Is Hubris Back in the City of London?

As bank stocks rise and profits return, there are signs that London's financial center is returning to its pre-crash mentality—and resisting further reform

By Carsten Volkery

The film is called "What If?" and the Bank of England shows it to visitors to convey how the 300-year-old institution quietly shields the British economy from crises. The video includes a section in which Governor Mervyn King proudly explains the work of his central bankers.

There's just one slight shortcoming. It was filmed long before the current financial meltdown. To visitors who followed how the banking system came close to collapse over the last two years, the little advertising movie must seem like a satire. After all, the Bank of England failed to ward off this crisis.

The bank admits the film should probably be replaced at some stage. But it doesn't appear to be in much of a hurry. The movie may even outlast this crisis—like many other aspects of the City of London. There are increasing signs that the world's largest financial center is returning to its old ways.

Share prices are rising, the banks are reporting respectable profits and as memories of the big Lehman Brothers shock last September fade, so does the reforming zeal of the financial district around the grand dome of St. Paul's Cathedral. "We're just drifting back into business as usual, as if nothing happened," said the finance policy spokesman and deputy leader of the opposition Liberal Democrats, Vince Cable.

At summer parties in the City, the talk is of bonuses, just a few months after the whole sector had to be bailed out by taxpayers.

"Bonuses Are Back"

The British press has invented a new buzzword: "BAB," short for "bonuses are back." Even the government is playing along. The new head of the Royal Bank of Scotland (RBS), which has been de facto nationalized, is to receive a double-digit million sum if the share price rises above 70 pence (80 euro cents) under his leadership.

The 5,400 investment bankers of Goldman Sachs (GS) in London have been promised hefty payouts because the Wall Street-based bank expects a record year. The government bond business is booming and thanks to the collapse of so many of its rivals, Goldman has risen to become banker to indebted governments.

Other banks that are doing well in the crisis such as Barclays Capital (BCS), the bank's investment arm, are busy poaching staff from their competitors. Adair Turner, the head of the Financial Services Authority, said recently there was "aggressive" hiring of bankers. Barclays has hired some 300 extra investment bankers this year by dangling attractive terms. The CEO of Barclays Capital, Bob Diamond, says he wants to turn BarCap into the world's leading investment bank in the coming years.

The Resurrection of Lehman

Even U.S. investment bank Lehman Brothers, whose collapse in September brought the global financial system to a standstill, is experiencing a rapid resurrection under new ownership. Its U.S. business is being continued by BarCap and its European operations went to Japan's Nomura Bank. The Financial Times reported on Tuesday that Nomura wants to become the top broker on the London Stock Exchange by the end of the year—like Lehman used to be.

And reports say that on the old Lehman trading floor in London's Canary Wharf there are signs with the sentence: "That Was Then, This is Now." The bank will soon move to new offices to complete the break with its troubled recent past.

It seems that the former masters of the universe are gradually regaining their confidence. True, the Bank of England said in its latest Financial Stability Report that the sector continues to face major risks. But the general tension is easing.

"We are like goldfish," the Observer newspaper quoted Jon Macintosh, a Mayfair hedge-fund manager, as saying. "We swim once around our bowl and when we complete the circle everything looks new."

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