By Nick Evans
Bankers lecturing the world about systemic risk and the
perils of shadow banking may strike most people as
taking the mickey. But to hear Alan Greenspan pontificating
about there being no need for any new financial regulation
truly takes the biscuit.
This is the man who created the conditions for the greatest
financial bubble and collapse the world has seen. Who stoked
the fire at every possible opportunity with his calamitously
misguided policy of endless rate-slashing and
Who turned a blind eye to every sign of the catastrophe that
was brewing. And who repeatedly championed, with such blithe
naivety, the credit risk transfer that banks were
engaging in to get around the Basle capital rules in the almost
endearing belief that the banks were practising sophisticated
risk management when what they were actually doing was
trying to make their supervisors (and ultimately making
themselves) look like monkeys.
Sometimes certain people forfeit any right to have a view on
certain things. Greenspan on finance and regulation is a case
in point. It is simply time for him to shut up and go away.
Of course there needs to be new regulation for the banks.
Any fool can see that. The only relevant issues are what kind
of regulation; who it is supposed to penalise, to protect and
to benefit; and whether it is designed in such a way as to
prevent banks getting around it all over again and becoming the
main beneficiaries of supposed attempts to restrain them.
It must be regulation that takes aim at and hits
the right targets. It must be simple, clear, effective
and practicable. It must be globally enforced and enforceable.
It must carry strict penalties for individuals, as well
as institutions. And it must root out the culture of money-lust
and self-interest that has become so engrained in the DNA of
So far the omens are not good. Some rules, like the ban on
bank prop trading, are clearly sensible. But the Dodd-Frank
Act, in classic US style, looks like simply providing a bonanza
for the legal community without achieving any clarity of
purpose or content.
In the UK, the Vickers commission seems already to have
fallen victim to vested interests and looks to be in
danger of ducking the key issue of how to rescue investment
banking from itself by putting an end to the absurd fees that
bankers charge their clients and the even more preposterous
amounts they pay themselves.
It is hard to believe that most bankers are as stupid, or as
lacking in self-awareness, as they sometimes appear. But to
hear them going on about how regulation will make many of their
activities unprofitable, without apparently stopping to think
how their P&Ls might benefit if they paid themselves
slightly more modest sums, is almost enough to make you
The reality, of course, is that it is the customers who will
pay for all this anyway and that includes hedge funds.
And for the hedge fund industry, these added costs will come at
a time when a whole mass of new and generally needless new
regulation is already coming its way as if it were hedge
funds, and not the banks, that caused all of this trouble in
the first place.
The AIFM directive, Dodd-Frank, the capital requirement
directive, the central counterparty clearing/OTC derivatives
changes, new short-selling rules, the market abuse directive,
MiFiD, the anti-bribery act you name it, its
either here already or on the way soon.
For the bigger hedge fund groups, all this additional red
tape is a hassle they could well do without but one that
they can live with and afford, even if it will do little to
benefit their clients. But many smaller boutiques, which are
the heart of this most entrepreneurial of businesses, could be
swamped by the legal and compliance burden and costs that will
Nobody would argue against well-thought-out regulation that
makes investors more comfortable, makes markets less open to
abuse and creates stronger public confidence in hedge
But this degree of regulatory carpet-bombing is excessive,
disproportionate and entirely counter-productive. And for what
purpose? So that politicians can claim they have taken decisive
action to sort out the financial system, when they have done
nothing of the kind?
Is this really what the end result will be that the
banks can carry on largely as before (still too big to fail and
still too powerful to control), while a whole load of harmless
and blameless small businesses could end up being regulated out
of existence? It would be a disgrace, but its starting to
look ominously that way.