Magazine article The Spectator

Smart Management Might Have Averted the Banking Crisis, Not Barbed-Wire Fences

Magazine article The Spectator

Smart Management Might Have Averted the Banking Crisis, Not Barbed-Wire Fences

Article excerpt

Will I join the ticker-tape parade to welcome back Senator Carter Glass of Virginia and Congressman Henry B. Steagall of Alabama? Well, I might lurk in the crowd, but I certainly won't be cheering. These venerable legislators sponsored the US Banking Act of 1933 which built a wall between securities trading and deposit-taking that remained in place until 1999. To use the labels invented by the economist John Kay, it separated the 'casino' of Wall Street from the 'utility' of retail banking on Main Street. And there's a clamour to rebuild it brick by brick, beginning with the so-called Volcker Rule (devised for Barack Obama by former Fed chairman Paul Volcker) which would limit the size of banks and stop them engaging in 'proprietary trading', which means staking depositors' cash on huge bets in securities markets. Britain never had a Glass-Steagall Act - instead, until 'Big Bang' in 1986, we had closed-shop stock exchange rules that achieved a similar division - and now Nigel Lawson and Vince Cable are among the voices arguing that it's high time we had one. A bandwagon is rolling, but a Glass-Steagall model would not have averted the crises at Lehman Brothers and AIG which nearly caused global systemic collapse;

nor, at the far end of the spectrum, would it have stopped Northern Rock and Bradford & Bingley ruining themselves on irresponsible mortgage lending. Constraints on sheer size and over-rapid growth might have tempered the ambitions of Sir Fred Goodwin at Royal Bank of Scotland, but in practice it will prove impossible to abolish the category of 'too big to fail'. I have argued before that a multiplicity of smaller, cleverer financial firms with niche specialisms would be a good thing, but there is also still a case to be made for the well managed, multinational and more or less universal bank along the lines of HSBC and JPMorgan Chase. The key, in every case, large or small, single-product or financial supermarket, is laser-sharp analytical management of risk - for which legislative firewalls and barbed-wire fences can never be a substitute.

Russian roulette When I revisited Hong Kong last autumn after a long absence, one of the changes I noticed was the number of young executive types speaking Russian. Perhaps they were all in town to work on the phonebook-thick prospectus for last week's $2.2 billion flotation of 'United Company Rusal', the world's largest aluminium producer and the first Russian company to list on an Asian exchange. Hong Kong's authorities have always tended towards the laissez-faire - in my day, a high-class Kowloon knocking-shop called Club Volvo was a listing candidate (despite its flagrant misuse of the Swedish carmaker's name) until the Black Monday crash scotched the idea. But Rusal sets a new benchmark for just how riskladen a stock can be and still gain access to a public market.

The company - which abandoned plans to list in London in 2007 - made huge losses during the global downturn, and has just completed a debt restructuring that leaves it owing almost $15 billion. It admits that if key repayments are not made this year, it could (this bit is printed in red) 'cease to continue as a going concern'. Meanwhile its major shareholder, Oleg Deripaska, acknowledges that, between 1998 and 2000, he was denied entry visas to the United States - parts of the media having speculated that 'the rejection was due to alleged connections to organised crime', which Deripaska denies. …

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