As the latest banking scandals – and the visceral public reaction – remind us, there has always been a trick to getting the balance right when it comes to money lending. If you too often abuse a strong position to steamroller those who can’t defend themselves, you store up trouble for the future. As bankers are now relearning, there is a price to be paid for cleaning up in the good times without regard for your customer. Both sides of the deal need to stay sweet for the business to be sustainable.
In medieval times, the monasteries were the bully boys. Gradually building up vast firepower through endowments from devoted knights, lonely widows and sharp practices, individual houses became ‘giant vampire squids’, like Goldman Sachs, Barclays or its peers.
All shared the same three golden rules: consolidate, manipulate and accumulate. In theory, the monasteries were more concerned with spiritual matters than modern banks. Yet many proved no more capable of resisting the temptation to dominate and crush anything that stood in their way. As the monastery gathered more resources, the more interest it took in expanding; and the less it took in its local environment and those who tilled the fields, made the candles, and groomed the horses.
Like the banks singling out small businesses with good security (hotels and pubs have been a major target for lending in the interest-rate swap fiasco), monasteries were ruthless: particular favourites were knights heading to the Crusades – encouraged to go by the monks themselves – who were given all the money they needed in return for mortgages charged on land to which they might never return.
As Henry VIII might have said, they had it coming: few sympathised with the monks, bloated on fine wine and good food when they were thrown out on to the street during the Reformation, just as few now will take pity on the perpetrators of the predatory practices that have shamed the banks.
The irony is that what spurred the worst excesses in the early 16th century, as in the recent past, is social mobility. Such mobility is something we should all rejoice in. But the more fluid society has become, the greater the incentive to behave selfishly in order to climb the greasy pole. Concern for the common good goes out of the window as self-interest takes over.
As society stratifies, the pressure and anxiety of missing out mounts inexorably: behaviour becomes more aggressive and more self-centred – how to keep up with schools, holidays, fast cars and the rest. So partnerships are replaced by usury: it is all about the means to an end.
In other words, the banks went wrong in exactly the same way as the monasteries: the priests were drawn into competing with rivals, rather than serving the ‘little people’ who got in the way. This is the moral of that most famous of banking tales – The Merchant of Venice. For Shakespeare and his audience, what made Shylock so shocking was not that he lent money, or even that he lent on punitive terms: it was the fact that he insisted on being paid when his mark, Antonio, could not cough up.
Therein lies the disgrace of the interest-rate-swap saga. As the Financial Services Authority (FSA) report on swaps reveals, banks lent to businesses that were carefully singled out as having good security and, in many cases, where cash flow was tight. For the banks, as for Shylock, the temptation was delicious: lend money, then use the unequal position to squeeze more from the relationship. One side stood to lose nothing; the other everything.
One small business after another has gone to the wall, most of them locked in at exactly the moment when the house of cards was coming down in 2007 and 2008 by executives who knew exactly what they were doing. And then there are the businesses whose suffocation has been slow, painful and relentless, crushed into the ground to keep up with covenants and cash requirements that were set in stone at a time when bankers setting these schemes up were raking in the bonuses.
The banks, like the monks and like Shylock, got rich for a reason. But there is, finally, the first hint that justice will be done. Perhaps the FSA will come good on its promise to investigate and deal with the many cases of mis-selling that have taken place.
But that was not what the local populations were after when the monasteries were finally broken by Henry VIII. They wanted more: a new system, new institutions, new clergy, new practices. Today, the Church of England has its own problems; but it serves as a good model for what needs to happen: new regulatory bodies, with teeth as sharp as Henry VIII’s attack dogs during the Reformation, to root out and make examples of rapacious and fat abbots – or now, the executives whose bonuses have been based on inflicting pain on others.
But there is good news too about the puritanism we are on the cusp of. It was, after all, the secret of Britain’s emergence as a great empire. Let’s hope – or perhaps pray – that the banking scandal has an equally silver lining.
• Dr Peter Frankopan is director of the Centre for Byzantine Research at Oxford University and author of The First Crusade: The Call from the East (published by Bodley Head).