Jeremy Warner's Outlook: Soros thinks crisis the worst since 1930s, but beware a similar regulatory response

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The Independent Online

It's always nice to see the sinner that repents, but I doubt that's what George Soros, the billionaire speculator, means when, in a series of interviews to launch his new book, he blames the present crisis in financial markets on Thatcherism, Reaganism, deregulation and what he sees as misguided free-market thinking.

As one of the founding fathers of the hedge fund industry, he and his philanthropic causes have benefited hugely from the debt leverage that these phenomena have allowed, yet now he seems to be turning on the whole system by claiming that it was an accident waiting to happen.

Mr Soros thinks the prevailing Anglo-Saxon political consensus that markets know best, and always self-correct in a manner that produces the best possible outcome for populations as a whole, is a load of tosh, and certainly currently developments seem to bear him out.

Markets have needed massive intervention by governments, regulators and central bankers to prevent them ripping down the whole economic edifice. It would surely have been the case, Mr Soros argues, that if banks had been better regulated in the first place, with more exacting controls on credit expansion, then none of it would have happened.

Is this increasingly fashionable view correct? Up to a point, possibly. Like communities, markets need policing or anarchy and excess to the detriment of the whole takes over.

The innocent also have to be protected from the unscrupulous, so we have our deposit insurance schemes, our prudential supervision, capital controls, disciplinary procedures, and our checks and balances. Central bankers also stand ready to treat the banking system with massive infusions of liquidity when confidence goes.

Yet you can have too much of a good thing and the danger of imposing too many controls is that you end up killing the goose that lays the golden egg. This has always been the conundrum at the heart of financial regulation. I'm not convinced the present crisis much changes the parameters of the debate.

What is certain is that the pendulum is swinging violently back towards a more heavily regulated approach to markets. The deeper the economic consequences, the more vicious the regulatory backlash will become. A bit more regulation of credit is no bad thing, but we surely don't want to return to a world of mortgage queues, credit rationing and oppressive regulatory obstruction.

Necessity is in any case the mother of invention and whatever the regulators do to plug the holes, the innovators will always remain one step ahead. George Soros reckons the present crisis is the most serious since the 1930s. Yet the policy response has so far been a good deal more sensible. Let's keep it that way.



Shabby behaviour, but what can you do?

Marks & Spencer has behaved arrogantly and unwisely in attempting to bulldoze through Sir Stuart Rose's elevation to the executive chairmanship in breach of corporate governance principles. It rarely pays to alienate your major shareholders by riding roughshod over their wishes in this way. If ever the company needs to call on their support in future, they will be in unforgiving and even vengeful mood.

It doesn't seem very likely that Sir Philip Green or some such other private equity player will be bidding again any time soon – in these markets nobody would lend them the money – but if they did, the board might struggle to command the loyalty of investors in the same way as last time.

Yet, in a curious way, the episode may have enhanced good corporate governance at M&S, rather than, as widely claimed, damaged it. After what's just happened, the board will be doubly careful to ensure best practice, or at least one would hope so.

If there is some terrible breach of standards or collapse in profits, everyone will turn round and say, "we told you so". Yet it is hard to see why this should be any more likely with Sir Stuart as executive chairman than if he continued to be overseen by the current non-executive chairman, Lord Burns. In allowing this rumpus to develop, Lord Burns has proved himself completely ineffective. Former civil servants do not on the whole make good corporate taskmasters.

Either way, Sir Stuart would be condemned as just the charming chancer that some in the City still half suspect he might be. It doesn't seem to me to make any difference one way or the other. There are good reasons for preventing, in all but exceptional circumstances, the chief executive from becoming the chairman, or from consolidating the two positions.

The assumption of such absolute power can be dangerous. Nor is it healthy to allow the chief executive through his elevation to the chairmanship to anoint and choose his successor. Possibly bad, corrupt, backward-looking practice and cronyism then become entrenched and the company is likely to suffer accordingly.

The combined code invites companies to comply or explain. There was scant explanation of why Sir Stuart should be a special case other than that there was no obvious successor and he might leave if not given the chairmanship. This again was a failing on Lord Burns's part. There was no adequate succession planning.

The company also failed properly to consult and then compounded the insult in the minds of big, institutional shareholders by claiming they were broadly supportive. So far, the board has persuaded only one to speak out in favour. The rest have been almost universally hostile. This distortion of the actualities has greatly inflamed the whole situation.

As for the £450,000 payoff Lord Burns was to receive for handing the chairmanship to Sir Stuart and the unspecified sum Sir Stuart was to receive for the burden of taking it on, it began to look like a straight fingers-in-the-till job.

In a letter to shareholders published yesterday, Lord Burns insists he didn't consult because he thought it would leak, a point which seemed to be confirmed by the fact that the letter, circulated to bigger shareholders prior to publication, did indeed leak. All the same, it's not much of an excuse. The more likely explanation is that the board knew it would be controversial, and simply tried to bluff their way through.

There has now been a little bit of compromise around the edges, but on the substantive issue the board remains intransigent. In any case, shareholders can do nothing about it until the annual meeting in July, and even then there is no direct vote on the issue.

Lord Burns is hoping everyone cools off in the meantime, but even if he does manage to win over the waverers, he can expect a substantial protest vote. As I've said before, it's a good thing Lord Burns is going. The whole affair has been appallingly handled.



Inspired rebasing by Alliance & Leicester

The architect of the modern combined code on corporate governance, Sir Derek Higgs, has meanwhile declared in his guise as chairman of Alliance & Leicester that the current array of bonus-related performance targets at A&L is far too onerous in today's straitened banking environment and wants to adjust one of them down accordingly.

This is reminiscent of the "rebasing" of share options that occurred during the dotcom and technology meltdown six or seven years ago. With options left deep underwater, exercise prices were repeatedly downgraded. In the end, share prices sank so fast and low that the downgrades couldn't keep up. It was an unseemly episode all the same, as directors tried desperately to hang on to the greed-fuelled excesses of the boom.

It happens in every downturn and it is a positive inspiration to see Sir Derek leading from the front in the present scramble to rescue banking bonuses. How reassuring it is that though the cost of your mortgage may be going through the roof, those providing it are to be be fully insulated from the pain.

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