Creditflux Newsletter

Cut-throat competition got us in a mess – maybe cooperation can get us out of it

We all believe in competition don't we? Isn't that what markets are all about? Didn't we all grow up in the market trying to win business from each other by working harder, showing tighter bid-offer spreads, hiring the opposition's best people and developing new products?

That was certainly how things used to be. That was how markets got to be as sophisticated as they are today. And, some would argue, that is how we got ourselves into the mess we are in. Too much competition is a bad thing.

This idea has a long pedigree. Old man JP Morgan - the über capitalist - was no fan of competition. He believed that the US needed only one railroad company, one steel company and one bank. And, so long as they were owned by JP himself, they would serve the national interest.

Where is old man Morgan when you need him? Today's credit markets face an existentialist threat and need participants who are thinking in the "national" interest. The threat to our survival (allow Wolseley a little hyperbole here) is from public opinion, politicians and regulators.

Bankers are not popular, credit markets are even less popular, and credit derivatives are the source of all the problems. We may not believe that, but, sadly, society does - and we have to deal with it.

So if the regulators want standardisation, transparency and central clearing houses, there really isn't much point arguing about it. Wolseley has been flabbergasted to see how slow some credit market participants have been to recognise this new reality. Only when threatened with draconian measures by the European Union did the dealer community knuckle under and sign up to implement a clearing house in short order.

So how do we explain this counterproductive obstinacy? It's back to competition. Our banking brethren in particular have spent their careers jostling for advantage. Those at the top of the credit business at JP Morgan and other "successful" houses have spent their careers (or at least the last decade) working hard to get into their current position.

Like Fortinbras at the end of Hamlet, they stand almost alone on the credit market stage. They are winners after a savage fight, their rivals wounded or worse, their instincts honed over the years to seize the prize for which they have strained every sinew: 90% market share; wide, wide bid offers only available to favoured clients; and fees with everything. Nirvana.

How hard it is then for these masters of the universe at the moment of their victory to have a visit from the man from the ministry who says they must participate with the losers in a risk mutualisation mechanism specifically designed to prevent the demise of another competitor.

But this is what we are expecting of JP Morgan and the other winners. So perhaps Wolseley shouldn't be quite so puzzled at the tardy embrace of credit clearing houses by the remaining robust credit institutions. Their prize has been snatched from them and what was a competition has suddenly become an exercise in cooperation.

Regulators face the same issue. This time last year the success of the FSA's "light touch" was cited as a major competitive threat to New York's position as a financial centre. Now the mantra ahead of the G20 meeting is international cooperation. All regulators have to tighten regulation together - or all is lost.

The moral: it's time to put away those sharp elbows and burnish your cooperative skills.

Wolseley is a leading practitioner in the credit market. Feedback is welcome at wolseley@creditflux.com