Banking Crisis - Treasury Contents

Further memorandum from Tony Shearer


  1.  My experience with the FSA is that they:

    (a) approved a change of control of Singer & Friedlander to Kaupthing even though they were pointed to the information that would indicate that Kaupthing was not "fit and proper";

    (b) did not properly monitor Kaupthing Singer &Friedlander when there was adequate information that they needed to;

    (c) did not support the KS&F management who were trying to do the right thing;

    (d) focus on the trivia and minutiae rather than their main objectives;

    (e) do not distinguish between those who make genuine mistakes and those who couldn't care or worse;

    (f) go for the easy targets; and

    (g) employ people who are nether sufficiently able or experienced.

  2.  Who knows what might have happened if any one of the "Protectors" (those such as auditors, regulators, lawyers, non-executives, corporate finance, rating agencies who are supposed to help protect stakeholders) had done their job? The fact is that they all failed to do theirs.

  3.  The Protectors failed because:

    (a) organisations such as the FSA did not have the right quality of people with the right experience. They need better people who are focused on their main objectives, rather than another re-organisation; and

    (b) the culture of "the City" is wrong. It is about earning large fees mainly from transactions. Too often they are not there to serve the stakeholders, but to earn money.

  4.  Big and/or fast growing organisations are very risky. Businesses with many decision takers who can each materially affect the balance sheet or profit and loss account (as is the case for banks and many financial services organisations) need very good, proven systems and controls. These systems and controls are very difficult to establish, and it takes more than a couple of years to do so. Merging the likes of Merrill Lynch with Bank of America, or HBoS with Lloyds cannot be the right answer.

  5.  Deposit-takers should not be mixed in with high risk taking activities.

  6.  Published accounts contain so much information it is almost impossible to find what is important. Accounts should be for the key financial information. The likes of International Financial Reporting Standards are distractions that earn nice fees for the accountancy firms.

  7.  The cost of "the City" is too large, and encourages excessive risks to be taken with capital in order to obtain what are seen as appropriate rewards for that capital.

  8.  The returns that are expected from capital are too often unrealistically high, and this encourages excessive risks to be taken.

  9.  Too many investment managers have failed to do their jobs. How can those on money purchase pensions get a decent investment manager when so many of them have been shown to be inadequate? What are the implications of this for the future pension provision for this country and the reliance on State pensions?

  10.  Too many of the best brains go into being lawyers, investment bankers, accountants etc because that is where the rewards are. These brains are needed in industry, commerce, retail, etc.

  11.  Too many of the regulations and laws are influenced/created by advisers/protectors; these regulations and laws usually require companies to obtain their advice, and this encourages more regulation, and more cost.

  12.  Too many of those who have failed the system still seem to be around in the system. The Government and the FSA seem to be relying increasingly on people who came from the failed organisations. For example there are a lot of ex-Merrill Lynch and investment banking people about, and the recruiting for UK Financial Investments Ltd seems to have been carried out by one of the traditional Head-hunters (Head-hunters have hardly done a great job in getting the right Executives and Non-executives into companies).

  13.  Very few people in Government or the system have acknowledged their responsibility and resigned.

  14.  The lessons from the Banking Crisis have far wider application than to Banks and Financial Services. They relate to the way that "the City" has worked, its culture and its role in providing a place for arms-length investors (such as pensioners and future pensioners) to risk their capital.

January 2009

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