Do asset owners have a case to answer?

1. Do asset owners have a case to answer? • The Banks – “Over the last 12 months I have seen five different managing directors refer to their own clients as Muppets.” NY Times Greg Smith (Goldman Sachs) • Government - "Shareholders, the owners, have a major responsibility here…….shareholders have to get a stronger grip on weak boards and out-of-control executives.” Vince Cable The Observer, Saturday 30 June 2012 • Regulators - “One of the great failures of this financial crisis was that large institutional shareholders did not exercise their voting rights and responsibilities.” Adam Posen, Bank of England MPC • Media - “The inability and unwillingness of institutional investors effectively to monitor and require accountability of management is one of the principal causes of the continuing financial crisis.”Wall Street Journal September 14, 2011 • “The institutional investor community has received little criticism in the last three years and yet it was a necessary participant in the creation of this crisis…. This drama could not have happened without the active participation of these investors….This complicit ownership expressly approved the aggressive developments that were taking place in the banking industry for years. They failed as fixed income investors and they failed as equity owners.”  Business Insider 25 January 2012

2. Who is to blame? Institutional Investors “…there appears to have been a widespread acquiescence by institutional investors and the market in the gearing up of the balance sheets of banks as a means of boosting returns on equity…..The environment of at least acquiescence in and some degree of encouragement to high leverage on the part of shareholders will have exacerbated critical problems encountered in some banks (and other entities).” Walker Review: Final recommendations 26 November 2009 “a short-selling bunch of spivs and speculators in the financial markets.” Alex Salmond MSP 2008 Legislators “For the part that I and the last Labour government played in that global regulatory failure I'm deeply sorry." Ed Balls BBC 12 September 2012 “…the UK Government was not prepared for a financial collapse, ….they ignored the warnings. The failure of regulation was ‘made in Downing Street.” Stewart Hosie MP Treasury Select Committee December 2011 Financials "doing God’s work" Lloyd Blankfein, CEO Goldman Sachs, 2009 Regulators “In the supervision of banks the FSA made huge mistakes: and has acknowledged them.” Lord Turner, Mansion House October 2012 “The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. “ IMF Independent Evaluation Office Report 2011 “The SEC failed to restrict their risky activities and did not require them to hold adequate capital and liquidity for their activities.“ Congressional Financial Crisis Inquiry Commission January 2011 "With the benefit of hindsight, we should have shouted from the rooftops." BofE Sir Mervyn King Information Managers “What is the root cause of these problems? Well, it’s a failure of self-control….we have met the enemy, and it is us.” John D. Rogers CEO CFA Institute “A conveyor belt of high-risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on.” Senator Carl M. Levin April 2010 “We do not accept the defence that bank auditors did all that was required of them.... that defence appears disconcertingly complacent.” House of Lords Economic Affairs Committee March 2011

3. Do we really understand banking & finance? • Systemic risk and failure • “In total, we count 124 banking crises, 208 currency crises, and 63 sovereign debt crises over the period 1970 to 2007. Note that several countries experienced multiple crises. Of these 124 banking crises, 26 are considered twin crises and 8 can be classified as triple crises, using our definition.” - IMF Working Paper,Systemic Banking Crises: A New Database Luc Laeven and Fabian Valencia November 2008. • “Many highly developed economies that have sophisticated markets and long functioning banking systems have had significant bank failures or banking crises during the past 30 years. …they exacerbate cyclical recessions and may trigger a financial crisis." Basel Committee on Banking Supervision Working Paper No. 13 Bank Failures in Mature Economies April 2004. • Impact • “Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP on average, and can be as high as 55.1 percent of GDP.” • “…output losses (measured as deviations from trend GDP) of systemic banking crises can be large, averaging about 20 percent of GDP on average during the first four years of the crisis, and ranging from a low of 0 percent to a high of 98 percent of GDP.” - IMF Working Paper,Systemic Banking Crises: A New Database Luc Laeven and Fabian Valencia November 2008.

4. Do we really understand banking & finance? • "I sincerely believe ... that banking establishments are more dangerous than standing armies” -Thomas Jefferson 3rd President of the United States. • “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford, founder of the Ford Motor Company. • “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” - Mark Twain • “Banks are an almost irresistible attraction for that element of our society which seeks unearned money.” - J. Edgar Hoover. Director of the F.B.I. (1924-1972). • “Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” - Napoleon Bonaparte • 'What's the difference between a dead cat on the motorway and a dead banker on the motorway? There are skidmarks around the cat." - Vince Cable.

5. Can asset owners really influence change ? • “Barclays faces fresh scandal over interest rate swaps.” The Independent 29 June 2012 • “Morgan Stanley, rating agencies conspired on 2007 SIV.” Thomson Reuters 10 October 2012 • “The JPMorgan London Whale: Now it's Criminal?” Forbes 17 October 2012 • “US sues Bank of America for $1bn over home loans.” Financial Times 25 October 2012 • “Nine more banks added to Libor probe.” Financial Times 26 October 2012 • “UBS, RBS Traders Suspended as Rates Probe Goes Past Libor.” Bloomberg 29 October 2012 • “MF Global collapse, one year on, still haunts futures industry.” Reuters 30 October 2012 • “Barclays reports third-quarter loss as US authorities mull fine over energy trading and Middle East fundraising faces scrutiny.” The Guardian 31 October 2012 • “HSBC 'sorry' for aiding Mexican drugs lords, rogue states and terrorists.” The Guardian 31 October 2012 • “Bill for PPI mis-selling passes £10bn.” Financial Times 2 November 2012

6. Going forward - Strategy, Structure and ESG Policy • Strategy & Structure - The post crisis reality for LGPS and a ‘defensive’ stance • Understanding ‘risk’ • Funding levels & de-risking • Alternatives - a focus on liabilities • Increasing passive allocation • Fundamental indexation • Relationships - questioning capability & ‘active’ management - challenging liability & ‘duty of care’ Asking the question – should we own financials, can we trust measures of value & risk? • ESG Policy - Taking ownership and seeking to influence change • Responsible Investment Policy - Compliance with PRI & Stewardship Code • Engagement - GES overlay • Co-operation & collaboration • Governance - effective & visible • Litigation - monitoring & action • Reporting - inviting scrutiny Asking the question - can we really influence change in this industry?