Anthony Peters, SwissInvest Strategist
A FRIEND OF mine is in the process of setting up a company in the healthcare sector and is struggling with the level and the detail of regulation.
She needed a piece of information from the local authority website, couldn’t find it, called up and was promptly asked whether she had authority to see it. And we in banking thought we were alone in having a problem with over-regulation.
The financial crisis – I’m never sure when writing about it whether I should be referring to it in the past or the present tense – is broadly seen as being the result of poor regulation. With that I cannot disagree. However, whether it was poor under-regulation or poor over-regulation is, in my humble opinion, very much a moot point.
In consequence, I think we ought to be asking ourselves whether more regulation will remedy the problem.
I can’t remember when I first suggested that the key issue is whether one can legislate, and hence regulate, against greed and that greed permeated society from top to bottom. Bankers were merely – if “merely” is the right word – the catalysts in the pursuit of Mammon.
Legislation and regulation – in other words, rule-based systems – bring their very own problems with them.
Codification introduces not only instant incipient ossification but also immediately raises a challenge to players to test the envelope.
The way in which structuring desks played up against the ratings walls is a case in point.
However, what tends to get forgotten is why they did this in the first place. It was the result of their clients being constrained by a strong element of ratings-based investment guidelines. Brains were switched from assessing risk/reward to trying to squeeze the highest possible return out of a portfolio that, within the letter of the law, met requirements. The alcoholics were running the bar.
WHICH BRINGS ME to our current regulators. Having been accused by politicians, the press and the general populous of having been asleep on the job, they are now in the process of re-establishing credibility.
The political masters have instructed them to make sure that a new regulatory environment will not permit the same fiasco to reoccur.
This brings with it two problems. The first is that the regulators risk doing what generals are frequently accused of, namely preparing to fight and win the last war.
Since 2007 and the collapse of Lehman Brothers the world has changed beyond recognition. What happened then will not happen again because it has happened before. But if it does not happen again, will it be because of or despite enhanced regulation?
A LARGE PART of the answer is to be found in private equity.
PE was never blamed for being a significant element in the global credit boom – it has the word “equity” in its title and therefore must be good, as opposed to things which have “credit” in their name, which must, a priori, be bad.
They risk regulating the living daylights out of market activity while demanding visibility and transparency
Private equity is a huge and unregulated leveraged debt game that has largely hit the wall despite the authorities not having come down on it like a ton of bricks. It has become a victim of the self-righting mechanism of markets.
However, there is a much bigger issue with the way regulation is developing. If the political masters say jump, the chastened regulators simply ask “How high?”. This leaves us with a significant risk of over-regulation for over-regulation’s sake. Civil servants will overkill as much as they need to, irrespective of the outcome for the markets, so long as they can never again be accused of having been caught napping or, worse still, having pandered to the markets’ desires.
In doing so, they risk regulating the living daylights out of market activity while demanding visibility and transparency.
DEBT MARKETS ARE not equity markets. There is a single price for a BP share but not for the liability portfolio of BP bonds. Bonds and loans are not a nice, homogeneous and transparent edifice, but who cares? They’ve been told to bring the beast to heel.
Global debt markets have become, by dint of the banking crisis, far more significant as a source of funding to a much wider range of borrowers than they were before.
Thus, many more issues are coming to market that, due to their sizes and the scarcity of knowledge about the borrowers, will make the aggregate market less liquid and less transparent – not more. I’m not sure that the regulators’ political masters have grasped that fact yet.
Irresistible forces and immovable objects spring to mind. Not only must we hope that the medicine doesn’t kill the patient, we have to find ways of preventing this from happening.
Investment banking isn’t healthcare and we have to be bold enough to make this known. Getting caught fingering the bonus till is not a good place to start.