Wednesday, 21 November 2007

Financial pollution

I've been reading some of the business commentary around the Northern Rock collapse with an increasing sense of recent history being rewritten. On the same theme I have also had two or three discussions lately with people who clearly seem to think that was has happened to NR was a) obviously going to happen and b) therefore the fault of the FSA and/or BoE and/or the Government.

In response to point a) I would refer people back to what the company itself was saying even back in the summer. On 25th July it issued this interim results statement based on the six months to the end of June. Although it warned about the tightening credit situation, it was a very upbeat assessment, and even talked about a planned share buyback (would be a pretty cheap exercise now eh?!).

The final line of commentary from the chief exec Adam Applegarth was pretty clear:

"The medium term outlook for the Company is very positive."

In response to point b) whilst I accept that the type and speed of the interventions of various parties may have changed the nature of the NR crisis, there would still be a crisis because the company's business model will still have come unstuck. Unless someone does a serious counterfactual analysis of the NR crisis we can't really say how different it could have been (and in any case such an analysis might support the regulators). But in any case to suggest that the crisis is somehow primarily the fault of the authorities for failing to prevent the implosion is, in my view, massively mistaken.

The best comparable example I can think of is blaming the Environment Agency because a company has been responsible for massive pollution. Clearly the Agency has a responsibility for trying to stop companies from polluting, particularly because serious examples (like in the case of NR) affect the environment that everyone else has to inhabit, and we all end up paying for the clean-up work. But in no sense does this absolve the primary responsibility of the company and its directors.

I'll finish with a quote from Howard Davis in a review of Alan Greenspan's recent book Age of Turbulence:

"[Greenspan’s] vision is a useful corrective to the prevailing view that if a financial firm runs into trouble as a result of a flawed strategy it is the regulators and the central bank who are primarily responsible, and must be held to account, rather than the management and counterparties who devised and facilitated the strategy."

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