The Dogs that didn’t Bark (1)

 

Throughout all the financial crisis, attention has been centred on one aspect -- the culpability of the bankers and the problem posed by the bonus culture in banking.

 

But there are at least three other areas that need attention if the same mistakes are not to be made again: the role of the non-executive directors and, particularly, the chairmen of banks; the role of ratings agencies; and the role of the auditors. None of the dogs barked. Guard dogs that don't bark are completely worthless. 

The Walker Report, issued yesterday (16/07/09) may go some way to shifting attention to the first of these three groups. Initial “reaction” from the banks – in fact more accurately, off-the-cuff responses from high-bonus earners  stirred up by the diligent reporters of the FT --  suggest that Walker’s review little possibility of being implemented, while Gordon Brown remains in thrall to the City.

But action has got to be taken in this country -- as it apparently is in the USA -- to make sure that the credit ratings agencies held to account.

At the beginning of the noughties they altered the way that they charged for their services shifting the burden to the businesses being rated and giving the ratings information away to their previous customers. This put them in a clear conflict of interest  since they were now taking fees from people who would wish to receive th best possible rating rather than impartial assessment.  They  either failed to recognise this conflict or else recognised it and failed to do anything about it. Consequently everything got rated highly regardless of the true  underlying risk.

The FSA should review the activities of Moody's; D&B; S&P and the other ratings agencies to make sure that they behave properly and observe their duties to the end customer who relies on the integrity of their information

The other issues of the auditors -- the other dogs who didn't bark -- is less easily addressed. All the big four are guilty of giving clean bills of health to banks who within months were found to be riddled from top to bottom with toxic assets There are some senior people in the accounting profession who need to be held to account. To be continued……