Is US right about UK's financial tragedy?

It is rare for a minister of one country to attack alleged government policy in another country, even when the government of the country on the receiving end of the criticism has changed.

So these remarks by Tim Geithner, US Treasury Secretary, are of more than passing interest:

"The United Kingdom's experiment in a strategy of 'light touch' regulation to attract business away from New York and Frankfurt ended tragically."

Is he right?

And no, I haven't taken leave of my senses.

Of course even the Financial Services Authority, the City watchdog, concedes that poor regulation was in part to blame for the banking crisis that laid low our economy.

But was the relevant lousy regulation and lamentable supervision an essential part of an explicit competitive strategy to win business from New York and Frankfurt?


That, I think, would be harder to demonstrate. The UK may have allowed its banks to become bloated and high on risk because of a naive view that whatever the City wanted was by definition good for the country.

And the prevailing belief in government - a Labour government as it happens - that if the City became ever larger and more international, the UK could only get richer - well that view may no longer seem an eternal truth.

But let us look at which banks in particular did for the UK. Were they ginormous foreign banks lured here by our laissez-faire culture?

Errr. Well, Northern Rock, Royal Bank of Scotland, HBOS and Bradford & Bingley all seem as British as our national propensity to fail at Wimbledon and in the football World Cup.

If the disaster of RBS and HBOS was all the consequence of some fiendish British plot to undermine New York and Frankfurt, the same self-destructive policy of beggar-my-neighbour was presumably in use in the US, where Lehman Bros failed worse and bigger (and on Geithner's watch as the then head of the New York Fed, as it happens).

Competitive advantage

All that said, there was a British policy of wooing certain kinds of business to London by being sparing on the red tape.

The relevant businesses the UK tried to draw in were:

1) companies of any sort wishing to seek a stock market listing - where the UK saw a genuine competitive advantage after the US imposed new disclosure and regulatory burdens on companies with its Sarbanes Oxley legislation.

2) private equity firms and hedge funds, which the Treasury saw as a valuable growth industry for the UK.

In both cases, the UK got its wish. The London Stock Exchange started to trounce its US counterparts when it came to the listing of international companies.

Which may not be our economic salvation, but no one can argue that the decision of a bunch of commodities companies - from Xstrata to Glencore - to list here has been our undoing.

As for the UK's success in becoming a home for hedge funds and private equity, the Treasury of a few years back - under the then chancellor Gordon Brown - may have exaggerated the benefits.

And if you hold private-equity financing techniques as responsible for the crisis at the UK's largest care homes company, Southern Cross, then you would say that it was a mistake to give such a warm welcome to private equity in the UK.

But, again, it would be ludicrous to argue that the UK economy has been tragically destroyed by private equity and hedge funds.

On that argument, Geithner would have to concede that the US has a bigger problem, because the US is where the very biggest hedge funds and private equity firms call home.

So what on earth is the US Treasury Secretary on about?

'Commercial warfare'

His motivation, he says, is that as his country takes its own steps "to contain the risk in the US". he want to "minimise the chances that it (the risk) simply moves to other markets around the world".

Which is a laudable aim, with which few would take issue.

But regulators have told me on a number of occasions over the past few years that in international negotiations over reforming the financial system, the US has failed to back reforms others deemed sensible largely - as far as anyone can see - to protect the short-term commercial interests of its banks

Here's the thing. What Geithner had to say about the UK using light touch regulation to woo firms to London is just what finance ministers in many eurozone capitals have been alleging for years.

And if Geithner stiffens the resolve of EU governments to rein in the autonomy of the City more than is currently happening, well, guess which city might be the beneficiary of an exodus of mobile firms and capital? Could it be New York?

Just possibly the US Treasury Secretary is engaging in a practice beloved of finance ministers the world over: commercial warfare.

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