Hedges, shadows and risk

By the Millennium, high-risk investment hedge funds shoaled - shark-like - in London’s wealthy West End district of Mayfair. Pension funds increasingly used hedge funds to generate higher returns on investments.

   Asset trades in home loans, ‘dotcom’ stocks, credit derivatives and commodities bubbled and burst during various crises between the late 1990s and early years of the 21st Century.

  Banks indulged in ‘shadow banking’ to ‘game’ or circumvent the Basel II Accord of 2004, an international treaty requiring banks to balance the risks on their books with cash or cashable IOUs. They created off-balance sheet Structural Investment Vehicles to bundle bonds and loans together to generate additional ‘independent’ structured income.

   Traditional mutual building societies also began to invest in global equities. Later, some raised their risk-taking by investing in Collateralised Debt Obligations, financial instruments precariously based on US mortgage lending to borrowers with a high chance of default.

  Such risk-taking would soon reap severe economic and social consequences for London and the rest of the world.


Words and Photo © LONDON INTELLIGENCE 2012

The Mantra with the Golden Goose


Politicians repeated a 30-year mantra to Londoners after 1980. ‘Trust the ‘market’ - especially financial services - to deliver increasing stability, growth and prosperity.’

   Politicians told Londoners to revere the UK’s financial services industry – based in the City of London, or ‘Square Mile’. The City, hailed as the ‘golden goose’, would lay precious eggs of wealth for London’s economy, writes Paul Coleman.

   Inequality might rise. But Londoners were promised newly created wealth would ‘trickle down’. A ‘free market’ would create a ‘rising tide of wealth to lift all boats’.

   Hence, Londoners were asked to show faith in privatised public services, deregulated banking and finance, the free migratory movements of capital and labour as decreed by the European Union, and tax breaks for ‘wealth creators’.


The Road from Bowler Hat to Big Bang and Golden Goose


Bowler Hats

US President Richard Nixon had presided in 1971 over the cancellation of the system of exchange rates fixed against the dollar and pegged to gold – a system agreed by Allied powers at Bretton Woods in 1944.

   Free-floating currency exchange began the City’s radical transformation. Yet London’s financial services industry remained focused, even in the early 1980s, on traditional ‘bowler hat’ functions; banking, insurance, bond and share dealing, commodities, currency exchange, and pension fund management.

   But monetarist economic ideology, cultivated by Chicago and London economists in the 1970s, underpinned the US President Ronald Reagan’s deregulation of international finance capital in the mid-80s.



















Big Bang

Hailed as ‘Big Bang’, deregulation was acclaimed for ordaining a new ‘financial universe’. ‘Big Bang’ rapidly and radically changed the City’s ‘bowler hat’ image and business practices.

   Giant, global Wall Street merchant investment houses set up office in the City, operating as share broker-dealers. Traditional lending commercial banks also set up broker-dealer arms.

   Insurance firms, equity and quantitative risk analysts, corporate accountants, and derivative traders clustered in the City. Mergers and acquisitions created demand for added commercial office space.

   This demand fuelled the dramatic and speculative growth of east London’s Docklands. Citigroup, HSBC and Barclays moved into new gleaming glass towers at Canary Wharf (above).


HOME         LONDON      CRISIS        STREETS        REGENERATION