Financial crisis is a mess of Brown’s creation

I think we've got to look at where there has been irresponsible behaviour and I've said for some time that we need reforms in the system," said Gordon Brown today. He's right - and the search ought to begin very close to home.
 
The 'system' in urgent need of reform is the regulatory regime ushered in by New Labour in 1997. Supposedly putting an end to self-regulation of the City, the Financial Services Authority that Brown himself created nevertheless promised a 'light touch'.

But that light touch turned into a decade of leaving ever more avaricious bankers to their own devices. The collapse of Northern Rock, the destruction of the property market in the wake of the sub-prime crisis and the rescue of HBOS are the result.
 
Eleven years ago, when Gordon Brown became Chancellor, he immediately handed over the Financial Services Authority to a man with impeccable deregulatory credentials, former McKinsey consultant and CBI boss Howard Davies, while the mandarin at the Treasury responsible for policy on policing the City was the brains behind many a Tory privatisation, Steve Robson.
 
It wasn't long before the FSA's inclination to watch from the sidelines was confirmed. When international banking scandals erupted in the late 1990s and early 2000s regulators in the US hammered New York's investment banks with multi-billion dollar fines. The big players in London, by contrast, escaped scrutiny despite officially recognised evidence that similar abuses - including biased stock analysis and insider trading - were rife in the Square Mile. 

As Brown's economy became increasingly reliant on financial services for growth and taxes, the object of regulatory policy became less the control of an industry always prone to excess and more the attraction of internationally footloose bankers to the City.
 
When Davies and Robson, duly knighted, relinquished their positions at the pinnacle of financial regulation they soon took up jobs in the industry itself: Robson joined the Royal Bank of Scotland and Davies was hand-picked by Morgan Stanley for his 'regulatory perspective'. Ironically, both banks are now feeling the effects of having over-stretched themselves under lax regulation.
 
These were just two moves in what soon became a rapidly revolving door between the City and the regulatory bodies. Davies was replaced at the FSA by a new chairman in former Barclays banker Callum McCarthy and a chief executive in former Arthur Andersen banking adviser John Tiner. Robson's job, meanwhile, went to James Sassoon of the Swiss bank UBS, who would go on to become Gordon Brown's roving 'representative for promotion of the City', trying to entice banks into London.
 
As the FSA increasingly came to resemble self-regulation by another name, key positions were handed to insiders. Hector Sants, from UBS, took responsibility for the wholesale markets on which the toxic packaged-up mortgages and other exotic products are traded. The regulator's banking team came under Thomas Huertas, a long-time veteran of the US giant Citibank. All the while, the excesses went unchallenged.

When Tiner resigned as chief executive last year, Sants succeeded him. And in the wake of Northern Rock a representative of the mortgage industry, Jon Pain, chairman of the Council of Mortgage Lenders, was recently put in charge of regulating mortgage lending.
 
While the markets boomed, few complained about the cosiness of British financial regulation. Indeed, received free-market wisdom had it as a model for the world to follow.

In February 2007, Ed Balls, then minister for the City, boasted that "the regulatory environment is viewed by many in the industry as world class and one of London's key attractions". He even restated his commitment to "reducing the administrative burden" by halving the size of the FSA's rulebook and giving it "a power of veto over excessive regulatory provision proposed by our recognised bodies [eg the Stock Exchange]."
 
Now that a decade of deregulation has come spectacularly unstuck, the rhetoric will doubtless change. Time for the regulation of bankers by bankers to end, too. ·