King Denies Fed Warning

In the understatement of the decade, Mervyn King (Governor of The Bank of England) has told the Treasury Committee that there needs to be change of culture at Barclays.

"Barclays has to create a new bank with a new culture to take it forward."

He also denied that the Fed had warned the Bank of England that Libor was being manipulated:

"If the Fed had regulatory concerns they would have shared that with the regulator, [not the Bank of England].

They didn't pass any information to us that Libor was being manipulated.

The Fed could have shared that with us and they did not, all we would have done was pass it on. The Fed is a regulator, we were not; the Fed asked us for advice on how to interact with the BBA."

This denial is rather odd given the following:

"Writing to the head of the Bank of England, among others, Geithner made six recommendations, which included eliminating incentives that could encourage banks to manipulate the rate and establishing a “credible reporting procedure.” 

Not least the fact that King responded and thanked him for his recommendations.

Notwithstanding that apparent conflict between what King said and reality, his statement that the Bank of England was not the regulator may well be technically correct given the appalling tripartite system set up by Brown. However, it surely had more than a passing interest in what was going on with the banking system and, now that it will have "beefed up" powers, most certainly has an even greater "interest".

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King Rewrites History

Sir Mervyn King, Governor of The Bank of England, has stirred up a hornets nest after his recent BBC radio lecture in which he rewrote history and his/the Bank's role in the financial crisis.

Amongst other things, King said that the Bank would be very happy to co-operate with another inquiry into the collapse of Northern Rock (the bank that the Bank of England refused to bailout).

This willingness to co-operate rather took the breath away of Andew Tyrie, chairman of the Treasury Select Committee, who said that the Bank "should get on with it at the first available opportunity".

Others on the Select Committee expressed astonishment at the Governor's comments, given that the Committee has asked the Bank on numerous occasions to co-operate with an inquiry only to have their requests refused. The Bank remains the only member of the tri-partite system not to have published a review into its role in the crisis.

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Hector Sants Resigns Again

Hector Sants (CEO of the failed, and soon to be defunct, FSA) has finally resigned from office.

He had resigned once before in 2010, and was due to leave in the summer of that year. However, he was persuaded by George Osborne to stay on to become deputy governor of a new regulator due to "go live" in 2013:

"As predicted on this site, George Osborne has sounded the death knell of the ineffectual and inept FSA (ironically, despite its lousy performance, FSA staff were paid nearly £22M in bonuses last year).

Osborne has stated that it will cease to exist in its current form, and a "Consumer Protection and Markets Authority" will be created.

Hector Sants, the CEO of the FSA, will stay to become the new deputy governor and chief executive of the new regulator. That announcement is to be treated with a degree of scepticism. The new body will be considerably less powerful than the FSA, and it is likely that as soon as the transition has occurred Sants will depart (as this in effect a demotion)."

As noted, this was in effect a demotion, as the Bank of England's role is to be considerably enhanced. Therefore it is not surprising that Sants has decided to step down this summer, his role in the new Prudential Regulatory Authority (PRA) body will be taken on by the Bank of England's Andrew Bailey.

Despite persuading him to stay on in 2010, Osborne doesn't seem to have offered official public thanks to Sants for his work.

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Gordon Brown's Mea Culpa

The Telegraph reports that Gordon Brown has admitted that he made a “big mistake” in the way he tackled financial regulation before the banking system collapsed.

As noted many times before on this site, the tripartite regulatory system set up by Gordon Brown failed primarily because no one body that belonged to it (ie Bank of England, Treasury and FSA) was deemed to actually be in charge of it.

Brown's admission is somewhat late in the day to be of any value!

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Brown's Legacy

I have written many times on this site about the failure or Gordon Brown's tripartite regulatory system (imposed on the City in 1997).

It is interesting to see that others have also now realised that this system was a failure, and played a large part in the recent banking crisis in the UK.

The Telegraph reports that US treasury secretary Timothy Geithner said:

"Remember your colleagues in the UK ran a strategy for a long time called light touch approach to financial regulation that was designed consciously to pull financial activity from New York and Frankfurt and Paris to London. That was a deeply costly strategy for financial regulation."

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FSA "Investigation" Outed as Useless

The failed financial regulator, the FSA, has been having something of tough time recently owing to its own incompetence and crass handling of its 18 month investigation into RBS.

Having exonerated the board of RBS and company, the FSA steadfastly refused to publish any form of report. Clearly the concept of "transparency" is not understood by those who inhabit the ivory towers of the FSA.

However, having been subjected to a barrage of well deserved ridicule and criticism, the FSA "relented" and agreed to publish a redacted report in March 2011.

Needless to say, expectations about the quality of the report should not be raised too high. In order to publish anything, the FSA claim that they will need to garner the permission of RBS first (ie RBS will have editorial rights over the report).

Impressed so far?

I'm not!

However, this litany of incompetence does not not end here. It transpires that the FSA exoneration of the RBS board may in fact be nonsense, and that the investigation nothing more than an incompetent whitewash.

For why?

WikiLeaks have published a cable that summaries a meeting between Sir Philip Hampton, the new chairman of RBS, and 3 US politicians.

During the meeting Sir Philip allegedly noted that he thought that the previous RBS had failed to live up to their "fiduciary duties", and did not conduct adequate due diligence before buying part of ABN Amro in 2007.

That hardly fits in with the FSA whitewash that exonerates the previous board.

Could someone please tell me why the FSA is still in existence?

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The Dog That Didn't Bark

The House of Lords is conducting an enquiry into the audit profession, and has been told that accounting rules were a significant contributing factor to the banking crisis.

Tim Bush, a member of the Accounting Standards Board's (ASB) Urgent Issues Task Force, told the Lords that international accounting standards forced auditors to abandon the principle of prudence in their audits.

Lord Lawson accused the profession as being "one of the dogs that didn't bark."

He quite rightly uses the phrase "one of".

As noted many times before on this site, the tripartite regulatory system set up by Gordon Brown failed primarily because no one body that belonged to it (ie Bank of England, Treasury and FSA) was deemed to actually be in charge of it.

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The Death Knell Of The Tripartite System

As predicted on this site, George Osborne has sounded the death knell of the ineffectual and inept FSA (ironically, despite its lousy performance, FSA staff were paid nearly £22M in bonuses last year).

Osborne has stated that it will cease to exist in its current form, and a "Consumer Protection and Markets Authority" will be created.

Hector Sants, the CEO of the FSA, will stay to become the new deputy governor and chief executive of the new regulator. That announcement is to be treated with a degree of scepticism. The new body will be considerably less powerful than the FSA, and it is likely that as soon as the transition has occurred Sants will depart (as this in effect a demotion).

The widely derided tripartite system, set up by Brown, is to be terminated and the Bank of the England given wide ranging powers to prevent another financial crisis; ie the Bank is now in charge of regulation.

The Bank will become one of the most powerful regulatory bodies in the world, with responsibility for both monetary policy and financial regulation.

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The Seduction of The FSA

Lord Turner, the chairman of the Financial Services Authority (FSA), has told the Treasury Select Committee that the FSA was "seduced" into thinking that the economic boom was unstoppable.

In other words the FSA was asleep at the wheel.

He also noted, quite correctly, that another global financial meltdown could occur.

In the event that the Tory Party wins power at the next election, the FSA will become a footnote in the history books as the failed tripartite system (set up by Brown) is dismantled.

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Hector Sants Resigns

Hector Sants, the CEO of the Financial Services Authority (FSA), has resigned.

Sants will leave the FSA this summer. He will have held the job for 3 years.

He has been in a corner for sometime now and, in the event that the Tories win the next election, knows that the Tories will shut down (or most certainly emasculate) the FSA.

He has chosen a good time to jump ship.

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Don't Feel Sorry For Yourselves

I cannot but help chuckle at Alistair Darling's comments directed to the bankers (ex "Masters of The Universe"), where he told them "don't feel sorry for yourselves".

Before he went into a meeting at Davos, with eight UK and foreign-owned banks, he held a press conference at which he said:

"My message to the banks is that it is in their interests to get off the front pages.

The banks should do what they are supposed to do, provide credit to the economy. They must know that changes are necessary. They can all see that the regulatory regime needs to be more robust and more intrusive.

Don't feel sorry for yourselves. Work with the government to see how you can improve the situation."

That almost is an admission that the tripartite system set up by Brown hasn't worked!

Regarding the banks, he is to some extent correct. Wallowing in self pity is not a pleasant spectacle to behold, not least when the "wallowers" are universally despised (rightly or wrongly).

The banks, like it or not, need to address their lamentable reputations if they are to have any hope of trying to set the agenda for regulatory changes etc.

It seems, for the moment, that the banks haven't quite realised that yet. They exclude themselves from being taken seriously at the discussions at their own peril.

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Shutting Stable Doors

Listen very carefully and you will hear the sound of a stable door being slammed shut by Darling and Mandelson.

Ahead of Alistair Darling's Labour conference speech outlining new rules to curb bankers' bonuses, Lord Mandelson spoke on BBC's Radio 4 programme.

He noted that Gordon Brown, as Chancellor, had introduced new legislation that "sorted out a ragbag of different regulatory processes" in financial services to make them "much leaner, meaner and more efficient".

Aside from the obvious point that the Tripartite system was hardly "leaner, meaner and more efficient", it is clear that if Darling is now having to introduce further regulations, it is clear that Brown's regulations weren't up to the job.

Mandelson will say later today that we rely too much on the financial services industry.

Fair comment, except this has been known for many years.

What exactly will he replace it with?

Later today Darling will outline plans to:

-End automatic bank bonuses year after year.
-End immediate payouts for top management.
-Defer any bonuses over time so they can be clawed back if they are not warranted by long term performance.

All very well.

However, as can be seen with the change of HQ for the CEO of HSBC, bankers will simply up sticks and leave.

The stable door may now be slammed, regrettably the horses have long since bolted!

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Turner Gets Heavy

Lord Turner, chairman of the Financial Services Authority, last night at the Mansion House launched another attack on the banking industry.

Turner said that bankers faced a future stripped of profitable businesses:

"British citizens will be burdened for many years with either higher taxes or cuts in public services because of an economic crisis ... cooked up in trading rooms where many people earned annual bonuses equal to a lifetime's earnings of some of those suffering the consequences."

He added:

"Top management, in particular of banks involved both in complex trading and retail banking, needs ... to be willing to recognise that there are some profitable activities so unlikely to have a social benefit they should voluntarily walk away from them."

I would make a number of observations:

1 The higher taxes, needed to plug the fiscal black hole, are in part due to the fact that Brown failed to "put something away for a rainy day" during the "years of plenty". Instead he chose to "spend, spend, spend".

2 Where was the FSA during the period of "reckless" lending, when banks "cooked up" these failed schemes?

3 The financial catastrophe is in no small part down to the failure of regulation, emanating from the "bugger's muddle" of the tripartite regulatory system created by Brown.

4 Labour was happy to "schmooze" with the City during years of plenty, and had its fingers in the till earning billions in tax from the profits and pay of the banks/bankers.

5 The country did well out of the years of plenty, we are a far wealthier and more advanced nation than we were 30-40 years ago. This is a direct result of globalisation and freeing of currency flows. The current financial crisis has not set us back 30-40 years; ie we are still better off.

There will always be financial crises, each one different from the other. Turner and the G20 are unlikely to find a panacea that will prevent the next.

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The Banking Rip Off

As I have noted before, the financial services industry in the UK has an unfailing knack for digging itself deeper into its own shit.

Not content with foisting endowment mortgages, PPI, excess credit card rates, bank charges and other insults on its hapless customers it now seeks to milk them further by "imaginative" and outrageous profiteering charges on mortgage arrears.

Many thousands of homebuyers, many of whom are unemployed, face profiteering penalty charges on top of their regular monthly mortgage repayments.

The Council of Mortgage Lenders (CML) report that the number of mortgages in arrears by three months or more has reached 270,400 (compared with 152,700 at the end of the second quarter of 2008).

Moneysupermarket.com report that Lloyds Group is charging £206 for repayments three months or more in arrears.

GMAC and Abbey charge penalties of £50 and £40, respectively, when the borrower is only one month in arrears.

Halifax charges £35 for every call/letter wrt mortgage arrears, and then has the barefaced cheek to charge £100 for debt advice.

The FSA has a Code of Conduct that requires that lenders treat customers fairly sympathetically.

Evidently the banks haven't read that code, or simply do not care about it.

The Treasury Select Committee is not impressed with either the banks, or the hapless and hopeless FSA. It has attacked the FSA for sitting on its hands.

Britain's financial services industry is rotten to its core.

Until the FSA is expunged from history, and replaced with a more pro active assertive regulatory body, the hapless British consumer can only expect more of the same and continue to be ripped off.

Those who currently are enjoying the fruits of their profiteering should bear in mind the wise adage:

"What goes around, comes around".

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Toothless and Muddled

The Treasury Select Committee put the boot into the Government's white paper on financial regulation, and called it "toothless" and "muddled" as it has failed to address the key weaknesses in Brown's failed and derided tripartite system.

As ever, the fundamental weakness of the tripartite system is that there is no one actually in charge of it.

The Treasury's "solution" is to create a fourth body to oversee the the tripartite (named the "Council for Financial Stability")

An absurd idea which would only add to the muddle, confusion and buck passing.

However, all of this is but fanciful dreams akin to rearranging the lifeboats on the Titanic, the Tory Party will abolish the FSA once it is elected and the responsibility for supervision will be returned to the Bank of England.

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Dead Man Walking

The Tories have promised to abolish the hapless and hopeless Financial Services Authority (FSA) when, as seems likely, they win the next election.

The FSA was set up by Gordon Brown in 1997, as part of his much derided and failed tripartite regulatory scheme. It has had many "triumphs" since inception, eg:

- standing up for the life assurance industry against the hapless consumers who were conned into buying worthless endowment mortgages

- allowing the board of Northern Rock to destroy the company

- allowing RBS to come to edge of ruin

- allowing banks and credit card companies to charge extortionate rates of interest

- allowing banks, credit card companies and loan companies to sell ineffective and over priced PPI

- standing by as the banks operated the world's largest Ponzi scheme (bundling and selling worthless debt in a frenzy of greed)

- allowing the banks and mortgage companies to push Britain into an unsupportable level of consumer debt

More generally asleep at the wheel, and lacking any real pro active energy, the FSA will not be missed by the consumer; but may well be by its paymasters in the financial services industry (whom the FSA stood up for on numerous occasions).

Responsibility for regulation of the financial markets will be given to the Bank of England, and a new consumer protection agency will be created with the necessary "clout" to make sure the public were treated fairly.

Not before time!

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Who's In Charge?

Those of you who were worried about who is exactly is in charge of the UK need worry no more, Lord Mandelson has revealed that he is in charge and the person where the "buck stops".

In an interview with The Today programme he said:

"The spending period currently operating in Government stretches beyond the next election and therefore it is reasonable to review public spending at that time."

Adding that the Chancellor has already "made that judgment".

By making that statement in public, he has tied both the Chancellor's and the Prime Minister's hands.

Now all we need to know is who exactly is in charge of the Tripartite regulatory system; the Bank of England, the FSA or the Treasury?

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King Clashes With Darling

Mervyn King, Governor of The Bank of England, publicly clashed with Alistair darling at the Mansion House dinner last night over the best way to improve the regulation of the City.

King said:

"It is not sensible to allow large banks to combine high-street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.

Privately owned and managed institutions that are too big to fail sit uneasily with a market economy."

However, as the Chancellor noted, restricting the size of banks is not that simple.

King also asked for more regulatory power to be given to the Bank:

"We need instruments to prevent the size, leverage, fragility and risk of the financial system from becoming too great. The resulting macro-prudential toolkit will contain a number of instruments to reduce risk, both across the system and over time."

However, the fundamental problem is the tripartite regulatory system which has no effective head. Until the system, which was introduce by Brown, is replaced regulatory issues cannot be satisfactorily addressed.

Unfortunately, as long as Brown is PM, the tripartite system will remain in place.

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Brown's Failed Tripartite System

In February 2008 I wrote:

"As long as Gordon Brown is Prime Minister, and that looks likely for the next year or so, the current failed tripartite regulatory mechanism will not be changed for the better. He is the arrogant architect of this failure, but will never admit to it."

In March 2008 I wrote:

"The fundamental failing of the current tripartite regulatory system, created by Gordon Brown ten years ago, is that no one is actually in charge of it.

Until Brown goes, that situation will not change, and the tripartite system will continue to be ineffective."

Later that same month I wrote:

"Unfortunately, because this dysfunctional system was created by Gordon Brown, until Brown is removed from office there will be no change to the tripartite system and the UK's financial system will continue to remain exposed to failures such as Northern Rock."

I am pleased to see that people are finally waking up to the disaster of a Chancellor/PM that is Gordon Brown (as another cabinet minister resigns), and the regulatory shambles that he imposed on the City in 1997.

The Times notes that the House of Lords Economic Affairs Committee has stated that the tripartite arrangements had failed. Lord Vallance, its chairman, said, "in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision".

Sir Martin Jacomb, a former chairman of Prudential and director of Barclays, also weighed in and criticised the Prime Minister for his "disastrous" decision while Chancellor to strip the Bank of responsibility for banking supervision and hand it to the newly created Financial Services Authority.

However, as I have noted before, the tripartite system will be with us as long as Brown is PM. Fortunately his tenure in office looks as though it is rapidly coming to an end.

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The Scary FSA

The FT reports that the FSA is trying to live up to the stated wishes of its CEO, Hector Sants, when he stated last month that people "should be very frightened" of the FSA.

The paper goes on to quote Tony Woodcock, partner at Stephenson Harwood, who said that he and his colleagues had come across cases where applicants were summoned for taped interviews, often with a member of the FSA's enforcement team present.

Quote:

"We have been left asking ourselves why this was thought to be necessary.

It inevitably causes delay, sometimes to the point of wrecking or risking the wreck of a transaction."

All very well but the FSA shutting the stable door after the horse has bolted, and trying to look intimidating is not the solution to a fundamentally flawed tripartite regulatory system.

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