Sants is no sinner but there are questions still to be asked

Published on Friday 10 October 2008 22:09

WHERE will the blame be laid when the current turmoil engulfing the world economy has run its course?

It is perhaps too much to suggest that a regulator, like a sheriff with a shiny star-shaped badge, could have imposed order on the conflagration.

But the apocalypse scenario is that Hector Sants, head of the Financial Services Authority, may be left, sheriff badge in hand, standing among the burned out ruins of a once-thriving British economy.

It may be there was only so much he could do to prevent the disaster from happening. Although the selling of subprime mortgages to Americans who could not afford to pay was what tipped the market into its crisis, this was merely the spark that blew it all up.

Rather, it is becoming apparent the whole economic system has been soured by a cloud of noxious and flammable fumes emanating from the so-called shadow banking industry.

Financial guru Warren Buffet four years ago called it the derivatives time bomb. Derivatives – complex assets based on nothing more solid than bets and promises – and other of their ilk are making a mockery of Western governments' attempts at underpinning their economies with tax payers' billions.

After the subprime credit loan came the credit default swaps, a form of insurance against bond defaults backed by institutions such as the now collapsed Lehman and ABN Amro – now owned by Royal bank of Scotland – and which this week destablised further the already precarious world markets as they begin to get called in.

The $57.9 trillion CDS industry makes the $700 billion bail out of the US economic system look like buttons.

And the regulators – the Financial Services Authority (FSA) in the UK and the Securities and Exchange Commission (SEC) in America – have nothing to do with it. Yet, insurance companies and banks are involved in their trade and may yet catch fire as a result.

So what do they do? And in particular how has Sants, who will be in Edinburgh to speak nest week, handled his role?

His admirers point out he stepped into the top job at the FSA in July 2007, only weeks before the credit crunch took a bite out of Northern Rock. If his predecessor, John Tyner, had still been in post, many suggest the FSA head would have had to resign after playing out his role in the tripartite "Bermuda Triangle" with the Bank of England, the Treasury.

But Sants, whose organisation, some say, bungled the jobs, really should have had a grasp of what was happening and what it would mean. Subsequent reports on the FSA's role in the Northern Rock problem suggested the regulator struggled to keep up. Yet before Sants took the post, he was for three years the FSA's head of wholesale and institutional markets – the very area that has since blown up in all our faces.

Unlike Tyner, Sants came from the glass and concrete City factories where the noxious substances were being brewed. His career was in investment and wholesale banking at UBS and then Credit Suisse First Boston.

"Hector definitely could have done better," says Jon Moulton, founder of private equity group Alchemy Partners, who admits Sants was not alone in letting the system catch fire.

"All regulators should have been harder earlier – easily said now. He certainly could not accuse me of not informing him of my bearish views well before CLOs and CDSs became daily reading and infected the financial world. He was in a lot of company. Unless someone simplifies the banks, no-one can do his job. He's trying hard in horrible times."

Next week Sants is in Scotland to speak to an audience of business and financial professionals, an event hosted by Scottish Financial Enterprise and Edinburgh Chamber of Commerce.

He has – reluctantly some have said – agreed to take questions from an audience that may yet see some break from Edinburgh's tradition of being very polite as the restless locals worry about the loss of one banking headquarters, HBOS, and fear for the very survival of another, RBS.

"The last thing we want is the guy turning up giving some anodyne speech when actually we feel he has got a lot to answer for," says Graham Bell , press and policy consultant for the Edinburgh Chamber.

"In the present circumstances it can't be that no-one is to blame for everything. One of the questions on the table for Hector Sants will be 'do you feel the regulatory framework has been proven to be adequate by the present crisis?' "

It is rare that someone of Sants's stature and relative youth can be lured into regulation. But the former banker has said his motivation to move into a poorly paid and often thankless task was Christian duty.

Although he is a religious man he not overtly devout. But neither is he known for being clubbable.

A stern, reserved man, he instead prefers to go home to the family rather than stay out mingling over drinks.

His career in industry could only be described as prodigious. Head of equities at UBS at the tender age of 32 and vice-chairman at a global bank, Credit Suisse First Boston, in his 40s, he probably has no need of his FSA salary to keep his home and gardens in Oxfordshire, plus a Cornish holiday home.

His involvement in such high-level banking means he had some very practical experience of regulation.

One of his first jobs when he joined CSFB was to settle what was then the biggest fine levied by the FSA of 4m.

"When I arrived at the FSA, I had the distinction of having negotiated the biggest fine it had ever levied," he was to say later.

He was also in charge at UBS when one of its analysts, Terry Smith, wrote a kiss and tell book called Accounting For Growth, laying bare the tricks of "creative accounting".

The book caused a furore at the time, and Smith was sacked. Sants was believed to be involved in trying to prevent the books' publications. Sants later said he was away when Smith was let go and would only say that Smith's research was "excellent".

Sants has previously admitted his belief that banking as we have known it is unlikely to be restored when the current market turmoil has ended. Banks, he has said, will start to "behave, as it were, more like banks behaved in the past".

Whether Scotland's banking future will look anything like its past is something even Sants may not be able to tell.

BACKGROUND

BOTH of Hector Sants parents are educational psychologists.

He meant to follow in their footsteps and studied psychology, philosophy and physiology at Oxford.

Instead Sants, now 52, went to work in the City. Married to Caroline he has three sons.

He was educated at Clifton College, Bristol and Corpus Christi, Oxford University

In 1983 he joined Phillips & Drew, a leading City research firm where he became partner in his 20s.

He moved to New York to set up a US equities business which was acquired by Swiss group UBS. In 1990 he became vice-chairman of UBS before being headhunted in 1997 to be head of equities at Donaldson Lufkin Jenrette which then merged with Credit Suisse First Boston. He became chief executive Europe, Middle East and Africa for CSFB in 2001 then in 2004 moved to the FSA to become head of wholesale and institutional markets, becoming chief executive in July 2007.

His hobbies include farming, shooting, painting, military history and classic cars.