a system run amok

8/8/2019 A System Run Amok

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A system run amokThe credit crisis one year on

Contents

Preface.......................................................................................1Introduction...............................................................................2

A system run amok ..................................................................2Section I: The greed game.......................................................8

The 10 Virgins..........................................................................9Carrot and carrot....................................................................11Game of Hot Potato ...............................................................12Top it up .................................................................................15Know your enemy..................................................................17

Section II: Whats to be done? ..............................................21Whats to be done? ................................................................22Back to school .......................................................................23No compensation without regulation .....................................25

Of debt and taxes ..................................................................28Over-rated..............................................................................31Study history, young man ......................................................33Bring me sunshine .................................................................37

About us ..................................................................................40Get breakingviews..................................................................40


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Collateral benefits

Some people will argue that such a package of measures would

strangle the financial system with excessive red-tape.

There will certainly be consequences - above and beyond themain purpose of making the system less vulnerable. Mostobviously, banks with more capital that take fewer foolish riskswill earn lower returns on equity in good times. In turn, that willlead to less extravagant rewards for financiers. And lowerprospective pay will mean that less of the world's talent will beattracted to the money-pots of the City and Wall Street.

But would this really constitute collateral damage? More like acollateral benefit. If less talent is sucked into Wall Street's greedgame, more would be available to go into industry and theprofessions. It's not just the market's balance of fear and greedthat would be improved. Better regulation would lead tohealthier balance throughout the economy.

Published 22 July 2008

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Section I: The greed game


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Section II: Whats to be done?

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Whats to be done?

By Hugo Dixon

Considered view: With panic receding, what is to stopbankers on Wall Street and the City of London going back totheir bad old ways? To drive home the message that foolhardyrisk-taking doesnt pay, regulators should inflict pain on firmsthat have benefited from government bailouts. No bonuses fortheir chief executives and no dividends for shareholders thisyear should do the trick.

The overall philosophy of entities such as the U.S. FederalReserve and the Bank of England ought to be to inflictmaximum pain without killing the patient. Their elaborate lifesupport systems have done a good job of keeping patientsalive. But there has not been enough pain.

To be fair, the doctors are not idle. They are, for example,urging patients to raise more capital. As well as strengtheningthe financial system, this inflicts pain because it will depressbanks future returns on capital.

More is needed. The doctors should tell the boss of any WallStreet or City firm that has benefited from their ministrations, orsuffered massive losses, that they shouldn't pay themselves abonus this year and that they should scrap any remainingdividend. Regulators would know who to pick on, but firms suchas Citigroup, the UK's HBOS, Lehman Brothers, France's

Socit Gnrale and UBS might be on the long list. Even thelikes of Goldman Sachs and Morgan Stanley should be told tohold back if they want regulators good will in the future.

The firms will probably squeal. But regulators can argue that ifthey hadnt rushed out the ambulances most notably whenBear Stearns was about to collapse much of the financialsystem would have been infected. If the firms still protest, thewatchdogs should threaten to turn off the life support systems.


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In the late 19th century, most US States decided to directlyregulate prices of railway operators. However, Charles Adams

of the Massachusetts Railroad Commission attempted topersuade railroads into compliance. The commission did nothave coercive powers other than to elicit information. Adamswould publish expert economic analyses of firms' performanceand profits and suggest that they could afford to drop theirprices, but it still was left to the private sector to set prices.Adams wrote that the board of commissioners was set up as asort of lens by which the otherwise scattered rays of publicopinion could be concentrated to a focus brought to bear upon

a given point.

Published 09 June 2008

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About us

Breakingviews.com is the world's leading source of agenda-setting financial insight. breakingviews has 25 correspondentsand columnists based in London, New York, Paris, Washingtonand Madrid. Our aim is to become the lingua franca for theglobal financial elite. Our real-time subscription service currentlyreaches around 15,000 financial professionals such asinvestment bankers, senior corporate executives, hedge fundmanagers, lawyers and private equity professionals. We reacha broader audience of nearly 4.5m investors and opinion-

formers via 12 columns in the following influential newspapers:the Wall Street Journal, Le Monde (France), El Pais and CincoDias (Spain), Handelsblatt (Germany), La Stampa (Italy), NRCHandelsblad (Netherlands), The National (UAE), The BusinessTimes (Singapore), Mint (India), LAgefi (Switzerland) andWSJE.

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Copyright 2008

a system run amok

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