St. James International · Further Readings
REGULATION, REGULATION AND REGULATION!
We are all familiar with the real estate mantra LOCATION, LOCATION AND LOCATION. In fact we are all too familiar with it especially as it has provided an easy soundbite for lazy politicians over the past twenty years. Remember Tony Blair in the United Kingdom with Education Education and Education? Just words given credibility by plagiarising one of the smartest slogans in the business world.
President Obama followed suit recently without necessarily realising that he had. The US financial reforms could have been presented as REGULATION, REGULATION AND REGULATION. The age old practice of left leaning governments interfering in markets has resurfaced. In the United Kingdom Blair and Brown did it by creating the Financial Services Authority, a one stop shop for regulation that proved unwieldy and incompetent by its very scope and size. In the United States Obama is now throwing the baby out with the bath water. The innovation and energy of Wall Street is to be sacrificed by preventing banks from renewing markets with vision just because a few directors were stupid and greedy. That is nothing new in the banking sector; bankers have always been stupid and greedy, not necessarily in that order!
Bailing out banks in the profligate manner in which governments on both sides of the Atlantic have frittered away taxpayers’ money was never necessary. What the politicians never understood was the banks had forgotten how to distinguish between their customers’ deposits and their shareholders’ funds. Directors, with the consent of their shareholders can do what they like with their profits, but they have a duty to protect their depositors. Investing in securitised debt and other assets of dubious value simply because they thought they could gain high returns was stupid and greedy. The problem lies in equal measure between government, directors and shareholders.
Governments can protect depositors through simple regulatory rules relating directly to liquidity and the value of assets matched to liabilities to depositors. That is banking. Directors can take risks with the shareholders’ equity as shareholders know that the value of their stock can go down as well as up. That is investment.
Shareholders in banks can curb their greed but this is where the equation doesn’t balance because the shareholders with the greatest influence are just as stupid and greedy as the bankers. Because we have a culture of collective investment through unit trusts/mutual funds, insurance bonds, managed funds etc the lines of responsibility have been redrawn. The directors and managers of these collective investments are playing the same game as the companies in which they invest. They have to have bigger returns to show their shareholders that they are the right destination for those shareholders’ funds. It has become an upward spiral that suddenly implodes.
The individual investor with common sense and a long term objective can no longer be heard. What we have is a wider distribution of company earnings through collective investment vehicles but we do not have wider share ownership. Only registered shareholders vote and it doesn’t matter how many underlying holders there are in a particular stock when that stock is registered in the name of a fund management company. Perhaps the time has come for collectively held shares to be disenfranchised so that only those shareholders who are the true holders can vote. What a simple regulatory process that would be with directors once again being directly responsible for their actions to individual shareholders. No more pussyfooting around with a bureaucracy of career regulators collecting information of no value and to no purpose.
Banks need to remember they started with depositors. Companies need to remember they started with individual subscribers to their capital. Fund managers need to remember they are simply a vehicle to distribute earnings and cannot be relied upon to exercise shareholder control.
In the final analysis perhaps all directors should be non-executive which is the best form of regulation and we would not need the nanny state to stifle enterprise by interfering in each and every stage of the process of business. All governments are in debt so why should we think they are capable of regulating businesses when they cannot balance their own books?
ERIC DIXON July 2010
eric.dixon@stjamesinternational.com
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