England's credit crisis: different players, same result.

A bit of an antidote to certain, ah, reflexive ways of thinking:

Bad Times Visit Our Betters in Europe

LONDON — Think that credit collapse that triggered the Bush administration’s $700 billion bank bailout was necessary because of Republican hostility to regulation and the ineptness of President George W. Bush?

If it were that simple, then British Prime Minister Gordon Brown and his Labor Party would not be squirming, and the United Kingdom would not be swimming in staggering sums of debt.

To summarize: essentially, England is going through the same problem with its banks that we did; to wit, too much reliance on a housing bubble, too easy credit given to people who couldn’t pay it back, and an institutionalized reluctance to either fix the problem, or tolerate the people who were making loud noises about how bad things were getting. Case in point: Paul Moore, who was a former head of risk management of the Halifax Bank of Scotland. When he started pointing out things, they essentially legal-settlemented him into shutting up.

Which is a shame: he makes excellent sense.

2.8 But let’s start with the cause and this fairly obvious proposition: even non-bankers with no “credit risk management” expertise, if asked (and I have asked a few myself), would have known that there must have been a very high risk if you lend money to people who have no jobs, no provable income and no assets. If you lend that money to buy an asset which is worth the same or even less than the amount of the loan and secure that loan on the value of that asset purchased and, then, assume that asset will always to rise in value, you must be pretty much close to delusional? You simply don’t need to be an economic rocket scientist or mathematical financial risk management specialist to know this. You just need common sense. So why didn’t the experts know? Or did they but they carried on anyway because they were paid to do so or too frightened to speak up?

2.9 What my personal experience of being on the inside as a risk and compliance manager has shown me is that, whatever the very specific, final and direct causes of the financial crisis, I strongly believe that the real underlying cause of all the problems was simply this – a total failure of all key aspects of governance. In my view and from my personal experience at HBOS, all the other specific failures stem from this one primary cause.

2.10 In simple terms this crisis was caused, not because many bright people did not see it coming, but because there has been a completely inadequate “separation” and “balance of powers” between the executive and all those accountable for overseeing their actions and “reining them in” i.e. internal control functions such as finance, risk, compliance and internal audit, non-executive Chairmen and Directors, external auditors, The FSA, shareholders and politicians.

Moore comes across as a bit exasperated and annoyed, but then, people pointing out that the bus that they’re in is going over a cliff often do. The whole thing is depressing reading, not to mention maddeningly familiar: in fact, that’s the most interesting thing to take away from his statement. Easy credit, bad banking practices, airy dismissal of the naysayers, and an institutional and political reluctance to change course. Or, as Saunders put it:

Throughout the Bush years, Democratic critics spoke as if every problem would be dealt with smoothly under different leadership. But in the United Kingdom — one of Our Betters in Europe, with European higher taxes and commitment to liberal regulation — their very European Union oversaw the same credit craze that occurred under the bumbling, right-wing, go-it-alone Bush.

Which is probably why we won’t see this brought up all that much. Doesn’t fit the narrative.

Moe Lane

Crossposted at Moe Lane.