Seconds Out: The Great Banking Fightback

Barclays and JPMorgan are leading a counter-attack against banker-bashing. Sean Farrell and Stephen Foley report

This week saw the latest instalment of the banks' fightback on both sides of the Atlantic. In the UK, Bob Diamond put on a defiant show at the Treasury Select Committee.

There was no implicit taxpayer subsidy of investment banking and ring-fencing retail banking was not a good idea, Barclays' chief executive told MPs.

Mr Diamond said any state backing was "an implied government guarantee" and that ring-fencing of retail deposits "wouldn't be my first choice... or best alternative, but there is a way to make it work".

In doing so, he rejected arguments of the Independent Commission on Banking (ICB), which is due to submit a final report in September.

Meanwhile in the US, Jamie Dimon, the chief executive of JPMorgan Chase, took the extraordinary step of challenging the chairman of the Federal Reserve in public over the effects of regulation on banks' lending.

"I have a great fear someone's going to try to write a book in 20 years and the book is going to talk about all the things we did in the middle of the crisis to actually slow down recovery," Mr Dimon told Ben Bernanke at a conference in Atlanta.

Mr Diamond and Mr Dimon have been the most forceful bankers in resisting efforts to rein the banks in. Neither Barclays nor JPMorgan took direct government investment to bail them out in the crisis and this appears to have emboldened them to tell politicians once again how the world works.

In the UK, the turning point appears to have come in the second half of last year.

Under its then-chief executive, John Varley, Barclays launched Project Merlin – a lobbying effort to draw a line under political bank-bashing in return for concessions on pay and lending to support the economy.

As talks on Merlin progressed in January, Mr Diamond, by now in charge at Barclays, delivered his famous remarks to the Treasury Committee.

"I think they [government ministers] recognise that there was a period of remorse and apology for banks. I think that period needs to be over; we need our banks willing to take risks, confident, and working with the private sector in the UK so that we can create jobs and we can improve the economic growth."

So there you had it. Banks had taken their medicine but it was time to get off their backs and let them get on with things. If not, the economy would suffer from lack of credit.

At about the same time, Mr Dimon had had enough, too. At Davos, he launched a scalding attack on politicians, the media and ordinary people who have been bashing bankers ever since the credit crisis.

"I don't lump all media together," he said. "There's good and there's bad. There's irresponsible and ignorant and there's really smart media. Well, not all bankers are the same. I just think this constant refrain "bankers, bankers, bankers" – it's just a really unproductive and unfair way of treating people."

At the time, his outburst was portrayed as little more than petulance, but a few months later, it is clear Mr Dimon is playing a much more sophisticated public-relations game to change the terms of debate.

Like Mr Diamond, he has argued that all bankers have been tarred unfairly, that giant banks such as his eased the credit crisis, and that regulations imposed on the industry since then unjustifiably crimp banks' profits and ability to lend.

His vociferousness has emboldened others. In Washington, the lobbying capital of the world, the banks have pushed hard for exemptions to rules tightening trading of derivatives contracts and others that force them to hold on to some of the securities created from their loans to keep lending standards high.

Now, lobbyists are arguing against a key plank of the post-crisis consensus, namely that systemically important banks should be forced to hold proportionally more capital than smaller banks, whose demise would have less of an impact.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, was so concerned about the push-back that she warned of "amnesia" setting in about the credit crisis.

The arguments of Mr Diamond and Mr Varley illustrate the apparent dilemma for politicians and their regulators. The banks may have been to blame for the crisis but if tough constraints are imposed, they cannot lend to businesses to get the economy going.

There is also a more explicit threat that affects the UK. HSBC, Standard Chartered and Barclays have let it be known they could withdraw from Britain, in part or completely, if regulations are too onerous.

Jonathan Herbst, a partner at the law firm Norton Rose, says: "There is a tension between the political need to be tough on the banks, especially within the Coalition, and the growing realisation that they are enormous employers and that the threats about them not expanding in the UK – or even leaving – are not idle.

"On the one hand, you have relatively soft lobbying by the City Corporation and individual banks and it's very much trying to influence the debate, and that's a difficult argument to win because of the politics. On the other hand, there are much harder comments about leaving the UK and that type of thing. Some banks veer more towards one and others towards the other and in some ways policymakers don't know what to make of it."

The Treasury Committee hearings exposed divisions between the banks on ring-fencing and lending to small businesses that could allow UK politicians to regain the upper hand. But for now, the fightback continues on both sides of the Atlantic.

Lord Oakeshott, the former Liberal Democrat Treasury spokesman in the Lords and a fierce critic of the banks, says: "They did a very effective job with Project Merlin, pulling the wool over the eyes of the Treasury and No 10, but it's now falling apart because the banks still aren't lending and the bonuses roll on."