As the UK learns to live in the post-bubble world of collapsing asset prices and failing banks, there is some value in playing the blame game. How did we get into this mess and who was responsible? Perhaps, if we knew the answers to those questions, we might avoid a similar crisis in the future.
Today, the Telegraph provided an interesting insight into the role of the FSA during build-up of the commercial property bubble:
In a letter to the Chancellor on last month's collapse of Dunfermline, FSA chairman Lord Turner listed warnings made over five years from 2003 against "the dangers of commercial property lending", the risks of buy-to-let and "the dangers of mortgage book acquisitions".
Despite the FSA's concerns, Dunfermline was allowed to increase its commercial property book five-fold to £628m between 2004 and 2008 and buy mortgage books worth £467m from Lehman Brothers and GMAC. The watchdog finally intervened in October 2007 to prevent Dunfermline acquiring another £160m mortgage book from Credit Suisse.
Dunfermline was not alone in ignoring FSA recommendations. Seven of the top 15 mutuals increased their commercial property books by 15pc or more between 2006 and 2007, according to data from accountants KPMG.
The article reveals four interesting facts about the crisis. First, the FSA knew that weak regional banks, like the Dunfermline, were taking on excessive risks. Second, the FSA warned banks about the dangers. Third, the banks ignored those warnings. Finally, the FSA did nothing as the banks plunged further into the murky world of commercial property lending.
Does this help us answer our earlier questions? It tells us that the FSA has the technical competence to identify excessive risk taking by banks. However, it does not have the political willpower to restrict banks from making crazy lending decisions.
In other words, the FSA knew what was happening but failed to do anything about it.