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Global financial crisis: how many wake-up calls do we need?
Raj Thamotheram and John Fullerton outline what they believe are the 10 biggest mistakes by investors on the financial crisis.
There is an old Arab saying which goes something like this: if your tent in the middle of the desert is hit by lightning, don’t worry, it will never happen again. If your tent is hit twice, then move it! Four years on since the global financial crisis started, it is now arguably in an even more dangerous phase. So now would be a very good time for the members of ICGN & UNPRI to take stock of what they have done to be part of the solution – not the speeches and events – but the real actions and actual achievements in order to safeguard their big, investor-filled tents. The context is clear, albeit uncomfortable. As the noted (US) economist Adam Posen, member of the Bank of England’s Monetary Policy Committee and of the Panel of Economic Advisers to the US Congressional Budget Office and senior fellow at the Peterson Institute for International Economics, said at the Just Banking conference in Edinburgh in April: “One of the great failures of this financial crisis was that large institutional shareholders did not exercise their voting rights and responsibilities”. The Bank of England Monetary Policy Committee isn’t known for being a hot bed of revolutionary fervour! Of course, Posen was just saying what most informed and independent commentators know but generally don’t say, at least so clearly. Whatever else the crisis was due to, there is no doubt that massive failures of corporate governance allowing banks to act irresponsibly contributed enormously to market dysfunction. So investors, alongside regulators, the financial media and economists messed up. The question is what have we learnt and what are we now doing? Learning from failure can be immensely productive. It’s something the financial world hates to do but it’s time to grow up, do so, and move forward, regaining our credibility and license to operate in the process.
So what were our biggest mistakes? Here’s our list of ten:
- We encouraged – certainly passively, if not actively – banks to pursue risky and suspect products and strategies. Consumer watchdogs raised the alarm about PPI in 1998 and the FSA issued its first report in 2005 many years before this became a matter of investor concern. Did any finance analyst really not understand the risks of NINJA (“No Income No Job or Assets”) mortgages?
- We tacitly encouraged banks to over-leverage on debt. As some banks have commented, when they met investors pre financial crisis the message was often: “why are you being so financially timid?”
- In practice, we judged future performance based solely on past performance. How else could investors have approved the mad RBS takeover of ABN Amro?
- We approved pay designs which incentivised dangerous risk taking and “too big to fail” growth. We were, in the immortal words of a well-known UK politician “intensely relaxed about bankers becoming filthy rich” (and we didn’t even care too much if they paid tax).
- We failed to get the sell side/credit rating agencies to analyse banks’ corporate governance and didn’t adequately resource independent research houses to do such analysis, or indeed pay much attention to those that did and who came up with worrying answers.
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