Adair Turner: tough on the causes of crime, not so tough on the criminals?
By Gavin Lumsden | 13:11:42 | 23 January 2009
Is it unfair to summarise Adair Turner's excellent speech on the financial crisis this week as tough on the causes of regulatory crime, not so tough on the criminals?
If you've not read the FSA chairman's speech at the The Economist's inaugural City lecture on Wednesday night I recommend you do. It's a very good explanation and analysis of the 'macro' factors behind the global financial crisis. But give yourself a quiet half an hour, it requires concentration to follow the argument!
If you've not got the time, here's the news story we did yesterday and the following is my quick, and very partial, summary ...
Turner explains how high savings rates in countries like China and their investment in risk free government bonds helped push interest rates to historically low levels, in the process stimulating a 'ferocious search for yield' by investors and fuelling the property boom. The former also stimulated an explosion in financial sector innovation which led to unsustainable growth in the credit securities market that both relied upon and increased massive levels of borrowing within major financial institutions.
You may well have heard this before, it's not new, but he does set the ground well. Having established his facts, Turner's goes on to argue that regulators around the world, governments, academics and financial institutions all completely failed to spot the systemic, market risk that was building up until the dangers begun to be unleashed on an unsuspecting world a year ago. Far from diversifying and reducing risk, the 'originate and distribute' business model of the investment banks, actually accentuated the risks as the proprietary trading desks of investment banks bought and swapped these dodgy assets with each other.
Along the way, Turner takes a pop at the IMF which, in its Global Financial Stability Report in 2006, actually praised the dispersion of risk by the credit securities market, saying it helped 'to make the banking and overall financial system more resilient'. Woops!
Referring to the IMF's howler, Turner says if there are inherent risks in investment banking and the credit market then 'it would be precisely the opposite of what many clever, hardworking and well meaning people believed about the securitised credit markets only two years ago.'
'Clever, hardworking and well meaning people.' Mmm, couldn't these words apply equally well to the role of the FSA and its officials in the retail financial services market?
After all, the FSA is staffed by highly intelligent people like Turner and Dan Waters, director of retail policy and themes, who analyse and assess the highly complex sectors under their care with impressive ease.
And yet, as Peter Rutherford testified in response to my blog on Monday, the FSA fails to act when given clear information about specific abuses such as blatant churning by a few advisory firms of clients with investment bonds.
In his speech, Turner calls for far greater co-ordination and co-operation between regulators and authorities around the world to deal with the faultlines that disrupt global financial markets from time to time. Nothing wrong there. But in the same breath, whilst admitting the FSA's mistakes in relation to Northern Rock, he questions regulators' emphasis on an institution by institution approach in their work.
While of course there is a danger that regulators don't see the wood for the trees, macro assessment of markets must not be at the expense of micro scrutiny of individual companies. It seems to me that from Equitable Life to Northern Rock the FSA has seen many of the wrongs but has not had the bottle to challenge managements effectively enough. Doling out punishments for dozens of hapless mortgage brokers and the occasional national such as AWD is not sufficient. We need to be confident that the FSA can make use of the information it has