Tuesday, February 19, 2008

Multi-Billion Dollar Losses in the Global Banking Industry

Dear Colleagues

From the New York Times:
Wall Street banks are bracing for another wave of multibillion-dollar losses as the crisis that began with subprime mortgages spreads through the credit markets.
In recent weeks one part of the debt market after another has buckled. High-risk loans used to finance corporate buyouts have plummeted in value. Securities backed by commercial real estate mortgages and student loans have fallen sharply. Even auction-rate securities, arcane investments usually considered as safe as cash, have stumbled.

The Western banking and financial services industry has been engaged in a very damaging game (as in gaming) for a very long time. The banking industry in the old days argued for special status because of the importance of "confidence" in the banking system ... but the rules and the code of conduct that applied then have changed dramatically.

My wake up call and my realization that there was a fundamental change was in the Reagan deregulation of the early 1980s and the subsequent Savings and Loan debacle. This was followed by junk bond excesses ... and then 20 years of banking sector reorganization that has landed us with a very concentrated and very shaky Western financial system that cannot stand up any more without either life support from the new money centers of Asia and the Arab world or Government bail out.

I am not opposed to profit ... in fact I regard profit as an essential for a sustainable economy ... but I am opposed to exploitation in the financial sector. I am also opposed to the lack of clarity in what an organization is really doing as a business. Is a bank doing banking ... or is it really a fee earning organization that is really nothing much more than a mortgage marketing organization, an M&A consultancy, or whatever?

The banking sector is not the only sector where there is a lack of clarity ... are the TV networks in the news and entertainment business or are they advertising organizations. Are the pharmaceutical company more interested or only interested in stockholders and profit rather than in health outcomes?

And the duality, and indeed duplicity, goes beyond these economic institutions to the very heart of national governance. Does a citizen's vote really count when the financial dimension of Washington is driven by K Street lobbyists and their support for political candidates? Does rule of law mean very much when the laws are constructed to seem one thing, and be quite another in practice, because of cleverly constructed loopholes.

The deterioration of the fundamentals of the American economy has been going on for almost a quarter of a century, during a period of what the media and a range of experts have portrayed as a period of great and growing prosperity. Really sad ... but what does anyone know ... hardly anything is what it seems to be!

There is good news ... but don't look for it in the Western banking and financial sector.


Peter Burgess

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