When a financier lends money, he wants to know exactly what it’s going to be used for. He then determines the prospects of getting not only his money back but also some profit. When he does decide to lend the money, he lays down conditions on its use and the repayment mode. The larger the loan, the more concerned the financier will be over the proper use of the money.
Barack Obama rode into Washington with a posse of what he claimed were the smartest guys to rescue hapless America — and the rest of the world — from the financial crisis and wrangled astronomical amounts out of Congress. But it looks like the Wall Street gang has outwitted the neophyte in the White House.
Last fall, financial conglomerate AIG (“too huge to be allowed to fail”) had last fall already demonstrated it had no qualms about using the taxpayers’ bailout money for anything but productive purposes. So, why didn’t treasury secretary Timothy Geithner set out the rules for how this money was to be used? To top it off, the US government, which has an 80% stake in AIG, couldn’t impose on the latter’s managers how to use the public funds.
Baying for Geithner’s blood aside, this episode, which is the news of the week, serves to underline the urgency for ethics, good governance and aboveboard practices. This, at least, seems to be the train of thought across the Atlantic as the UK busily organizes the agenda for the G-20 summit in London on the 2nd April to fashion a new financial world order.
To set the pace, the UK’s Financial Services Authority (FSA) has begun working on a banking overhaul which could lead to, among others, a ban on the complex financial products blamed for triggering the credit crunch. These include instruments such as collateralized debt obligations. The FSA feels that some sophisticated financial instruments are simply too complicated to be used without unacceptable financial risks.
Also expected are much tighter rules on mortgage lending to prevent the lax credit conditions that preceded the current crisis. In the FSA’s crosshairs, too, are an overhaul of the bonus culture of banks and other financial institutions.
The FSA has promised a “revolution” that will lead to simpler banks and tougher regulation. Chairman Adair Turner sees less profitable banks taking fewer risks. The FSA’s faith in market forces and reliance on management’s scruples was “a mistaken philosophy”, he said, suggesting that a heavy hand will instead guide banks’ choices on what they invest in and how they account for them, whom they appoint to senior management and their remuneration.
The FSA said its new regime will likely cause banks “to pursue strategies which are primarily focused on classic commercial and retail banking activity”. There will be “fewer resources — in terms of people or total balance sheet — devoted to the complex and risky trading ctivities.”
With the FSA also having set the lead in nurturing and promoting Islamic finance, the UK could well be the role model Obama ought to be looking to. For the well-being of the global economy, he needs to succeed.