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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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