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FSA's Hector Sants passes the buck for financial crisis

FSA's Hector Sants passes the buck for financial crisis Ian Fraser

At a hearing of the Treasury Select Committee last month Hector Sants, chief executive of UK regulator the Financial Services Authority, seemed determined to persuade the MPs that he had done something – anything – to prevent the failure of Royal Bank of Scotland. Prior to its October 2008 collapse under the leadership of former chief executive Sir Fred Goodwin, the Edinburgh-based bank briefly became the world's largest with $3 trillion in assets.

Sants joined the FSA in May 2004 straight from the investment bank Credit Suisse First Boston, where he was chief executive for Europe, Middle East and Africa. He became the FSA's chief executive when John Tiner stepped down in July 2007, 15 months before RBS came within hours of bringing down the UK and perhaps even the global financial system.

At a hearing of the Treasury select committee in the Thatcher Room on January 30, Sants was grilled about the FSA's 450-page report into the RBS collapse, which is widely perceived to have been a partial 'whitewash', why the FSA didn't do more to prevent the RBS catastrophe in October 2007 to February 2008, and whether he is fit for continued regulatory office (he has been named chief executive-designate of the Prudential Regulatory Authority which is due to take over many of the FSA's functions from 2013). The subtext was whether, given a track record that is questionable at best, Sants is really the right man to be leading with PRA.

Throughout the hearing in the Thatcher Room, Sants was on the defensive (full transcript is available via Hansard). He wanted to convey the impression that he personally had sought to do more to prevent the RBS implosion, but had been prevented from doing so by the FSA's silo like structure, and culture of non-intervention (often called its "light touch, limited touch" approach to regulation).

But in my view Sants' attempts to pass the buck on to his predecessor John Tiner and the FSA's former head of retail, Clive Briault, were unedifying. He said the policy framework in place under former FSA chairman Sir Callum McCarthy and chief executive John Tiner, prior to the summer of 2007, in relation to overseeing UK institutions was “grossly inadequate; totally unacceptable to me. That is why, as soon as I could, I introduced changes.” He later said “the quality and quantity of the supervisory staff that I inherited in the summer of 2007, as well as the procedures and philosophy they were operating to, was inadequate."

To these sort of remarks Andrew Tyrie, chairman of the Treasury Select Committee, said: “It does sound as though you are dumping on your predecessor”.

Clearly riled by the way in which the regulator's pre-crisis inaction was characterized by the MPs, Sants almost seemed to clutch at straws when highlighting one action he had taken personally to stave off the RBS collapse. He said that on April 9, 2008 he personally ordered RBS’s former chief executive Fred Goodwin to raise fresh capital via a rights issue.

“I have no doubt that he would not have had a rights issue of that size without my personal intervention ...We pressed them to raise as much capital as we possibly could.”

But this rights issue was a deeply controversial exercise particularly since the Listing Authority, an arm of the FSA, is considered to have signed off a fraudulent rights issue prospectus, published on April 30, 2008, once RBS's delusional board had been cajoled into raising the cash.  The Liberal Democrat MP, John Thurso, thought that forcing a rights issue on the RBS board was not a particularly good move given that the £12bn the bank raised from institutional and retail investors was almost entirely lost since the bank was bust five months later. Thurso asked Sants:

“Can I just tell you that for quite a number of small investors – the Dowager Lady Thurso [John Thurso’s mother] being one of them – the rights issue was not unalloyed joy. What do you say to all the small shareholders who lost out as a result of that?

A crestfallen Sants' responded by saying:

“I am truly sorry that the bank failed. We genuinely believed at the time, if we could raise capital of that type of magnitude, unless there was a further dramatic deterioration in market conditions, that that would be sufficient. Unfortunately, that proved not to be the case. I am truly sorry for all the small shareholders who have been caught up in this financial crisis.

The Conservative deputy chairman Michael Fallon MP was totally underwhelmed by Sants’ attempts at self-exculpation, telling him that forcing Goodwin to do a rights issue did not erase the impression the FSA had been asleep at the wheel between October 2007 and February 2008.

Sants claimed that, in this period, the regulator had been so distracted by other issues (including how trying to salvage the UK’s former building societies, including Bradford & Bingley and HBOS, from collapse) that it had ignored the RBS elephant in the room. Sants told the MPs:

“The assessment I received from the supervisors ... was [that RBS was in that period] benefiting from a flight to quality, and was actually gaining deposits because of the pressure on the smaller banks in the period described. From November 2007 onward we did have concerns, and as I said, that was the point at which the chairman of the FSA started pressing the central bank and Treasury to put in place contingency facilities..."

Sants was caught on the hop by Mark Garnier MP, who asked how many of the key causes of the crisis  listed in the 2010 Turner Review the FSA had actually addressed. Garnier read out a number including “the massive growth and increased complexity of the securitized credit model”, “high leverage in multiple forms” and “hard-wired procyclicality”.

Sants was forced to admit the FSA had done nothing to address any of these issues, but blamed its limited remit, which he said did not cover financial stability or risk in the system. FSA chairman Lord Turner helped clarify the position by saying:

“The focus was very strongly on Equitable Life, split-capital trusts, RDR, treating customers fairly, and so on. That was the skew of the focus of the board at that time, against the background of a widely held assumption – but in retrospect, complete delusion – that the world had become a safer place, precisely because of all these complicated things, which in retrospect we know have made it less safe.”

Sants insisted trying to block RBS’s €72bn acquisition of the worthless Dutch bank ABN Amro was never an option for the FSA. He claimed this would have been:

“irresponsible and could in itself have destabilized RBS. The board might well have responded very negatively to that. So that is certainly a different point to the straight judgment on threshold conditions."

Does this mean the FSA was running scared of Goodwin, the tyrannical former RBS boss who recently had his knighthood removed by the parliament's Honours Forfeiture Committee?

Sants was later asked by Andrea Leadsom MP to confirm that there was nothing the FSA could have done to block the ABN Amro takeover. Sants again said no and blamed the non-interventionist philosophy of the day. He told the MPs that "for the FSA to act as shadow directors, and second-guess the judgements that executives and boards have made, was absolutely not the philosophy prevailing at the time."

Leadsom asked Sants whether the FSA was “caught up in the herd mentality of the RBS board and the shareholders”. Sants denied this and again lashed out at his ex-colleagues. He said Tiner had “not even thought that he should consider the issue" and that the FSA's former chairman Sir Callum McCarthy had not deemed the deal worthy of consideration. Sants told the MPs that at least he had personally had “the guts to consider the issue." Unfortunately for the rest of us, having Sants "consider" the deal was not enough, though.

This is part one in a two part blog about Hector Sants' January 30 appearance before the UK's Treasury Select Committee. Part Two will follow tomorrow.

Further reading on the FSA and Hector Sants:

Tags: Andrea Leadsom , Clive Briault , Equitable Life , Financial Services Authority (FSA) , Fred Goodwin , FSA , HBOS , Hector Sants , John Thurso , John Tiner , liquidity , liquidity risk , Lord Turner , Mark Garnier , Michael Fallon , Prudential Regulatory Authority , RBS , Retail Distribution Review , rights issues , Royal Bank of Scotland (RBS) , securitization
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