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Inside job expounds on financial crisis

Published: 
Sunday, March 18, 2012

As I follow the enquiry into the CL Financial failure, I would argue that there is value in expanding the discussion to include the wider system that allowed; if not encouraged the excesses and eventual collapse. This leads me to the award winning 2010 Charles Ferguson documentary called Inside Job which gives viewers a holistic explanation of the 2008 global financial crisis. It is required viewing for anyone who wants to understand how the financial services industry evolved into the beast we see today.

 

It would be hard not to see any parallels between what happened on Wall Street and what happened in the Southern Caribbean with both the Stanford Financial and the CL Financial disasters. There is some agreement that the problem lies in the wider system. There is no agreement however, on how to resolve the wider systemic issues. Of the many issues discussed, two in particular jumped out at me.

 

 

Firstly there was George Soros’ analogy about the financial system being like a huge oil tanker. In a tanker, the oil is stored in separate compartments that prevent it from moving around too much with the wave action, and destabilising the vessel. In the US financial system, the 1933 Glass–Steagall Act and the 1956 Bank Holding Act are argued to have done the same thing by compartmentalising funds and preventing financial institutions from using regular deposits in high risk investments. In 1999 the merger of Citibank and Travelers Groupled to legislation that removed these compartments and allowed a higher level of risk with depositors’ funds.

 

Secondly, there was Raghuram Govind Rajan, former chief economist of the IMF who delivered a paper in 2005 that to me, hit the nail on the head. It is called “has financial development made the world riskier" and it is freely available online. In it he argues that the banking culture of high bonuses stands at the very core of present problems by leading individuals to take greater risks with short term wins to trigger their bonuses. Short term thinking and behaviour comes at a long term cost. Amazingly, in 2005 he proposed that this incentive towards greater and greater risk may eventually destroy firms if not damage the wider financial system. How right he turned out to be!

 

To those following the CL Financial enquiry, just those two points above ring alarm bells. The scary thing however, is that both in the US and in parts of the Caribbean such as Trinidad, the people who were the architects of the policy framework and the bonus culture that contributed to such turmoil are still in positions of influence. In the documentary, the former head of the IMF admitted that he knows CEOs in the financial services sector who wished that compensation was regulated as no bank dares to cap pay on their own as rivals will simply steal talent.

 

 

In the US, the financial services sector has five lobbyists for every member of congress. In Trinidad, CL Financial decision makers funded both major political parties and have held ministerial portfolios. In the US, up to days before certain financial institutions collapsed in 2008, the profit-driven rating agencies had them as investment grade. In Trinidad, highly respected accounting firms appeared to have had no problems collecting their auditing and other consulting fees from CL Financial entities in silence.

 

Aside from legal action which is taking place in several Caribbean jurisdictions, I do hope that nations take the opportunity to strengthen their oversight and policy framework to prevent any recurrence of the abuse of trust that continues to be revealed.

 

Coincidentally, last month, there was an article in the Canadian Press which highlighted a study which suggested that rich people are less ethical and more likely to cheat. The researchers were from the University of California and the University of Toronto and the report was published in the Proceedings of the National Academy of Sciences of the United States of America. Stephane Cote, associate professor of organisational behaviour and psychology at the University of Toronto’s Rotman School of Management explains that, “We found a trend that upper-class individuals—people that have the most money, the most income, the best education and the most prestigious job—have a tendency to engage in less ethical behaviour.”

 

She goes on to say that, “This doesn’t mean that every rich person will behave less ethically than any less-rich person... But we found a tendency. So if you look across people in a variety of settings, the higher-class people tend to engage in more unethical behaviour.” My name is Derren Joseph and I love my country and I love my region. Despite our current challenges, I continue to have the audacity of hope that we will all enjoy a brighter tomorrow. Read more on derrenjoseph.blogspot.com

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