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2 Law & Fin. Mkt. Rev. 1 (2008)

handle is hein.journals/lawfinancmr2 and id is 1 raw text is: Editorial Debt junkies It was the Sunday Times' that (unintentionally) got the point - with a hypodermic needle. The article by David Smith, praising a well-judged jab of confidence for UK features a huge drawing of the instrument in question - symbolising the 0.25 per cent interest rate cut in the UK on 6 December 2007 - and looks forward to at least a couple more booster injections in 2008. We have become a society of debt junkies. The banks have been pushing money at us - at just about anyone it seems - for so long and with such abandon2 that we are now well and truly hooked. We know we have a problem and have tried in recent times to wean ourselves off the habit with higher interest rates and a fair amount of political finger-wagging. But now that we are faced with the cold-turkey credit crunch we have gone running back to our dealer - Mr Big, the central bank - for a quick fix. Just a little one for now, but we know we'll need more before long. Money has been thrown away - by the billion - on loans that should never have been made. The problem has become so serious that now the banks don't even trust each other and the knock-on effects of this include poor old Northern Rock and a continuing need for central banks to bail the markets out. And now money may get just a little bit tight - perhaps very tight, in fact - even at the high street level. So please, please can we award ourselves a little bit of good financial news, however temporary and illusory? Surely 0.25 per cent isn't too much to ask? Not a good time to be a shareholder in a bank, you might think. But that would be to discount the political imperative to protect banks against the consequences of their own profligacy - worrying about moral hazard already seems so last year - and their effective stranglehold on the debt-supply business. The clearers provide a generally poor service, but what's the point in shopping around when they're all the same? Do you really care whether you fill up at a Shell or a BP station? The banks can't cope with their own size - and helplines and call centres are not the answer. The write-downs attributable to sub-prime expo- sure are truly massive in some cases but these mighty beasts are not just big - they're a protected species.3 What other kind of enterprise could get away with the now-you-see-it, now-you-don't accounting treatment and elicit calls from leading accounting firms for easing up on regulatory capital treatment when the going gets rough?4 The monoliths created in the post-Big Bang era may resemble dinosaurs, but this lot look as if they will be around forever, albeit with some interesting changes in shareholders. They may be hugely careless, even reckless, with money, but they can afford it, my dear. Mainly because the rest of us can't afford to let them go under. Looks like red is the new black. And infla- tion? Well, that's next year's problem. The dodgy deal arrangers will have taken their bonuses and disappeared over the horizon by then. And, talking of next year (ie, this year - 2008 - by the time you read this), we felt the time had come to indulge in a little seasonal activity when this issue was being put together so we asked some of our contributors and other friends to give us their predictions for 2008 - in the law/financial sector. Here is a selection (some perhaps a little more tongue-in-cheek than others): * An overhaul of deposit insurance. * A greater role for the FSA in monitoring liquidity. * A regulatory review of the banks' exposures to CDOs and their risk models. * Another mis-selling crisis as banks become more desper- ate to grab, and keep, depositors' funds. * More pressure from EU sources for a European-wide FSA equivalent. * Northern Rock is nationalised and its new public-sector board decide to focus on the secure commercial prop- erty market in London, rebranding the bank Southern Sands. * A major monoline fails, dragging down with it a whole series of SPVs providing services to hospitals and prisons. * The first CDO of defaulted CDOs. * The first banks to record massive profits from writing back provisions that caused massive losses in 2007. * The first vehicle that looks like a SIV, operates like a SIV but isn't called a SIV5 * After another series of high-profile London IPO listings Wall Street gets even more nervous about the growing importance of the City. One of the new listings is the US firm Sopranos Inc. whose CEO (and President and Chairman) Tony Soprano says that he is attracted to London's more proportionate regulatory regime. City authorities deny that lighter corporate governance requirements have anything to do with the Sopranos list- ing - or the prospective listing of Russian services firm KGB plc. * Led Zeppelin securitise their newly revived receivables and launch a world tour sponsored by a large financial institution; Robert Plant expands his already impressively wide repertoire by taking the lead role in the new Broad- way musical production of King Lear which is put in an imaginative modern setting - Wall Street. * Gordon Brown is reported as being incandescent because a bank has failed to take into account the inter- ests of the community in (a) making a loan that was not sustainable to an iconic corporate borrower and (b) asking for its money back, in a disproportionate way, at an inappropriate time (the due date). A risk- based review and investigation, chaired by high-level former politicians and bankers, is called to consider the implications and outcomes from a stakeholder per- spective and various spokespersons for different sections of the community are invited to engage in the pro- Law and Financial Markets Review January 2008 1

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