Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former Treasury permanent secretary
As the official in charge of the UK Treasury during the global financial crisis, this week’s revelations about Peter Mandelson’s activities while business secretary at that time have triggered a strange mix of memories and emotion. They also offer lessons on how politics and finance work together — and how they should not.
My first thought was of Alistair Darling, the then chancellor of the exchequer, a man of extraordinary integrity who gave the lie to the idea that all politicians are in it for themselves. A good judge of character, he had few illusions about the motives of some colleagues. But he would have been utterly appalled by the implication of the Epstein files that a fellow cabinet member was leaking confidential government documents and conversations in real time, contrary to the national interest and even potentially the Official Secrets Act.
My second thought was the strangely elevated status that finance enjoyed in politics in the first decade of this century. Epstein’s mysterious career as a financier is one thing but government was rather in awe of bankers as a whole. If a chief executive of a global bank came to town, ministers and officials alike would rush to pay homage.
To some extent this was understandable — the UK had a comparative advantage in financial services. Banking was enjoying an extraordinary boom and the revenues that financial services and the City generated for the Treasury were paying for an ambitious expansion of public services.
The symbiotic nature of the relationship between government and bankers was underlined as the financial crisis took hold in October 2008. A build-up of risk in the banking system may have caused the crisis but the government also needed the expertise of bankers to sort it out.
I could not walk around the Treasury at that time without coming across a banker deep in conversation on their mobile phone. Some were genuinely motivated by public service and wanted to deploy their experience and market intelligence in the national interest. A few even resigned from their banks, took big pay cuts and came to work for us on the inside. But others’ motives were rather more suspect. There was always the prospect of healthy fees.
Arguably, Number 10 had a closer relationship with the banks, and largely out of necessity. No sensible prime minister should give the Treasury and the Bank of England a monopoly on advice, least of all during a fast-moving international crisis. Number 10 should always have a direct line to financial leaders, just as to captains of industry. The can-do culture of a banker can be a good counterweight to the dead hand of the Treasury.
Seen from the Treasury, investment banks seemed to have an inside track to influencing Number 10. The 50 per cent tax on bankers’ bonuses is a case in point. Introduced at the end of 2009, it was a pragmatic temporary measure to encourage a more prudent approach to banking remuneration, raising £2bn in the process. But the extent and nature of the pushback was extraordinary.
Bankers inundated the government with stories of its dire consequences: it fell to the Treasury to calm nerves in Number 10. At the time, I put their jumpiness down to having such a close relationship with the City. With hindsight, that was probably unfair. More sinister forces were at play. We now know that Mandelson, a senior member of Gordon Brown’s cabinet, was simultaneously advising a powerful US financier to “mildly threaten” his colleague Darling.
Much has changed since 2009. Banks are better regulated. Investment banking is ringfenced from retail banking. The regulator holds individuals to higher standards: Jes Staley, who regularly features in the Epstein files, is banned from working in UK financial services.
Successive governments have sought to strengthen both content and policing of the ministerial code. Lobbyists are subject to greater curbs. There is greater clarity about declaration of interests.
But the Greensill scandal showed that the UK’s centre of political power is still susceptible to ideas from financiers that are too good to be true. And the Covid inquiry has revealed that in a time of crisis, there is a tendency for the British state to cut corners and ignore the rules, whether through fast-track procurement or the use of private emails and WhatsApp groups.
Spotting a bad actor who fails to master the art of secret communication is relatively easy. It is extraordinary that so many of Epstein’s interlocutors were happy to use email. But for all we know there are other bad actors whose conversations will never be traced.
It would be foolish to insulate government from the legitimate views of private individuals and companies. At its best, lobbying can improve policy decisions. But generally the bigger the company, the more influence it has.
Today, the Big Tech bros have supplanted bankers as masters of the universe. Politicians are drawn to their power and hope some of the gold dust will rub off: Prime Minister Rishi Sunak interviewing Elon Musk comes to mind.
Our constitution, as the historian Peter Hennessy has observed, relies on the “good chaps” theory of government. This week is a reminder that good chaps can turn bad. And, however well intentioned a government, it is always at risk of undue influence. The next time Big Tech persuades the government to water down a digital regulation or wins an NHS contract, the ordinary citizen can be forgiven for being just a little suspicious.