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Financial Systems In Meltdown

March 5th, 2008

To say that the US financial market (and the Australian one) is suffering a crisis of confidence is an understatement. What started with financial institutions in the US granting some dodgy loans have spread from there to demonstrate weak standard of ethics and competence of auditors, rating agencies and financial advisors. At the end of the chain were gullible and greedy organisations trying to get a higher rate of interest. This has resulted in town councils and superannuation funds in Australia looking at a pile of useless paper. If it wasn’t for the fact that they are throwing away other peoples money I would have no sympathy for them. Stupidity is not a crime but some of the responsible officials in these organisations may end up by losing their jobs. However as we go up the chain the question of liability arises after all we must remember that these professionals are being paid to perform a service that they failed to deliver. Let us take them in turn:

Financial advisors. They present themselves as experts and persuade their clients that they were investing in secure investments backed by mortgages. Since they are paid for their advice and expertise one would have to believe they failed in their duty.

Rating Agencies. They are supposed to grade debt according to the degree of risk involved. They obviously did not do very good job of identifying the risk involved in batches of risky mortgages.

Auditors. In days gone by auditors signed accounts as presenting a true and fair view of an organisations affair and one could rely on this. Now they sign the accounts as conforming to Accounting Standards. The only problem is that the standards are questionable and transaction and risks can be excluded from the Balance Sheet. We should seriously question the worth of an auditor’s certificate.

Lending Institutions. To lend money to the so called NINJA clients (no income, no job, assets) even if it is backed by a mortgage is still utter stupidity. House prices can go down. To parcel these loans up and sell them on as securities is dishonest.

The real problem is that, in this game of pass the parcel, it is the retirees and ratepayers who are the main victims. If major banks in Germany, UK, Switzerland etc get caught with parcels of worthless paper they can only blame themselves for letting greed overcome sound practises. However their greed and losses has ramifications for others. As they try to shut the stable door others are getting caught up in the whole sorry affair. Substantial companies round the world are facing liquidation as they try to refinance loans (too readily given) in a tight market.

There is no doubt that the legal framework governing the financial markets has failed and something must be done. However we must avoid piecework reform by individual countries. If we ever doubted it, we now realise that we live in a global market and need internationally recognised ethics, standards and laws. Drafting these will not be easy but must be done if we are to preserve our current financial systems. Meanwhile the legal profession will have a boom time as they pursue organisations that have failed to carry out their responsibilities.

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1. The stock exchange will recover and I don’t have any sympathy for any of the Opus Prime clients who lost their shares. Margin investing is gambling and they are just like losing punters at Flemington. The stock exchange is there to raise money for companies not to allow greedy people to gamble money they don’t have.

   Comment by ozziejoe — April 15, 2008 @ 1:04 pm

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