Margareta Pagano: Radical reform is the only way to save banking
Sunday 16 January 2011
The last time I met Professor Larry Kotlikoff was over dinner at the London School of Economics nearly a year ago, after he gave his first riveting lecture in Britain explaining why he's so convinced the financial system needs drastic reform.
The softly spoken American economist drew a bigger audience than usual for such a subject after he'd been thrown into the spotflight by Mervyn King, the Governor of the Bank of England, who said his work should be studied by the authorities as we look for new regulatory structures. Since then his words have been spreading like wild-fire; on Friday he addressed 200 Republicans in the US and this week he's in Sweden and Holland talking to policy-makers.
Kotlikoff's view last year was that unless we change the way our banks operate, it won't be long before we head for a financial meltdown that will make the Great Crash of 2008 look like a minor hiccup. When I spoke to him again last week he said his outlook hasn't changed a bit. Indeed, he's even more pessimistic about the long-term prognosis, warning that the eurozone debt crisis could easily tip into a banking one that could trigger another round of insolvencies.
More importantly, he claims to know how to fix the system to stop this happening again – and wants to start by sorting out Ireland's mess. So it's great news that the professor will be in London again on Wednesday to present more details of his proposed new regime – he calls it Limited Purpose Banking – to the Independent Commission on Banking. Having taken King's advice and studied his work, the ICB's five commissioners and secretariat want to quiz him more, mainly to allay their fears that that such a system would reduce the ways savings are turned into investments.
In a nutshell, his proposal does what it says by limiting banks to their legitimate and original purpose – to connect and intermediate between borrowers and lenders, savers and investors; which is how banks used to work until the 1960s. The really radical part – he would argue the safe part – is that banks should be banned from lending money that is not matched by cash reserves. Under limited purpose, any groups or corporations engaged in financial intermediation – banks, hedge funds, insurers – would act as middlemen rather than as principals. They would create mutual funds, be able to sell shares in the funds to the public and use those proceeds to buy assets, not unlike a unit trust. But they would never own any financial assets, so could never fail due to bad risk. This would make them the "disinterested intermediaries they pretend to be". People would still be able to gamble, but the banks would not, and thus taxpayers' money would not be at risk from a future bailout. As he points out, one third of all financial assets in the US are held by mutual funds and these were the most stable part of the existing financial system and, in the main, weathered the financial storm.
The ICB has shown real boldness during its investigation into such a sensitive, and politically volatile, subject. Knowing the commissioners are listening to Kotlikoff is gratifying and, I hope, shows their intent to come up with robust reforms when they report in September. Their chairman, Sir John Vickers, is known to be cautious, but I'm also told that the nuclear option of splitting retail and investment banking in some way is still on the table. If the ICB doesn't come up with reforms as thoughtful as Kotlikoff's, we can only hope they find something even better. This is no time for a short-term fudge.
Slam on the brakes, Holden, you can't abandon Crossrail now...please?
Some frantic arm-twisting is going on behind the scenes to try to stop Rob Holden from going ahead with his decision last week to step down from Crossrail. I'm told ministers and industry bosses involved in the £16bn project are so shocked and saddened by his surprise move that they are moving heaven and earth to get him to change his mind.
So far, the thoughtful Holden hasn't given any reason for leaving the project which he only took on – and some would say saved – in April 2009. He joined Crossrail from the LCR team which built the high-speed line from London St Pancras International to the Channel Tunnel, a magnificent engineering feat. And it was Holden who is credited with helping to persuade the Government to slow the timetable of the 72-mile Crossrail route from Maidenhead in Berkshire to Shenfield in Essex because, he argued, the project could be built cheaper and better. Construction has just started – the most visible signs being the chaos around Tottenham Court Road – and the line is due to open in seven years.
It's going to be another feat of magnificent engineering – the route passes from the West End and Canary Wharf, with a link to Heathrow Airport, and will have up to 24 rush-hour trains an hour running between Paddington and Whitechapel.
That's why it's so surprising that Holden should go now, in the middle of one of the biggest infrastructure projects ever undertaken in the UK. All he would say on announcing his departure was that he was looking for "new opportunities".
Doesn't sound like Holden to those who know him. Construction industry chatter is that he was frustrated with the governance of the project and may well have had an uneasy relationship with its chairman, Terry Morgan. Apparently, he was disappointed not to have been invited to do the Network Rail job and could now look overseas.
If his departure is really only about governance and personalities, let's hope ministers can persuade him to stay.
Female order: Bring more women, WEF tells Davos Man
Davos Man was always a rare breed: well-educated, well-heeled, well-connected to a global network, expert at wining and dining and, of course, skiing. Every year, about 2,200 of this tribe – businessmen, politicians, academics and policy-makers – march to the Davos summit in Switzerland for the World Economic Forum, where they make grand statements about the state of the world.
A few women do attend, but only 370 or so, and this number hasn't changed over the past few years. But the WEF wants more of the Davos Woman and has ordered all the firms which pay a fortune to attend this jolly event to bring at least one woman for every five men. The 20 per cent quota is the brainchild of Saadia Zahidi, who heads the WEF's women-leaders and gender-parity groups. But before lecturing others, the WEF might take a look at its own backyard – its managing board has no women at all, while just two of its 12 directors are women. Over to you, chaps.
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