Since the Court hearing last Monday I have learned a new collective noun: a chamber of barristers. We had Theodor van Sante representing the FCA, and Tom Weitzman representing the PRA, both of 3VB. Representing the applicants (Equitable Life and Utmost Life) was Martin Moore of Erskine Chambers. Each was supported by a whole team of assistants, passing post-it stickers up and down as the proceedings proceeded.
Considering the numbers of lawyers involved, and considering they all had three weeks from the date of my original submission on 1 November, I was surprised by their difficulty in getting even the non-technical facts right. For example:
Martin Moore QC: The various extracts that Dr Buckner has produced are not properly evidence. They’re simply extracts from speeches that have been given. They are not experts in the sense that the court would understand expert evidence to be.
There are several layers of confusion and wrongness here. First, only one quotation in my original submission was definitely from a speech.1 The speech was by Don Kohn, who said
While economists are famous for disagreeing with each other on virtually every other conceivable issue, when it comes to this one there is no professional disagreement: The only appropriate way to calculate the value of a very low-risk liability is to use a very low-risk discount rate.
If a recognised authority like Kohn (senior fellow in the Economic Studies Program at the Brookings Institution, former vice chairman of the Federal Reserve etc) states something like that in a speech, presumably there is an important reason for doing so: presumably he thought he was stating an important fact that everyone should recognise. Why is his statement ‘not properly evidence’? Is there any phenomenon that makes a statement in a speech false, and the same statement true when presented in person to the Court? Surely not. And why is Kohn not an expert ‘in the sense that the court would understand expert evidence [sic] to be’? What a mess.
But it gets worse.
In its second written submission the PRA made a great deal of, er, a speech by David Rule.
Tom Weitzman QC: Your Lordship has been referred in this respect to the speech of David Rule, the Bank of England’s executive director of insurance supervision, a copy of which is annexed to the PRA’s second report at page 27 onwards, with the relevant passages being, in particular , at page 31 onwards.
So a speech made by Kohn is not properly evidence, but a speech by David Rule is properly evidence? What?
Worse still, the speech referred to was actually this (‘An Annuity is a very serious business’), about the ERM valuation problem, which quotes Bank economist David Miles on housing predictions. The very same David Miles I quoted in my submission saying (and not in a speech) that MA was ‘nonsense and a dangerous road to go down’. Why is Miles’ statement not properly evidence when I quote it, even though not from a speech, whereas his statement in a speech by David Rule is properly evidence? How horrible.
The PRA’s statement also highlighted the part about “The Bank of England supports the Matching Adjustment framework”, but they clearly neglected to look at the part which followed, and particularly the paragraph ending “Getting it right is important!”.
Right. The significance of Rule’s speech was that sometimes valuation models can be wrong, perhaps very wrong, and that it is important to correctly assign that portion of asset spread corresponding to default risk. The speech was not in unqualified support of Matching Adjustment, but quite the opposite. As I pointed out to the judge:
DR BUCKNER: I’d like to talk about [equity release] because if the PRA are saying, “We are the PRA, we must abide by our own our own rules”, well, the PRA’s own rules involve internal consultation, and the equity release case was a very important case, where it took three years for economic theory to prevail . If you look at [the] history, there’s a whole series of consultation papers which turned out in the end with the PRA saying, ”Actually, sorry, we got this wrong, we allowed firms to calculate default risk based on projection of house price growth. Actually that’s totally wrong, we should base it on something — on net rental yields ”
MR JUSTICE ZACAROLI: So your point is that there’s been another occasion in the past when the PRA said everything was fine but turned out to be wrong about it?
DR BUCKNER: Absolutely
Absolutely!