The Hindu Business Line : A not-so-capital sermon

In Britain it was open season to blame the various Satans of the financial system, and ire was particularly directed at short-sellers and hedge funds. Some of this came from the pulpit itself.

J. Srinivasan

God alone can save the City! That was possibly the pervasive feeling in much of the Western world last week as the global — more appropriately, the Anglo-Saxon — financial world seemed to be collapsing with many a high priest of finance queuing up, as it were, at the doors of purgatory.

Fire and brimstone

In Britain it was open season to blame the various Satans of the financial system, and ire was particularly directed at short-sellers and hedge funds. Some of this came from the pulpit itself with the Archbishop of Canterbury, Dr Rowan Williams, and the Archbishop of York, Dr John Sentamu, all righteous Christian indignation, attacking modern finance, the way it is practised and its practitioners.

They were all fire and brimstone about what they called the “capitalist fundamentalism”. They went on to call modern finance a fiction and fraud. Their key targets, the short-sellers, were termed “bank robbers” and “asset strippers”. In an article in Spectator, Dr Williams drew a parallel between debtors and financiers to the “feckless young clerics and landowners described in the novels of Anthony Trollope”.

He wrote: “Individuals find that their own personal financial decisions and calculations have nothing to do with what is happening to their resources, in a process for which a debt is simply someone else’s wholly disposable asset.”

Criticising the practices which involve financial institutions selling debts onto each other, Dr Williams said: “It is no use pretending that the financial world can maintain indefinitely the degree of exemption from scrutiny and regulation that it has got used to.”

While the sentiment is right, one wonders how much the clerics understand the workings of the financial system. For, as a Financial Times editorial, Canterbury Tales, of September 25, admonished: “Dr Sentamu was wrong to join the chorus of abuse for short-sellers, now the UK’s most popular pantomime villains... If investors believe a price is too low, they can buy and hold it. If they believe a price is too high, they can sell it short. This interplay is important. Without short-sellers, prices will tend to rise too high. There are strong arguments for restraining them under febrile market conditions, but what they do is not wrong or immoral...”

Charges of hypocrisy

But the enormity of the Church leaders’ gaffe became clear the next day when it came to light that the Church of England has itself contributed to short selling by lending stock from its investments. The Church Commissioners, who oversee assets of over £5.5 billion , it transpired, had also invested in Man Group, the largest listed hedge fund manager. Suddenly, the church was facing charges of hypocrisy with hedge funds pointing to the willingness of the Church Commissioners to lend stock, the key to short selling.

Besides lending stocks for shorting, the Church Commissioners had, according to their annual report, invested £13 million in Man Group, and last year divested a £135-million mortgage portfolio. Further, through the Church of England Pensions Board, which manages another £847million, the Church invested this year in a fund from Auriel Capital, a London hedge fund, which trades in currencies, including short selling.

Yet, Dr Williams was unsparing of trading debts exclusively for profit. Some damage control was attempted with a secretary to the Church Commissioners claiming that the investment was not in Man’s products, but only its shares, and that none of their managers used shorting.

“We can assure you that the commissioners’ stocks have not been used to facilitate the shorting of financially vulnerable institutions in the US and UK, including HBOS,” he was quoted as saying by Financial Times. “Nor will this happen.” A senior aide to Dr Williams rejected the charge of hypocrisy, saying the Church “clearly invested across a range of instruments to ensure no undue risk is being taken”.

But what is clear is far from investing in areas that would benefit the flock, say, in cooperatives or in efforts to ameliorate the poor, the church is investing in corporates and, according to some bankers, in commodities such as oil and gold. The motive is profit, though it may be using these profits in good cause.

Goodwill overleveraged?

But as Jonathan Bartley, co-director of liberal think-tank Ekklesia, was quoted widely by the British press: “The archbishops should be extremely careful when attacking City ‘bank robbers’ for short-selling and speculation. Among the billions of pounds that the Church currently invests in property and shares are hundreds of millions invested in oil and mining companies... The Church has benefited significantly from the speculation that has underpinned rising oil and commodity prices such as gold and copper. The Church has substantial shareholdings in banks and a stated aim of making an excess profit of 5 per cent each year, over and above the rate of inflation, on its investments...”

Had the Church leaders over-leveraged their goodwill?

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