There must be something in the air (besides the rain); just over a week ago we had the outgoing head of the FSA, Hector Sants, blasting the financial sector for causing the financial crisis, and now outgoing BoE head Sir Mervyn "Swervin'" King weighs in with a similar polemic against the banks.
On one hand, since both these august figures are about to leave their jobs, we should listen carefully to what they have to say; neither of them has any particular financial interest in their current position, so they are moderately free to say what they like. On the other hand, they are clearly keeping one eye on the history books and trying to ensure that their actions in one of the worst financial crises in UK history aren't damned to hell and back. So what do we learn?
Merv is clear that the FSA needs to shoulder a lot of the blame in the handling of the run-up to the crisis, and that the BoE was essentially impotent:
However, he claimed the Bank was hamstrung by the decision to move regulation to the Financial Services Authority (FSA) in 1997 – a reform "that would return to haunt us". It left the Bank with the limited power of "publishing reports and preaching sermons". Regulation is now being moved back to the Bank.but as regards the root cause of the crisis he's still pushing the Glass-Steagall Act:
"We don't build nuclear power stations in densely populated areas, nor should we allow essential banking services and risky investment banking activities to be carried out in the same 'too important to fail' bank," Sir Mervyn said on Wednesday. "It is vital that Parliament legislates to enact these proposals sooner rather than later."
Well, Merv, many of the notable failures in the UK included Northern Rock, Bradford + Bingley and other building societies that came a cropper over their funding model. That doesn't sound very investment-banking-related to me. RBS came a cropper due to a demented acquisition strategy and a board who followed the "all in favour, bleat like sheep" strategy. HBOS overstretched itself in mortgage lending, thanks to the Halifax (ah, who remembers the Howard Brown adverts?) and was handed like a poisoned chalice to Lloyds TSB by Gordon Brown. I note that the big investment/retail hybrids in the UK were Barclays and HSBC, and they seem to be doing just fine (modulo shareholder revolts over pay at Barclays).
Hector, by contrast, weaseled, using the "true but irrelevant" strategy:
He said: "Ultimately, management are responsible for running firms and ultimately firms fail because of the decisions taken by their boards and their management. These decisions are made within a firm's corporate governance framework.That's right, Hector; financial firms are not perfect, often greedy and they take sometimes excessive risks. That's why we pay large amounts of money to fund the regulators who are supposed to spot this happening and act on it. Sound familiar?
"The crisis exposed significant shortcomings in the governance and risk management of firms and the culture and ethics which underpin them. This is not principally a structural issue. It is a failure in behaviour, attitude and, in some cases, competence."
Mervyn at least was honest about the fallout:
As well as moving regulation back to the Bank and ringfencing retail banking, the Bank will have new powers from next year to "prevent a hangover by taking away the punchbowl just as the party in the financial system is getting going".About bloody time, I'd say.
Some of those powers, such as possible loan-to-value caps on mortgages, "won't make us popular among bankers, politicians and even at times some of you [the public]", he warned.