Creditflux Newsletter

The nature of the credit business is to bring buyers and sellers of credit together. In everything from agreeing covenants to setting the price, credit professionals – from syndicate officials to salespeople – are trying to reconcile competing interests. Some people choose to be open and upfront about their motivations, while others are reticent to the point of virtual silence. It takes all sorts.

When you have a long history of dealing with someone who has always been fair and straight with you, then you will come to trust them. If you have a consistently positive experience of dealing with a number of individuals from one firm you may conclude that you understand and appreciate the culture of that firm and are comfortable with it.

We don’t all appreciate the same type of culture. Some of us prefer to deal with a salesperson who is always looking out for our interests and second guessing them, others will feel patronized by that.

 It is as hard to regulate these multifaceted, multidimensional relationships as it is to regulate a marriage. Many of us have significant personal capital invested in commercial relationships. We may share a sense of a running score with a counterparty, whether institution or individual, and think: “They owe me a favour,” or “I need to support her.”

There are limits, though: cultural and legal. I don’t know about you but Wolseley won’t do business with someone who lies or cheats. Once bitten, twice shy. And when asked I will share my views of people and institutions with others.

In this way, there is a social sanction on bad behaviour. The scorpion may sting once or twice, but after that the whole community knows that they are dealing with a scorpion. (Of course, some people will want to deal with the scorpion. It’s bizarre but true.)

We also operate in markets which are subject to an enormous weight of regulation. Regulators around the world have hauled off numerous baddies in handcuffs and almost always on camera “pour encourager les autres”.

Put the legal and cultural aspects of our relationships together and we have sufficient mechanisms to root out crooks and scoundrels. Indeed, everyone in our market has a responsibility to themselves to develop a valuation of the sense of the moral probity and trustworthiness of everybody with whom they deal.

This score is dynamic and changes with every newspaper story and every email that you read about institutions, from the most prestigious to the most obscure.

No amount of regulation can ever attempt to replicate this social fabric. Worse, it undermines and corrodes it: the scorpion can most effectively disguise herself when she can say: “Look I comply with all the rules.”

In the past few years, we have seen how some regulations have directly and indirectly created behemoths that have endangered our financial system.

Make no mistake: every well meaning extra regulation over the past decade has made it harder for start-ups and small firms, and increases the incentives to be big. Ask any independent financial adviser in the UK.

None of the above is meant to express any view about any particular contract, deal or transaction. Indeed, my whole point is that it is very difficult or impossible for external observers to appreciate the context of a particular transaction sufficiently so as to be able to form a view. We all need the rule of law to protect us from the most egregious transgressions, and that is all.

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