Financial crisis, 10 years on
This September marks the 10th anniversary of the collapse of investment bank Lehman Brothers as a massive bubble in the sub-prime mortgage market burst. Many analysts and ordinary citizens are asking whether any lessons have been learnt.
The quality media has tackled this issue clinically, avoiding dramatic assertions against those perceived to have caused the crisis in the first place. Almost all agree that while there have been some improvements in regulation, no one can honestly confirm that another major financial crisis is unlikely to happen again in the next decade.
The general public is still puzzled about the financial services sector as stories about mismanagement continue to hit the headlines. Mismanagement can be the result of incompetence, greed or outright ignorance. Almost universally these human weaknesses that can cause enormous economic damage are not crimes.
This reality explains why, for instance, in the UK even though the government had to bail out three of its biggest banks with taxpayers’ money, not one senior banker has gone on trial. Sir Fred Goodwin, the maverick CEO of RBS, may consider himself unlucky to have been stripped of his knighthood by the Queen. He did say, however, that he was “sad” when leaving the bank in October 2008.
Some movies about financial criminals have perpetrated a popular misconception that major financial fraud is effortlessly committed by financial villains who manipulate markets and move billions around the world in seconds.
Millions have lost their jobs globally as a result of governance failures. The perpetrators of such crises have generally recycled their careers
The story of Nick Leeson, a junior rogue trader who brought Barings Bank to its knees in 1995 through a combination of greed, ineffective oversight by his bosses and incompetent regulators has been turned into a bestseller and Hollywood movie. After serving a brief prison sentence, Leeson is now a celebrity selling management advisory services to all those interested in learning from his experience and conversion to the merit of good governance.
During the last decade, millions have lost their jobs globally as a result of governance failures in the financial services sector. The perpetrators of such crises have generally recycled their careers. Many still operate in various businesses. Regulators have tightened the fit-and-proper criteria for directors and senior executives serving in the financial services industry, but many objective observers can name multiple individuals tainted with flawed characters, incompetence, reckless management or crass ignorance who still serve as directors or senior executives of companies worldwide. None of these potentially lethal elements is a criminal offence, and law enforcers will seldom find a chain of e-mail or other direct evidence that proves intention to deceive or defraud third parties.
Another reason why law enforcers find it difficult to prosecute alleged wrongdoers in the financial services industry is that in capitalist societies business as well as political leaders consider risk-taking as a necessary element of doing business. No wonder that US President Donald Trump is adamant on diluting the strict regulation that was introduced as a result of lessons learnt from the 2008 crisis.
The public remains unconvinced that enough has been done to avoid a repeat of the 2008 crisis. A spokesman for UK Finance, which represents the banking industry in Britain, has told Reuters: “The finance sector takes its responsibility to wider society extremely seriously and has undertaken significant reform in the last ten years to ensure that the taxpayers should never need to bail out a bank again.”
This statement is correct. One can also add that European regulators are more intrusive and robust in their oversight function to protect depositors, shareholders and taxpayers even if their methods are at times controversial and seen as unfair on some banks.
The risk of another major financial crisis on a global level can only be mitigated if more importance is given to the promotion of a corporate culture that, while encouraging risk-taking, ensures that this is done within well-defined parameters of prudence. Taxpayers’, depositors’ and shareholders’ money are onerous liabilities on any business balance sheet.
Regulators should also ensure that the tone from the top of financial services organisations should ensure that those lower down the ranks do not feel they are entitled or expected to abandon morality in a search to maximise profits and earn higher bonuses.
In some cases, this objective is being pursued through box-ticking processes by regulators and internal auditors. This is not enough. We need to start by promoting ethical business values in our university courses. We then need to revise the regulatory process to make it effective against the risk of reckless management.