Robert Jenkins said:"The crisis arose from the combination of greed, imprudence and leverage. Greed is not new. Reckless lending is not new. Imprudent borrowing is not new. What is new and what distinguishes this credit crunch from past excesses is the unprecedented level of leverage. We will not outlaw greed and cannot legislate against stupidity. But regulators can and must address the issue of leverage."
In relation to how the crisis has impacted the asset management industry directly Mr. Jenkins talked about falling stock prices, widening credit spreads and the rising cost of execution. He observed that this had dented investor confidence and resulted in weak to negative retail fund flows. His simple message to the industry was:
"If you don't understand it, don't buy it. If your client doesn't understand it, don't sell it."
Underlining the need to restore confidence whilst avoiding moral hazard, Mr. Jenkins said:
"The market must see that the system is strong enough to withstand the failure of a failing institution. Capitalism cannot succeed unless capitalists are allowed to fail. The test of regulatory competence is not the absence of bank failures but a proven ability to efficiently dispose of failing financial institutions as a routine matter. Bailouts do not restore confidence. Liquidations which leave the system in tact do. Bear Stearns and Northern Rock are examples of the former. Let us hope that the treatment of Lehman becomes an example of the latter."
Mr. Jenkins urged regulators not to miss the opportunity to apply lessons learned from the banking crisis to the investment world:
"Investment banks are creating and distributing structured investment products aimed at the retail investor. Deceptively simple in sales pitch but complex in construction, they carry issuer risk, liquidity risk, and a level of costs which the retail buyer may not fully understand. Yet this is an area largely free from regulatory oversight and competes directly with a highly regulated traditional investment industry where agency status is central, transparency of fees and holdings de rigueur and government pressure to raise levels of treating customers fairly foremost. Is someone asleep at the watch?"
In his conclusion, Mr. Jenkins said the biggest challenge now is for the regulators to restore investor confidence:
"The faster the banks put their problems behind them the faster new and more prudent credits will be created. There is no shortage of liquidity. There is a shortage of confidence in many key financial institutions. The sooner the banks mark their mistakes to a price at which they can be moved off the balance sheet, the sooner the old stuff can be replaced by transparently constructed and prudently originated new credit. Investors will by the old stuff but not at yesterday's prices. Similarly we will happily buy the new stuff originated to high standards. Let the banks come clean and the money will flow."
