As the annus horribilis 2011 draws to a close the FSA has come up with a brilliant idea: regulate the way bankers assess whether you or I can afford a mortgage. The brilliant regulator, who spotted the banking crisis within a year of it starting, is already consulting on how the current slump in home ownership can be turned into a true crisis.
The purpose of this wonderful piece of increased FSA bureaucracy escapes me completely. Many years ago I was a credit manager for a medium sized company trading throughout Europe. My task was simple: ensure we do as much business as we can and make sure we get paid quickly. I received a reasonable salary and a bonus if I achieved my targets. If not, I did not get my bonus and if it got out of hand I would probably be fired. Fortunately I was promoted a couple of years later to treasurer and worked on our credit position with banks.
No regulator got involved in the credit decisions of our business. If my decisions got too lax the company’s cash flow would suffer (and my bonus would disappear) and if they got too tight the sales team would shout at me (and their bonuses would suffer). So a good balance was kept and some sales people actually liked me – I think. It was a very simple system really and no different from being a banker.
There are of course some subtle differences when it comes to bankers, the main one being that bankers cannot be trusted to make the objective credit decisions. Bankers have proven (with some exceptions) to be led by greed and an instinct for gambling, neither of which fit with a proper banker, or credit manager for that matter.
The other subtle difference is that if they fail they get bailed out and keep their bonuses, whilst the rest of us have to live or die by our decisions.
Leading up to 2008 bankers gambled on property values increasing dis-proportionally to the economy forever and they encouraged borrowers to think the same way. The FSA proof of income regulations will not stop this kind of thinking.
Most of us have been through enough cycles to know that markets go up and markets come down but the memory of bankers, and this obviously includes the FSA which aided and abetted this process, only goes as far as yesterday it seems. Bankers, encouraged by the FSA because London was now the center of global banking, gambled that the increase in values would continue even though everyone else in the market was already talking about overvalued properties.
Worse still was the packaging of mortgages done by the really clever bankers and the purchasing of these packages by other really clever bankers. I have always subscribed to the ‘lemming theory of banking’ (which basically states that if one bank is stupid enough to do something, the others must follow). Nobody was looking at security anymore or any other metric of the banking profession.
The principles of banking are very clear and no regulator will make them clearer. The FSA has proven its inability to regulate and the rating agencies have proven that they are not really on top of things either (ask the three major credit rating agencies how they rated Lehman – see footnote – and AIG up to the moment they went bust). Creating more regulations, more paperwork and more regulatory jobs worths is not the answer.
So why not reduce bureaucracy with four simple rules:
- all bankers must be qualified (no excuses of ‘I did not know how to assess risk’)
- if a bank fails every person who has been a Director for more than 12 months at any time in the previous 10 years has to pay back all earnings over the 10 years (focuses the Directors)
- if a bank fails every person in the bank who earned a bonus of more than £250,000 at any time during the previous 10 years has to pay back all earnings over the 10 years (focuses the large bonus earners)
- any bank that fails becomes the property of the state completely and there is no bailout of any kind for shareholders (focuses the shareholders).
The FSA has managed to come up with a bureaucratic, time consuming, costly and ill-considered idea all by themselves, without any guidance from Europe! Their thinking is clearly that it is better to make the lives of the consumers difficult on our own than to follow foreign (=European) guidance making the bankers pay for economic collapse they created.
To protect yourselves I suggest businesses start looking at crowd funding and avoid bankers wherever possible. Perhaps we can introduce crowd funding to the mortgage market also.
I wish you all the very best for the Christmas season – yes even you FSA – and a prosperous 2012 – despite the efforts of our regulators.
Note: In answer to what actions Moody's had taken in relation to its AAA rating of Lehman Brothers the CEO said: "No, we did not fire any of the analysts involved in either AIG or Lehman," he replied. "An important part of our analysis was based on a review of governmental support that had been applied to Bear Stearns earlier in the year.