Wednesday, September 16, 2009

Don't remember an Anniversary ...

... covered in such a coordinated manner as that of Lehman's collapse. Also, disappointed that those who are opining publicly on this can't seem to look beyond banks' culture of bonuses. This includes the President of the US. The mainstream media is of course happy to play this angle up.

My thoughts on the causes of the crisis and what needs to be addressed:

Causes

a) US Government (Clinton's Democrats initially, followed by the Bush administration) promoting home ownership
b) Economic leaders refusing to acknowledge that low interest rates were causing asset prices to get frothy - in his book Greenspan amazingly says that they didn't act on interest rates at the time because inflation remained low - doesn't someone need to look at what measure of inflation is looked at and how it should be measured? People weren't buying soap and vegetables with this new wealth.
c) Shareholder expectations of strong short term growth and equity market returns, leading boards of companies generally, not just banks, to push managements to deliver this growth. Managements that did deliver such growth were lavishly rewarded - not just by banks. The issue with banks was that the route chosen to deliver this growth was one that involved building up portfolios of assets that turned out to be toxic.
d) Poor risk management, ratings and regulatory mechanisms that were both manifested and encumbered by little visibility of the scale of the developing problem because of a build up of off balance sheet assets. I include the insanely high levels of short term leverage taken on by banks in risk managment practices. Also a result of pressure from Boards and shareholders to deliver strong short term growth.

What needs to be addressed
a) We, the shareholding population need to come to terms with the fact that preventing bubbles from developing will entail lower returns on equities - in good times and also lower relative losses in bad.
b) The whole manner in which Boards oversee companies needs to be looked at with nothing held sacred. This is probably the weakest link in the whole chain. I will be posting something on this separately.
c) Regulatory and Risk Management policies need to be upgraded to deal with modern and quite global financial markets. An effort is under way at the G20 etc. but I personally would like to see lesser political involvement.
Clearly too complicated a subject to be summarised thus but these are starting points and all our views on this are evolving.
Would love to hear your views ...

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