"What Did You Learn In School Today?"

Maybe you don't know, or more likely have never heard of, the song by Pete Seeger with the above title. Actually, of course many of you have probably never heard of Seeger either but that's merely a function of age. An incredible folk singer, activist and great human being who at 90 is still going strong.

The song title jumped into my head today as I contemplated a question I was asked at a Forum in Singapore last week by an old and much respected friend, Tommy Koh, and a follow up question that was put to me in Beijing which had a bearing on what I said last week.

Tommy asked me if I could consider three lessons that I had learnt from the financial shenanigans of the last couple of years. A tall order I thought, to cover briefly - and only three of them at that - when there were so many thoughts running through my head.

In the end I did what I know other people do in a similar situation. I panicked. But I did think of three things. Three lessons that I learnt in "school" - perhaps not a formal school, and perhaps not today, but over a long period of time and that have come into focus recently. 

"Basics", when linked to financial services, may be boring but there do not seem to be many financial institutions who stuck to the basics that went far wrong during the recent crisis. Let's face it, banking is not all that difficult. You are entrusted with other peoples money because they believe you are going to keep it safe. You have custody of that money and lend it to others who can use it to improve their businesses and/or their lives - and who will pay it back to you of course, so that when the depositors turn up asking for their money back you can return it. You can provide other services, but you should not go too far off the beaten track - especially with other peoples money. Lesson number one, if I have learnt anything at all in 40 years of banking - basics will rarely let you down.

"Greed": It doesn't seem to matter what angle you look at it from, the recent crisis was fueled in a large part from a desire by many participants to take a short cut to wealth. Deals were created that were inherently unsafe. Credit standards were allowed to drop, because there was a chance to make more money than ever before - in a short space of time. Many participants in the market knew there were problems brewing, but they wanted to get their bonuses and move on before everything hit the fan. 

And as I have written before, bonuses are a part of life in the industry, but I think much more care would have been taken over the creation of some of these instruments of financial destruction if bonuses had been staggered, instead of being paid out quickly in lump sums. (And yes, this is a generalisation because some people were not paid out immediately, but I am talking about an industry on the whole). Lesson number two, reward well when deserved, reward fairly because it is the right thing to do, but don't hand it all out at once.

"Education": It seems to me that too many people were involved in financial dealings who had too little knowledge about what they were dealing in. You are rarely too young and never too old to learn new things. Boards of directors, for example, who approved products without asking some of the relevant questions because they felt they should already know the answers, and to ask would be a "loss of face". People who were selling products were insufficiently educated about what they were selling. Not their fault in many cases - it was management pushing sales targets, and telling their sales staff that "mini-bonds" were good. Regulators perhaps not moving quickly enough because they did not fully understand what was going on. Lesson number three; education at any time will never go wrong, and just because you happen to be a senior person and ask a question does not mean that you are losing the plot.

Those, then were the three answers I gave at the Forum last week, and then today it was suggested that every financial crisis is different, and that you cannot necessarily find answers from lessons of past crises. And while I agree that there are always some differences they are usually subtle as very often the basic problems are the same, and I return once more to the lessons from my recent favourite book, The Country Banker, where the author talks of the importance of learning "to distinguish those transactions in banking which are safe and legitimate from those which are unsafe". He cautions about the potential negative influences of the media, he warns of banks seeking to enhance profits imprudently at times when interest rates are low over a long period of time.

All characteristics of this crisis, all comments from a book written in 1885.

So what did you learn in school today, this month, this year, through your career? Whatever it was, it should provide a lesson for the next time, and be passed on - although it won't; no matter what new regulations we put in place, someone, somewhere is going to say "but it's different this time!".

Comments

[hans]

David,

another nice piece keep going

Hans

[Steve Tait]

I enjoy your insights David. Always have. Always will.