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House of Cards

Friday, February 13, 2009

Watching this week's cruel and unusual entertainment as the House of Commons' Treasury Select Committee interrogated society's outcasts (otherwise known as Bankers) reminded me of what I used to be told by the Bank of England guy who looked after Firstdirect. It's a house of cards old boy, he'd say , as he handed me a gin and tonic : if something dislodges one of the cards it all comes down.

He was talking about the UK banking system but the words today apply directly to the inter-connected global financial system. The old style regulators used to see their job as assessing and avoiding systemic risk ie anything that could dislodge one of the cards. It was an intense focus by highly experienced people and they didn't interfere in anything else. It worked.

It didn't work in 2008 , hence the credit crunch . It didn't work for two reasons: firstly the financial system is global now with global systemic risk and regulation remains national. The Prime Minister is absolutely right to point a finger at that. Secondly regulation has become unfocused. There are more banking regulators in the world now than ever before - probably a 100 times as many as in the 80s. There are more regulations - volumes and volumes of them. Vast fortunes are spent on computer systems to assess risk in all aspects of an organisations' business. Regulation is intrusive, unfocused and diffuse and judging by the results - useless. (I know that's unfair!) .Nobody talked in 2008 about Houses of Cards over gin and tonics. If they had done they wouldn't have missed the big systemic risks that led to a relatively containable crisis in US sub prime almost destroying us all. The biggest card that fell was Lehmans , at the centre of the trillion dollar trade in CDOs. Destruction was unstoppable after that -of all the banks to let fail......

Yes bankers were greedy, yes they made mistakes - some really stupid mistakes, yes the bonus culture became obscene, but let's not let regulators off the hook!

And while we are are at it a ritual flogging as well please for rating agencies who rated everything triple A, economists who built the risk models that turned out to be nonsense, and fund managers who urged the banks on to faster and faster expansion. And don't get me started on the whole risk management industry - it didn't exist in the 80s and not one ot the tens of thousands of people employed in it now predicted the systemic risk that would cause wholesale money markets to stop working and thus bring down the more over extended banks.

If those banks hadn't have been rescued by the way the rest of the "well- managed" banks would have toppled soon afterwards. That's what happens with a House of Cards.

Rant over, back to garlik!

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