Trying to make sense of Fred ‘The Shred’ Goodwin

In a funny kind of way, if Fred ‘The Shred’ hadn’t existed, it might have become necessary to invent him. How else would it be possible to truly encapsulate the contemporary phenomenon of a man, charged with some of the most serious responsibilities any corporate human being can carry, the prudent management of a leading retail bank, who has been so unwilling or unable to demonstrate any feelings of personal shame, regret or remorse for his actions, all the while so egregiously enriching himself, beyond the dreams of avarice, while trashing the very empire which provided his financial underpinning?

There was a time when a man in this position might just have gone to his study with a bottle of whisky and his revolver.

But not ‘The Shredder’ and his ilk! No, he and his mates just got together in their glossy boardroom and worked out how much more money they could unjustifiably squeeze out of the already mortally wounded bank, just so that Fred would walk away, with his mouth firmly shut!

It’s not just old flaky Fred of course, he just happens to be a particularly loathsome example of the breed, because there are countless other corporate hogs who have plundered the trough with their snouts, all the while refusing to explain the losses their institutions have made.

How does one explain what appears to have become a truly modern leitmotif for greed, and dysfunction, the practice of paying off senior executives with sums of money which frankly dwarf one’s sense of any kind of realistic value, when all they have done is preside over a campaign of commercial incompetence, and piss-poor performance which beggars the imagination. What is it that makes rewarding failure such a regular occurrence in our modern society? Why do these losers feel able to pick up the dosh with quite the degree of insouciance they display, and then demand that their wounded companies also pay their tax bills into the bargain.

The answer lies somewhere in the thorny thickets of what criminologists call ‘The Anomie of Affluence’, a state of being where one’s normal senses of what is right and wrong, what is normal and what is bizarre, what is acceptable human conduct and what is off the wallpaper behavior, become distorted and confused, because the society in which these people operate and the values and norms by which they determine their ability to function have been allowed to become contorted by too much money!

The British attitude towards financial services, banking, investment and all the other grubby detritus of financial alchemy which go into the make-up the financial community, has always been distorted, twisted, and maimed, and what had, in so many cases, become an accepted way of commercial conduct among the denizens of Throgmorton Street, would, in any other walk of life have been called a serious crime.

The financial sector has always demanded a different set of rules by which to play the game, and by and large, for many hundreds of years, the British Establishment (which was originally very careful not to have anything whatsoever to do with the grubby denizens of Cornhill, or Change Alley) was content to let the Square Mile get on with it. The City has muddled through a series of scandals and vices, the South Sea Bubble, the era of the Railway Share Frauds, (read your Trollope or Dickens), and later the ‘Unacceptable Face of Capitalism’, the Guinness Case, The Blue Arrow scandal, etc. All of these and more have followed in a long line of old fashioned scams, fiddles and rip-offs.

The real problem however, came about when we started to muck about with the real distinction between what was a crime, and what was a more or less accepted market practice, and this occurred after the introduction of the Financial Services Act 1986, together with the adoption of the new regulatory environment which followed.

Let us take an example of the Occupational Pension scandals which rocked London in the late 1980’s and early 1990’s.

Back in the early 1960’s I recall hearing a financier on the radio talking about the problems with insurance policies, and pension arrangements. He talked about the way in which the actuaries who calculated the terms and premiums of insurance policies and pensions had made some serious mis-calculations in the 1940’s and 1950’s and had not appreciated that as a direct result of the emergence of a National Health Service, people in the UK would start to live longer, and that longevity would have a direct impact upon the value of insurance and pension funds.

He stated that by the 1980’s, if more money was not injected into the insurance industry, then serious shortfalls would begin to become apparent in the insurance and pensions sector, with possible disastrous effects.

Surprise, surprise, in the wake of the Thatcher reforms and the opening up of the era of ‘popular capitalism’, noises began to be heard from the insurance industry about the need for more capital and investment, and how this might be achieved through an act of de-regulation of the pensions industry, so that people now in occupational pensions could be given the benefit of being allowed to purchase a private pension from which-ever pension provider they liked.

This reform was needed because the insurance companies had become aware of the vast number of people in the UK who would be in receipt of an occupational pension when they retired, most, if not all of which were being contributed to by deductions from the employee’s salary in the form of ‘superannuation payments’. The insurance companies realized that there was a significant build-up of public-sector raw ‘cash’ to be acquired if the holders of occupational pensions could be persuaded to apply for their funds to be released to them so that they could be re-invested with the insurance companies.

Financial sector companies like raw cash better than they like anything else, and this vast pool of money began to play on their minds, and they bent all their efforts to getting their hands on it. They lobbied Government assiduously, and eventually, Norman Fowler was persuaded to propose the necessary degree of legislation needed to enable the privatization of pensions to take place.

And the wolves descended upon the sheep in a feeding frenzy that has seen no equal in modern times.

Hundreds of thousands of gullible, innocent, financially unsophisticated occupational pension holders, nurses, railwaymen, boilermakers, even policemen were inveigled to cash out of their copper-bottomed and protected pension plans and throw in their lot with the private sector, who frankly, just raped them blind.

So huge and so egregious was this period of downright theft, fraud and deception that a public scandal quickly followed, as the reality began to dawn on the new pension holders, how little of their money would find its way into their plans, and how much commission they had paid, and how much of their money had been eaten up in costs and payments to others, and how little they would have to live on in retirement, became apparent.

The problem was that there were so many high-profiled financial institutional names involved, and so many companies caught up in this series of scandals, that the scale of the crime became too big for the Government to handle. The SFO turned their back on the problem and walked away. Nevertheless, something had to happen because this was a problem that wasn’t going away and some form of closure had to be achieved.

Then, some genius came up with a new definition, a new description of conduct hitherto unknown to English criminal jurisprudence, and the scandal became defined as ‘mis-selling’. Overnight the problem went away, it was not a criminal issue any more, it was just a simple case of mis-selling, perhaps the most classic example ever of the ‘anomie of affluence’!

As soon as the definitional terms of engagement had been thrown into the trash-can, everything that followed became easier. Black was white, good was bad, right was wrong, and everything was up for grabs! The most obvious example was the way the financial sector looked upon financial wrong-doing and criminality.

The investigation and prosecution of serious fraud is widely perceived to have found its way into the 'too difficult' tray on the desks of too many Regulatory policy makers, despite the proposal to enlarge the remit of the Serious Fraud Office. A number of competing agendas have influenced this state of affairs, many of them very closely identified with the self-interest of the promoters. The end result of what has been a blatantly politically motivated involvement in the white collar regulatory procedure has been to complicate the fraud trial process immeasurably, resulting so often, in overloaded indictments, poor decisions and confusion in the minds of counsel, judges, defendants and public alike, particularly the latter.


The primary reason has been the total refusal of the City and the financial establishment, aided and abetted for too long by influential Whitehall Mandarins and their Regulator cousins, to underwrite a pro-active, dynamic fraud investigation mechanism; publicly preferring the promotion of a hugely expensive bureaucratic mechanism of self-regulation, but one in which positive acts of criminality can be re-defined in non-criminogenic terms such as mis-selling.


This 'regulatory resistance' factor is a vital element in understanding how a specific regime of financial regulation, one which positively promotes the adoption of an alternative, socially divisive system of crime-resolution, within a theoretically socially-equal system of criminal justice, could have evolved; one in which “ordinary" members of society who commit acts of dishonesty “outside” the financial sector, such as social-security fraud, are dealt with through the courts, criminalised and almost invariably imprisoned; while the representatives of the white collar sector are becoming increasingly insulated from the stigmatising effects of criminalisation, because they are being allowed to become immune from the normal sanctioning effects of the criminal law.


The financial sector deliberately encourages this conflict in attitudes, firstly by promoting the deflection of recognition of City criminality by an intensive exercise in special pleading in support of 'the reputation of the City.' Following the 'Guinness' and 'Blue Arrow' trials, this 'appeal to higher loyalties' had manifested itself in a policy which promotes the misconception that the esoteric affairs of the financial sector are so complex that they are incomprehensible to ordinary juries and that therefore they need special considerations to apply to their regulation. In such a way, behaviour which would be criminal to any ordinary person, if committed outside the City environment, is being allowed to be called something else and increasingly dealt with in a different, quasi-civil, regulatory manner. Dishonesty is universal, as both the law and the public recognises, the use of the 'complexity' argument being adopted to avoid the criminal process.

Secondly, there has been strong Government sector support for such a policy, which naturally recommends itself to the Treasury, because it means that normally cost-intensive areas of criminal wrongdoing can now be given all the appearance of being dealt with in a private manner, instead of through the public criminal court process, and without becoming a burden on the public purse, while reducing the public perception abroad that the City is full of a lot of greedy crooks!


Thirdly, through the identification of the regulatory-resistance factor, we obtain empirical recognition of the positive degree of unwillingness among many financial practitioners to adopt pro-active compliance procedures which would lead to the likelihood of criminalising their industry colleagues. This demonstrates that the regulatory bodies, whose effectiveness depends to a large extent on co-operation with their members to develop good compliance practices, can not expect to be capable of providing the same degree of deterrence required to inhibit widescale wrongdoing in the financial market, which many are presently claiming they possess.


Together, these key features have contributed to the creation of a state of regulatory anomie or normlessness - what Christopher Stanley of Kent University has called 'ethical indeterminancy' - in which blatantly dishonest financial conduct, whether in the form of the unauthorised sale of financial products, insider dealing, market manipulation, the abuse of discretionary client account management; the churning of insurance or pension products; the continued promotion of unsuitable products in order to generate greater commission, as in the institutionalised level of fraudulent pension transfers; or the wilful refusal to comply with regulatory demands to control the egregious practices of salesforces, can be defined as mere 'misconduct' or 'mis-selling', and where even the most blatant examples can be dealt with by fines and orders for costs, and only very occasionally, expulsion from the market.


Once you engineer such an ‘Alice in Wonderland’ world within the financial sector, is it any wonder that the ‘Fred the Shred’ syndrome becomes a sine qua non for an accepted standard of commercial behavior, without shame, regret or contrition.

The FSA: Rottweiler or Poodle?

Some years ago, I was a senior official in FIMBRA, the Financial Intermediaries and Managers Regulatory Association, the unlamented early Self Regulating Organisation which was eventually subsumed into the Financial Services Authority, when the alphabet soup of competing original SRO’s was eventually ended.

My early concern, as head of investigations and member vetting, and the concern I took away with me when I left, was that FIMBRA and its corresponding agencies did not see themselves as performing a policing function when it came to dealing with their member firms. They were far more concerned to ensure that their member firms were protected from the impact of the financial services levy, which was how the lead regulator was funded, by ensuring that a minimal number of member firms were expelled from membership, and encouraging more and more firms to join, thus diluting the costs of membership to the others.

I lost count of the number of times I heard the Director of the compliance division say ‘our job is to keep our members in compliance’, as an excuse for not taking a member in serious breach of the rules to the disciplinary committee and face the likelihood of the errant member being expelled!

Frankly, the early days of the post Big-Bang era, as far as City regulation was concerned, were a farce, and it eventually got so bad that FIMBRA’s name became re-interpreted as ‘F**k It, My Broker’s Run Away! as more and more members disappeared with their client’s monies.

Imagine my bemusement therefore to read in The Sunday Times an article entitled ‘…Exposed: the banks’ cosy ties to the watch dog…’

It appears that as a result of a whistleblower’s information to the Commons Treasury Committee, the FSA required the very firms it regulated to report on their relationship with the FSA inspector sent to oversee their activities, and how these observations were then used to help influence the level of bonus and the career prospects of the individual concerned.

Quite why the FSA feels the need to pay bonuses I have never managed to work out, but this appears to have become part of their anomic culture.

As a result of the whistleblower’s claims it appears that FSA staff were anxious not to antagonize the banks they oversaw because of the potential impact on their pay; Regulators were warned ‘not to frighten the horses’ during visits to firms because it might impact upon their willingness to provide cooperation; The FSA believed its role was to ‘serve’ the industry which ultimately funded it; and that staff turnover and a limited level of resources resulted in limited expertise among staff to really question the big banks too closely.

This is precisely the same level of spasticity in regulatory intervention that so marked out the ineffective days of FIMBRA, with regulatory staff ill-equipped to take on the member firms for lack of industry expertise, coupled with an almost child-like belief that member firms would want to co-operate with their regulatory visits.

This ridiculous point of view stems from the fact that most banks and financial institutions will go out of their way to avoid bringing themselves to notice as far as the FSA is concerned. They have taken a very careful ‘risk-based approach’ towards the nature of their relationship with their regulator and they have established that as long as the regulator is able to find and see what it wants to find and see during a visit, then not too many awkward questions will be asked.

This is why FSA officials get such a respectful hearing from member firms when ever they give key-note speeches at industry conferences or workshops. The FSA officials trot out the same tired and hackneyed policy statements that have been approved and reviewed by so many different people inside the agency that they are now entirely devoid of any humour, light, interest or value, while the audience sits in silent receipt of these words. There are never any questions, the FSA official is never, repeat never challenged as to the policy statement, and they then return to the office, content that they have maintained the high-level of FSA delivery.

The audience at the same time, quietly lets out a collective sigh of boredom, grateful to have got that part of the programme out of the way without antagonizing the FSA. The regulator on the other hand returns believing that yet another incomprehensible policy statement has been delivered which everyone present appeared to understand, adopt and no doubt, would soon implement.

Financial regulation is about asking awkward questions of the biggest institutions and having the courage to say ‘Well, I’m sorry Mr Fat Cat Banker, but your explanation for these figures does not make any sense to me and I am going to go on asking awkward questions until I do see some sense in them…’

When I was at the Fraud Squad, I used to love it when some irate spiv would accuse me in the interview room of not having the skills or the training to understand his business model. My answer was invariably the same. ‘…Until such time as you can explain these figures to me in a way which makes sense, you will continue to sit in that chair…’ and I will continue to ask these questions. It is a matter for you..!’

It is quite scandalous that things should have got to a state where the lead Regulator is inviting its constituency to report on the conduct of its supervisory staff. Human nature dictates that if a person thinks that their income, or their bonus is going to be impacted by an adverse report, they will pull their punches.

This latest revelation is really the final nail in the coffin for the FSA and frankly, it really is about time that it was wound up and allowed to go the same way as its predecessors, SIB et al.. We should give banking supervision back to the Bank of England, who at least used to understand these issues, and we should let a re-invigorated Metropolitan Police Fraud Squad deal with the rest.