November 26, 2009
Spare the Rod, Spoil the Child!
"Speak softly and carry a big stick" Theodore Roosevelt
In the Gilbert and Sullivan operetta that is global financial regulation, surely the most comical figure is Baron Turner of Ecchinswell, in the County of Hampshire. Lord Turner is Grand PooBah of the Financial Services Authority (FSA), the UK banking regulator, and is a central, if somewhat self-regarding, figure in debates about regulation after the Global Financial Crisis.
As befits an ex-management consultant, Turner rushed into print in March this year with a self-titled report on the GFC called the 'Turner Review'. This was not, as some thought, a musical based on the life of Ike and Tina but a dissection of the root causes of the crisis and some thirty recommended actions to 'create a stable and effective banking system'. One certainly cannot fault the good Baron for lack of ambition. He certainly does not speak softly as recommended by Roosevelt, but does he carry a big stick?
In his Review, Turner (we don't know whether he wrote it all himself or had the help of a few ghost writers in the FSA) pointed the finger of blame at 'bad remuneration policies' as a major cause of the shenanigans in the global financial markets. Such policies, Turner rightly points out, created incentives for excessive and, ultimately disastrous, risk taking.
So if big bonuses are the carrot, where is the stick?
Regulation of course is one cudgel (if rigorously enforced)!
In October 2008, the FSA sent out the famous 'Dear CEO' letter to the heads of UK banks with a thinly veiled warning that the FSA were about to get tough on the issue of remuneration policies. The letter, signed by FSA CEO Hector Sants, warned that "if the policies are not aligned with sound risk management, that is unacceptable. Immediate action will be required to change the policies".
Now on receiving this threatening letter, London bankers, filling the pubs around Threadneedle Street after another hard day's gambling with widows' mites, must have been quaking in the boots, or more likely laughing all the way (back) to the bank.
Because the FSA is all squawk and no action!
This week, the FSA censured Nomura International for failing to "conduct its business with due skill, care and diligence and failing to take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems".
Wow, don't pull your punches, tell us what you really think!
The Final Notice castigated Nomura for a whole series of 'extremely serious' and 'egregious' failings, over a long time and in multiple departments.
What had happened was that Nomura had discovered that one of their equity derivatives traders had mis-priced his books, shades of Saint Jerome (Kerviel). And in even more echoes of that French Farce, the mis-pricing had not been picked up by the relevant control departments. Deja vue all over again?
Given that Societe Generale had lost some $7 billion in that fiasco, one would assume that the FSA would make an example of a regulated entity that was caught doing the same thing?
And they did make an example, but not the one that they meant.
They fined Nomura 1.7 million pounds. Yes you heard right, they stung Nomura for only $3 million.
This is not a fine! That is a tap on the wrist with limp lettuce by a lazy librarian.
Since Nomura had recorded a profit of some $300 million that quarter alone, they are hardly going to worry about less than 1%, it is at the level of rounding errors. And given that, in 2008, Nomura posted a loss of some $7 billion an extra 3 million is not going to pain the Nomura board over much.
How can we take seriously a regulator that, after finding serious failings in an extremely risky business, fails to impose a decent penalty?
Two strikes. FSA have form in this regard. In August 2008, they levied a fine of around $10.5 million on Credit Suisse for mis-pricing Asset Backed Securities (ABS). At that time, the FSA claimed that this fine (less than .15% of the bank's annual income) was a 'credible deterrence'. In the Nomura case, the FSA claims that such a penalty would "deter other firms from committing contraventions and demonstrating generally to firms the benefit of compliant behavior."
Who writes their scripts - a comic genius?
Now FSA are an easy (a too easy) target and they would undoubtedly argue that their hands are tied by legislation since maximum fines have been determined by the UK Financial Services and Markets Act of 2000. It is therefore the fault of the politicians.
So the answer is easy, Baron Turner must get on the phone to Alistair Darling the 'Lord Treasurer' of the UK and get him to bring a short bill to Parliament to up the maximum fine from .1% to 100% of annual income. That would make them sit up in Tokyo and Zurich (and elsewhere).
If no response is forthcoming, Turner has no option but to resign his post or risk becoming a figure of further fun. It is untenable to threaten banks with sanctions and then fine them a pittance if they transgress. Unless, of course, you want to encourage regulatory arbitrage to get more banks to settle in London?
In Gilbert & Sullivan's comic opera The Mikado, the Grand PooBah is also called the Lord High Everything Else, and has become a synonym for someone who holds multiple offices and has an unusually high regard for themselves. In the opera, the Grand PooBah describes what it is like for a prisoner waiting to be executed
"Awaiting the sensation of a short, sharp shock,
From a cheap and chippy chopper on a big black block!"
With the FSA, the regulatory chopper is definitely cheap, but is as cutting as a cheesecake.
Posted by pjmcconnell at 05:32 AM
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