The Year That Was – The Year That Will Be

It’s that time of year again. And what a year!

For those of you living on a desert island, a summary of events during 2009:-

• Barack Obama was inaugurated as the new US president;
• The Icelandic banking system collapsed;
• The second G20 summit in Pittsburgh produced some comforting words;
• Swine flu reared its ugly head triggering contingency plans around the planet;
• Banks were bailed out with particular pain in the US and Europe;
• A whole host of regulatory change proposals were tabled principally focused on changing who regulates rather than how they regulate;
• Recession set in around the world with particular emphasis in the US and Europe;
• Estimates of $ 2.8 trillion in banking sector related losses.

At this point as we enter a new decade we need to decide whether our cup is half empty or half full.

Given my role as an observer I will make the case for both parties.

My Cup is Half Empty

Why do I believe that the cup is half empty?

Firstly the credit crunch and the collapse of banks led to untold recessionary misery that will take years to put right. This was essentially caused by human greed. Principally it was caused by human greed in the banking sector. Yet in spite of being bailed out by the taxpayer, greedy bankers claim that they need to pay large bonuses to certain staff to retain their precious and rare talents.

Will we ever learn?

2009 has indicated that bankers clearly understand that word with one syllable – “rights”. They are constantly harping on about their employment rights and how they are unfairly persecuted.

But what about the word with six syllables – “responsibilities”? With rights comes a set of obligations to society as a whole. The right to earn an above average remuneration package surely comes with a responsibility not to blow the system that pays you up. Having blown it up, surely one has a responsibility to atone for one’s actions and ensure it does not happen again. Surely one has a responsibility to recognise the damage done and seek to mitigate the misery caused.

We really ought to have learnt given the fact that this is not the first major banking crisis or disaster. But is it any surprise that we fail to benefit from the lessons of history when age and experience is such a highly dispensable commodity? It has been depressing to analyse the type of people losing their jobs during 2009 and struggling to find an alternative. There is a clear if not unsurprising tendency for older people to suffer more. Can we really afford to jettison the years of learning never to be replaced? Does the fact that you are over 45 years old make an unsuitable candidate for the risk management function of an investment bank?

Secondly legislator and regulators are really not getting it.

Banks went bust because regulators failed to detect what was really going on. The key reason for this was that the techniques they used were inappropriate. They trusted when they should not. They relied on banks’ own self-assessment of risks when they should have been conducting the assessment themselves.

So how do legislators respond?

They draft extensive proposals detailing who should regulate? In the US, the debate rages around whether the Fed should supervise banks. In the UK, we are engaging in our own debate.

But what about how regulators regulate? Where is the meaningful debate on this facet?

My Cup is Half Full

On the other hand, one can take a positive view on life as we enter a new decade.

Firstly Risk Audit survived 2009. Cause for celebration indeed. For this, we would like to thank our clients and the wider community for continuing to engage with us and we look forward to transacting with you during 2010.

Secondly I am optimistic that the financial services sector will continue to innovate but this time in a safe fashion. We will see innovative ways of reducing credit risk. We will see better and more effective risk models. We will see the return of securitisation but this time in a transparent manner. We will see banks regulated by regulators who understand the risks and are prepared to intervene before it is too late. We will see the term “corporate governance” stand for “ensuring that financial services companies provide an effective intermediation service for the benefit of all stakeholders”.

Thirdly, the US and continental Europe are coming out of recession. Initial data indicates that the UK is on the brink of commencing its journey into growth. Economic activity is starting to increase with business opportunities for all.

Fourthly, the internet is a wonderful creation. It allows human beings to collaborate across vast distances as never before. Risk Audit will be embarking on its own internet journey with a new website and a new training offering in terms of online live courses using the Cisco Webex platform. Exciting times.

And finally, on a personal note, your editor achieved a major life aim. He lost some weight! I am now energised and ready to for 2010.
Risk Audit would like to wish all the readers of Stop Press a peaceful Christmas and positive 2010.

We will be back on Monday 4th January 2010.