Creditflux Newsletter

Inexperienced government officials aren’t just regulating our industry – they’re important customers, too

Everyone in the credit market understands that one of the downsides of government involvement in markets is... government involvement.

The obvious price of the bail-out can be seen in restrictions on bonuses, restrictions on business, and pressure to do the wrong business in the wrong way. And our chastened industry, shorn of a generation of leaders, is in no position to argue.

Beyond these already visible costs, government intervention comes with a price tag that is as yet largely unseen. Elected government officials and their civil servants respond to a different set of stimuli from those that motivate markets people like you and me. They respond to public pressure; they are (shock horror) "political". That means they don't always make rational decisions. It's certainly fair to point out here that markets don't always make rational decisions, but that is another subject for another day.

Some of these irrational political decisions are pretty tame (for instance, designing bail-out packages with a weather eye to making the true cost to the taxpayer less than fully transparent). Sometimes this has resulted in a suboptimal bail-out structure from a market point of view, but I guess we can live with that if it is the difference between life and death for a major bank.

But some of the political pressure is more opaque and insidious. It is applied to government officials who are making key decisions about which firms get to do what business. Whether it is a TALF management contract or the price of insuring your toxic assets, government officials are now some of our industry's most important customers. And these are customers who have had little experience or training in making these kinds of decisions, who are in crisis management mode, who have no framework to help them make those decisions, and who have to make them quickly. Thank goodness that there are some excellent banking industry salespeople on hand to help our overstretched officials make the right calls. Or maybe not.

What makes the bureaucrats' procurement decisions even more challenging is the increasing concentration of capabilities within our industry. The number of firms with a given capability on a scale to match a government's needs is limited. If a government designs a policy programme that offers leverage to a group of asset managers who have knowledge of a particular asset class there are a limited number of scale players with the credibility to pitch.

If you exclude those asset managers who have a close affiliation with the institutions that are being expected to sell, then the number is further reduced. But that is not an end to the challenge. The government will likely need one or two institutions to help it manage and monitor the programme. Who is left? What Wolseley is saying is that the expanded role of the government in credit markets has created a world of conflicts that make the pre-2008 rating agency model look like a model of probity and impartiality.

For now, while we are busy fixing the system, bureaucrats will likely listen to the honeyed words of lobbyists and salespeople and overlook institutional conflicts. In time these decisions will come back to haunt them. In a few years (or even a few months) government procurement departments, audit offices and competition authorities will be forensically scrutinising decisions taken in the midst of a credit crisis by harassed officials subject to intense lobbying. They will have a field day.

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