For Preventing UK Regulators from Being Burdens to the Nation & for Making Them of Use to the Public.
The late, great, American bank robber Willie Sutton, when asked, late in life, why he carried a Thompson submachine gun on his heists, observed, “You can't rob a bank on charm and personality.”* Well Mr. Sutton, you were wrong; you can rob a bank on charm and personality, but only if you are a banker. 
Witness the charm and personality that has besotted the FSA supervisory staff who reviewed Northern Rock. Was it the gleaming, youthful smile of Adam Applegarth or the toothy grin of David Baker or just that they were mesmerised by the financial sleight of hand that Northern Rock exercised so well?
Actually, it matters little, as we have just discovered that the FSA could not have done anything even if they knew all and knew it well in advance.
Why? Because they have no power!
That’s right, the poor FSA has no power to intervene because the structure of the Tripartite Authorities prevents them. According to the Financial Times of 20 September,
“FSA executives privately say the regulatory regime does not give them the power to interfere in the running of a bank, as long as it meets the regulatory capital requirements. Northern Rock met regulatory capital requirements and satisfied all solvency requirements.
FSA insiders also point out that the regulator insists on regular stress tests. It also stepped up monitoring, recently asking Northern Rock whether it was prudent to fund itself on such a short-term basis.”
Hello? Have I been living in a parallel universe where an alternate FSA rules?
The last time, in fact, every time I have had dealings with the old boys and girls of Number 25 The North Colonnade they were not so hands-off or so constrained by the UK’s “regulatory regime.” In all of the High Street banks I have been involved with over the last 10 years (I have worked or advised at 4 of the top 6), I have had direct contact with senior FSA supervisors and their teams. I can tell you that none of them were shrinking violets that blanched at the thought of telling us brutal, barbaric, bankers to behave and not to loot and pillage. No, they “offered” advice just the way you were “volunteered” in the military, "You, you and you come here!" On numerous occasions we, the banks, have been told in no uncertain terms by the regulator to fix or change very particular structures, including business plans and products. It would be laughable, if it weren’t so poor a porky pie, to have “FSA executives” claim that “they were only following orders", pardon, "principles-based regulations." I doubt that there is a single senior banker on this island who has not had to choke back a chortle when they heard the FSA Executive's latest rendition of the Whiffenpoof song.**
But what a convenient "out" the mandarins have in the Tripartite Authority – the BoE can point to the FSA who can point to the Chancellor who can point at the BoE, and round and round it goes, where it stops nobody knows - the perfect Catch 22.
I was going to write, “Please, don’t treat us as idiots; there are all too many of us who have had dealings with the FSA and BoE, and we know when you are engaged in a CYA exercise,” but I have thought better of it.
Why not just take the Tripartite's position at face value? Maybe they weren’t asleep at the wheel or thoroughly incompetent; maybe they are telling the truth and there was nothing they could do except sit on the sidelines and wait for such a disaster to occur. After all, the same-said “FSA executives” stated, “This is a one-in-a-million event; nobody expected interbank funding to dry up.” After all, other regulators across the globe, not just the FSA, had failed to predict a total drying up of liquidity in the money markets; none of them had prepared banks for such an eventuality.
Maybe, this is the best we can expect from them; to quote Jack Nicholson as Melvin Udall, "What if this is as good as it gets?"
Don't Quail in Fear, for Here's an Idea,
Let’s Buy a Bank in L'Angleterre!
Let’s Buy a Bank in L'Angleterre!
Instead of looking at this as a negative, why not look on the bright side of life? This crisis reveals a structural weakness that is a godsend for those wanting to make a profit. The stuffy old banking world of Mervyn King's 12 September warning note is dead. With no more silly worries about moral hazard and fiduciary responsibility, with regulatory bodies with self-inflicted wounds having neatly tied their own hands behind their backs, the UK is now a perfect place to buy up a bank!
Just sit back, close your eyes and dream of this possibility. A band of brilliant bankers backed by intrepid international investors enter the UK market with the view of creating a new financial entity, let's call it ÜberBank, following this plan:
- Do a leveraged buyout of a small building society and de-mutualise it. Using the benevolent UK tax code’s treatment of leveraged buyouts, gain "taper relief" so that one need only hold investments for 2 years and are required to pay only 10% tax on dividends.
- Start buying mortgages from other building societies, many of which are looking for liquidity and new funding, at present discounted “market” prices. This will build up the balance sheet rapidly and provide critical mass.
- Use the increased mass to issue mortgage-backed "covered bonds" - Pfandbriefe look-a-likes *** - into the emerging markets of China and India which have already turned to these vehicles due to their perceived increased security and tradability. Given the lack of alternative available investment vehicles, prices on this class have fallen thus increasing ÜberBank's profits.
- Start a major campaign to draw in depositors by paying above-market rates on smaller deposits, between £2500 and £5000, locking them in for 12 to 24 months. (Any number of UK banks are already doing this in the £1000 to £2000 range.)
- The “covered bonds” and new deposits become the base for further acquisition of discounted mortgages. Continue to grow the balance sheet without the need for direct lending.
- Onward and upward -- until the bubble bursts - and then go knocking on the Tripartite Authorities door!
And this scheme does not forget our friends at the FSA, those poor little lambs who are powerless to help the banking public. Given their sad lot in life, they will be offered a new opportunity to be of service to the people of Great Britain, as the staff of ÜberBank branches. Who better to deal with the public, and explain why they cannot help them, than the very people who wrote the principles-based regulations and were trained to quote them in such ponderous voices?
Can you imagine a certain Knight Bachelor standing at the till and explaining to an angry, frightened and bewildered group of depositors to please remember that "the wider economic background remains benign" and that "as an industry" we "have capital ratios which remain significantly higher than regulation requires" and our "return on equity is at levels which many competitors envy" and while we "may be subject to liquidity pressures," we "have, with a single notable exception, coped well with these pressures to date."
For those of you who didn't have the pleasure of attending, these remarks are taken verbatim, with the exception of the change from they to we, from those given by Sir Callum McCarthy at Mansion House on Thursday, 20 September.
I am sure that one of two things would happen if this flight of the imagination where to transpire: either the depositors would be swayed by the Knight's dulcet tones or he would say good-night and hie off to some QUANGO or other where he is safe from public, as well as Parliamentary, gaze.
Granted, my prose does not have quite the elegance found in the original Modest Proposal of Dean Swift, but at least it has no cannibalism, or rather only that related to financial institutions.
Finally, I want to go on the record that it is not my intent to disparage any of our regulators, whether they be individuals or institutions; I know it may be thought of as a cliché, but it is true nonetheless -- I am honoured to number among my friends several of the senior supervisors and their team members, past and present; they are not just adept risk practitioners, they are good and wise men and women. Rather, mine is a call for a return to sanity and consistency; to responsibility and accountability; to truth and away from "spin." We are told that financial institutions and markets need to be more transparent; so too do our regulators.
To those who think this "over the top," I leave you with the words of Prospero:
If you were dismay'd: be cheerful:
Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp'd towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rock behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.
-- I am vex'd:
Bear with my weakness;
my old brain is troubled.
Be not disturb'd with my infirmity.
If you be pleas'd, retire into my cell
And there repose:
a turn or two I'll walk,
To still my beating mind.
Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp'd towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rock behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.
-- I am vex'd:
Bear with my weakness;
my old brain is troubled.
Be not disturb'd with my infirmity.
If you be pleas'd, retire into my cell
And there repose:
a turn or two I'll walk,
To still my beating mind.
Cassandra
* It is an urban legend that Willie Sutton said, in answer to the question, "Why did you rob banks?' “Because that is where the money is.” However, the above quote is actually his own words, as recorded in an interview he gave to The Reader’s Digest in September 1980.
** The Yale University Whiffenpoofs are the oldest collegiate a cappella group in the US, established in 1909. Best known for "The Whiffenpoof Song," the group is comprised of senior men who compete in the spring of their junior year for 14 spots.
The ending of the Whiffenpoof Song is as follows:
We're poor little lambs who have lost our way,
Baa, baa, baa!
We're little black sheep who have gone astray,
Baa, baa, baa!
Gentleman songsters off on a spree
Doomed from here to eternity
Lord have mercy on such as we
Baa, baa, baa!
*** The key difference between Pfandbriefe and mortgage-backed or asset-backed securities is that banks that make loans and package them into Pfandbriefe keep such loans on their books. This means that when a company with mortgage assets on its books issues the covered bond, its balance sheet grows, which it wouldn't do if it issued an MBS, although it may still guarantee the securities payments. This action of maintaining the mortgages on one’s books provides investors, or so they believe, with a seemingly better position than if the mortgages had been sold off into the market. At the time of their introduction in the UK market they were deemed to be in accordance with UK contractual law and thus no new regulatory law needed to be passed. “The Treasury and the Bank of England were happy that we could do something without primary legislation,” said Bill Young, managing director at Goldman Sachs.
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