9/21/2008

Where are the accountabilities?

Should heads roll? The near collapse of the US financial system and the bankruptcy of several investment banks must surely see someone taking responsibility and getting the stick. Looks like it is not going to happen and they will live happily ever after with their loots over the years of mismanagement. According to Ann Williams in her article on the financial crisis in the Sunday Times, the CEO of Lehman Brothers, Richard Fuld, 'gets to keep the US490 million he earned.' If it was a simple case of business failure, fair enough. What if there were mismanagement amounting to fraud, cooking of accounts, hiding losses etc? From her article, she mentioned 10 reasons for the current turmoil and among which were the churning out of dubious financial products to unwary customers, raising loans and living off loans and more loans, 'keeping loss making investments "off balance sheet" and the failure of regulators to do their due diligence. All the policing and regulating agencies, including auditors etc that were supposed to check on the soundness of business practices and accounting systems were not doing their jobs. The accountability of failure of such a scale does not lie alone on the respective investment banks but a hoard of regulating bodies, including govt agencies. But as mentioned by Ann Williams, the Americans and those apeing the American practices, have been living on a culture of greed 'that gave outsized rewards for success and risk taking but did not penalise failure.' Do we have a mirror of similar practices and culture here? Are we harbouring a similar potential problem that is waiting to explode in our face? Have we been doing things like the Americans, for greed without any concern to the consequences of failure? This is what Tan Kin Lian said, 'There has to be stronger protection of consumers. Regulators should disallow unsuitable products form being marketed to the retail investors. Regulators also need to take stronger action against financial institutions that fail in their duy to provide good advice to their customers.' This should include financial institutions and regulators who have failed to do their due diligence. A case in point is the churning out of many IPOs into the stock markets which eventually failed within a few years despite the glorious accounting data dished out to the investors in the prospectus. Listing companies into the stock exchange with no control on their qualities is a crime. So far no one has been held accountable.

11 comments:

Anonymous said...

The irony of the bailout is that they are in essense helping the very people who created this crisis. It's a bailout of the fat cats, not helping the common folks who lost their properties.

During the asian financial crisis, the US, the West, together with the IMF and World Bank were teaching every asian country affected, that bailing out failing banks was taboo, improper and not the way to go.

Now with the US and European Governments bailing out banks and other financial institutions by the hundreds of billions, what did the IMF and World Bank have to say? They suddently seemed to have lost their voice. Who controls these bodies? Who set up these bodies and for what purpose?

redbean said...

we should send a team there to teach them a thing or two headed by mahathir.

Anonymous said...

matilah_singapura would have pointed fair and square to the U.S. Federal Reserve (Greenspan, Bernanke) and central banks to be the primary culprits.

Matilah_Singapura said...

Yes, The US FRB (a private consortium granted monopoly by act of congress) is the prime culprit and it aided and abetted the "bad choices" of individual actors.

* All market phenomena is the result of individual self-serving behaviour — both competitive and cooperative.

As usual, there is only one real "bad guy" in massive economic system failures — The Government, in this case the US Federal Government.

[My figures may be off here, but I'm illustrating a concept called 'inflation'] The actual physical money stock (i.e. the dirty paper and pieces of scrap metal we all carry around to exchange for sex, food, drugs and other of life's necessities) is in the order of 200 or so billion USDs. There has been 'extra' physical money created, but that's not the entire "evil" that crashed the works.

However the actual measured supply of money (medium of exchange AND unit of accounting) flying around in the economy is in the order of 3 trillion. So what happened? All the stuff over and above the 200 billion of physical money is CREDIT-created money.

Easy e.g.: You place $100 in your cheque account. The banks holdings now increase $100, which it can lend out to 'A'. It is a simple ledger entry. You write a cheque for $90. No problem, as most cheques are not "cashed", they are deposited. A few more ledger entries and the recipient has his account credited with $90, and $90 is deducted from your account. When you are dealing in small numbers, there might be some physical currency involved which the banks can cover. When you are dealing in millions — as the corporate, govt and financial world do — there is no physical currency involved and it is just a bunch of transfers and ledger entries.

Bank runs expose the shenanigans the banks get up to. By lending out your chequebook deposit, your original $100 now has TWO claims to a property right — you to the bank, and the bank to 'A'. If 'A' defaults, you lose, and all you did was keep your money in the bank for SAFETY.

To make matters worse, there is in effect a particular US banking regulation (Act) which forced US banks to give out more credit — especially to the poor in impoverished communities — because of the belief that the poor were being denied credit and therefore couldn't buy homes. The argument rested on the need to build vibrant communities, but how to do so when so many people can't get mortgages? Banks were required BY LAW to give credit or face the possibility of being prosecuted shut down by The Government. Beware the tenacity of a US government regulator!

Many people now had mortgages. People who under strict financial good-sense would not qualify. These "subprime" customers paid a higher interest rate than the better, more reliable "prime" customers. More mortgages, means more homes being bought means a price boom in real estate. People were going nuts, everyone was borrowing more and more as prices rose so that that wouldn't be "left out" in this (illusion of a) wealth boom. "I'm rich! I'm free! Yippeee! God Bless America!

America, like S'pore, has GLC's but they are called GSE's (Govt Sponsored Enterprise — definitely more garang-sounding than GLC), and the 2 being featured in this theatre of the absurd are Freddie Mac and Fannie Mae, the latter being a creation of America's first 20th century dictator: Franklin Delano. Freddie and Fannie's roles were to essentially provide "liquidity" (more ledger entries) by bundling up these mortgages and selling them as "securities" (now, that's a big fat lie right there) to mostly hedge funds and investment banks, who then re-packaged them into SIV (Stupid Investment Vehicles) for general consumption. Managers of funds bought them — maybe even your own CPF... who knows? Will they tell you?

And one day, the house of cards starts to fall — as the "bad-risks" fail make good on their mortgages — Mortgage Securitites and SIVs are now "junk bond" status. Many of the bad-payers have lost their jobs in the declining economy. Interest rates have risen. Housing is now in a slump. Big time losses everywhere. Banks are foreclosing, adding to the inventory of houses for sale, further depressing the prices. And on it goes.

But seriously folks, life is for living. The govt will continue to cock up and cause structural failure. It always has, because of the very nature of governments. The sad fact is when they cock up and lose squillions, they're still in business tomorrow. When they cock up causing YOU to fail, they stay in business but YOU are OUT of the game. You might lose your house. But your millionaire minister will still have his and his job will be INTACT. It is best to stay off the state's radar, and be cool, and know that in an existence of uncertainty there exists some certainty: Governments of the world will fuck up and if you are not careful, you'll be dragged into the shit as well.

By acknowledging these FACTS OF REALITY you can make a conscious choice on whether to allow these bare truths to depress you, or to cause you to be determined to rise above as best you can and continue your pursuit of happiness.

I choose the latter.

BTW, increasing regulation has negative externalities and creates moral hazards. The people who suffer most under increased govt interference in the economy will be the poor and economically weak, not the "filthy rich bastards" who are always blamed as the cause of every economic crisis.

"Moral hazards" are the worst because once introduced they could contribute in fostering "immoral" behaviour, especially by people who won't behave "immorally" if left alone.

E.g.: Increased regulation: Increase taxation rate to 70% (very extreme)

Change in individual behaviour: Many people would be motivated to avoid taxes, many by "dishonest" means. Many people will lie, and they will have to conjure up more lies to protect previous lies. Ordinarily "honest" people now lie frequently.

Long term effect: The danger of lying and dishonest disclosure being woven into the culture of the society. (i.e. if you practice lying, it will become a habit)

Matilah_Singapura said...

P.S.

There should be NO bailouts. Let the market "tumble". What is actually happening?

Simply, the markets are CLEARING. The debts are wiped out (or wipe out the holders of the debt), capital is re-organised (e.g. mergers and acquisitions), if capital markets were left alone.

Capitalism is a rivalrous enterprise. Individuals make bad choices, but they also make good choices. There are individuals who read the world correctly and anticipated the subprime collapse, and now these people are in a position to profit from their previous actions and perceptions.

We cry crocodile tears for the "losers" in an event like the subprime crisis, but we forget to cheer the people who are winning because they're prudent and wise.

redbean said...

running an economy based on increasing consumption and forcing people to consume more even if they don't want to is like going on a treadmill that is increasing in speed and never slowing down.

at some time in the future when the speed is just to fast, more and more will fall off.

thrift is an undeniable goodness. spendthrift will lead to ruins, to people and also the economy.

Anonymous said...

re: matilah_singapura

How do you reckon this would pan out?

Do you see this as the beginning of the end of the current regime of 'freely' fluctuating fiat currencies?

My greatest fear is a one world central bank.

Matilah_Singapura said...

redbean:

> thrift is an undeniable goodness.

That would depend on each person's individual preferences. Some people HAVE TO spend more and more — for e.g. if they or a loved one was sick and required on-going expensive medical treatment.

On the personal level there are 3 "states" of money:

1 Money used for consumption

2 Money used for investment

3 Money kept "as is" — i.e. saving or hoarding, perhaps as reserve, maybe for some future investment or purchase.

The point is this: if the govt didn't influence in anyway and allowed people to decide for themselves how they would dispose of their money, it will all work out in the end. The individual gets "feedback" on his choices: if he spends too much, he gets a result. If he over or under invests he gets a result. If he hoards too much he reaps consequences. There's a PRICE and CONSEQUENCES to every choice made.

anon:

> How do you reckon this would pan out?

No idea. You can't even make an educated "guess" because you don't know how individuals will respond or whether govts will keep on interfering.

One thing is for certain, it too will pass. Best not to worry about it.

> Do you see this as the beginning of the end of the current regime of 'freely' fluctuating fiat currencies? <

Definitely not (this I'm quite certain) in any of our lifetimes.

In fact the trend is to move more away from physical fiat currency and over to EFT's — Electronic Funds Transfers — more ledger entries at the speed of light.

Electronic fiat currency is already a part of nearly everyone's everyday life: ATM cards, EZ-Rider, credit and debit cards, PayPal etc. Some of these cards can be used internationally as well — global electronic fiat all in the wallets of most individuals in the world. It's BIG business.

S'pore, for example, makes a lot of revenue in becoming a financial hub where trillions are transferred. Hardly any physical currency changes hands — you get some at money changers, bank counters and hotels, but that's about all the global physical currency "action" that occurs. Even those players take positions on futures bourses to hedge their dealings in physical currencies exchanged for SGD's.

> My greatest fear is a one world central bank. <

You might want to rest easy.

I doubt that will occur because of the resistance by each sovereign nation - on many levels. Fundamentally, no govt will willfully give up its ABSOLUTE POWER over the territorial banking system to an external MORE POWERFUL agency. It's just unimaginable.

redbean said...

thrift means not spending unnecessarily when there is no need to. those situations when one has to spend, one must spend, eg the basic needs, a little luxury if affordable, medical etc. but when one can make do with spendind $100, there is not need to spend $1000.

i make a distinction between thrift and spendthrift.

Anonymous said...

Redbean, you and me have the same thinking. People call me 'old antique', 'sua ku', 'cannot keep up with society' etc. But I think one day I will have the last laugh. And he who laugh last laugh best.

redbean said...

haha, old friend,

let them call us whatever they like. we live one day at a time.