A History Lesson in Financial Greed and Corruption

If we do not learn from history they say we are likely to repeat it. We now have yet another economic crisis brought on by the excesses of Wall Street. This is the third such event since the 1980’s when financial markets were deregulated.

I am reading a great book now called, “The GREED Merchants” by PThe Greed Merchantshilip Augar. He worked in investment banking for 20 years and this book is about how the investment banks played the free market game. It is frightening and the book was published in 2006 BEFORE the current mess.

Although this is a book about investment banking their bad behaviour extends to the wealth management industry as a whole to varying degrees.

The lesson to be learned here is the one I have been pushing hard – don’t trust any financial institution with your money unless there are some serious reforms of the laws governing derivatives, transparency, leverage, and punishment for gross mismanagement and greed.

I’m happy if I put my money at risk when I am made fully aware of that risk and when the fund manager abides by the rules, is ethical and shows me ALL the costs associated with my investment. If I make a loss under those conditions so be it.

But until now they have treated investors with utter contempt and often appear to consider the money invested with them as their own.

In the Preface Mr Augar states,

“The exposure of uncontrolled conflict of interest at the heart of investment banking came not from the regulators who were meant to be in charge of the investment bank but from … Attorney General Eliot Spitzer. ”

He went on to say,

“The new rules left intact a business model riddled with conflicts of interest.”

That model was the fully integrated model which included corporate advisory services, underwriting, in-house trading, research and analysis, wealth management.

In Australia the large banks are highly integrated which is a cause for concern in my view. Whilst these bank are not investment banks as such and appear not to have indulged in many of the Wall Street practices, they have high potential for conflict of interest in their banking model.

What is really of concern though all this happened in 2001-2002. So even though they received heavy fines, nothing was changed. In the main the same people headed up these investment banks and went right back to doing what they did best, parting people from their wealth with high risk investments which netted them fat fees and exposed their clients to possible large losses for their clients.

Why is this relevant to us today? It was still happening until the credit crisis in 2008, a full six years after the last debacle. We need to learn what happened and try to understand it to avoid getting sucked into the wealth machine yet again.

It’s all very well scaring Baby Boomers by saying you won’t have enough for your retirement if you don’t invest in stocks. But if the very financial foundation is being dug out from under the stock markets by the financial industry you can do all the “right things” and still lose your shirt through no fault of your own.

It just happened – didn’t it?

Next time you go into a bank to deposit some money to live on in a bank account, I will bet you they will suggest you would be better off putting the money in a fixed interest managed account. They’ll tell you the returns are higher.

They will tell you it is a fixed interest or enhanced cash account or whatever sound nice and safe. In this extract from, “How fixed-interest funds fare in the money trap” you can see the volatility that can occur and remember you have to deduct the management fees and charges too.

“According to research company Morningstar, there was a difference of almost 6 percentage points between the best and worst-performing retail Australian bond funds last year. The best performer, Equity Trustees’ Premium Bond Fund, returned a solid 6.42 per cent; ANZ’s Fixed Interest Trust a mere 0.74 per cent. Look at global bond funds, where the DDH Global Fixed Interest Alpha Fund returned 8.34 per cent, but the Invesco Global Fixed Interest Fund lost 6.45 per cent. And the blended Australian-global funds where Australian Unity’s Vianova Core Plus Trust was up 9.31 per cent, but an ANZ/ING diversified fixed interest offering lost 1.77 per cent.”

The problem is fixed interest is not like a bank deposit fixed interest – it can lose money. I bet many of you did not realise that. I didn’t until I got my first quarterly report on my WRAP Account -dummy 🙁  I thought fixed interest was just that – fixed interest.

In a bank deposit account the bank has to pay you the interest regardless of what return it gets on your money when it invests it. There are usually no fees or charges. Right now most banks guarantee your capital and interest by government decree.

In a managed account the bank puts your money at risk to get you a return  and charges you a fee for the privilege. There is no government guarantee either.

It’s all about the need for the banks to transfer risk from them to you and get a paid for doing so. You need to understand that. Don’t let them do it to you with money you want to live off, at least until the market settles down.

One Response to “A History Lesson in Financial Greed and Corruption”

  1. […] Greed Merchants” is a book I mentioned in an earlier post entitled, “A History Lesson in Financial Greed and Corruption“. It’s about the Investment Banking business. So how badly behaved can Investment Banks […]

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