Rothschild: Banks turned a blind eye to sub-prime
Jonathan Prynn and Hugo Duncan, Eveing Standard
2 October 2008, 10:08am
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One of the banking world's most respected grandees criticised the City today and called for a massive overhaul of regulation.
Sir Evelyn de Rothschild said there had been a collapse in ethical standards among banks in recent years, which had been ignored by watchdogs, rating agencies, shareholders and accountants.
The 77-year-old head of the banking dynasty issued a sombre warning that the crisis would get worse before it gets better. 'We should not be under any illusion in this country that sub-prime is only an American problem,' he said.
It came as another senior City figure, private equity boss John Moulton, said it could take seven years for the British economy to recover from the crisis that has brought the world's financial system to its knees.
The outspoken comments were made on another day of grim economic news pointing to increasing damage to the 'real economy' from the credit meltdown.
A survey from the Bank of England suggested that banks plan to rein back their lending to families and small businesses over the coming months.
The report said: "In the three months to mid-September, lenders reported that they had reduced the availability of credit to households and corporates by more than had been expected three months ago. Lenders anticipated additional reductions in credit availability in the next three months.'
There were also bad figures from the construction industry, record falls in house prices reported by the Nationwide-and a six per cent fall in sales from Marks & Spencer.
The only good news was that City economists now believe that a cut in the Bank of England's base rate to avert a slide into a deep and long lasting recession is likely. That would cut the rate from 5% to 4.75%, bringing instant financial relief to millions of borrowers on tracker mortgages.
But the worsening economic outlook increased recriminations over how the City landed the economy in such a mess.
Sir Evelyn, speaking on Radio Five Live, accused the banking community, including the regulators, of turning a blind eye to the explosion in the British sub-prime mortgage market.
He also declared that investors in the banks should have acted to control bankers' pay and the risk-taking of management. 'What are shareholders for? I think shareholders have not been speaking up.'
He added: 'You can also look to the accountants. It is their job to dig deep into the accounts and assess the risks a bank is taking. I mean, some of these American banks were 20 to 30 times leveraged - that is something I have never heard of.'
De Rothschild said the only way out of the crisis was to improve regulation and license anybody involved in financial services.
The veteran financier, who has seen many crises, added: 'You have to have regulators who are properly paid and who properly understand the situation. And you should have a licensing system like you have in pubs where if you break the rules, they take away your licence.'