Bad banks and bad maths

Ireland and the UK, united in ignorance?

Just as it says!Just as it says!
The financial trouble that "began in America", as Gordon Brown was always keen to remind us, still lumbers on. In this post the effects of the trouble were looked at and the proximity theory explained, well now there is more to consider. In one of the best articles of the weekend another theory is put up for scrutiny. This suggests that the UK and Ireland did not fully understand what was going on, 'wrong maths' was to blame. In the Celtic tiger post the relationship between the Irish and ourselves was dealt with and the main reason for the UK's lucky escape from the trouble facing Ireland was not being a member of the euro. Lumbering on indeed, as the crisis has been doing this for so long we have become accustomed to it, and also for so long that some serious analysis has been possible. Doing this has been Tim Bush, he trained as an accountant and is a regular writer on the academic end of accountancy. Here he is criticising the EU, it's heavy going but worth a try as it shows his approach is thorough.

Tim Bush, a former fund manager at Hermes, argues that Britain and Ireland have been uniquely subjected to accounting rules that have been wrongly applied and as a result “produced false profits and overstated capital” which have “misled creditors, misled shareholders, the Bank of England, FSA and others”.

In a recent letter to the Treasury, he said the system has led to “mistakes [being made] of such severity that it is difficult to overstate”. Bush says that without scrapping the accounting regulations, no amount of tinkering with capital and liquidity, corporate governance or bonus bashing will prevent another crisis.

This could well turn out to be a 'glass half full' versus 'glass half empty' debate as, opposing Bush -

The assessment has been roundly dismissed by others in the accounting profession, not least the Accounting Standards Board (ASB) which was responsible not only for monitoring the accounting rules but also for introducing them in the first place.

The ASB has been backed by the influential Treasury Select Committee, which in 2008 concluded that accounting played no part in causing the crisis.

As time moves on either this particular aspect of the financial crisis sinks from sight or it festers and grows, both sides can't be right. The approval of the Treasury Select Committee might not count for too much as its opinion in 2008 predates the general election, influential it might be at the time, but impartial? Only in theory. But one can imagine why the ASB would say "don't shoot the messenger".

It's also hard to fathom why a bank would ignore the warning signs of disaster, but Bush can answer that too -

“If a bank’s capital is the speed limit then the accounting rules are the speedometer. If the accounting rules are wrong, the speed limit is irrelevant because no one knows how fast you’re going anyway.”

So, Tim Bush - a name to remember