Too often people condemn City financiers without asking what it is that they do. But we must try to distinguish the good from the bad. The tale of two larger than life City financiers who have got into trouble brings this into focus rather neatly.
The first is Conservative donor and hedge fund manager Lewis Chester. He, or rather the fund he manages, has been hit with a massive fine by the US Securities and Exchange Commission (SEC) for abusive trading in mutual funds, the US equivalent of unit trusts and OEICs. These collective funds provide opportunities for retail investors to take a share in a portfolio of investments without owning the shares individually, and are one of the best ways for ordinary investors (even very wealthy ones) to invest. But they aren’t priced real-time, and that can leave them open to abuse. In this case Mr Chester’s fund is supposed to have bought stakes late in the day, after prices had been fixed but when there was reason to think that they were under priced. The fund was able to make a handy profit by selling the stake back later – but it came at the expense of the fund’s ordinary investors.
Hedge funds are investment funds given an unconventional or aggressive brief compared to the plodding ordinary funds which merely manage portfolios of shares and bonds. Often the exploit pricing anomalies. This isn’t very pretty, but usually it’s a way of transmitting information across financial markets and ensuring that everybody gets a fairer price. On balance this is positive. But when it comes to exploiting anomalies in mutual fund pricing there is no such information transmission. It is simply theft, and there are rules against it. And even if rules aren’t actually broken, it is unethical, and anybody perpetrating it should be shunned by respectable society.
In this case Mr Chester still seems to be denying wrongdoing, dismissing his rather juicy emails as “banter” (gems like: Poor souls, working past cookie and milk time…for once in your lives, you can work like real men and do a proper day’s work. (You really are a bunch of women of the first order).). But it’s gone through four years of judicial process and the fine has ended up at $100 million – though an appeal may be on its way. I really hope that our own FSA is on his case, as if this is true he is hardly a fit and proper person to be conducting business here.
The second case is receiving much more attention, including two opinion pieces in todays FT. It is Ian Hannam, a specialist in mining investments and friend of David Davis, the Conservative MP. Like Mr Davis, and unlike Mr Chester, he is not a classic City smoothie who came up through the usual channels. He got his boots dirty by travelling out to various dodgy parts of the world to take a closer look at the investments he was advising on, and talk tot he people that matter. This is a striking contrast to so much of the City game of trawling through statistics and devising new computer programs. He advised on investments and facilitated big deals. Not pretty I’m sure, but you can see how this type of work can justify a big salary. The net result is that more resources get mined to keep the world going in the style to which it has become accustomed.
Mr Hannam has been fined by the FSA £450,000 for flouting rules on insider information, for revealing too much about deals he was working on to clients. I have no feel for the facts of this case, and Mr Davis has leapt to Mr Hannam’s defence. What I do know is that the rules on insider information are tricky, and that there is a lot of grey in amongst the black and white. If well connected insiders are getting all the best deals and making money out of the outsiders, this undermines confidence in markets. But information is the lifeblood of markets, and restrict it, even amongst insiders, and markets will suffer. It is already becoming more and more difficult for smaller companies to go public due largely to restrictions on information flow – and this will have a baleful influence on innovation. Regardless of the rights and wrongs of Mr Hannam’s case the rules seem to be drawn too restrictively at the moment.
The last few decades have seen astonishing advances in the battle against world poverty. A more globally integrated economy has been a key part of this, and global finance has been a key facilitator. It has also been wildly abused, with too many fortunes being made to no socially useful end. The public needs to take a closer interest in what goes on, to condemn the unethical (whatever side of the law they are on), but admire the people that genuinely make new connections and keep things moving – even if they cross the odd arbitrary line and get themselves into trouble.