Creditflux Newsletter

As credit marketeers return from summer holidays their thoughts are focused on the likelihood of a “double dip” and the merits of more quantitative easing. When Fed chairman Ben Bernanke was in London last year he coined the phrase “credit easing” to describe the willingness of central banks to inject money into the economy by buying riskier assets rather than the usual government securities or short dated bank bills. The recent announcement of the Fed’s intention to reinvest proceeds from maturing mortgage backed securities into treasury securities should then be seen as credit “tightening”. Let us hope this is a step in the right direction, towards credit markets which operate with the need for gradually less government support.

The authorities in the UK must surely be hoping that less intervention will be needed in the near future. If action is required now it would find the UK in the middle of an expensive game of financial musical chairs, as the government dismembers the FSA and redistributes its responsibilities in line with the policy of the new coalition government.

Wolseley is surprised that this policy survived coalition building. It always seemed a populist attempt to nail former prime minister Gordon Brown with a measure of personal responsibility for the credit crunch. It was Gordon who stripped the Bank of England of responsibility for bank supervision and gave it to the newly minted FSA. Promising to give those powers back to the bank (much to the obvious distaste of some senior bank officials) was clearly designed to say “this policy was wrong”. But with the need to build a coalition with FSA-friendly Liberal Democrats, and with the regulation brief being wrested from the architect of the break-up policy, James Sassoon, it looked likely that the policy would be reversed and that the FSA would survive.

But with the publishing of the regulatory white paper, the UK government has made it clear it remains committed to its policy of shuffling deckchairs in a titanic exercise of reform as the UK’s financial services industry steams onward at full tilt. Let us hope no icebergs await as the crew get to know their new roles.

One unsung heroine of the near miss of 2008 is Sarah Breedon. Formerly head of market risk at the Bank of England it was the diminutive Breedon who stepped in to deal with the hole in Northern Rock’s balance sheet before stepping up to lead the liquidity pumping exercise which culminated in the design and execution of the Bank’s £200 billion ($308 billion) special liquidity scheme. It would be reassuring to know that Breedon was still on the bridge should more remedial action be needed, but as one consequence of reorganisation Breedon has been drafted in to organise the Bank’s takeover of banking supervision.

That is a well deserved promotion, but are we seeing a successful organisation stretched to breaking point? Meantime the discredited FSA is losing experienced officials to a newly resurgent City. Within the markets area of the FSA, remaining officials are under enormous pressure to maintain morale, make the transition work, and to bat for Britain within the increasingly assertive Committee of European Securities Regulators.

And will it all be worth it in the end? Let us hope so. But in the meantime we can only cross our fingers and hope that the credit markets give financial secretary to the treasury Mark Hoban the breathing space of no less than two years he estimates it will take to get the new structures legislated and in place.

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