility that the DFS is trying to gain some political mileage and some credibility having started official functions only towards the end of last year (3rd October 2011). What is interesting is the Standard Chartered response. Instead of HSBC’s mea culpa strategy, they’ve gone for the Bob Diamond approach. For a bank which “see[s] some virtue in being boring” and having maintained a low profile so far, this is uncharacteristically bold. And exciting.

In October 2006, the CEO for Americas sent a message to the Group Executive Director stating the Iranian business needed urgent reviewing at the Group level. The boring banker replied with humility ''Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."

Let’s review Strategy 101:
Currency of international trade and investment: US Dollar (mainly).
Your main business: Financing international trade and investment.
Nation in control of the US Dollar and thereby your business: USA.
Therefore what you should not do: P*ss off Uncle Sam.
What you actually do: P*ss off Uncle Sam.
Job well done Group Executive Director.

The allegations combined with the incendiary language of the DFS statement seem shocking and on the sensational side. But in cases such as these and especially in times such as these where every bank is guilty even when proven innocent, one does not adopt the Bob ‘all guns blazing’ Diamond approach. However, it seems that inside every boring banker is a repressed cage fighter waiting to get out. Standard Chartered have counterattacked.

Unfortunately their tactics are as strong as the tactics employed by Napoleon in 1815. Their first mistake was stating that transgressions were “small clerical errors”. “Clerical errors” might have been sufficient and would have enabled them to put the matter to rest by finding some scapegoats and sacrificing them. Qualifying it with “small” is needless and dangerous. If it turns out that the sum involved runs into billions ($250bn is alleged by DFS, $14m claimed by Standard Chartered) then the “small” is going to come and haunt them.

Their second and big mistake is to lobby the City to fight a hitherto obscure US department and make it into Britain vs US fight. It risks drawing the main US regulatory forces into battle. According to the FT article, a ‘City figure’ said “This is an attack…If we don’t stand up to it, it could be catastrophic for London’s financial standing…Political intervention may be needed over this.” In case this ‘City figure’ has just come back from a mission to the Antarctic, banks are not very popular at the moment. And consequently politicians do not want to intervene on their behalf. It would be a “courageous decision” in the words of Sir Humphery Appleby. Raising the stakes in this manner achieves nothing and is likely to backfire. The City cannot win a battle with the US. Simple game theory shows that any threat is not credible. Revoking Standard Chartered’s (and even HSBC’s) banking license makes little difference to the US economy. In contrast, retaliation by London through banning JP Morgan or Bank of America would be suicide. Therefore the prudent course would have been to make ‘City figures’ laud the bank’s “boring” culture and trust its innocence and use diplomatic channels to defuse the situation.

Their third mistake is to make intemperate remarks to the press. According to the FT an executive described the DFS report as “a John Grisham novel”. This is not only intemperate but poorly thought strategy. It achieves nothing but antagonises the opponent making it that much harder to settle.

Looking at these shambolic tactics, two questions arise. The first question is why if the facts are so much in Standard Chartered’s favour (as it argues) does it need to escalate it to the level of the City and the government? After all, whatever the popular opinion in the US and whatever the incentives of regulators, the rule of law still applies. If they can prove their innocence, the DFS can do nothing.

This leads to the second question of whether they are being disingenuous or are they so poorly advised and led?

Maybe this response is a rush of blood. The boring banker finally making a stand and showing the world. Much like Lloyds’ purchase of HBOS.

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