A timely letter to the editor
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I loved this letter to the editor in today’s (16 Jan) Australian Financial Review (I would link to the AFR website but the content is only available to subscribers).
The letter was submitted by David Beattie of Mont Albert, Victoria:
A great little club
As a small investor, I’d like to wish all the Australian finance insiders - the fund managers, executives, merchant bankers and lawyers - a great year. Although I could never aspire to your earnings, it’s great that my investment funds let me assist your wealth by voting for ever rising executive pay and allowing more and more bonuses and payments to high-priced bankers and lawyers. That fact that you guys are all friends - and therefore know how to reward each other with my money - makes it even better.
Surely, the sub-prime mortgage crisis and the subsequent credit exposure for the banks is a result of the cosy relationships that exist in the finance sector - a small community of wealthy people lining their pockets at the expense of the common man.
Unlike Enron, this fraudulent activity is endemic to an entire industry, which makes it hard to point the finger and provides Government with no option but to bail the banks out with our money!
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January 28th, 2008 at 5:06 pm
You’re talking about a couple of things here, which may or may not be accurate on their own, but are definitely not linked, in my humble opinion.
(1) The sub-prime mortgage crisis was created by greed, ignorance of risk, lack of due diligence, a dash of stupidity and an insatiable appetite for high returns. It was NOT Fraud. No one said “invest in this fund that puts money in high yielding cash accounts”, to then go and put all the funds on a riskier asset instead. That would be Fraud. These sub-prime funds were setup by clever bankers who then sold them to less clever bankers, to capitalise on the less clever bankers greed and appetite for return. They forgot about risk. These funds, which invested in home loans given to poor people, were only ever going to go well as long as the US economy and house prices went well. Obviously when the economy turns south, the collectibility on the loans decreases and the assets are less valuable. (By the way, the same thing happens with BHP and Iron Ore prices, Woolworths and consumer spending figures, etc). A high return investment always has a high risk. Bad timing, greed, and an inappropriate consideration of risk led to this - not really Fraud.
(2) Cosy relationships in the finance industry. Yes they exist. Yes they ought to be more properly disclosed. Yes its a bit sick how high flying CEOs can ruin a company and walk away with millions in payouts. All valid points. But how exactly is this linked to the sub-prime mortgage crisis? How does putting your banker friends on company boards cause a meltdown of US housing markets? How does voting for each others pay increases cause a company of experienced investment bankers to completely disregard the risks and underlying assets behind structured finance products, and greedily put large swabs of money into investments that are so hard to understand? The cosyness of the finance industry and the meltdown in sub-prime mortgages have both occured for different reasons, neither good, but I dont agree one caused the other, as you suggest.
January 29th, 2008 at 9:32 pm
Thanks for your great comment LA. You make some valid points and obviously have a good understanding of some of the dynamics at play here but swap the word ‘fraudulent’ for ‘negligent’ in the original post and I think we basically agree.