It’s obvious that the collapse of African Bank (ABIL) into curatorship is not the first crisis of its kind to hit South Africa’s banking industry, nor will it be the last. It’s equally fair to say events of this nature will repeat themselves in both the United States and Europe. It’s only a matter of time.
What’s perhaps puzzling is that this is despite an ever increasing mountain of legislation designed specifically to prevent such things recurring. In recent times, for example, South Africa has had everything from a new Companies Act to the establishment of a National Credit Regulator and new consumer protection legislation. In the United States, the massive Sarbanes-Oxley Act was passed in 2002 post-Enron and WorldCom, followed by the Dodd-Frank Act post-Bear Stearns and Lehman Brothers in 2007/2008, whose collapse provoked the global recession from which we’re only now emerging.
Throw in things like the King III Code of Governance, the Basel III international banking regulations, and a veritable alphabet soup of regulators known by their acronyms, like our own FSB and SARB, to say nothing of FICA, RICA and FAIS, and it’s a miracle that even a few cents could ever go missing. But they do and many more will do so again.
Three things have happened very recently to convince me of this.
The first is Tim Geithner’s new book, Stress Test, about his years as President of the New York Federal Reserve and then US Treasury Secretary. Geithner was right in the very thick of things when the sub-prime mortgage crisis hit: Bear Stearns, Lehman, AIG, Wachovia, Washington Mutual, Fannie Mae and Freddie Mac all happened while he was on the field alongside US Fed chairman, Ben Bernanke, and Geithner’s predecessor at Treasury, Hank Paulson.
He makes it very clear that in the run up to the crisis breaking, no-one had the faintest inkling of what lay ahead. The day before Bear Stearns failed, the US Securities and Exchange Commission (SEC) was saying there was no problem. Geithner’s own economic research team at the New York Fed thought that there would be some fall-out from the collapse of the sub-prime mortgage market, but that it would be very limited and easily contained. Remember that the people studying and regulating these affairs are not first-year BComm students from the University of Backwater c/o Elbow Gulch, Arkansas. These are some of the finest economic and business brains available, at least in the US. Not one of them saw it coming.
The second point relates to the SEC. That’s a stock market regulator – right? So what’s it got to do with a failing bank? Well, it turns out (and I for one didn’t realise this) that Lehman Brothers, Bear Stearns and the likes of Goldman Sachs, might look like banks, act like banks and cause bank-like catastrophe when they fail, but they are not banks. According to American law, they are investment banks, which means that they are regulated by the SEC, and not the US Federal Reserve and its subsidiary, the New York Fed. A giant global insurer like AIG is dealt with by another separate regulator, and the massive US government-backed mortgage issuers, Fannie Mae and Freddie Mac, have yet another regulator still. All 50 US states also have separate sets of rules and regulations. Fittingly, Geithner calls this the ‘balkanisation’ of banking regulation, and cites it as a key reason for the crisis of 2007/2008: in short, the left hand didn’t even know where the right hand was, let alone what it was doing.
The third factor is the decision this week by ratings agency Moody’s to downgrade South Africa’s Big Four banks by a notch – this in the wake of the ABIL debacle. Investors, many of whose fund managers are constrained by ratings agency decisions, are being asked to believe that these banks – huge, diversified, well-regulated – face the same kind of risk as did ABIL, which is what’s known as a monoline – a one-product company, and in ABIL’s case quite a dodgy product at that.
But why weren’t the ratings agencies howling about ABIL and the apparent systemic risk to the rest of South Africa’s banking sector before its collapse into curatorship? Hindsight is a remarkably exact science but let’s not forget that these are the same agencies that gave AAA-ratings to the sub-prime CDOs before their collapse. It would seem the agencies’ crystal balls are made of cheap glass just like everyone else’s.
In South Africa ahead of ABIL, as in the US ahead of the 2007/2008 crisis, very few voices with any authority were screaming, “Stop! This is going to end horribly!” Of course there were a few in both cases. Some who even backed their forecasts by shorting the stocks concerned and made fortunes. But most of us simply don’t see these things coming – especially when markets and share prices are at heavily inflated levels.
Reinforcing my view that an ABIL-like crisis will certainly repeat here was a conference I attended this week at GIBS in Johannesburg about strengthening South Africa’s financial systems. This was an insider’s conference, dealing with what a senior Reserve Bank figure, Ingrid Goodspeed, called “the plumbing of the house”. She was talking about the National Payment System and how money moves from point A to point B.
I won’t bore you with details. It’s arcane, highly complex, riddled with three-, four- and even five-letter acronyms, and incredibly important. Should it fail, not only business but also our ordinary lives would grind to a halt.
But during this event, I learnt that Geithner’s “balkanisation” happens here, too. Did you know, for example, that the departments of National Treasury and Trade and Industry (dti) are barely on speaking terms? Did you know that although National Treasury and the SA Reserve Bank are responsible for the country’s banks, it’s the National Credit Regulator who controls things like the unsecured lending practiced by African Bank? And did you know that the National Credit Regulator falls under the dti?
You can work the rest out for yourself, can’t you? It’s clear that we don’t have the right kind of oversight, nor do we have regulators who communicate with each other, nor do we have professionals who can forecast failure on a systemic level with any degree of accuracy, neither inside nor outside the sector. Apart from that, everything’s just fine.
Will an ABIL-like debacle happen again here? I think that’s one forecast you can bank on.