On JP Morgan's Losses

IMG Auteur
Published : May 14th, 2012
592 words - Reading time : 1 - 2 minutes
( 0 vote, 0/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...
FOLLOW : Too Big To Fail
Category : Gold and Silver

A quick fix for the failed experiment of FSA financial services regulation...

AS I WAS READING of yet another spectacular mismatch between bank managers' competence and their remuneration, and this time at JP Morgan no less, I realised that there is a simple solution which really could be implemented, writes Paul Tustain, founder and CEO of BullionVault.

My poor old Dad was what they now call an 'investment banker'. His firm got it wrong by expanding business into the 1970s' slump, and when it went wrong the Official Assignee took everything he owned. That was in the days when partners had joint and several liability, which meant that all the top management of a firm were personally liable for the entire debts of their business. In those days the regulator was judicious self-interest, exercised by the partners themselves.

Joint and several liability quickly weeded out the incompetents, the gamblers and (which I like to think he was) the unlucky. It made managers look very carefully at their colleagues' strategies, and concentrated everyone's efforts on controlling risks, rather than seeking bonus-building nominal profits.

The approach was discarded in 1986 after 150 years of pretty effective operation. It wasn't perfect (what is?) but we were all very stupid to think we could do better by replacing the natural damper of direct personal liability with a combination of salaried and bonused managers, and sixty thousand pages of regulations.

I realised this morning that FSA regulation of financial services has become so onerous and so unsuccessful at loss prevention that joint and several liability could easily be re-introduced. All it would need would be a subsidiary FSA set up exclusively for the regulation of investment businesses run by unlimited liability partnerships.

Lots of reputable financial professionals do not get big bonuses, because they work competently in the low-risk, low-return areas of the industry. Yet within FSA there are so many complex rules that even these firms have to employ more compliance officers than accountants, while at the same time funding the wretchedly unfair Financial Services Compensation Scheme, which is a bit like being forced to pay for the car insurance of your drunk next door neighbour.

They should be given the choice of submitting to FSA or choosing a simpler system, where they put up as collateral their house, their car, their holidays and their children's school fees, and – within reason – are left to get on with managing their business risks as they see fit.

Making management collectively liable for their mistakes has lots of benefits.

  1. Because partners all want to be able to understand their whole business it encourages smaller and less systemically dangerous organisations – ones which are not 'too big to fail'.
  2. It encourages business formation, something which has ground to a halt now, because of the huge cost of setting up an FSA-compliant organisation.
  3. It forces revenue generators to be more critical about risks, rather than leaving it to formulae which pass the rules and get boxes ticked, but do not work in practice.
  4. It encourages senior management stability and accountability, and suppresses the job merry-go-round whereby careers advance by sweeping problems temporarily out of sight and quickly changing jobs.
  5. It directly links remuneration to risk, as well as to performance.
  6. It keeps all prior remuneration still in the compensation pot, to be reclaimed in the event of future investor losses.

Our experiment with rulebooks, regulators and salaried managers has been a bit of a disaster. Maybe a partial return to the old ways is not such a bad idea.

 

<< Previous article
Rate : Average note :0 (0 vote)
>> Next article
Settlement-systems specialist Paul Tustain launched BullionVault in 2005 to make the security and cost-efficiencies of the professional wholesale gold market available to private investors. Designed specifically to meet his own gold ownership needs as a risk-averse investor, BullionVault now cares for over US$1bn of client gold property, all of it privately owned in the client's choice of low-cost, market-accredited facilities in London, New York or Zurich.
Comments closed
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
Sometimes Things Turn
14 JunThemis
When humans try to do it all using their own strength and 'wisdom', we screw up royally. Let us remember that we have a powerful God and humbly tu...
The CFTC’s Summer Camp Letter
14 Junsonora691
I have followed the daily and intra-day prices of silver for most of the last 10 years. I am not a speculator, but a small investor interested in m...
Sometimes Things Turn
13 Junsonora693
I would like to thank you for turning a hundred years of American history into a succinct and subjective account of what has gone wrong in this co...
Sometimes Things Turn
11 JunS W.2
When a country like the USA does all the things that third world countries do, then by default it ends up in the third world.
Sometimes Things Turn
11 JunGypsy1
Being a "working stiff" I didn't start to notice The Turn until Foley and the Democrats would never stand up to Regan and Voodoo Economics. It was...
Going Where, Exactly?
10 JunJ.
I wonder where history will put the collapse. Like a recession, the collapse of a society is only apparent long after it is underway. Some, such ...
Trump’s Last Stand
08 JunS W.
I don't think China will be too worried about tariffs . They are getting on with business in the silk road with about 100 countries so they wi...
The CFTC’s Summer Camp Letter
02 JunS W.
I assume that Mr Butler has accumulated stacks of silver bars at artificially low prices and at some time in the future he will sell all his silver...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS