The Treasury select committee will today grill top bankers on the credit crunch and banking crisis. Until now, parliament's financial watchdog has been accused of giving our banks a softer ride than the notoriously robust congressional hearings.
Since the committee of backbench MPs first started tackling the private equity industry two years ago, critics have questioned its ability to home in on the key financial issues.
Today there are at least a dozen questions that need to be answered:
Why did your risk models not show up the dangers?
Banks pride themselves on being able to measure risk. But the mystery is that their models all failed to anticipate what would happen if banks no longer had access to wholesale funding sources such as the securitisation market, even though these were a relatively recent invention.
How often did you think about your bonus when making decisions?
This goes to the heart of the current row over pay. Bonuses exist to provide healthy incentives, but appear instead to have encouraged a short-term rush for growth. MPs might also ask if there are any circumstances in which the bankers would support clawing back bonuses paid for poor performance or deals that have subsequently backfired.
After the collapse of Northern Rock, is there more you could have done to reduce risk?
More than a year elapsed between the collapse of Northern Rock, which showed the fragility of the British banking model, and the collapse of Lehman Brothers, which brought down the whole system. Yet banks such as HBOS continued to increase their exposure to the very riskiest markets, such as property. Why?
How big a part did tax avoidance play in encouraging an excessive reliance on debt in corporate capital structures?
Much of the riskiest business was hidden from the view of regulators and shareholders in "off balance sheet" vehicles. These are often highly tax efficient. Huge loans were also made to private equity firms because debt financing attracted less tax than equity financing.
Why should profits be private, but losses socialised?
Public anger has been fuelled by the sight of bankers reaping huge rewards when times were good but needing public assistance when times are bad. Can the bankers make a convincing case against nationalisation?
If the industry's full liabilities and assets were valued on a mark-to-market basis, would it be solvent?
Banks have criticised regulators for exacerbating the crisis by focusing on the present, distressed, prices of their assets rather than their long-term value, but how bad would it look if the music stopped tomorrow? Does the investment banking model have a long-term future?
Has short-selling played a significant role in destabilising banks?
Some of biggest beneficiaries of short-selling were investment banks, but they changed their tune when speculators turned on them. What do they think now that bans on short-selling have been lifted?
Did you understand all parts of your business?
Banks became enormous and enormously complicated during the boom. The suspicion is that the risk of instruments such as credit derivatives was poorly understood even by their traders.
Did you feel your fellow board directors, shareholders, and regulators were fully aware of the risks you were taking?
If bank executives were struggling, what about those supposed to be keeping an eye on them?
At what point did you realise the system was in trouble, and at what point did you admit it to anyone else?
The roots of the credit crisis predate even Northern Rock by nearly a year, beginning with the sub-prime crisis in the US. Few senior figures have spoken publicly about the scale of the crisis until the last few weeks.
How can we stop this happening again?
Who better to answer gamekeeping questions than the poachers?
Will you say sorry?
Given the spiralling cost of the recession on us all, a lack of contrition from many senior bankers has enraged public opinion. How many apologies will we get?
Since the committee of backbench MPs first started tackling the private equity industry two years ago, critics have questioned its ability to home in on the key financial issues.
Today there are at least a dozen questions that need to be answered:
Why did your risk models not show up the dangers?
Banks pride themselves on being able to measure risk. But the mystery is that their models all failed to anticipate what would happen if banks no longer had access to wholesale funding sources such as the securitisation market, even though these were a relatively recent invention.
How often did you think about your bonus when making decisions?
This goes to the heart of the current row over pay. Bonuses exist to provide healthy incentives, but appear instead to have encouraged a short-term rush for growth. MPs might also ask if there are any circumstances in which the bankers would support clawing back bonuses paid for poor performance or deals that have subsequently backfired.
After the collapse of Northern Rock, is there more you could have done to reduce risk?
More than a year elapsed between the collapse of Northern Rock, which showed the fragility of the British banking model, and the collapse of Lehman Brothers, which brought down the whole system. Yet banks such as HBOS continued to increase their exposure to the very riskiest markets, such as property. Why?
How big a part did tax avoidance play in encouraging an excessive reliance on debt in corporate capital structures?
Much of the riskiest business was hidden from the view of regulators and shareholders in "off balance sheet" vehicles. These are often highly tax efficient. Huge loans were also made to private equity firms because debt financing attracted less tax than equity financing.
Why should profits be private, but losses socialised?
Public anger has been fuelled by the sight of bankers reaping huge rewards when times were good but needing public assistance when times are bad. Can the bankers make a convincing case against nationalisation?
If the industry's full liabilities and assets were valued on a mark-to-market basis, would it be solvent?
Banks have criticised regulators for exacerbating the crisis by focusing on the present, distressed, prices of their assets rather than their long-term value, but how bad would it look if the music stopped tomorrow? Does the investment banking model have a long-term future?
Has short-selling played a significant role in destabilising banks?
Some of biggest beneficiaries of short-selling were investment banks, but they changed their tune when speculators turned on them. What do they think now that bans on short-selling have been lifted?
Did you understand all parts of your business?
Banks became enormous and enormously complicated during the boom. The suspicion is that the risk of instruments such as credit derivatives was poorly understood even by their traders.
Did you feel your fellow board directors, shareholders, and regulators were fully aware of the risks you were taking?
If bank executives were struggling, what about those supposed to be keeping an eye on them?
At what point did you realise the system was in trouble, and at what point did you admit it to anyone else?
The roots of the credit crisis predate even Northern Rock by nearly a year, beginning with the sub-prime crisis in the US. Few senior figures have spoken publicly about the scale of the crisis until the last few weeks.
How can we stop this happening again?
Who better to answer gamekeeping questions than the poachers?
Will you say sorry?
Given the spiralling cost of the recession on us all, a lack of contrition from many senior bankers has enraged public opinion. How many apologies will we get?
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