Creditflux Newsletter

One of the fascinations of the markets is watching the ebb and flow of power amongst various institutions, individuals and other groups.

In the last few years we have seen power shift comprehensively from borrowers to lenders. Doubtless it will shift back at some point. We have also seen power shift from private sector masters of the universe to the public sector: central bankers, politicians and taxpayers.

Within banks we have seen power ebb away from investment bankers to commercial and retail bankers; only for it to switch straight back as investment banking earnings have surged and consumers’ travails have hit retail banks.

On trading floors, traders rule the roost once again. He who makes the price, and has capital to commit, is master of all he surveys. Meanwhile, bank salespeople’s relationships are almost worthless.

The ebb and flow of power can do remarkable things. A Thursday evening in July finds Wolseley in the bar of a hotel which he has never previously felt any inclination to visit. A hotel moreover where no one reading this column is likely ever to have been. And make no mistake it is the ebb and flow of power which has compelled Wolseley to be there. Power is on the move and it behoves us all to watch from whence it drains and – most importantly – to where it accrues.

Wolseley is there to introduce a regulator and a politician to each other. Both are keen to meet, but both don’t want to be seen to meet: hence the deeply unfashionable hotel rendezvous and the deeply unfashionable go-between.

The politician is currently not in power, but with an election pending and the polls set fair, power is accruing to her. Hence the regulator’s desire to meet, but to meet clandestinely. He has briefed the current government, but what really matters is what the opposition plan to do, for they will likely soon be able to implement their policies.

As it happens, the hotel was in London and the regulator and politician concerned were both British, but similar scenes were played out in Washington DC before the November elections, and are being played out in Brussels and Frankfurt as you read this.

A theme from that meeting relevant to us all was the way in which shifts in power undermine those who are nominally in charge. The UK has little power in Europe at the moment because Europeans read the polls and see that the current government will soon lose office. After that election, it is likely that a new Conservative government would neuter the Financial Services Authority.

Whilst the British Government, the FSA and the Bank of England have been arguing about the distribution of financial regulatory power within the UK, real power has been rapidly draining away to Europe. Ladies and gentlemen, meet Eddy Wymersch, affable and gregarious chairman of CESR, a previously almost anonymous committee recently upgraded to the role of Europe-wide securities regulator based in Paris.

Similarly, power is draining away from the group of “bulge bracket” banks, which established the new credit market and have prospered as it has grown.

Wolseley wonders what they are thinking as they celebrate their hard fought victory to limit the number of “non banks” on the ISDA determinations committee. Like Napoleon celebrating his chess victory over Ney at La Belle Alliance in June 1815, the banks, too, will soon be fighting their Waterloo.

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