Eldon-Online

Financial Regulation - The Race for Reform

Let me take you back to a speech made on 24 February 2009 to a joint session of the US Congress, and a comment made by President Obama who said: "And to ensure that a crisis of this magnitude never happens again, I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system." Of course, he said many other things about banks and bankers that night too, much of which I have to say was appropriate in the light of the debacle on Wall St. But it has been regulation that has been on my mind since the financial crisis, wondering how the regulators and their masters would, in fact, deal with them.

While there was a lot of disgust in the minds of the public, fuelling a desire by the politicians to do something that was a cross between doing their duty and making themselves popular, the frenzy surrounding the regulatory regime was being kept on the boil. Two particular worries for me were that some other crisis would loom, which might take the politicians eye off the regulatory reform ball, or the global economy would recover to the extent that the politicians were no longer so interested in those reforms, although recent events in Greece should have brought that idea to a grinding halt! That and the fact that the 80th bank this year in the USA has just been taken over by the Fed.

The questions we should have been asking, of course, were more about whether the regulations failed that badly, or were they just sloppily administered? Were we not perhaps more concerned about following rigidly to a set of rules and making sure the boxes were ticked, rather than giving some thought to the principles or ethics of the financial business world?

I have referred before in my Blog to a book I have (sadly no longer in print) that clearly set out the causes of the latest financial crisis - a book that was first published in 1875. If the advice therein had been followed this decade, we would have been much less likely to get into the sort of mess we did. 

And in any case, it is hard to regulate, or legislate, or even teach against greed. 

So, I am far from convinced that a change to the regulatory structure is the entire answer and although it's an impractical suggestion, nevertheless consider the best methodology - to be consistent with President Obama's required regulatory overhaul - would be to do just that; overhaul the entire system starting from scratch. We must have regulation, no argument there, and some of it is indeed old, but overlaying a new set of regulations to paper over the cracks of the old regulations is NOT a solution but a "fix".

The other matter for debate relates to the fact that banks have, in the eyes of some, become "too big to fail", and that we should therefore solve that particular problem by emasculating them and making them "too small to need to bail them out". That way we save lots of taxpayer money. But frankly that is a debate that misses the point entirely. The small banks actually fail more frequently than the big banks - but for the same reasons. They are too weak to survive. In other words our regulations and our banks - of any size - need to be created so they are " too strong to fail".

I opened with a quote from a speech given some 15 months ago, and what prompted my review of the subject was the approval by the US Senate on 20 May of a Financial Reform Bill. The first, I guess, of the major economies to get this far - and unsurprising that should be so, given the economic and political turmoil going on in Europe just now. A Bill that contains some new regulations, presumably designed to prevent a crisis of this magnitude ever happening again. A noble but unachievable goal I am sorry to say - but no, take nothing away from the fact that some action has at least been taken.

But then another article caught my eye - this on the subject of the Washington lobbyists which read, Financial Overhaul Bill Poses Big Test for Lobbyists. This article then went on to spell out just how the lobbyists, for cash, take up the cudgel on behalf of their donors to try and amend the provisions of legislation most damaging to the donors interests. The figure that made me really take notice was that the financial sector lobbyists had received US$1.7bn over the last 10 years from their benefactors.

I guess many of us are aware of the power of the Washington lobbyists, and have a notion of the amount of money that passes through their hands, but this looks like a large sum by any standards. And in fairness, of course, not everyone agrees with the process. One senator is being accused by his detractors of "sheer hypocrisy". Suggesting that he is bashing Wall Street with one hand, and filling up the money sack held in the other to fight on their behalf.

It certainly seems to me that no matter how strong the desire by Government to do the right thing, how high the anger levels by the person in the street who blames the banks for making his or her life a misery, we will never get this sorted out in a fair and well reasoned manner if we continue to allow vested and conflicted interests to rule at the end of the day. It's a race for reform alright - one where the rodents also take part.

Reality or Surreality...The World Today

I don't know if it happens to you, but there are times when I get a feeling in my stomach that all is not well - but I don't know why! I cannot quite put my finger on the cause, and that in itself is a worry. I have been experiencing it rather a lot at present.

For example, you know what is happening in Thailand - but do you really know why? Do the Red Shirts have some genuine grievances that have driven them to attack the Government so violently and if so, do you know what those grievances are, or does it all have something to do with the fact that they are being paid daily to stay where they are? Is this a genie that Mr. Thaksin has inadvertently let out of a bottle that will be difficult to put back?

In Hong Kong over the weekend there were 5 by-elections, created (at some cost to the taxpayer I must add) by political activists to demonstrate that the people of Hong Kong were crying out for political change and in particular to push hard for a true democracy. The pro-democracy candidates were all elected by large majorities in their constituencies - but the voter turn out was under 18%. Hardly a ringing endorsement by the "deprived of democracy" Hong Kong public. And isn't it anyway rather ironic that under British rule in Hong Kong, democracy was only really introduced as a topic in the last few years of that rule?

I don't think that China has yet expressly said that Hong Kong will never ever have full democracy, but I believe I am paraphrasing Deng Xiao Ping who said that if you are crossing an uncharted river, you need to know where the stones are as you cross.

A letter in the Hong Kong press last week which became a little too close to comfort for me personally, took to task those selfish people who didn't want to retire at 60, thereby depriving younger people of the opportunity to earn a living. The author had obviously not yet realised that people are living longer (even in polluted Hong Kong - so far!), and that many want to carry on working. Indeed many countries are tackling this as a serious problem - Singapore being one of them.

And of course I cannot miss an opportunity to have yet another go at our Hong Kong Civil Service  Government, on the subject of pollution. I was in Sydney last week. The air was brilliant. I have also been in Taiwan and Korea recently, countries where the capitals both had previously chronic pollution problems that today, if not entirely solved, are much better than they were. I'm sorry, I don't want to leave Hong Kong but there is a limit ... 

The economic fallout continues to cause problems, and this is one that will run and run I'm sorry to say. At present the USA can sit back and watch Southern Europe in particular struggling financially for a change, their minds having been taken  off foreclosures, bank failures and regulatory changes by BPs oil disaster in the Gulf of Mexico. But only temporarily I suspect. And environmentally the problems continue with that volcano still keeping parts of Europe pinned down, floods in China, and much else.

And of course it doesn't end there does it? We seem to have been hearing a little less about Afghanistan these days, and Dafur. Little news about despotic regimes - but these things are also all still there...... and I wonder why I am nervous? Maybe not!

People of my age and good fortune have much to be thankful for - which we must never forget. After the second world war ended there has been no major global conflict since that time, although there have been some pretty horrible extended battles, causing much loss of life, hardship and grief. There have been parts of the world that have done better than others, been able to steer away from corrupt leaders, had better luck with vagaries of the climate - no droughts, floods, hurricanes and tsunamis. But I am not convinced we are reaching upwards and forwards, and perhaps it is this that makes me nervous.

I didn't start off the Blog with this sort of conclusion in mind. I was intending to lead in to what happens when families quarrel - and how insignificant it all becomes within the big picture. I might still do so later, because there are lessons for all of us in how families get on with their problems and how they can prepare for them. But much of what happens in our world today is shaped by our social environment. By the families, and maybe if we made a start there, we might see some improvement in our world. 

That was where I was going, and it ended up in a bit of a rant - sorry - but then it is what blogs are for!!

At least I am not feeling as "unsettled" as I was when I started, and I must just share with you, in my own words, what that very talented American show host Jon Stewart said the other day on his Daily News programme in relation to Britain's new leadership. As a caption to the picture below, he said

...is it just me, or is this an advertisement for a "before" and "after" weight loss programme?? 

"...Home Rule"

In my last Blog, which sort of covered the UK election I wrote "I really should return to writing about other things". And so I should, and will soon - but courtesy of the newspapers in Australia, which is where I am at present and possibly already commented upon in Britain, there is an interesting little statistic I had overlooked in other election commentaries. 

You have all probably spotted this already, but look at the map of "elected" Britain - (it does include the constituency, of course, of the still unelected Prime Minister!)

Most of England is held by the Conservative Party (blue), with a sprinkling of Liberal Democrats (yellowish) particularly in the South West, and some Labour (red). In fact the Conservatives hold a significant absolute majority in England. Scotland is Liberal Democrat, Labour, and Scottish Nationalist, Wales is Plaid Cymru with a sprinkling of Tory, Labour and Liberal Democrat, Ireland is also largely local parties (Sinn Fein and Unionist).

As someone said to me today - a non-Brit, but observor of matters international, political and financial - "it seems that like it or not, the wealth creators (in his view the Tories) got most of the vote in England, but the wealth consumers (particularly Labour, and allies - looking at the UK deficit), attracted the votes in the other countries". His words not mine!

Hmm.

It is of course supposed to be the United Kingdom, as a result of people 303 years (and 12 days, as I write) ago suggesting that the individual countries of England, Wales and Scotland might be stronger together than they were separately.(The Irish joined in 1800). A philosophy with which I would generally agree. But since then the Welsh, the Scots and the Irish have all been campaigning for Home Rule - or some sort of amplified autonomy.

Given these election results, and if my friend is right about the wealth creators, then perhaps the Nationalist parties outside England should have their way - or more, give them full autonomy. Let them continue to sing their own anthems before sporting fixtures, (so much already, for "United Kingdom") and let England go back to Land of Hope and Glory.

"Home Rule for England" could become the mantra, instead of England being on the receiving end of demands for autonomy by the other countries.  

Why not? If the voters of England have spoken so clearly, why should they be saddled with the whims and fancies of their neighbours, who can then be left alone to try and realise their dreams and deal with their own problems!

Okay, it's not April 1, and am I serious?.....well putting aside the many flaws in the superficial argument, of course I recognise that this is a little tongue in cheek - but maybe only a little. 

It's another beautiful day in Sydney, and I hear that the Conservatives seem to have struck a deal with the Liberal Democrats. So that really is all I have to say on this subject.

People in Glass Houses...

People in glass house shouldn't throw stones is the old saying... and here is Britain, great critics of the inefficiencies of the American polling system particularly in Florida in the year 2000, suffering the sort of problems one would more often equate with a third world country in its own elections last week. People who were entitled to vote, not being allowed to do so, and no system in place to take care of some clear deficiencies in the procedures.

Unseemly rows taking place in polling stations - where voters with a genuine grievance were being denied the opportunity to express their views by voting. Look, it doesn't actually matter whether those votes would have made much of a difference to the overall result. The fact is they were entitled to have their say and it was denied. Britain's former (I presume) foreign minister would have been on his feet quickly enough if something like this had happened in, for example, Africa. Saying words like Britain “…deplored the discouraging setback this was to democracy”.

And if all of this wasn't enough, you now have an unelected Prime Minister, whose political party whichever way you cut it lost the election, deciding to stay in the Prime Minister's residence. Whatever happened to gentlemanly conduct? Is he suddenly going to try and change the constitution and introduce martial law or some such nonsense, just so he can stay where he is? No, let's be honest, thatis rather far fetched even for me to suggest. But is he hoping seriously to try and do a deal with the Liberal Democrats, and the other smaller parties so that he can have a go at staying in power? Clearly not if the media headline today is correct which read "A diatribe laced with threats: Brown vents rage in furious call to Clegg as talks resume between Lib Dems and Tories".

It is reported that Mr. Clegg is no fan of Mr. Brown anyway, so this will have done nothing to provide a smooth path for discussions, were the talks with Cameron to fail and talks with Labour Party representatives became an option.

So, where do we go from here?

There is enough reporting in the newspaper to keep everyone advised, albeit not necessarily informed, about the state of play in Britain politically, and I really should return to writing about other things. But there are some serious issues that emanate out of Britain today from a purely financial perspective. Agreement needs to be reached soon in Britain. It should be reached between the Conservatives and the Liberal Democrats. I do not think that the Tories should try and go it alone, even though it might just be possible, as it will just waste time and create delays in making a start on the much needed focus being brought to bear on an economy that has been destroyed over the last few years. A focus shared by both of those political parties.

Failure to move is going to put Britain in a more difficult financial situation than it already is; few measures will be popular, and the party therefore likely to benefit politically in the long term will possibly be a rejuvenated Labour Party, as they will not be the ones taking the measures - but if those measures are not taken, the British people are going to wake one morning to witness the same street scenes as we have already seen in Greece... lots of glass and lots of stones.

Lie To Me - or "Elect Me - I'm an Honest Politician".

May I commend to you the American TV Series "Lie to Me", if it is on a screen near you? Starring British actor Tim Roth it deals with a unit that assists in investigations reaching, in the blurb about the programme, "...the truth through applied psychology: interpreting microexpressions, through the Facial Action Coding System, and body language"

The upcoming British election on Thursday 6 May has provided a fertile ground on television news for the "facial" and body language experts to comment on the veracity, or otherwise, of the candidates leading their parties into the next election. And whilst the politicians cannot agree with one another, naturally, there seems to be general agreement amongst the experts that all of them are lying through their teeth or, if that is too harsh, then they are least being very economical with the truth.

There are all the usual platitudes ... clean government, new, modern, progressive, we'll keep the cuts lower than the other guys/tax the rich higher than the other guys, defend the health system, make education better... wherever you turn there are new entreaties - but where is the truth? 

Mervyn King, Governor of the Bank of England, has probably got it nailed - even if it was in an unguarded and probably "not intended for public consumption" comment to the US economist David Hale the other day when he is reported to have said that the cuts required to turn around the British economy will be so severe as to leave the victor in Thursday's election subsequently out of power for a generation.

This is the sort of information that the British public need to hear directly from the leaders, not a third party - or in this case even a fourth party - but then let's be honest for a change. Whoever tells the truth might not win the election. By the same token, not winning the election might be the best thing to happen to any of the parties!

Oh, but why am I, a disenfranchised Brit living 10,000 kms away from Britain actually interested in the election? Well, first of all I still need to know what friends and colleagues are going to be talking about after the event. Secondly, you are becoming aware of the "PIGS" (Portugal, Ireland, Spain and Greece) - and by the way it is not a mnemonic I like, but it is in current usage - as a term being used to describe the sick economies of Europe. I do have a concern that if Britain does not get its act together very quickly after the election - and do many of the things that are going to make any Government, coalition or otherwise, unpopular, we might be hearing about "Brit PIGS".

Lastly, I said as part of a speech in Singapore two weeks ago, "...the outcome of the UK election will also most certainly have an impact on the global economy in general and the financial services sector in particular. Any form of bank tax that is introduced will push some firms out of London and onto maybe, Switzerland...". I used Switzerland because of its European location, as an alternative to London, but I make two observations here. 

The City of London Global Financial Centres Index which, with my interest in emerging financial centres has always provided me with an interesting observation of changes in that arena, is being discontinued. The more cynical amongst us might suggest that this is perhaps due to London finding it harder and harder to justify its traditional number 1 ranking in the Index.

So, if London is really losing its way as a major financial centre, a position it has held "...since the 19th century because of the power of the British economy, and the wealth of its citizens..." (from Stephen Inwood's excellent book "A History of London") is there not a potential opportunity here that Hong Kong should be eyeing? If you don't dream, or aspire, you don't achieve. We've already persuaded the Group CEO of one of the world's largest banks to set up shop in Hong Kong (okay - a homecoming!), so can we not persuade others to do the same, by the quality of what we have here and what we can do as a financial centre? Will the "big boys" not laugh at the idea - you bet, they will.

But then Goliath laughed at David and look where it got him!!