Saturday, 5 March 2011

How shit actually works

The full title should be “How shit actually works in ways that leave us all getting the bad hurt”, but that was a tad long and so is what follows so I’ll try and keep it short. To begin with there’s loads of different examples and points to be made to substantiate a title like that, here though I’ll stick to 2 and a half.

The first one and a half concerns the Financial Services Authority (FSA). This august institution fucked up so bad with the credit crunch it's absolutely fucking amazing; during the initial liquidity crisis all these schmucks focused on was capital, capital and more capital, except, it was a liquidity fucking crisis i.e. people stopped lending to banks full stop. See the difference? Capital is well capital whereas liquidity is a completely different thing altogether.

That aside, the reality is as follows; some punter goes to work for the FSA, they get on, takes up a supervisory role, meets with bank bods, ya di ya di yada. The bank being supervised or another, similar one then recruits or poaches the self-same supervisor on the basis that they know the personalities, the culture, the rules etc., that actually make the FSA work. But, they're not the only one, rather there’s a revolving door between the regulator and the regulated and so a hermitically sealed bubble evolves, one lubricated by pay rises and promotions. In it the primary focus is on playing the game (between the regulator and the regulated), not the wider economy or even the possible (and as it turns out actual) consequences decisions reached within this bubble have upon the UK economy and society in general.

The half-point concerns building the models banks use to assess risk and identify how much of the all (FSA) important capital needs to be held. Here you see much the same as with the FSA more generally, but in an attenuated form. Like say Bank A wants to build a model to assess the risk lending to say toilet makers poses. To do so it decides to hire a consultancy; some consultants do some lovely presentations to bored Bank A senior bods to win the contract, then do some shit design until hey presto there’s a toilet maker risk assessment model to submit to the FSA for approval that can genuinely claim to have been independently built i.e. it has the imprimatur of Superduper & Co the famous global consultants.

Does the FSA actually understand this shit given the serious maths involved? Too right they do because they've also hired consultants or an actual former Superduper & Co senior bod to run their risk model assessment division. This bod in turn OKs the toilet maker risk model, something Bank A takes note of when it next goes recruiting a head of its risk model making department. And so the merry go round continues.

Except even more fucking obvious vested interests come into play here to an extent that shit gets even more fucked up. The former Superduper & Co bod has a clear and vested interest in saying “yup this model is fucking A”; he could say no cos these guys do badly documented botch jobs and make whopping great assumptions that barely hold water. But, he won’t because that would undermine the claims to credibility and technical competency that justified them getting an FSA job in the first place (and neither actual nor former consultants are that naïve). So instead the model gets approved leaving Superduper & Co to make an even more impressive sales pitch to Bank B, C, D and so on to a point where big chunks of an entire industry end up with much the same risk assessment tools regardless of whether they’re actually any good or not.

Of course any FSA or banking bod confronted in public by the above reality will vomit shite to order about how regulators need to understand their key stakeholders, ensure commercial experience is in place and brought to bear, the benefits of a “breadth” of experience and so on and so on, but really what you’ve got is a magic roundabout wherein the magic derives for the most part from the complete failure to acknowledge the vested interests such processes create, how that impacts on actual decision-making and what impact those decisions have on the rest of us e.g. if some wee FSA cunt is wanting more dosh, they have a clear incentive to not be too harsh on their potential future employers regardless of whether they're a fucking basket case that the taxpayer is going to have to bale out or no.

The second or final point relates to Merv the Swerve King wanking on about banks focusing more on ripping off customers than providing a good (financial) service. The cool thing about people as smart and as Oxbridge as Merv is how what they say usually warrants close scrutiny because its frequently ambiguous, and self-consciously open to interpretation. In this instance, I reckon, the close reading applies more to the tone than the actual words given they were straightforward enough. The context here would be it following on from Adair Turner doing another wankfest speech about socially harmful, useful or whateverul financial innovation. Ignoring the “invisible hand” argument that could be used to rebut Merv’s claims with ease, my guess is that both are sabre rattling because despite their apparently influential positions (Governor of the Bank of England and Chairman of the FSA respectively), both have been sidelined by ConDem politicians currently in the process of stitching them (and us) up by agreeing to let banking go back to business as usual as much as possible as soon as possible to an extent that's left Merv arguing for what should be as opposed to what will. I mean it’s no like it’s the first time he's been kept out the loop except now if Project Merlin did anything it established clear, direct and influential lines of communication between banks and politicians regardless of the feckers actually in charge of regulating the financial system. Cunts.