Creditflux Newsletter

Wolseley knows it is summer, and the “silly season” and all that, but he has just had a rather otherworldly experience.

It all started when Wolseley was invited to a conference on “the future of finance” organised by – wait for it – The Paul Woolley Centre for the Study of Capital Market Dysfunctionality. The host had nailed its colours to the mast, so we were braced for an assault on the free market, but still we were unprepared for the glimpses of the future served up in the delightful setting of the Institute of Electrical Engineers in London.

The FSA’s “Red” Adair Turner kicked off with his usual brilliant analysis, this time demonstrating that markets are messy and inefficient. Lord Turner has now added a green tinge to his oft repeated red logic. You could paraphrase his argument thus: “Markets generate more and more is bad.” Too much credit, he said, caused the crunch: too many transactions, too many banks, too many bankers, too much to analyse, and too much to regulate. Less is more sustainable, said Lord Turner, who, lest we forget, moonlights as chair of the Climate Change Committee. The logical conclusion of his argument is that liquid markets are bad and illiquid markets better, and that low turnover is better than high.

This theme was picked up by Paul Woolley, the founder of the Centre for the Study of Capital Market Dysfunctionality (and of GMO Europe), who drew on his experiences as a value investor to advocate transaction limits on funds.

He pointed out that the volatility of traded assets, notably stocks, is far higher than the volatility of the underlying cash flows or earnings streams of those assets, and he used this observation to substantiate a view that a high volume of transactions were not serving to improve the price discovery process.

Reeling from this anti market onslaught Wolseley hardly had time to recover before Martin Wolf, newly appointed to the UK Government’s Banking Commission, was describing a scheme to regulate bankers’ pay. Using the role of head of JP Morgan’s investment bank to illustrate his talk, Wolf went on to describe how desk managers, divisional managers and board members should have a substantial, long term, uninsurable, direct personal exposure to the risks they brought onto the bank’s balance sheet.

Wolseley hopes and believes that Wolf’s intention was to demonstrate how unpalatable such a scheme would be, so as to encourage focus on other areas of the regulatory reform debate.

Turner, Wolf, Woolley. How could the students of Dysfunctional Capital Markets top that? The coup de grace was delivered by Vince Cable, Her Majesty’s Secretary of State for Business Innovation and Skills. He told us that “the banking system is still on life support” before going on to lament bankers’ reluctance to lend money to UK PLC.

Unfortunately, Uncle Vince failed to draw what seems to Wolseley the obvious conclusions from what had gone before: not least that bankers are responsible citizens, that they have learned their lessons and are preparing to embrace the future, where they will have direct personal responsibility for the exposures they take on to their banks’ balance sheets, and where smaller markets and lower turnover reduce hedging and ensure a closer, long term relationship between borrower and lender.

If the future of finance is anything like that advocated by the dysfunctionalists, bankers will forever be lending less.

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