Tuesday, 10 February 2009

Contrite bankers

Two issues arising from the Treasury Select Committee’s performance today:

Notice how at every answer given, the UK regulatory authorities – the FSA – were intimately involved in, and agreed to every decision taking those businesses forward. Whether decisions over debt, the management of risk, the takeover of ABN-Amro or the over-reliance on wholesale funding. The FSA were there. They discussed and agreed banking activities at every stage of the business, from proposal through to implementation. The question we need answering is whether the very backing of the government’s highest regulatory authority at every stage of this disaster might have actually emboldened those banking executives to continue digging the hole in which we now find ourselves.

Secondly, each banker consistently maintained that the credit crunch – the drying up of wholesale credit markets between banks – was solely responsible for the economic disaster we now find ourselves in. Not their company’s performance or business model - far less their own competence in valuing debt.

The credit crunch of course, is seen as an ‘external’ problem. Something they could never have foreseen or in any way have prevented. So that’s ok then. They’re off the hook. It was beyond their control. That’s a pretty qualified apology by any standard.

At root, the credit crunch is a failure of confidence. An inability by banks to trust the financial integrity of other banks with whom they need to trade credit in order for the banking system to operate effectively. And why such mistrust? Because the banks themselves took on and traded the now-toxic debts that lie at the heart of this problem. And what was responsible for taking on those debts? The wizard financial acumen of those very contrite bankers.