Saturday, January 24, 2009

The crying need for an ethic of finance - towards communalism

The destruction of goodwill on the balance sheets of the financial sector continues apace. Recent revelations that John Thain had authorized accelerated bonus payments at a time when he knew that Q4 earnings would reveal a huge write down have angered BoA shareholders and American taxpayers alike. This mornings revelations of the multi-million dollar redecoration of his office with $87,000 rugs and $1400 trash cans have only served to link Merrill's name with that of Enron in the pantheon of financial greed run rampant.

The root cause of all this has been the increasing commoditisation of money. There was a time when financial investors were prudent in their dealings recognizing that the capital they handled and advised was the sum of personal investors hard earned savings, corporate success, occasional good luck and the retirement dreams of young and old alike. To be in the financial sector implied probity and responsibility.In the mid-90's this conservative approach to capital management slowly started to change with restraint giving way to excess. Money was increasingly viewed as a basic commodity that could be limitlessly mined and endlessly leveraged without any link to the fortunes of the people,families and firms that provided it. Moderation as an appropriate ten plate was forgotten in an ethos that rewarded risk. Abstention was laughed at. Personal wealth enhancement replaced fiduciary conservatism in dealing rooms and as the guiding mantra for the industry as a whole. Greed blossomed in an environment where risk was down played.

After a decade of excess that moved from brokers to fund managers the party has finally come to an end. Risk has been shown to be alive and well and trust in the financial sector has evaporated. By placing their reward structure above that of their clients the current generation of managers in the banking sector have overseen the destruction of their companies, the impairment of their balance sheets and the undoing of generations of goodwill built up in their companies.

One first step to restore confidence in the banking system will be the SEC and FSA and others formally tasking independent directors with the duty of safeguarding client capital and ensuring that suitable questions are asked of management. The era of the cosy board must come to an end or governments will provide their own candidates. Going down that route opens up other dangers.

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