Speed and greed left no room for ethical conduct
The economic crisis was a failure of personal integrity from beginning to end. The consequences are massive financial regulation. Regulation can, however, only fix a given problem at a particular moment and becomes obsolete over time. These are the words of Charles Cronin, head of the CFA Institute Centre for Financial Market Integrity for the Europe, Middle East and Africa (EMEA) region, who was guest speaker at the first conference of the Luxembourg Institute of Global Financial Integrity (LIGFI). We spoke to him after the conference.
What were the main messages you were addressing to the audience?
My main messages were the importance of ethics and the acceptance of ethical behaviour by the financial services industry. Until that is accepted the service industry cannot hope to regulate itself, it will be regulated from outside and external regulation just fixes one problem at one moment of time.
So companies from the financial services industry have to fix themselves internally like coming up with codes of acceptable behaviour that can be accepted by general public and politicians before they are allowed to govern themselves. That’s the first point that came out.
The second point is, internalizing these behaviours requires the excellent practice of judgment, good ethical behavior internalized by the organization. But the most important thing is to have the leadership with the organization instilling these values into the corporate culture
Are you not concerned about overregulation?
I am very concerned about overregulation. This whole financial crisis leads to political momentum of its own making of which populace politicians may gather more favour by pushing something further than it should be to take advantage of the current momentum of popular opinion.
Certainly in my own country, we’ve got elections coming up and it’s an opportunity for people to push the envelope by looking for excessive regulatory solutions.
If you compare the United States with Europe, which market is better regulated?
They have different approaches to regulation. I don’t think it is very easy to say which one is better regulated but the crisis that occurred originated in America and that is due to lax lending policies and a number of ethical failures through the whole chain of the originator distribute model.
But if you have a look at access to easy credit in Europe, there are a number of countries in Europe that had policies which put them in considerable danger and so I don’t think one can say the United States have a better or a worse regulation than Europe.
What I can say though is that Europe is tackling the regulatory problems much faster than the United States and the new pan European supervision structure is very encouraging.
Are politicians only looking for short-term solutions?
Unfortunately, the problem about regulation is that it fixes one particular problem at one moment of time. So as you move away from a piece of legislation, not only since it was conceived, but by the time it was passed and turned into a law, it may become obsolete as the markets evolve and change shape.
Talking about legislation, if you want to be critical about the United States, American legislation is very rules based and you have tons and tons of lawyers out there trying to get around the rules whereas European legislation is more principle based. The problem is you have to have people with a common set of values to observe the principles, which go back to the ethical argument.
What could be an efficient and helpful reform on rating agencies?
You know that a piece of regulation has been passed by in the European Union on rating agencies; we were involved quite a bit on this. The situation was that rating agencies were depending on models to evaluate the portfolio in these credit crunch structured products and the mathematics proved to be wrong.
There were incentives and pressures on rating agencies to accept better, even more wacky mathematics, because at a certain point percent of their revenues were depending on rating these structured products.
Now, I feel sorry for the rating agencies because I think this whole concept ceases to exist because mathematics failed. Conceptually, if you think about it, if you have a portfolio of poor quality assets, you cannot through repackaging that whole package of assets make it worth any more.
It is a zero sum game. If I have a one pound note here and a one euro coin there, you can’t make it worth any more by repackaging it. Fundamentally it doesn’t work and the market has woken up to that. So that whole product stream has pretty come to an end.
Now with regards to the rest of the area which is agencies rating corporate issues and government issues, there will be a market for them.
But the emphasis I see on European regulation is for investors to do more for their own due diligence and I think that the space that rating agencies did occupy, that they had a certain franchise on because under the law you had to choose assets which had a credit rating value. So I feel their market is certainly shrinking from where it was in the past.
Charles Cronin is the CFA Institute Centre for Financial Market Integrity head for the Europe, Middle East and Africa (EMEA) region.
Mr. Cronin holds a B.Sc. with honors in economics and a minor in economic history from Loughborough University, England.
Prior to joining CFA Institute, he was self-employed as a senior equity analyst at Edison Investment Research, a consultant to Richard Davies Investor Relations, and an expert witness in freehold valuation for leasehold enfranchisement for central London residential property.
Mr. Cronin spent over 20 years working in most areas of the equity capital markets, including buy- and sell-side research, international institutional fund management, pension fund trustees, and investor relations. During this time, he served with leading firms, such as Hill Samuel Investment Management, LF Rothschild, Nomura, and Prudential-Bache.