What If an Investment Banker said this in 2006

Can you imagine the head of one of the big investment banks at a news conference in 2006 stating that his company was in danger of becoming dangerously over-leveraged and so was going to stop taking on what is now known as toxic debt.

Also what if he admitted he did not understand what these exotic derivatives were or how to value them if the market turned down. It is not unreasonable for a responsible head of an investment bank to consider a market downturn and plan to protect his bank should it happen.

What if he found out none of his researchers and marketers and sales staff understood the long term affects of these debt instruments either.

What if he went on to say that he had discovered that many of the “MBA young turks sales people” had been encouraged to sell sub prime and other “complex” stuff to their clients and he was putting a stop to it immediately.

And he believed the right thing to do was to asked all those clients that had been sold those products to contact his office so he could take them back and refund their money in full.

You guessed it, he would probably be sacked on the spot after the investment bank’s stock price fell through the floor.

His competitors would openly attack him. The press would have a field day with him, and investors around the world would be very angry with him. It is likely his reputation would be ruined.

Even though it may not spook the rest of the market it could certainly “damage” it. That word “damage” is a relative word. The damage may well be much smaller than has actually occurred by NOT admitting a problem.

He would be accused of trying to wreck the markets and destroying shareholder values.

It is also possible that the government and the regulators would be lobbied by the financial world to charging him for gross market manipulation or some such equally trumped up charge. The public would probably say it was a good think too. How dare he spoil the investment party of the century.

Even though he would have been doing the right thing by announcing this as soon as he realised what was happening, he would be hanged, drawn a quartered.

This is the problem. We have already seen how Roubini and Schiff have been ridiculed. Roubini is known as Dr Doom.

The problem is these Investment Bankers must have known what was happening. Their boards would have seen how much more money their derivative departments were making. Many of these executives and board members have been in the financial world for 20 years or more. During that time they had seen several booms and busts.

They know their business. That is why they were the heads of their investment bank.

Good business people know their long term averages, their key business parameters and how their business performs over the long term. They know when they are experiencing a bubble or a trough. The problem is they chose not to find out why the bubble was occurring. Ostrich Management came into effect.

Those that might have considered doing something about it might have voiced their concerns but been shouted down or they just did not have enough courage to say something.

Governments too didn’t want to ruin the party because to stop it would have seriously eroded their tax income. I believe New York is going to suffer a large loss of tax revenue because the Wall Street Bonuses have been cut significantly this year.

So it seems appropriate to blame Mr Greenspan for keeping interest rates too low for too long. But the Investment Banks could have shown some business ethics and fiscal discipline rather than waiting for Mr Greenspan to discipline them by raising interest rates. Government Regulators with all their financial tools must have known there was a bubble and did nothing to reign it in.

The US Government realised it was forcing banks to make loans to people who could not afford them but did nothing.

Private citizens knew things were just too good to last and did nothing to stop their own debt binge either. That may well mean you too.

It is for just these reasons that things are unlikely to change and it is unlikely many people will be charged for this gross mismanagement and irresponsible behaviour. Too many people abdicated their responsibilities either to their citizens, their clients or themselves and their families.

So it is up to you to learn how to protect your nest egg. No one is the least bit interested in you and your nest egg unless they can make money out of it. The responsibility rests with you.

One Response to “What If an Investment Banker said this in 2006”

  1. […] I wrote about the dangers to an executive who “blew the whistle in my post, “What if an Investment Banker said this in 2006” […]

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