Brave New World?
We're still making sense of the current global crisis (and having little success in doing so). Fingers are being pointed, blame apportioned (particularly amongst the banks), and rescues being made. Where do we go from here?Unlike previous crises, this one is neither individual nor sectoral nor regional. It is global and systemic. Finance and the general economy have now become much more inextricably intertwined since the "dotcom bubble" of the start of the millennium. Countries and regions have become much more interdependent thanks to the globalisation of finance. Now, you can have a crisis in one country because local companies are borrowing from foreign banks (witness what is happening in Russia and Eastern Europe).
I am now working out what the "new order" will be. The way I see it, we have several areas to review: regulation, risk management, governance and employment legislation.
I hope it will not result in more regulation, as the result of previous "knee-jerk" legislation has often been to stifle the development of free markets, however well-intentioned (witness Glass-Steagall and Sarbanes-Oxley, to name but two). However, with taxpayers baying for blood, and politicians needing to be "seen to be doing something", I fear that we may get more than we need. What is needed more is better understanding amongst regulators of the risks undertaken and the assurance that if these are raised, the messenger will be heard rather than shot. Would HBOS have survived if Paul Moore's concerns had been heeded?
Do regulators need to cooperate internationally? My view is "yes", given the way that markets are inter-dependent. However, getting different regulators with different national interests to cooperate will, I fear, be a task too long in the making, when action is needed NOW. However, generally accepted international standards will be needed.
We need to accept how closely intertwined the financial and business world has become and work with that. We need to ask ourselves whether it is right that companies expand too rapidly into areas that are not core competencies - as did AIG with Credit Default Swaps. The distinction between high- and low-risk activities became blurred with the availability of cheap credit, plentiful supplies of lenders and innovative financial products. Risk management needs to refocus.
One problem that became apparent was that the failure of one party could set off a chain reaction or domino effect on a much larger scale than before (or could it - BCCI, Barings??). This was why AIG was rescued - they were counterparty to too many deals which would have brought down others. Lehman Brothers, unfortunately, were allowed to fail (although it is said that it could have been rescued through a sale to another party). I know of at least one bank in the Middle East which sacked their CEO, AGM Retail Banking and one third of their retail staff as at least an indirect result of this. No company will be able to run a complete risk analysis of all its counterparties, but they will need to be more aware of what could go wrong if... and plan for this.
On the employment legislation side, we need to be able to hire and fire easily. Noone likes being fired, but it makes sense if industries that cannot cope are able to shed staff so that other sectors which are growing can take them on. Legislation that makes it difficult for a moribund firm to shed staff will simply result in the taxpayer having to support that industry. This is going to be one of the hardest political pills, and will need union support and understanding. What is needed is taxpayer funding for re-training and relocation either of the workforce being made redundant, or in the shape of support for potential new industries that will replace the "moribund" ones.
What we will need is more focus on corporate governance and fiduciary duty, even if it means settling for lower rewards (in fact, it is this behaviour that should be rewarded). If this happens, maybe we can avoid too many layoff scenarios. During the good times, greed overcame reason, inertia overcame common sense, complacency overcame caution. Gordon Brown hubristically claimed that we had abolished boom and bust - how are the mighty fallen!
Labels: Strategy
posted by William Martin @ 22:49
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