Being honest about the financial sector!

It’s not often that I disagree with Ian King in the Times’ ‘Business Commentary’, I rely too much on him for some really good quotes.

But today I must honestly say that I can not agree with him in his comments about the way in which the FSA have penalized chipmaker Wolfson for dragging their feet over the making of a public announcement of some news which possessed significant price-sensitive qualities.

Put simply Wolfson failed to disclose in March 2008 that it had lost a key contract with Apple Computers to provide chips for its next generation of the iPod music player. It appears that Wolfson were advised by their investor relations consultants that they did not have to make the disclosure, after Wolfson disclosed that Apple had awarded it another contract to supply chips for the new iPhone. It was opined that the revenues from the new contract would balance and therefore cancel out the loss of revenues from the iPod contract.

Subsequently, Wolfson sought advice from their lawyers and then disclosed the facts to the market. The immediate impact was that Wolfson’s share price suffered an 18% hit over its previous close.

Subsequently, the FSA have fined Wolfson £140,000 for failing to make a timely disclosure of negative financial information.

In his turn, Ian King, has adopted the ‘City apologist’ stance and has sought to argue that if experienced City practitioners such as Wolfson’s advisers ‘…cannot recognize what amounts to price-sensitive information, how can anyone else..?’

He admits later in his very fair piece ‘…The truth is that, while suspicious trading before price-sensitive statements is as common as ever, no-one has been jailed for insider dealing since the Financial Services and Markets Act became law [ ]… Until they are, the suspicion remains that the FSA is happy shooting fish in a barrel…it is one way to try and prevent such information leaking, but hardly the most effective or fair…’

Putting the immediate issue of the Wolfson case to one side, and turning to a more general overview of financial conduct, if anything about the financial news in the last few days and weeks has taught us anything, it is that vast sectors of the financial sector have completely lost their real sense of moral obligation towards their shareholders, their market counterparties, and, in the long run, to the ordinary people who make up the bulk of the working population of this country and whose futures and those of their families depend so much on the financial sector playing by the rules.

We, the ordinary members of the community who don’t benefit from the big salaries, and the bigger pensions and the obscene bonuses which the City fat-cats have been spraying around each other, have every right to expect that if we entrust them with our savings, our investments and our pension funds, then the price of letting them play in their free market is that the least they will do with our money and its future safety is to treat it as a sacred trust. We don’t expect them to run off on some bizarre frolic of worthless foreign acquisitions, a spending spree of such lunatic proportions that they frankly deserve to be certified.

We don’t legitimize them to put their ego on the line while they challenge their fellow CEO’s in competing institutions to play a game of ‘let’s see whose got the harder balls and the bigger dick!

And we expect them to comply with the rules which the FSA and the other regulators expect to be obeyed.

And that’s the point of this blog!

As Ian King says, ‘…suspicious trading before price-sensitive statements is as common as ever…’ Such market activity is a very strong symptom that the body-financial is infected with the virus of greed and insider sleaze, and that is a disease that needs a very painful cure! The problem is that in recent years, the regulation of the City has been allowed to be carried out with a ‘light touch’, and the financial institutions have been allowed to push back against the implications of important regulatory constraints. Capital adequacy rules have been weakened and relaxed; City apologists have protested that the rules are too complicated and that no-one can understand them. Trade associations push hard to pressure Regulators to give detailed definitions of what the rules mean, and then, armed with such a definition, the practitioners burst a blood vessel running to their lawyers and paying them massive fees to tell them how to get round the constraints.

The market pushes the envelope again and again, and as long as the wheel doesn’t fall off, regulators, financiers and politicians all jog along together in a complicit state of regulatory anomie.

So, let’s stop pretending please that it was ever any different. Those of us who have been around long enough can read the signs and we know that this mess has been caused by too little regulatory activity on a bunch of truly greedy bastards, acknowledged and tacitly encouraged by a complacent political environment, which believed that the money sloshing round in the cesspit that was the financial sector, was evidence of their political genius in market understanding and the wisdom of their ‘soft-touch’ control .

The only way back now, if anyone wants the investing public to inculcate any meaningful re-belief in the integrity of these markets, and God knows, without them, Governments will have very short shelf-lives, then we must see the re-introduction of the observance and the imposition of the financial sector rules, executed in as draconian a fashion as possible.

Insider dealers must expect immediate prison sentences. Those who manipulate the market ( the doom and gloom merchants who talk this country’s companies down, or spread malicious rumors about a company’s value, all the while shorting the stock for all they are worth), must be willing to spend time inside. Those who commit criminal offences by deliberately ignoring the imposition of important legal regulatory constraints because of the cost implications, must expect to share a cell, even if only for a couple of weeks, (it wouldn’t need any more), with a steroid-crazed body builder who misses his comforts!

Bank CEO’s who fail to deliver meaningful investor value, (not shareholder, notice, any clown with enough money can become a bank shareholder), I am talking about investor value, should not be allowed to scuttle off clutching a huge pay-off, pension fund contributions and compensation for loss of office. Failure in a free market should be penalized, not rewarded.

A new Government, one untainted with these scandals, must, as a matter of immediate priority, put the systems and controls in place to ensure that no fat cat, ego-tripper or rogue CEO can ever again, bring this country and its financial infrastructure to the state we are in today. If that means banging up a few bankers, then let’s get on with it! It may not sound very fair, but you’d be amazed how many people in this country would be willing to slam the cell door!