A Useful White Paper?
Have ministers got the prescription right to protect us from future banking and economic crises?
After a difficult gestation, the Government’s blueprint for regulating the City finally emerged blinking into the cold light of day. Observers anticipated few surprises in the White Paper, much of which is based on the relatively uncontroversial proposal put forward by Lord Turner, chairman of the FSA, in March.
As expected, the Chancellor made clear that he did not favour splitting up big and complex global banks, dubbing such proposals “simplistic”. Instead, they will be forced to hold more capital to absorb losses and to have greater liquid assets to guard against a run on deposits. The riskier a bank’s operations are deemed to be, the more capital they will have to hold. There will also be a new “backstop” power to prevent them borrowing too much.
The initial reaction from the City was broadly positive. As well it might be. Investment banks, including Barclays Capital, are already inventing schemes to reduce the capital cost of risky assets on balance sheets to a practice BarCap calls smart securitisation. Some will see this as a sign that financial boffins have already found a way to run rings around rules on capital designed to make banks safer.
Certainly signs of life in the securitisations market should serve as a warning to regulators: the plan to impose higher capital thresholds will only succeed if the riskiness of the derivative products can be accurately monitored. What does the White Paper say on that? Not much. Little detail was given on how macro-prudential oversight is to work, or who will be in charge. As such, the Chancellor’s proposals are a wholly inadequate response to the banking crisis.
The bottom line is that Alistair Darling has plumped for fudge. Perhaps the biggest dollop is the new Council for Financial Stability, which is actually just a rechristened version of the old tripartite system, comprising the Treasury, the FSA and the Bank of England. The old trio failed miserably, largely because they couldn’t communicate effectively and things fell through the cracks.
In future, both the bank and the FSA will have slightly broader powers and the Council - chaired by the Chancellor - will be more transparent. But these are mere tweaks. The Chancellor has also deferred the important questions of exactly how counter-cyclical measures, such as jacking up capital ratios, will be applied.
Getting the details right is clearly important, but so is getting things done. There is some good stuff in this White Paper, but unless momentum is maintained, the Government could end up wasting a good crisis.
Tackling The Banks
Trading profits are up and bonuses are back. Yet Britain’s banks are still not lending. Is it time to get tough?
There’s a new buzzword doing the rounds in the born again City – BAB. It stands for Bonuses are Back and its arrival in the lexicon is evidence that bankers are once again looking forward to bumper payouts, just eight months after the sector faces meltdown.
Goldman Sachs staff are now looking forward to the biggest payout in the bank’s 140-year history. Many other investment banks are anticipating stellar profits in no small part as a result of the chaos caused by their previous activities. Bond markets are hectic as a result of governments’ needs to finance their deficits, while economic problems have created (profitable) volatility in foreign exchange markets.
When even majority government-owned banks, like RBS, join the party, you know the system is rotten. RBS chief Stephen Hester’s £9.6m bonus shows that bankers haven’t changed. Indeed, there is growing suspicion that this lethal breed is going back to business as usual, although the financial crisis remains unresolved – frightening prospect for taxpayers everywhere.
Fading political will to secure a strong regulatory response – and a good deal of sustained lobbying – would appear to have let banks off the hook. That is dangerous, particularly against a background of unresolved global imbalances. There must be a possibility that, with bankers once again at play, the financial system will return to chaos in the not too distant future.
What should be done? Bank of England Governor, Mervyn King, argues that investment and retail banking should be separated, along the lines of the old US Glass-Steagall act. His reasoning is that it is too risky for high street banks to continue playing in the casino of investment banking. The problem, though, is that shrinking banks so dramatically would generate a big chill just as the markets are beginning to unfreeze.
Without its investment banking division, Barclays would have joined RBS and Lloyds as a burden on the taxpayer. It would be better to follow the FSA’s strategy of making banks reserve more capital the banks warn that even a tamer crackdown could stifle recovery, because the more capital and liquidity a bank has to hold, the less they are able to lend.
That’s a valid point. The crucial thing now is to get enough money into the system to get the taxpayer off the hook, keep good businesses alive, and convince jittery foreigners to find the Government’s truly extraordinary borrowing requirements. The niceties of financial regulation can wait.
War Of The Watchdogs
Should the big banks be broken up? And who should regulate them? The battle-lines are forming.
Ever since the fall of Northern Rock, a cold war has been waged between the Treasury and the Bank of England. Last week we witnessed the equivalent of the Cuban Missile Crisis. The setting was the gilded banqueting hall of mansion house, and the level of brinkmanship and tensions, as Alistair Darling and Mervyn King faced each other down, was palpable.
Darling delivered a lacklustre speech on regulation, setting things up nicely for the Governor’s putsch. King is making a power grab: not only does he want to put the Bank in charge of spotting squelching future threats to financial stability; given the chance, he’d break up Britain’s biggest banks, too. The Treasury is opposed to both measures; the Tories broadly sympathetic.
The financial crisis has descended into a tedious soap opera. Alistair and Mervyn have fallen out again. The guv’nor is getting matier with David and George… It’s all so trivial. Instead of arguing about who should be sheriff, we should begin with the broader question of what sort of financial system we actually want.
Yet the sheriff question is key. The tripartite system of joint regulation (between the Bank, the FSA and the Treasury) which Darling defends in such lukewarm fashion clearly hasn’t worked. The tatters of the British financial system are testament to its failures. Indeed, in continuing to champion it, Darling has cast himself outside consensus.
A key measure of President Obama’s regulatory blueprint is to put the US FED into the cockpit. King’s wise proposal echoes that. The FSA should be left to deal with consumer protection and the solvency of individual banks, leaving the Bank to safeguard against systemic risk.
There are regulatory battles everywhere. This week’s tussle between Gordon Brown and Brussels over fiscal independence was a more significant encounter than the Darling-King scrap. Who would you prefer to, make judgements about the UK banking system, Mervyn King or the European Central Bank? The PM, fortunately, secured an opt-out.
Clearly, the posse of global regulators is breaking up as national interests assert themselves, and, given the confusions, that’s all the more reasons why Darling is right not to rush reform. The FSA chairman, Lord Turned, fears that the will to reform… could weaken as recovery takes hold. Perhaps, but until you know what new levers you want to give the regulators, you can’t really decide who should pull them. Darling is right to take his time. We need to get this one right.
Recession Over?
Predictions of a faster than expected recovery are gaining ground. But there are big dangers in jumping the gun.
“Don’t be fooled by one month’s data” is one of the first lessons taught on any good economics course. Yet the accumulation of upbeat stats can no longer be ignored. Rather than the odd green shoot, the economic landscape now resembles a fragile carpet of green, and economists are busy revising their forecasts higher.
The most weighty of the green-shootists is the National Institute of Economic and Social research. If the NIESR is right, and they have been in the past, there’s a good chance that official GDP figures could show a flattening in the second quarter and a return to growth in the third. Good grief! The Chancellors’ much-derided Budget forecast could turn out to have been right all along.
Perhaps there is an economist’s recovery but, with large numbers of job losses still to come, the pain for many ordinary Britons is just beginning. Meanwhile there’s a danger that we lose something crucial amid all the green spouting. Momentum for reforming the financial sector and for rebalancing the UK economy was strong in the depths of crisis. Now it is palpably slipping away… on the slenderest of pretexts.
Forget green shoots, GMB union leader Paul Kenny said, what we are actually seeing is “greed shoots”. The “recovery” seems to consist largely of bankers getting “the financial gravy train back on the tracks” – witness the recent huge payouts at Barclays. Yet it is clear that the banking system is not yet out of the woods. The ECB warns of a further bank writedowns totalling $283bn this year: a bleak outlook.
There is now a big risk that central banks and governments will move too swiftly out of recession-mode strategy and begin reversing their supportive monetary and fiscal policies. There were hints of such exit strategies at the last G8 meeting. Yet there is still meltdown potential, especially in Europe. Latvia, for example, is a ticking time bomb.
Some economists think that the world has dodged a bullet. The risk of an all-out Great Depression… has receded, but historical analysis by economists Barry Eichengreen and Kevin O’Rouke gives pause for thought. The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted. But we shouldn’t delude ourselves. The path to full recovery is likely to be long, hard and uncertain.
Brown Sugar
Is the appointment of Sir Alan Sugar as the Government’s “enterprise tsar” anything more than a distracting gimmick?
The recession ended in May. Whether or not you believe that to be true, the one thing Gordon Brown hasn’t had to worry about recently is the economy, which is staging something of a fightback.
It looks like output will start to grow again by the end of the year. But the recovery will be sluggish, and could be short-lived – and swingeing job cuts and business insolvencies could make it feel far worse next year. So what are we to make of the bizarre appointment of Sir Alan Sugar to the House of Lords as enterprise tsar? A serious man for serious times, no doubt.
Sugar seems to have a lifelong gift for boarding sinking ships, leaving computers for property and property for politics. Yet, as he has shown on The Apprentice, at least he is comfy on camera – which is more than the PM can say. How Gordon Brown must envy him. He doesn’t have charm. There’s no sign of any emotional intelligence. His sense of humour is oddly stunted and he’s stubborn, arrogant and mouthy. And yet the public not only love him, but back him in their millions with their remote control. But will he get results?
Sugar’s stated aim is “to help out businesses and act as a kind of giant Dragon’s Den… although not with my money”; he plans to act as an intermediary between banks and companies. But that may be as empty a promise to the average small business as every other emergency enterprise package: you only get the cash if you can show you don’t need it.
Sugar’s recent track record in business hasn’t exactly been brilliant, and he’s not always the most prescient forecaster: “Next Christmas, the iPod will be dead, finished, gone, kaput,” he predicted in 2005. But there’s a lot more to him than boardroom bluster. The Amstrad PC genuinely revolutionised consumer electronics in Britain, and that alone makes him a business visionary. But that was a long time ago and you’d think the less-than-happy experience of Lord (Digby) Jones in Whitehall would have dulled Brown’s enthusiasm for bringing bumptious businessmen into the big tent.
You can’t help thinking the PM has missed a trick. Who better to knock the banks into line than Sugar’s sidekick, Margaret Mountford? The strategic application of that sceptical scowl and cocked eyebrows would soon stop them coming up with another fiasco like subprimes. Never mind Lord Sugar, bring on lady Salt.
The Travails Of Vauxhall
Vauxhall car-workers have become pawns in the international carve-up of GM Europe. Do they face the scrapyard?
Saving General Motors’ cash-strapped European division from the consequences of its parent’s bankruptcy was always likely to be both complicated and highly political. Last week the two remaining bidders for Opel and Vauxhall were invited to a summit at the German Chancellery.
Many though Fiat would come out on top, but the Italians were beaten by the unlikely alliance of a Canadian car-parts maker, Magna, and the Russian savings bank Sberbank. The irony of a Russian state bank rescuing a pair of car firms whose US parent is being nationalised will be a jolt to anyone who still thought the car industry was ruled by market principles.
The question facing Vauxhall’s 5,000-strong workforce is: who the hell are Magna? The company, built from a single garage by a colourful Austrian-born entrepreneur named Frank Stronach, is the largest car-parts supplier in North America, yet it has no experience of running a motor company and there is scant detail on what, exactly, it plans to do to the European arm of GM.
The involvement of the Russian oligarch Oleg Deripaska – the man caught up in the Mandelson/Osborne yacht imbroglio last summer – may provide a clue. Deripaska (an “industrial partner” in the deal) owns the Russian carmaker GAZ and, until he fell on straitened times, had a 20% share in Magna. The plan he hatched with Stronach in 2007 was to conquer the Russian car market and make headway into Europe and Asia. Thanks to the deep pockets of Sberbank and the convenient collapse of GM, the plan is back in play.
That may not come as much reassurance to workers at Ellesmere Port and Luton, and matters haven’t been helped by the verbal sparring between the Business Secretary, Lord Mandelson, and union leaders who accuse him of not doing enough to secure a commitment for the plants. Mandelson will probably stave off significant job losses for now. But since he has not committed a penny to Vauxhall’s new owners (unlike the Germans, who advanced a 1.5bn euro, bridging loan to secure Opel) his influence is limited.
One might have hoped for better. Imagine the creations of an industrial culture in which somebody fought for British ownership of some of our landmark marques. This is not a protectionist, but a pluralist position: neither a wholly British-owned nor wholly foreign owned industrial sector is desirable. You want a mix. If Magna redirects Luton’s van production to Russia and Ellesmere’s car production to Spain and Germany, we will see that ownership matters.