FSA admits huge mistakes
My jaw was on the floor after the first 45 minutes of watching the chairman and chief executive of the Financial Services Authority give evidence to the Treasury Select Committee.
To say that Lord Turner and Hector Sants admitted there were shortcomings at the City watchdog in the years before they arrived would be a bit like saying Nelson Mandela oversaw a modest change in the constitution of South Africa.
They totally repudiated what they called the philosophy of the FSA prior to the near total collapse of our banking system in the autumn.
Lord Turner said that the FSA, as a matter of principle, did not question whether banks had appropriate strategies. It adhered, or so he said, to a free-market ideology - as preached principally by Alan Greenspan, at the time the world's most powerful central banker - which broadly said that banks would by definition behave rationally.
The only role for the FSA at the time - according to Turner - was to make sure that the structures, systems and processes of the banks were ticketyboo. So it verified stuff like whether there were a sufficient number of bodies in the risk-management department; or whether the right kind of management and risk information was being gathered and disseminated to the right people; and so on.
But it wasn't apparently proper for the FSA to challenge banks on whether they should be growing so fast in the mortgage market, or loading themselves up with collateralised debt obligations manufactured from toxic subprime loans, or funding themselves to an ever-increasing extent from the sale of mortgage-backed securities.
I'm so shocked that I've come over all cockney. All I can think of to say is "can you Adam-and-Eve it?"
And my own answer is "no", if I'm honest.
Sants made an equally gobsmacking disclosure. He said that in the past, when deciding whether someone was fit-and-proper to be a senior banker, almost the only consideration for the FSA was whether the candidate was a crook. But it didn't take much of an interest in whether the bank might be appointing a dunderhead, an incompetent, as a steward of our precious savings.
There is some reassuring news, however. Turner and Sants both insisted that it's all change at the FSA.
The watchdog is now crawling all over the strategies of the banks and examining where these institutions that are so central to our economy are heading.
And competency is now a formal requirement for the FSA for appointment to the board of a bank. The FSA has even decided that it's going to meet and interview candidates for top positions at banks, to verify whether they cut the mustard.
If you said "about time too", I wouldn't be at all surprised.
Here are two more shocking disclosures.
Turner conceded that neither the FSA nor the Bank of England had a formal, legal responsibility for maintaining the financial stability of the system.
And he also said that the FSA would be increasing the capital requirements for the trading activities of banks by several hundred per cent.
This means that the securities trading and investment banking activities of the likes of Barclays will become more expensive for banks, much less profitable. Banks will be deterred from engaging in the kind of financial engineering that led to the creation of all those poisonous, subprime-based investments.
But it also implies that - again - the FSA got it wrong to a mindboggling extent in another absolutely core area of its regulatory responsibilities.