Other Financial Instiutions

The banks, quite rightly, are reaping much of the opprobrium for our enduring economic difficulties, but it is becoming increasingly clear the lots of other  financial institutions (OFIs in the jargon) share much of the responsibility.

A couple of weeks ago the much mocked Revd. Paul Flowers, former chairman of the Co-op Bank, pointed  out in an interview on Newsnight that the bank's takeover of the Britannia Buildings Society, a major source of the bank's difficulties,  had been give the OK by three separate accountancy firms, including the Co-op's own, which I think he said was KPMG.  Are these independent private sector firms to be made to pay compensation for their errors?  It appears not.  Come to think of it, neither were the credit rating agencies, Standard and Poor et al, when they gave their AAA ratings to the Icelandic banks et al.

In the privatisation of 60% of the Royal Mail, the government took advice from no fewer than seven merchant banks, including household names such as Lazards, Goldman Sachs, UBS, Merrill Lynch and Barclays.  Their recommendation of a price range of 220p to 330p per share remained unaltered  in spite of the fact that the offer was 24 times over-subscribed.

Any moderately competent A-level economics student could draw you the graph illustrating  excess demand (though the page of the exercise book  might not be wide enough to accommodate the length of the horizontal axis) and tell you that this was the result of the price being well below equilibrium.    They would have been dead right.  Within days the share price rose to 610p  and, in spite of Vince Cable's dismissal of this as "froth" it remains at around 540p, still 66% above the price at which they were bought. It is estimated that the government lost £750m in one day's trading.

Yet for this advice which a pupil in the lower sixth could have bettered Lazards alone received £1.5m, and total privatisation costs, including accountants, lawyers and the inevitable PR advisers, was £12.7m.  Who is holding them to account?  In which court are they to be sued?  From which professional association and guarantor of competence are they to be expelled?

None of the above excuses the the government's culpability in other malfunctions of the sale.  Bizarrely  some of the banks advising on the price also had preference for an allocations of the shares:  that more or less defines "conflict of interest."  Of the 16  institutional bidders who were given preference because they were expected to take a long term interest in the future of the privatised company, six have already flogged off all their shares and by January 2014 only 12% of the company's shares remained with these "priority investors." Were no guarantees asked for?

Any school responsible for this accumulation of blunders would be put into "special measures" if not closed down entirely with the "senior management team" and chair of governors barred from future involvement in the sector. But these OFIs, along with the banks, continue to operate and award themselves bonuses, and our government sails on, proclaiming success.

You couldn't make it up.