Expect more bezzles

Just when you thought that banks' reputations couldn't get any more stained, one of the previously cleanest names in the sector has found itself covered in mud. Standard Chartered was attacked in quite extraordinarily vehement terms by a New York regulator this week, slamming the share price and forcing the bank to deny the allegations (that it had hidden $250bn of transactions with Iran) just as vehemently. But regardless of the eventual outcome, this is bad news for the City, and by extension, for London.

JK Galbraith, in his book, The Great Crash, 1929, said it's only in the aftermath of a financial boom that you uncover the bezzle': the "inventory of undiscovered embezzlement" that piled up when times were good. The way I see it, there are two types of bezzle'. There's the Bernie Madoff or Allen Stanford-type frauds: your out-and-out con merchants, who use the cover of the boom to take as many people for a ride as they possibly can before the bubble bursts and they get caught.

Then there's the more insidious bezzle the institutional bezzle. This falls into the category of "everyone else is doing it, so why shouldn't I?" This is the mix of bad habits, corner cutting and widely accepted rule-bending and breaking that builds up during the boom.

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People exaggerating their income on mortgage forms, egged on by brokers. Traders gaming Libor rates and bragging to each other about it like naughty school boys. Bankers treating money-laundering regulations as petty distractions to be worked around. And regulators turning a blind eye to it all as long as enough of the right boxes are being ticked.

It's this sort of bezzle that will be dragged up for months, if not years, to come. Practices that looked acceptable during the boom look very different in the cold light of a crash. That gives ambitious new regulators, keen to make a name for themselves, an ample supply of scandal to get stuck into.

The trouble for London is that it is right at the heart of this mess. London's special' status was built on the financial services boom. All those whining articles we used to read about the plight of double-income white-collar professionals being priced out of Notting Hill and the Cotswolds? That was down to high earners in the City riding the bubble. That bubble has popped.

The issue now is not that the banks and hedge-fund operators will up and leave London. Or even that New York, Europe and Asia will take business away from the capital. They might well do, but the real problem is that the finance industry as a whole and its profits are being cut back to more reasonable levels.

That's no bad thing. But it does mean that anyone expecting other relics of the bubble to continue such as ludicrously over-priced properties and the idea that London is immune to any correction is heading for a big disappointment.