markets and to date few have done a more thorough job than Charlie
McCreevy, the European commissioner for internal market and
services.
Addressing a plenary session of the European Parliament in Brussels
on 22 September, McCreevy systematically chastised role players in
the current financial market fiasco and left no doubt that a “new
regulatory approach” lies ahead.
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Unsurprisingly, it was US banks that were first to come under
attack from McCreevy for their pivotal role in creating a global
financial crisis – described by the European Central Bank governing
council member Miguel Ángel Fernández Ordóñez as “the worst since
the 1929.”
He was, of course, referring to the October 1929 crash of the New
York Stock Exchange that heralded the onset of the Great
Depression. The crash had followed a period of reckless speculation
not too dissimilar to what occurred in the US subprime mortgage
market in the run-up to the current crisis.
The current crisis, said McCreevy, “started with reckless selling
of mortgages in the US, promoted by banks and others who did not
care about lending standards because they could offload the loans
to others through securitisation.”
McCreevy then turned his attention to other role players who have
come under widespread attack for their role, credit rating agencies
who he accused of giving “respectability” to high risk
[securitisation] products by assigning low credit default risk to
them.
However, institutions that invested in subprime mortgage
securitisations and have fallen foul of the crisis also have
themselves to blame for ignoring that sound piece of advice, caveat
emptor – “let the buyer beware.”
“Financial institutions around the world bought up these products
without, it seems, doing any serious risk assessment of their own,”
stressed McCreevy.
“In the light of events over the past year it has been incredible
to see how little understanding senior managers of financial
institutions had of the risk they were taking on board. No doubt
the size of the profits that were rolling in blunted serious risk
analysis.”
Market regulators did not escape a dressing-down from
McCreevy.
“Supervisors seemed to have no better idea of the risk in these
hugely complex products. Things were so sliced up, diced up and
repackaged that no one knew where the real risk was,” said
McCreevy.
An aspect of McCreevy’s address that deviated notably from popular
thinking was his attitude towards the role hedge funds and private
equity funds have played.
“They were not the cause of the current turmoil,” he declared. “It
has turned out that it was the regulated sector that had been
allowed to run amok with little understood securitisation
vehicles.
“I don’t believe it is necessary at this stage to tar hedge funds
and private equity with the same brush as we use for the regulated
sector. The issues relating to the current turmoil are
different.”
However, McCreevy emphasised that financial market participants in
general can expect regulatory change.
“We are going to have a different financial services sector when
this is all over and we will have a different regulatory framework
as well,” he stressed. “The taxpayer cannot be expected to pick up
the bill for the excess and irresponsible risk taking of private
institutions.”
McCreevy continued: “The ultimate shape of whatever new regulatory
approach will be adopted will be designed over the coming period as
the lessons from this crisis and the appropriate response become
clearer.”
Reassuringly, McCreevy said a first step to improve regulatory
oversight has been taken. This came in the form of a memorandum of
understanding agreed by European Union supervisory authorities,
finance ministers and central banks setting out common
principles.
Little doubt credit rating agencies will be the subject of
especially close regulatory scrutiny. Issues to raised by McCreevy
were conflict of interests, a need to improve valuation of illiquid
assets and what he termed “the misalignment of incentives in the
originate and distribute model”.
