The news that Goldman Sachs, one of the most renowned banks in the world, was being investigated by the Securities & Exchange Commission of the US sent shivers down the spine of many political and business leaders. The US financial watchdog is alleging that Goldman is involved in a $1 billion fraud by selling dodgy complex mortgage backed investments to unsuspecting investors.
Gordon Brown rightly labelled the Goldman's executive who approved this fraud as "morally bankrupt". The current global economic slump will prolong itself if cases like the one in which Goldman is currently involved continue to hit the headlines. Despite Goldman's reputation, and its declared intention to fight these accusations in court, the still fragile investors' confidence was once again rattled.
The arrogance that seems to characterise the behaviour of some leaders of the financial services industry worldwide seems to know no limits. The CEO of Goldman Lloyd Blankfein is quoted as claiming that "Goldman does God's work". The business media is often too dazed by the success of big financial institutions as manifested in their annual results. Goldman has in fact announced very good results for 2009 and few dared to question the dynamics behind these profits.
President Barack Obama, possibly the best political leader around at the moment, dedicated one of his recent weekly video addresses to "Holding Wall Street Accountable". His determination to legislate against abuse of power by some bankers, despite strong opposition, is the best chance we have of avoiding another crisis that will rock the world economies again in the near future.
Many financial services leaders worldwide seem to have already forgotten the shock that their irresponsible behaviour has given to the economies of many countries. They do not really appreciate that ordinary taxpayers, many of whom are still losing their jobs, had in fact saved them from obliteration.
Protection of investors, especially the smaller ones, should be a priority on the agenda of regulators and politicians. The strong financial services lobby will cry out that any more controls will ruin the growth prospects of this important industry. They threaten to abandon countries where regulators show intentions of tightening the screws of an industry that has shown that it is not infallible.
On the local level, I believe that our regulators are generally very vigilant on the control of abuse. There are many operators who follow strict professional standards when giving advice to their clients. But there are areas where more can be done to protect small investors from the hard selling pressures of some financial services providers. There are many who feel the need for an independent financial services ombudsman similar to the one that exists in the UK.
Financial analysts who keep their ears to the ground often confirm in private that they know of cases where investors complain that certain financial services providers sold them investments that were unsuitable for their particular circumstances. Luckily, there are other operators, not necessarily the larger ones, who are sensitive to the customers' real interests.
No doubt, cases of alleged misselling are being investigated by our financial regulators. But since not much information is made public, no one can really say to what extent we may have a problem with the misselling of financial products. Many argue that more needs to be done to introduce a higher degree of transparency to make the control of abuse by regulators more visible to the public.
One area that I believe cries for action is the grading of risk associated to the purchase of bonds issued by local companies. The CEO of HSBC in Malta recently hinted that banks are facing some difficulty with doubtful debts. This naturally makes banks more cautious in lending money to local entrepreneurs who in turn increasingly resort to the general public to raise the finance they need to support their activities.
When long-term bonds offering rates of return that can be up to four per cent and more over the risk-free rates, unsophisticated investors and superficial journalists go in euphoric mode and proclaim that no one should really miss such gold-plated opportunities. This is a dangerous attitude.
At the risk of sounding patronising, and while acknowledging the good work done by our regulators, I believe the time is right to protect small investors more effectively from the aggressive selling techniques of certain financial service providers.
jcassarwhite@yahoo.com