Unapologetic insolence from an aging subversive

Unapologetic insolence from an aging subversive

Thursday, 7 February 2019

Two Reports

Pic courtesy ABC
You may recall, gentle reader, the release, back in February 2011 in the USA, of the  Financial Crisis Inquiry Report.

On this side of the Pacific, on February 1st this year, the report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services was released.

These reports were separated in time by eight years, and set in very different locations, both in terms of purpose and intent, but there are some striking consistencies in their conclusions.

Comparisons are intriguing.

The Financial Crisis Inquiry Report (I'll call it the FCIR) has a summary of conclusions dealing with the causes of the GFC. I'll use the headings for this summary including the prose from the report to keep it simple.

They include the finding that the financial crisis was avoidable, that it was the product of widespread failures in financial regulation and supervision, and that there were dramatic failures of corporate governance and risk management at many systemically important financial institutions..

It also found that a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.

It concluded that there was a systemic breakdown in accountability and ethics and that collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.

The final conclusions were that over-the-counter derivatives contributed significantly to the crisis and that the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

In the case of the Australian Banking Royal Commission (henceforth called the  RCBSFS), Commissioner Hayne lists Four Observations.

Paraphrasing, they are the connection between conduct and reward; the asymmetry of power and information between financial services entities and their customers; the effect of conflicts between duty and interest; and holding entities to account.

Comparing the conclusions of these inquiries is fascinating.

Working from the Australian commission, we can neatly group the findings of the FCIR under Hayne's Four Observations.

Under the connection between conduct and reward, we can group a systemic breakdown in accountability and ethics and collapsing mortgage-lending standards.

Grouped with the asymmetry of power and information between financial services entities and their customers we find a combination of excessive borrowing, risky investments, and lack of transparency.

Under Haynes' holding entities to account. we can align widespread failures in financial regulation and supervision, and dramatic failures of corporate governance and risk management.

The RCBSFS observation of the effect of conflicts between duty and interest cannot be characterised quite so neatly. It actually conflates references to failure of corporate governance, and accountability and ethics.

There is one very clear thread that runs through the findings of both reports. The yielding of financial institutions to unbridled greed without any concern for the consequences to the consumers of the industry (or more correctly - the service) is stark and clear. 

In the case of the GFC, these consequences went well beyond the local scene, of course. The term "collateral damage" comes to mind. Depending on how the politics pans out, collateral damage could occur in terms of the brokerage industry in this country, 

The cliché holds. When Wall St sneezed, the rest of the world caught cold.

What bothers me about the financial services industry, both here and in the USA, is that those responsible for the damage seem quarantined from penalty. 

We know what effect the GFC had on Australian workers. It's been studied. The effect on American and British workers, especially the middle class was comparatively worse.

And the effect on the Masters of the Universe, the traders and financiers responsible for the whole GFC catastrophe? Not much.

I won't be holding my breath to see any local penalties from the RCBSFS. That's not how the finance industry rolls..

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