Saturday, 2 May 2009

passing stones

In a global financial system, whoever has the most lax financial regulations wins. We know this because of things like the US Sarbanes Oxley act, or SOX, introduced in 2002 in response to various accounting scandals at major US PLCs. Complying with SOX was regarded as being so onerous it arguably helped London overtake New York as the world’s leading financial centre.

This kinda harsh reality provides the backdrop to the report on reforming British financial regulations recently issued by our lovely FSA. The report sets out a whole mess of things to consider in due course, the emphasis being on the "due course" because if Britain goes apeshit with the regulation all those lovely financial people that avoid paying taxes while working in London (for companies/hedge funds etc. listed in say the Cayman Islands for tax purposes) will F’off elsewhere and stop buying things here. So essentially we're waiting to see what the US does, because its response sets the benchmark everyone else will use when reforming their own regulations.

This in turn poses the challenge of assessing whether the US is likely to come out with anything even appoaching sane given the risk of it being fucking insane is quite high. To give an example of this the US government first bailed out AIG, then handed it an additional $100bn so it could meet its obligations on insurance policies (credit default swaps) it had sold to various banks - the alternative being AIG could have been placed in administration, the useful bits nationalised and the creditors told to go swing or at best paid a fraction of what they were due.

Practically, this saw the US government using AIG as a Trojan horse for passing even more tax-payer dollars to banks it was already bailing out (and some British &Continental European ones). Having received billions of taxpayer dollars thru this initially covert handout (man did the US financial authorities bitch about and try to avoid fessing up to who got what and how much they got), Goldman Sachs turned round to the government and said now that you've given us loads of taxpayer dollars via the right hand we can disguise as commercial earnings, can we give you back the loads of taxpayer dollars you gave us with the left so we can avoid all the restrictions you're wanting to place on what we pay ourselves?

So if we can’t rely on the US to do anything vaguely decent at a time when the former masters of the universe have once again made clear how greedy, grasping, venal and disingenuous they truly are, what about the EU? Hmm, I’m not sure. The debate there is being led by France and Germany who hate private equity and hedge funds and want to go for them big time. This might seem fair enough, except in continental europe the lack of a vested interest stands out so clearly it kicks you in the nads bearing in mind France, fer instance, is teh country that helped out its car industry on condition it closed plant based elsewhere in the EU to save French jobs). Reading between the lines the proposals so far come across as “we don’t have a hedge fund industry so we don’t care if we over-regulate something we don’t have” i.e. they’re going after politically safe bogeymen and potentially ignoring say the extent to which German state owned landesbanks, fer instance, pissed away their credibility, liquidity and assets buying sub-prime dreck in the first place.

So Britain is somewhere between the devil (the US) and the deep blue sea (the EU). That the government now appears to have lost its authority at a time when the opposition parties are making noises in favour of a UK equivalent to the Glass Steagall act just adds to the confusion.

As for the initial passing stones reference, its about how easy it would be for:

- The US to pass financial regulations that permanently impinge on the big Wall Street bonuses and pay packets that insulate financiers from the consequences of their actions and as such encourage excessive risk-taking to the detriment of the broader economy
- The EU to pass financial regulations within say 3 years that anyone understands and actually constrain what Euro-zone financial institutions do to make money for more than the 3 months it might otherwise take say a big accountancy firm spot however many loopholes.
- The UK to pass financial regulations that (a) had teeth and (b) weren’t overly complex to the point that financial sector management consultancies aren’t already licking their lips thinking of the fees they'll be charging to interpret them on behalf of the British banking system.

A P.S. postscript is due here (May 7th). I forgot the EU vs Microsoft example and associated fines of an order you'd never see in Britain because that just wouldn't be cricket. Then there is the German efforts currently being made to merge the landesbanks. So mebbe the EU will set a good example?

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