Friday, 20 March 2009

Let them go bust!

I watched my favourite political programme last night, this week with Diane Abbott, Miguel Portaloo and Andrew Neil. Ms Abbott cut through all the waffle and pointed out the banking system can be cured using simple principles. First as we did in under Eddie George if a bank gets into trouble let it go bust like Barings and BCCI. (The latter tried to sue the BoE for lack of regulation and lost. The former's debt, three name paper, was honoured by the London money market.) When Northern Rock went tits up Willem Buiter, one of the original MPC was the only one to public state the correct solution was to let it go bust.

Second for the US to reintroduce the Glass-Steagal act and for us to impose a similar clear divide between investment banks, the spivs, and retail banks like the old building societies and Lloyds TSB pre Gordon Brown. Glass Steagal was repealed in the US as a result of pressure by an ambititious CEO, Sandy Weill of Citibank on the Clinton administration. Citibank became the biggest bank in the world but is now bust and propped up by the taxpayer. Strike an RBS chord?

Third make sure the banks have adequate capital. This is not difficult. It was specified under the Basle rules but our FSA did not police it adequately. The Spanish did. They put had 15 of ttheir regulatory staff in each Spanish bank at any time to police the capital rules. Result no Spanish bank got into trouble.

The FSA should focus on the protection of retail depositors and keeping the crooks out. We need to increase personal responsibility for investment decisions not reduce it. Equity shareholders have been punished severely but bond holders have been bailed out. The old deposit protection scheme was quite sensible and could easily have been tweaked to perform better. But we should not protect those with million pound deposits chasing above average returns.

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