Is MAD Driving you, Mervyn?

by Christoper Booker

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Did Mervyn King know what he was talking about when he was grilled on the Northern Rock affair by the Commons finance committee last week?

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The Governor of the Bank of England began by saying "the main point" he wished to make was that he had not been able to rescue the bank as he would have likedbecause of constraints imposed by four pieces of new legislation, in particularthe EU's Market Abuse directive (officially known as MAD).

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The chairman, John McFall MP, impatiently brushed this aside, but Mr King insisted that, where as once he could have carried out a rescue "covertly", MADrequires all such operations to be done in openly.

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The MPs showed no interest in the point Mr King felt was so crucial, any more than did the media, although the European Commission later stated that thedirective would not have prevented Mr King acting as he wished.

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As it happens, the Commission appeared to be right. The chief purpose of MAD,directive 2003/6, is to end financial skulduggery by promoting "transparency" inthe dealings of companies and individuals, not central banks.

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Indeed a Commission Regulation, 2273/2003, issued under the directive,specifically exempts transactions designed to achieve "stabilisation", of thetype Mr King wanted to bring about in the affairs of Northern Rock. In such cases, it is only necessary to reveal what is going on after stabilisation hasbeen brought about.Was the Governor correctly advised as to what MAD says?

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He did at one point saythat the wording is "ambiguous" and that the constraints he referred to appearedto be an "unintended consequence" of the directive.

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Did anyone from the Bank consult the Commission as to whether a "covert" rescueoperation was illegal?

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The MPs spoke much of the "tripartite" grouping nowresponsible for such financial regulation - the Bank, the Treasury and theFinancial Services Authority - but clearly it should be seen as "quadripartite",with Brussels just as important as the rest.

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That even the Bank's Governor seems confused by this labyrinthine system raisesyet more doubts about the curious new form of government under which we live. It makes a nonsense of the proudest boast of our new Prime Minister, that he gave the Bank its "independence".