Sants is leaving a sinking ship

February 9th, 2010 (minor edits April 28th, 2013)

This morning’s shock resignation of FSA chief executive Hector Sants leaves plenty of unanswered questions in its wake.

Sants can hardly be considered blameless where the banking and financial crisis is concerned. From 2004 to 2007 he was the FSA’s managing director of  wholesale and institutional markets, and some shocking things happened in that area on his watch.

It’s also worth remembering that, on his promotion to chief executive in 2007, Sants strongly resisted the implementation of the Basel II regulatory framework. Had he introduced this (particularly where calculating the risk capital required for structured instruments was concerned) — as the country was required to do by the Bank for International Settlements — the financial crisis might have been less severe.

Sants decision to keep UK banks out of Basel II enabled crazed lending by incompetent banks such as HBOS to continue. This was because they continued to be able to issue structured products with zero risk capital attached. This provided them access to deep pools of liquidity with which they drunkenly overlent to the frothiest segments of the UK market, including commercial and residential property, hotels, leisure and hotels.

(It’s possible Sants failed to implement Basel II because the political pressure. Perhaps Tony Blair and Gordon Brown rather liked having dangerous amounts of liquidity floating around the UK system — after all it gave homeowners and property development wannabees the chimera of wealth. But the FSA is supposed to be an independent organisation, and if Blair and Brown were hostile to Basel II, then it was in Sants’ gift to ignore to ignore them).

The most obvious questions include why is the 55-year-old former Credit Suisse First Boston investment banker is jumping ship now? And did he jump before he was pushed?

• Is he stepping down now because his political paymasters — prime minister Brown and chancellor Alistair Darling — have demanded that he back-pedals with his current investigations into HBOS for fear that the stench of corruption that is emanating from the former bank, now part of Lloyds Banking Group, might be reflected back on them?
• Is Sants frustrated that a lack of resources is making it impossible for the FSA to do its job properly (he implied as much in the second paragraph of today’s statement)? Maybe Sants is unhappy about having to “outsource” critical and complex investigations to third parties, who are almost inevitably conflicted and therefore biassed.
• Or has Sants had enough of the interference and criticisms from his chairman, Lord Turner, who took over chairmanship from Sir Callum McCarthy in September 2008?
• Or is Sants leaving because he opposes Tory plans to disband the FSA, break it up and merge bits with the Bank of England?

Until Sants writes his memoirs — which I suspect he never will — we’re unlikely to find out the answers to these questions.

It’s also difficult to assess the extent to which Sants has succeeded in giving the watchdog widely known as the “Fundamentally Supine Authority” some real teeth. (To judge by the lackadaisical approach to investigating the BoS Reading scandal evinced by head of supervision for Lloyds Banking Group, Jean Moorhouse, Sants has quite a long way to go on this front, although there has clearly been some tough action elsewhere).

What is beyond doubt, however, is that the FSA’s track record in the period 2001-08 was lamentable. The Canary Wharf-based regulator tended to focus on wrongdoing by small-time intermediaries such as IFAs and became so obsessed with meaningless slogans such as “treating customers fairly” — to which financial institutions paid, at best, lip service — it didn’t spot the elephants tramping through its financial room.

In no particular order these included banks’ and other financial institutions’ widespread abuse of leverage, their over-dependence on commercial paper and securitization, the dangers posed by the surfeit of credit in the market and the misguided faith in the self-correcting power of the markets.

In particular, the FSA sat idly by while RBS chief executive Sir Fred Goodwin expanded his bank’s balance sheet from £368bn in 2001 to a bloated £2.4 trillion in 2008, surpassing the UK’s GDP. The FSA’s Listing Authority unit seemingly did nothing to check the veracity of statements made in the rights issue prospectuses issued by both RBS and HBOS during 2008.

Other blind spots included its failure to intervene even when alerted to blatant wrongdoing and obfuscation by HBOS on both the corporate and retail sides of its business (after Sir James Crosby joined the FSA’s board while simultaneously serving as chief executive of HBOS in January 2004, the regulator’s view of the Edinburgh-based bank was pretty much one of ‘anything goes’), the sheer folly that was Northern Rock and the madness at AIG Financial Products.

On a smaller scale the FSA was responsible for sanctioning the policies that led to the collapses of a whole string of other mortgage banks including Bradford & Bingley and the Dunfermline Building Society. As a general rule, it always gave credence to miscreant and even mendacious bankers, rather than paying any heed to the sustainability of the system they had created or to the people and businesses they helped to destroy.

Reforming anything as institutionally corrupt and myopic as the FSA was probably going to be an impossible task anyway. But even if Sants lacks moral fibre (as I am assured he does by people in the know), he at least deserves credit for trying.

• The best article so far on Sants’s departure is not to be found in the mainstream media but on John Lappin’s The Money Debate blog
• To read about the FSA’s role in covering up the HBOS / Vavasseur fraud click here
• For more on the regulator’s lack of appetite for investigating the BoS Reading scandal click here
• To read how FSA sanctioned an effective £1.5bn heist of Scottish Widows policyholders’ cash by Lloyds TSB click here

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Posted by Ian Fraser on Feb 9 2010. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry