Thursday, 26 February 2009

Why didn't the watchdogs bark?

In the UK yesterday Lord Turner, the chairman of the Financial Services Authority (FSA), was interrogated by the Treasury Select Committee and repeatedly asked to explain why the FSA was asleep at the wheel during the last several years which coincided with the heyday of banking incompetence. The members of the Committee were trying to find out why the FSA failed to follow warnings and take appropriate regulatory action, even when those warnings came from senior people working within banks which are now nationalized, and Lord Turner could only point to a "philosophy" which discouraged such surveillance.
So, according to Britain's senior financial regulator, we can blame a "philosophy" for the UK's domestic version of the global financial meltdown. And just to underline the magnitude of this colossal incompetence, just today it has been acknowledged by Chancellor Alistair Darling that UK citizens will be insuring against losses of almost half a trillion dollars worth of troubled assets on the books of just one bank, Royal Bank of Scotland. Her Majesty's taxpayers already have a 70% stake in this bank and further assistance of £20 billion above the insurance just mentioned will take the stake to approximately 80%, although the Chancellor obstinately refused to say that this amounted to nationalization. For US readers the semantics of this should be reflected upon when contemplating what kinds of ingenious fig leaves the US government is searching for to justify a likely stake by the US government in Citigroup (C) of perhaps as much as forty percent.
But to return to Lord Turner's reasoning it appears that a "philosophy" can be blamed for a banking system built on structured finance which became ever more incomprehensible, and for the squadrons of smart and well armed bankers who sold trillions of dollars worth of contractual claims that virtually no-one understands and which lie at the heart of the gaping black holes in banks' balance sheets. But the consequences of this "philosophy extend even further. It was also cited as the reason why a bloated bureaucracy of regulatory watchdogs not only failed to bark but who, in fact, saw it as their role to look the other way when any intruders or whistle-blowers appeared on their doorstep to disrupt their tranquility.
Not mentioned by Lord Turner, but noted by many commentators, including this writer, the primary motivation behind the "philosophy" to which he kept alluding yesterday, was a carefully crafted policy of "light touch" (i.e. non-existent) regulations which were primarily designed to promote London and its City culture as the friendliest onshore center for all kinds of financial engineering shenanigans, tax avoidance and favorable to those seeking to maximize the benefits of, to use the new buzzwords, "jurisdictional arbitrage".
While writing this piece I am listening to a fascinating radio discussion about the cultural background to T.S. Eliot's The Wasteland which was written in the early 1920's. Situating this great work in the history of ideas reminds us that all cultures have a prevailing philosophy or ideology and that before and during the period that Eliot created his masterpiece the world had to confront the nationalism that had lead to The Great War, the philosophy of Karl Marx which inspired the Russian Revolution of 1917 and a feudal and aristocratic mindset that manifested itself in imperial grandeur and the servility of millions in the name of God, King and country.
Putting the current global crisis into a longer term perspective, Lord Turner's feeble appeal to a "philosophy" of cultural complacency towards financial risk management may provoke very strong feelings of anger that this should never have been allowed to happen.
But, at the moment at least, the consequences of the light touch philosophy and the market fundamentalism about which George Soros has articulated well, has been confined to the write-off of trillions of dollars worth of phony wealth, admittedly with all of the associated misery from people losing jobs, homes and businesses, but, this is in stark contrast to the tens of millions of innocent young men who lost their lives fighting two World Wars in defense of the prevailing philosophies of nationalism and other ideologies of communism and fascism.
Let us hope that the largest cost to be borne by the world economy as a result of the stupidity, greed and cronyism of the financial and political technocrats, can remain in the domain of paper wealth destruction and that it does not extend, as it did several times in the 20th Century, to a loss of human lives on an epic scale.

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