Fund manager body slams ‘greed, imprudence and leverage’ behind credit crunch.

Fund management lobby group chief urges banks to come clean on bad debt.

The head of the UK Investment Management Association has launched a scathing attack on the combination of ‘greed, imprudence and leverage’, which he said was responsible for the credit crunch that has claimed some of the biggest scalps in the global banking, mortgage and insurance industries in the last fortnight. Speaking at the Financial Services Authority’s (FSA) Asset Management Conference today, IMA chairman, Robert Jenkins, said regulators should step in to limit market borrowing levels for investments. Jenkins said: “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.” The IMA is the trade body for the UK’s £3.4 trillion asset management industry. Jenkins also criticised the bail out of financial groups by governments, saying markets needed to restore confidence whilst avoiding moral hazard: “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 intact do. Bear Stearns and Northern Rockare examples of the former. Let us hope that the treatment of Lehman becomes an example of the latter.” Jenkins also suggested that regulators had been negligent in their oversight of complex products produced by investment banks. He said: “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, Jenkins urged banks to “come clean” and mark sub-prime related assets at a price at which they could be bought in order to restore market confidence: “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 buy the old stuff but not at yesterday’s prices. Similarly we will happily buy the new stuff originated to high standards.”