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FSA after McCarthy

• Robert Peston
• 16 Jan 08, 02:39 PM

The Treasury has begun the search for a new chairman of the .

It has appointed the headhunters Egon Zehnder to find candidates, and has put an advert in today's Financial Times.

In the wake of the , there will be speculation that the current chairman, , has been forced out.

The FSA has conceded that it failed to spot the risks being run by the way Northern Rock financed itself in wholesale market, till it was too late.

But my understanding is that he always intended to serve just the one term, which ends in September of this year. He will be 64 this year.

The FSA chairmanship will be a difficult job to fill, not least because the Chancellor, Alistair Darling, has already announced that there will be significant changes to the financial regulatory system but has not precisely specified these changes.

Right now, any candidate would not know what kind of organisation he or she would be taking over.

Mr Darling has however indicated that the FSA will have great powers to intervene when banks run into trouble, to pre-empt a repetition of the massively damaging run on the deposits at Northern Rock of last September.

In the City, there have been rumours that the likely successor would be , a former chief executive of HBOS, the big bank – who is currently deputy chairman of the FSA.

However, Mr Crosby has told friends he is uninterested in becoming chairman.

Other possible candidates would be the former second permanent secretary at the Treasury, Sir Steve Robson, and Lord Turner, the former director-general of the CBI who came up with the blueprint for the new national pensions saving scheme.

Mr McCarthy, who is a former investment banker and has also worked at the Treasury, is widely liked and respected in the Government, not least because he was regarded as a highly successful regulator of the energy industry.

The first term of the Governor of the Bank of England, Mervyn King, also expires this year - and there has been no announcement about whether he will be re-appointed.

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Small mercies and the Rock

• Robert Peston
• 16 Jan 08, 07:18 AM

Let’s not get carried away with woe about the Northern Rock mess and what it supposedly shows about the fragility of our banking system.

The – till recently the world’s biggest bank – provides useful context.

The loss of around £5bn it incurred in just the last three months of its financial year would have wiped Northern Rock from the face of the planet.

If Northern Rock’s loans were in as parlous a state as Citigroup’s, there would be no argy bargy about whether it would be right to nationalise the bank or whether shareholders should receive a penny.

The Rock would simply be in liquidation. The game would be well and truly up for shareholders and depositors.

And Citi is not an exception.

In the US, the assets of Merrill Lynch, Morgan Stanley and Bear Stearns have all suffered write-downs that would have been sufficient to topple any medium size British bank.

And in Germany, a number of banks are feeling very from their exposure to US sub-prime.

So by all means wring your hands about Northern Rock.

And don’t hesitate to point out that the Rock is a special case because of the sheer size of the financial support being provided to it by British taxpayers.

But please take some small comfort from the demonstrable truth that both the Rock and other British banks have been more astute lenders than many of their overseas counterparts.

As I’ve pointed out many times, the problem for the Rock is that it was a terrible borrower – which is a cardinal sin for any bank.

Its mistake was to be too reliant on money markets for its funding.

But although it may end up incurring substantial losses on some of its consumer and mortgage lending, especially on those loans made in the last 18 months or so – at the top of the UK’s housing bull market – there is no evidence as yet of crippling loan losses.

The other tragedy for the Rock is that because it is so narrowly focused on the UK housing market, it’s not terribly attractive to the Asian and Middle Eastern sovereign investors which are bailing out the US banks.

Citi and Merrill alone yesterday announced aggregate capital injections of more than £10bn from investors, much of it from the Government of Singapore Investment Corporation (which had earlier bailed out UBS of Switzerland), the Kuwait Investment Authority and the Korea Investment Corporation.

Sadly, even Goldman Sachs – the mighty investment bank advising the Treasury – cannot persuade these new financial superpowers to gobble up the Rock and thereby rescue the British taxpayer.

As I’ve already disclosed, Goldman has come up with a cunning plan to significantly reduce the taxpayers’ £55bn Rock exposure.

This would involve converting much of the £26bn of the Bank of England’s loans to the Rock into asset-backed bonds for sale to international investors.

The problem is that the deal would only fly if wrapped or guaranteed by a reinsurer.

And the cost of such reinsurance would be crippling.

Transferring the Rock-risk off the public-sector balance sheet would require the Treasury to make huge subsidies in the form of payments to the reinsurers for the five-year term of these loans.

That’s why the Rock is heading pretty fast towards nationalisation – because the costs of propping it up in the private sector are very large and would continue till well after the next general election (see yesterday on the Treasury’s contingency planning for emergency legislation to transfer the Rock’s shares into public ownership).

So long as nationalisation were predicated on a ruthless plan to sell assets, shrink the business and then privatise when market conditions became more benign, nationalisation could look better value to taxpayers.

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