Wheeler-dealers laughing all the way to the bank

by | Sep 15, 2009 | Economy & Markets, Finance & Tax

THE party rolls on. Just one year after the collapse of Lehman Brothers, and the most tumultuous days in the markets since the Great Depression, the bonuses are back, the debts have shifted from private to public sectors, and little seems to have changed.

The locusts, you might say, have simply swarmed to another paddock. In Australia, despite being underpinned by the taxpayer through assorted guarantees and protections, bankers awarded themselves pay rises last year in the order of 6 per cent.

Markets have recovered in inspiring fashion since their nadir of early March yet, in some asset classes, decades of wealth have been wiped out thanks to the exotic products concocted by fee-hungry financial engineers. And let’s not forget the leveraged products and awry advice which led to the demise of Storm Financial Group and its ilk.

The global financial crisis has turned economics on its head. Economists didn’t see it coming and, amid the rancour, Nobel Prize winners Joseph Stiglitz and Paul Krugman have called for an overhaul of the ”dismal science” as it is known. Over the weekend, Stiglitz questioned the GDP ”fetish”, saying the obsession with this benchmark ignored critical issues such as the environment, the quality of production and leverage. It was the latter which brought the crisis on, and which has quickly increased – at the household level at least – since the recovery began earlier this year. Plus ca change.

In its immediate aftermath, the wreck set in motion by the fall of Lehman Brothers brought financial markets to a standstill as banks around the world stopped dealing with each other, fearing counterparty risk. Who knew what exposure the other had to Lehman? Briefly, world trade contracted by 40 per cent, recession put millions out of work and, on IMF reckonings, the cost of the GFC is some $US4 trillion.

The greater ramifications of the collapse of Lehman, however, lie in the new ”moral hazard”; that is, the dilemmas thrown up by deploying taxpayer dollars to bail out failed corporations. Unlike its rival Bear Stearns, not to mention AIG and a raft of other financial institutions, Lehman was not deemed ”too big to fail”.

Now, regulators see the interconnectivity of financial markets is so great that the risk of ”letting one go” is too much to take. Counterparty risks bump rapidly, and unpredictably, from one institution to another.

And this plays straight into the hands of the players who got us into the mess in the first place. They know they will be bailed out should things get hairy, and with that knowledge they can comfortably take more risk.

This goes for Australia, too, where the banks were underpinned via emergency measures such as the deposit guarantee and by the blind eye turned to takeovers. Westpac took St George and RAMS; the Commonwealth Bank snaffled BankWest on the cheap; and new loans are almost exclusively written by the big four banks.

The clock has been wound back 20 years. The reforms of deregulation are lost. The price of averting systemic collapse may have been worth it, but it has been high.

Around the world there are more reviews and inquiries than you could poke a stick at but little evidence of substantial reform – particularly for the intermediaries such as bankers who risk other people’s money.

While the savings of ordinary Australians were decimated, the money managers and assorted advisers and transactors merely took a haircut on their bonuses.

Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.

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