The Financial Services Authority's chairman Lord Turner made a fairly staunch defense of FSA chief executive Hector Sants at a hearing of the Treasury Select Committee on January 30.
But some of the MPs on the committee seemed unconvinced that Sants, who earned £807,000 as FSA chief executive in 2010, is the right man to lead successor body the Prudential Regulatory Authority (see part one of blog on Hector Sants' visit to parliament).
This is largely because the FSA made such a hash of regulating Britain's banks in the early part of his stewardship -from July 2007 until about 2009- and because the steps that Sants did take to avert catastrophe, like forcing several insolvent banks to raise billions of pounds through ill-judged rights issues April to June 2008, turned out to be so disastrous.
In some ways, the Treasury committee session seemed like the longest job interview in history, and a pretty desperate one at that, with Sants pleading and occasionally clutching at straws in the hope he will still be given the PRA job. It all seems quite surprising since he formally resigned from the FSA on February 9, 2010 but was persuaded to stay on.
Sants was asked by Andy Love, Labour MP for Edmonton, why his stewardship of the FSA qualifies him for the PRA job. (A transcript of the committee hearing is available from the UK Parliament website.) Sants insisted that on becoming CEO in July 2007, “we did our utmost” to prevent the crisis from intensifying. However the inescapable truth is that RBS, HBOS, Northern Rock, Bradford & Bingley, Alliance & Leicester and Dunfermline Building Society all failed on his watch and that UK taxpayers have been left to pick up the tab.
The FSA boss insisted the crisis had been a “searing learning experience" that had enabled FSA insiders to finesse their skills. He said:
“When you look around that whole process (...) the authorities (...) would have made better judgments if we had more people who had direct and immediate experience of a crisis of that nature (...) We are still in one of the most severe financial crises in modern times, and I think a very sensible judgment has been made by those who asked me and others to stay on, so that people could have the benefit of that searing learning experience.
"Let us not underestimate how extremely unpleasant a time that was. I think everybody who knows me, and I have been in front of this Committee many times, will not have doubted that I have always acted with the best of intentions. I have 30 years of experience in investment banking. I have always done my very best, and I think that from what I learned in that period there is value in me imparting that to the system."
Sants, who left Credit Suisse, where he was chief executive for EMEA to join the FSA in 2004, insisted that he is putting in place “a better regime for the future, which will significantly diminish the probability of these types of crises happening again."
David Ruffley, Tory MP for Bury St Edmonds, seemed unimpressed suggesting that the UK has “a grotesquely inadequate system of regulation [given] that a man like Fred Goodwin can pretty much walk away from this mess scot-free.”Jesse Norman, Conservative MP for Hereford & South Herefordshire, said the FSA seemed a “wildly dysfunctional organization.”
Sants agreed that the FSA's framework need to be changed, and advocated one in which people guilty of serial misjudgment such as the RBS directors, were easier to prosecute.
Passing the buck, Sants said that from November 2007, the FSA tried to persuade the Bank of England to inject more liquidity into the UK financial system to prop up ailing banks. He claimed FSA repeatedly “put this in writing" to the heads of the Tripartite Authorities -the FSA, Bank of England and Treasury. But the requests fell on cloth ears...
Lord Turner said Sants had successfully led the transformation of the FSA from September 2007 onwards, and that “has been the right person to lead the FSA and to stay on and lead the transition to the PRA.” John Thurso a Liberal Democrat MP asked Turner if the FSA’s astonishing pre- and post-crisis failures should be blamed on the Canary-Wharf-based regulator's culture, or its structure, or both. Turner said:
“A combination of the structure of the FSA and the entire intellectual philosophy of the time. As I have said, the structure of the FSA (…) was too wide a span. There is an intellectual affinity between thinking about the capital and liquidity of banks and central banking that makes that logically better to reside within the central bank, and there is a different set of disciplines to do with retail conduct, and that is why I believe that the future structure is better. I think the structure was problematic..."
In a further bid to get Sants off the hook, Turner said the FSA's problems were ideological and couldn't be pinned on one man. He stressed that in the period 2000-07 many of the world's leading economists and central bankers were delusional about economics and finance. He said:
"We have to put ourselves back in a mindset where people [believed] in some great moderation of low, stable inflation and that a lot of the problems of the past had disappeared .... if you look at the April 2006 Global Financial Stability Report of the IMF you will find an extraordinary statement, which says that, because of the development of CDS, of structured credit and distribution and securitization, the world financial system had become safer, and the likelihood of commercial bank failure had declined. It is an extraordinary quote in retrospect.
Asked whether the role of the central bank, the Bank of England, and the Treasury in the UK's financial crisis ought to have been examined more thoroughly, Turner surprised me by conceding that, with the benefit of hindsight, the UK ought to have organized a wide-ranging 'Royal Commission' (along the lines of the Leveson inquiry into media ethics) into the banking crisis, along similar lines to the congressional crisis inquiries in the US. He also implied that it may not too late for the UK government to embark on a similar probe. Turner told the MPs:
"You could argue that if we could all roll it back to 2009, we ought to have launched a Royal Commission, which would have looked at absolutely everything, including each of the banks that failed, all together rather than one by one, and at the role of all three authorities. I think there could be merit in that at some stage.
If such a no-holds-barred inquiry, which has been resisted so far because it might prove so embarrassing the Bank of England and the Treasury, ever takes place, it would in my view further reduce Sants' chances of getting the PRA role that he appears to so cherish. If he does get it, wouldn't it be just another egregious example of a reward for failure?
To conclude I'd like to quote from Tony Shearer, ex-CEO of Kaupthing Singer & Friedlander. In a Telegraph article headlined Heads should role at Bank, Treasury and the FSA, Shearer wrote:
The [FSA's RBS] report states: “The FSA’s overall pre-crisis supervisory approach was inadequate with, in retrospect, an overly reactive approach and insufficient data available to supervisors to assess prudential risks fully.” So Sants had no idea that the whole of the FSA’s approach was flawed?
This is precisely the warning I gave to Callum McCarthy, then chairman of the FSA, in March 2005. Back then I invited him to visit Singer & Friedlander to see at firsthand how the FSA regulated what I called “trivia and minutiae” and paid no regard to the possibility of “systemic failure of the banks” (which was one of only two of the FSA’s objectives).
This week the Bank of England said it had “every confidence in Hector Sants” and looked “forward to him joining us as deputy Governor in 2013”. Even today the Bank of England has no idea what happened and what the FSA is supposed to be doing. They are not the right people to regulate the banks.
This is part two in a two-part blog about Hector Sants' January 30 appearance before the UK's Treasury Select Committee. Part One here.
Further reading on the FSA and Hector Sants:
- FSA's attempt to rewrite history over RBS lack credibility by Ian Fraser
- If the FSA wanted a white wash, PWC is well placed to deliver it by Ian Fraser
- FSA's failure to tackle 'white collar' crime endangers the City of London by Ian Fraser
- As Britain prepares to junk the FSA, some in the City still believe the market knows best by Ian Fraser
Tags: Alistair Darling , Alliance & Leicester , Bank of England , Bradford & Bingley , Callum McCarthy , Credit Suisse , Daily Telegraph , David Ruffley , Dunfermline Building Society , Financial Services Authority (FSA) , Fred Goodwin , FSA , HBOS , Hector Sants , Jesse Norman , John Thurso , John Tiner , Kaupthing Singer & Friedlander , Lord Turner , Mervyn King , Northern Rock , Philips & Drew , Prudential Regulatory Authority , Royal Bank of Scotland (RBS) , UBS