Addressing a plenary session of the European Parliament in Brussels on 22 September, McCreevy systematically chastised role players in the current financial market fiasco and left no doubt that a “new regulatory approach” lies ahead.
Unsurprisingly, it was US banks that were first to come under attack from McCreevy for their pivotal role in creating a global financial crisis – described by the European Central Bank governing council member Miguel Ángel Fernández Ordóñez as “the worst since the 1929.”
He was, of course, referring to the October 1929 crash of the New York Stock Exchange that heralded the onset of the Great Depression. The crash had followed a period of reckless speculation not too dissimilar to what occurred in the US subprime mortgage market in the run-up to the current crisis.
The current crisis, said McCreevy, “started with reckless selling of mortgages in the US, promoted by banks and others who did not care about lending standards because they could offload the loans to others through securitisation.”
McCreevy then turned his attention to other role players who have come under widespread attack for their role, credit rating agencies who he accused of giving “respectability” to high risk [securitisation] products by assigning low credit default risk to them.
However, institutions that invested in subprime mortgage securitisations and have fallen foul of the crisis also have themselves to blame for ignoring that sound piece of advice, caveat emptor – “let the buyer beware.”
“Financial institutions around the world bought up these products without, it seems, doing any serious risk assessment of their own,” stressed McCreevy.
“In the light of events over the past year it has been incredible to see how little understanding senior managers of financial institutions had of the risk they were taking on board. No doubt the size of the profits that were rolling in blunted serious risk analysis.”
Market regulators did not escape a dressing-down from McCreevy.
“Supervisors seemed to have no better idea of the risk in these hugely complex products. Things were so sliced up, diced up and repackaged that no one knew where the real risk was,” said McCreevy.
An aspect of McCreevy’s address that deviated notably from popular thinking was his attitude towards the role hedge funds and private equity funds have played.
“They were not the cause of the current turmoil,” he declared. “It has turned out that it was the regulated sector that had been allowed to run amok with little understood securitisation vehicles.
“I don’t believe it is necessary at this stage to tar hedge funds and private equity with the same brush as we use for the regulated sector. The issues relating to the current turmoil are different.”
However, McCreevy emphasised that financial market participants in general can expect regulatory change.
“We are going to have a different financial services sector when this is all over and we will have a different regulatory framework as well,” he stressed. “The taxpayer cannot be expected to pick up the bill for the excess and irresponsible risk taking of private institutions.”
McCreevy continued: “The ultimate shape of whatever new regulatory approach will be adopted will be designed over the coming period as the lessons from this crisis and the appropriate response become clearer.”
Reassuringly, McCreevy said a first step to improve regulatory oversight has been taken. This came in the form of a memorandum of understanding agreed by European Union supervisory authorities, finance ministers and central banks setting out common principles.
Little doubt credit rating agencies will be the subject of especially close regulatory scrutiny. Issues to raised by McCreevy were conflict of interests, a need to improve valuation of illiquid assets and what he termed “the misalignment of incentives in the originate and distribute model”.