World came close to collapse, says banker
Richard Gluyas 16 July 2009 The Australian
ANZ chief executive Mike Smith lost faith in US regulators when they allowed Wall Street investment bank Lehman Brothers to fail, and he wondered at the time “if this was the end of the banking system as we know it”.
In a series of interviews for The Deal magazine on the state of competition in the domestic banking industry, the leaders of the big four banks have revealed how close the global financial system came to complete collapse.
All four say the world came unnervingly close to a catastrophic meltdown, and National Australia Bank chief executive Cameron Clyne warns we are “not yet at a point where anyone should declare victory”.
A typically forthright Mr Smith said he had wondered “if it was all over” in the chaotic weeks that followed the demise of Lehman on September 15 .
“When I looked at the other investment banks, they were very vulnerable because they were so highly leveraged,” Mr Smith said.
“At the time, I thought maybe this was the end of the banking system as we know it.
“It’s the first time in my career I’ve felt that, but the US looked very, very precarious and I felt the regulators didn’t know what they were doing.”
Asked how close the system came to collapse, Mr Smith quoted a reflective Duke of Wellington, after his victory over Napoleon in the Battle of Waterloo in 1815.
“It was a damn near-run thing, and I don’t think people realise that,” Mr Smith said. “I tell you the person who did realise it, and that was (British Prime Minister) Gordon Brown; he was one of the few people who actually understood the severity of it, and by standing behind the banking system he put his finger in the dike.
“That stopped it, because the European contagion was massive. I think he probably did save it.”
In the chaotic weeks following the Lehman collapse, Merrill Lynch was absorbed by Bank of America, and insurer AIG was rescued by $US85 billion ($107bn) of taxpayer funds as the financial contagion spread.
Westpac boss Gail Kelly joined Mr Smith in condemning the move to save Bear Stearns in March last year while allowing Lehman to fail, ostensibly to reduce the risk of moral hazard.
Mrs Kelly said she had attended a European meeting in October of about a dozen global bank chief executives, and there had been a strong view that it had been “a mistake” to allow Lehman to go to the wall.
“I don’t think people thought through the consequences,” she said. “There was a sense of inconsistency when what was needed was stability.”
Mr Smith said that then-US Treasury secretary Hank Paulson had got it “completely wrong” in not understanding that Lehman Brothers was a counter-party in a huge number of global transactions — including the off balance sheet derivatives market.
“I think he felt he had to let something go, and he was probably right, but he shouldn’t have let something go that was so international; he could have let a large regional bank go if he wanted to make a point,” the ANZ chief said.
Commonwealth Bank boss Ralph Norris extended the criticism to the British regulatory system, where the Financial Services Authority’s twin briefs of consumer protection and prudential oversight had rendered it ineffective.
“Consumer protection has gained dominance, whereas APRA (the Australian Prudential Regulation Authority) has proved itself in this crisis, working very closely with the Reserve Bank and the major banks to ensure there was no liquidity freeze,” Mr Norris said.
While Mr Smith said he still had the old-fashioned view that the central bank should oversee the banking industry, the independence of APRA had worked because chairman John Laker “comes from the central bank”.
“He still works with the RBA. They’re linked in, whereas it’s been so long since the FSA split from the Bank of England that they don’t talk to each other,” he said.
“(Collapsed British lender) Northern Rock was the classic case because it fell between the cracks. If you’re a regulator, you have to be in contact with the market, see where the flow of money is going and understand the liquidity situation. Central bankers know this stuff.”
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