French regulator creates a storm in a wine glass

Weinstock's legacy; Argentine crisis
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The Independent Online

A regulator's lot is not a happy one; successes go unnoticed and unpraised, while anything that looks remotely like a failing commands months if not years of public retribution and criticism. Regulation is either too light or too oppressive, too intrusive or too lax, too prescriptive or not prescriptive enough. It can never be just right.

With so few friends, you would expect regulators to stick together to defend their own, but not so one Jaques Delmas-Marsalet, president of the Commission de Controle des Assurances, who yesterday launched an extraordinary full frontal assault on his UK equivalent, the Financial Services Authority.

According to Mr Delmas-Marsalet, the CCA repeatedly warned the FSA that all was not well at Independent Insurance but got nothing in return. Six months after the first warnings, the company spectacularly went down with all hands. And whose fault is that? Mr Delmas-Marsalet's implication is clear; it is the FSA's.

There can only really be two explanations for Mr Delmas-Marsalet's outburst. Either he's right or he's buck passing. On the evidence so far, it looks more likely to be the latter than the former. In nearly all financial collapses there are instances where the regulator might have done things differently. The FSA's position in the Equitable Life débâcle, for instance, is far from being beyond reproach. But in this particular case the FSA seems to have done most of what it should have.

Independent Insurance had long been on the FSA's high risk list. Even the most sleepy of regulators couldn't have missed the warning signs – high rates of growth, aggressive pricing, and an overbearing chief executive. By the time the CCA wrote to the FSA saying it was concerned about unpaid claims and underreserving at Independent's French offshoot, the FSA was already on the case; Independent had been ordered to suspend expansion until it had raised more capital.

None of this is what brought Independent down. That occurred in the course of trying to raise the capital, when it was discovered that there was a whole raft of unrecorded or "whiteboard" claims which had not been reserved for at all. The scam was made worse by the emergence of back to back reinsurance contracts, most of which turned out to be worthless. The French regulator had warned of none of these things because, like the FSA, it had no idea they were going on.

Mr Delmas-Marsalet's allegations are really no more than a storm in a wine glass, born more out of inexperience and the regulator's constant fear of blame than anything else. Mr Delmas-Marsalet was said yesterday to be already out enjoying theBastille Day celebrations. Perhaps he shouldn't return.

Weinstock's legacy

Arnold Weinstock hovers over Marconi like Banquo's ghost. His corporate life is meant to be over, but still he unnervingly appears from beyond the grave to the consternation of all involved. He played no direct part, it is said, in the battle to remove John Mayo a week ago. But, like the injured old war horse that he is, Lord Weinstock was being kept informed from his hospital bed.

Now, we are told, he is working actively to identify a successor to Lord Simpson as chief executive as well as a new chairman, a new corporate strategy and a fresh set of non-execs to replace the duffers who let Marconi get into its present pickle. As the former boss of GEC, before it changed its chief executive and then its name, he has every right to take a view. As the owner of 40 million shares he is also entitled to his opinion like any other shareholder.

But should his writ run wider than that? Lord Weinstock has the honorific title of chairman emeritus and a small office in Marconi's Belgravia headquarters. But neither of these give him the authority to decide the future of his former company any more than Lord King of British Airways or Sir Iain Vallance at BT, whose ghostly presences also linger on in their old companies.

Lord Weinstock has had a good press since all this began. His careful, parsimonious ways are favourably contrasted with the disastrous gamble his successors took with the company's future. But the truth of the matter is that in almost every sphere of activity, the old GEC failed to live up to its potential – whether it was in telecommunications, silicon chips, power engineering or even defence electronics. Nor did it succeed in emulating its namesake, General Electric of the US, as an industrial conglomerate, Lord Weinstock preferring to horde his cash rather than grow the business or develop a financial services arm.

Now aged 77, the former managing director of GEC, should learn the art of retiring gracefully

Argentine crisis

Are we on the edge of another emerging markets crisis? In the late 1990s, Argentina managed to ride the emerging markets storm relatively well. Its currency board, which pegs the Argentinian peso to the US dollar, held firm, and the general view is that despite some short term economic pain, Argentina emerged more or less unscathed. That view is now being challenged. Growing fears of default or devaluation have reached a crescendo this week, and it is easy to see why.

The currency peg with the strong dollar has made the Argentinian economy uncompetitive against its neighbour, Brazil, whose own currency, the real, has fallen about 30 per cent against the dollar this year. But that's by no means the whole story. The whole point of a currency board is that it is meant to give foreign capital absolute confidence that it can get its money out at the same value it came in at but, of late, a more conventional view of an emerging market as one from which it is impossible to emerge has begun to reassert itself. There's been a flight of capital, not just from Argentina, but from the whole region.

Part of the reason is the technology meltdown, which has made investors generally more cautious and risk averse. In theory, the very low returns now on offer in developed economies should heighten the attractions of emerging markets, where returns can still be high. But actually, the reaction against risk has been more general. From technology to emerging markets – no one wants to know any longer. You may not think of the US economy as a safe haven right now, but it looks a lot more like sanctuary than Argentina.

At the time of the last emerging markets crisis there was a terrible angst driven wringing of hands among western policy makers about the need to create a new "global financial architecture" and tame the wilder excesses of the capital markets, but despite all the talk, not much of substance came out of it all.

And as for the fundamental problem with the developing world – that it doesn't tend to live by the same rules as richer nations, has a cavalier attitude to the rule of law and contract, and doesn't have the same safety nets, checks and balances – hardly anything was done about it all.

The general belief is that this time around a more general emerging markets crisis can be held in check. Don't bet on it. Asian economies have specialised in the industries being most hard hit by the technology meltdown – computers, semi-conductors and telecommunications. Already the economic pain is biting and the foreign capital is turning on its heals and heading home.