Monday, July 07, 2008

The Credit Crisis – What you get when you have Capitalism without Owners?

I’ll finally finish off my reports from the recent TUC Pension Trustee Conference with the key note speaker, David Pitt-Watson. Respected fund manager, author of the best selling “The New Capitalists” and life long member of the Labour movement.

David reminded everyone of the economic might of pension funds – no one may rule the world, but pensions own it. UK pension schemes won 20% of UK shares, while a further 20-25% is owned by foreign pension companies. Pension funds also own big chunks of insurance companies who also hold massive holdings of shares worldwide. Some 10 million Brits are a member of a pension scheme. Petroleum giant BP recently tried to calculate how many people benefit from the payment of their dividends into collective funds. They gave up after counting 280 million people worldwide.

The two major problems in the economy are the credit crisis and rising commodity prices. The problem is as severe as the 1970s but so far the system has managed to hold together better e.g. no mass unemployment.

David noted that “turbo charged capitalism” has made huge amounts of money for a small number of speculators such as investors in hedge funds. He notes that most of this money was made using pension fund investments.

How did the credit crisis come about? In the old days to get a mortgage you needed a 30% deposit for a 70% loan over 25 years. Until post crisis, unregulated mortgage brokers were buying up credit loans and selling to pension funds. They valued it not as how much was owed, but how much you could trade it for. Eventually these dud mortgages came home to roost and the crisis ensued.

However, there is a problem here. We own the banks, we appoint managers and accountants. We knew that credit reference agencies who gave positive assessments of these loans were being paid by the people who packaged the mortgages. How did we allow this to happen?

How much is the huge increase in the price of oil the result of speculation using our money to drive up the price?

How big is the crisis? It is very big. You have had banks with £50 billion of mortgages supported by only £1 billion of equity.

How to address the problem? Better regulation? Yes, you need to worry about short selling but remember the most regulated market in the world is in the US.

A better standing point is accountability. Pensions own the world and trustees should represent members. We want profitable companies to pay for pensions but we don’t want to destroy the planet along the way. Trustees should be defenders of beneficiaries.

David pointed out what pension funds working collectively together have done in the past. Such as allowing the production of cheap drugs in developing countries against the wishes of drug companies. Stopping the production of pig iron in Brazil for the car industry which depended upon indentured labour and the destruction of rainforest for charcoal.

David finished by stressing the need for us to act as owners in a sensible pragmatic and principled way to make the economy run properly.

I felt that David was actually pulling his punches somewhat, to let the message sink in. To use Northern Rock as an example. Yes, the Bank of England has hardly covered itself in glory over its lack of regulation over Northern Rock; however who appointed the risk management committee members of that bank? We did, whether we realised it or not. If as the owners of Northern Rock we failed to appoint the right people to manage on our behalf or failed to employ the right advisers to monitor them then who is to blame?

In my post yesterday I made my anger clear regarding directors (the owners of companies or appointed by them) who are not held responsible even for killing workers.

Taking your ownership responsibilities seriously is key. While at the moment it is actually difficult for pension trustees to act as owners it is not impossible. The biggest hurdle I think is actually improving the self-confidence of my fellow trustees/member representatives to actually act more as owners. It is after all their money and they should challenge, probe and test their managers and advisers constantly. Demand accountability and full transparency. Ask the simple, direct questions that owners should ask of the people they employ to manage their money.

Remember the old adage, if you don’t understand it, don’t buy it.

After all, to further misquote Hartley Shawcross “We are the masters now”.

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