Quis custodiet ipsos custodies? by Jonathan Owen
From Market Matters April 09
1,500 years ago the Romans had a saying
“Who shall watch over the guardians?”
which is particularly relevant today as the UK economy plunges deeper into recession and is “the worst financial crisis for 60 years”, according to the Chancellor.
President Obama has promised to “explore every legal possibility” to block executive bonuses at the bailed-out AIG insurer and the FBI are considering criminal charges against bank executives and auditors. But in Britain the British Government has published a report by Lord Turner into what went wrong. How very British. But hold on a minute – isn’t this the same Lord Turner who is Chairman of the Financial Services Authority – the regulator supposed to stop the system going wrong in the first place? I’m not sure you’ve picked the right guy for the job, Prime Minister.
Back in the 1980’s I was a very junior surveyor working for an insurance company in the City when Maggie Thatcher’s ‘Big Bang’ deregulation took place. I can remember the puzzled looks amongst senior staff when all of a sudden the previously- sacrosanct fund liquidity ratios apparently went out the window. It didn’t take long for the animals in the pit (the brokers) to seize the opportunity to develop so-called derivatives to sell bundled-up loans as securitised investments. This made our senior staff look even more puzzled. They loved the bottom line profits but it was a pity they didn’t understand the risks as well.
Lord Turner’s initial report into the banking crisis admits the regulatory system has failed(ish) and he proposes profound changes to the banking system and the ‘bonus culture’ in future. Detailed proposals are due to be published in September, but in the meantime he warns that banks will be forced to build up more cash reserves and hedge funds will be subject to tougher scrutiny – back to liquidity ratios again? The credit- rating agencies which have been widely-blamed for fuelling the crisis will also be tightly controlled. Shadow Chancellor George Osborne
took the opportunity to have a poke at this ‘devastating critique of the last 10 years of economic policy’ - but wasn’t it Maggie who started all of this back in 1986?
Of most interest to homeowners is Turner’s proposed ban on 100% mortgages, buyers being expected to stump up 15% deposits and loans limited to three times annual earnings. All this to prevent a repeat of the crisis triggered by ‘sub-prime lending’ in the USA and over-generous lending practices like Northern Rock’s ‘Together’ mortgage of 120% of property value and up to six times salary.
Good attention-grabbing headlines no doubt, but it leaves an awkward question unanswered – why did the FSA fall down on the job and what’s to say it won’t do so again? We all know successive Governments embraced Thatcherite deregulation of the City but the FSA was specifically created to stop this sort of problem. Pointing out the failures of the system in a report is one thing but the public wants more – it wants to see the guilty parties named and shamed. It’s all very well the Government banging-on about the £700,000 pension of Fred Goodwin, disgraced former Chief Executive of Halifax Bank of Scotland, but what did the FSA do to prevent the banking crisis? There’s precious little explanation of that in Lord Turner’s report and not a word of apology for the FSA’s failures or how it intends to avoid repeating them in the future. How charming.
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