In answering the question, “Who has the credibility problem here, Halifax Bank of Scotland or the UK’s Financial Services Authority?” for HBos's problems, the FT’s Lex suggests HboS cannot have been managing satisfactorily for its shareholders, as the bank’s value fell by three quarters despite the FSA's assurances. Lex thinks both are blameless and blameworthy?
Certainly, it is not good if the bank is increasingly reliant on short term funding. But, the bank is not directly responsible for its short term share price, least of in current circumstances where many other banks’ shares are similarly down. The FSA cannot ensure the fair value quality of the stock market where prices can be automatically driven by last price tick rather than by volume and frequency of direction of trades governed by the human judgement of market-makers, which have been effectively abolished!
Too much negative sentiment may be attaching to mortgage exposures per se and too little trust attaching to FSA judgement that the fundamentals of the banks are satisfactory. The FSA should and could have intervened on short sellers after two or more days of a similar intraday pattern. But, this is driven as much by automated algorithmic trading, excessive stock lending and CFDs that the regulators failed to ban years ago. What the crisis shows up are problem of day trading profit-takers as well as excessive proprietary trading by banks. Retail and institutional (longer term) investors generally recognise that HBoS is undervalued and would weigh in if it were not for the intra-day traders squeezing them out! Regulators need to do a great deal more about how markets are regulated and their quality of price discovery or price creation. Instead, they became over- focused on regulating banks' capital reserve ratios.
At the time of Big Bang and since the late '80s many senior market makers and other bankers worried that a valuable and functioning ethical ethos of how markets were nationally regulated and overseen was being lost, giving away to global 'cowboys' etc. It has taken 20 years to establish and refine new global regulations and accounting standards in the face of increasingly global innovations in derivatives and off-balance sheet instruments, new complex structured products and the fragmenting of equity markets as financial flows and markets also became more globally inter-connected. The work of BIS BSBC and other standards bodies has to be much admired; their challenges are immense, and therefore it is no wonder that major problems and global credit squeeze crises have arisen.
That banks and investment houses should have sought to become global through mergers and takeovers has appeared a defensive as well as an aggressive necessity. It was long argued that survival would depend on becoming either very big or very specialised, global or niche, or both. But these are just fashionable concepts, never precisely proved to be true or false. It is the nature or job of markets to continually rattle the cages of everyone's business models. But, through all of this pressure for change, perhaps what has been lost sight of is the importance of banks retaining public respect, moral authority, and customer confidence, appearing more than 'as secure than houses', more like 'as secure as the Bank of England'.
While shotgun marriages such as HBoS's merger with Lloyds TSB appears a good solution, the shotgun nature of it, the speed of events, is deeply undermining of customer confidence and that must be a general cost to all banks. Even before the credit crunch, in recent years, 90% of bank customers were found by surveys to mistrust and even hate their banks, all banks. The fast growth and far above average profits of banks allowed them to ignore or discount their unpopularity. The credit crunch has changed all that. One of Gordon Browns' conditions for supporting the HBoS/LTSB merger is that the new financial giant must provide for first time mortgage borrowers. But, this may only be the first of many social responsibility obligations that will now be imposed on banks one way or another.
There is a misconception that some banks have been more prudent than others in avoiding sub-prime exposure or in becoming over concentrated in mortgage lending and that this translates into good banks and bad banks. Truth is that all banks are exposed to property; it is the single biggest exposure in banking generally, not just mortgages, but as loan security and collateral, direct ownership and in many ways indirectly. LTSB has been called a good bank in these terms. But it has been indirectly heavily involved in sub-prime securitisations as a major player in the US in providing financing for SIV/SPE conduits. Alongside other high rated banks like JPM and GS it is not immune from toxic exposures, merely more indirectly and less directly. Similarly, RBS had an enormous role in underwriting securitisation issues in the US, some say about $1tn worth, but its direct exposure is relatively manageable at somewhere in the region of $80bn. Lloyds TSB also had its own worries about a £23bn SIV that has since been worked down to under £12bn and not sub-prime related, though topped up with a mish mash of securitised assets from building societies and others that can be problematic to account for. That said, it is now on balance sheet and fully CP financed. HBoS took £36bn of conduit tranches back on balance sheet earlier, at a cost that may have triggered its need to ask shareholders for £4bn in new capital that damaged investor confidence and its share price. It is also paying the price for not cutting back on mortgage growth and market share earlier as James Crosby wanted to, and over which it is rumoured he was pushed out by his executive team?
Banks whose share price have not suffered much, or not much worse than the equity market indices and far better than most banks such as JPM and HSBC are not immune from toxic debt, merely perceived to have the matter under better control or to be more indirectly and less directly exposed, or beter globally diversified. Some would say that those banks like Citigroup or UBS who were more transparant about writedowns earlier suffered disproportionately more than those banks who took longer or played for time, or perhaps whose accounting systems did not work so well in revealing the mark to market unrealised losses. Recall Black Rock's confession that their accounting system did not tell the board the full picture, and similarly at UBS, Fortis and others. JPM (the inventor of sub-prime securitizations) have (at a rough guesstimate) about $400bn level 3 cash market exposure of which $300bn is CDS, possibly much reduced by the takeover of Bear Stearns plus quarantine measures. Moves developing now to quarantine toxic mortgage related debts (akin to burying them in deep holes until maturity) possibly could have moved faster, but given the number of 'stakeholders' involved in the US and internationally, and the polics, I doubt it. This means that those banks who felt morally if not technically obliged, as a matter of integrity, to put their hands up first, were the most punished by the equity markets.