A strategic inflection point in the Financial markets.

So as the politicians grill Ben Bernanke and Hank Paulson about the bailout out plan, you cant help wondering what could we have done earlier that could have prevented this from happening? Could banks have better risk management systems? Should they all have signed on Basel 2? Should they have fixed their incentive systems earlier? What happened to their Risk Management systems? What were all the consultants doing?



700 Billion dollars is not a small amount. It is more than the GDP of half of the nations in the low income nations group. For this kind of a crisis to happen, multiple things went wrong. Here's what i believe went wrong:

a) Saying that the banks had weak risk management and monitoring systems is an understatement - but the fault is they were suffering from hubris - I remember during my project with the banks in Malaysia how the foreign banks there were always acting as if they were superior to the local banks in risk management.
b) Excessive focus on growth - the banks were looking for more retail growth in a very competitive market - this led to the "sub-prime" crisis which was the root of the entire problem.
c) The propensity of American's to live well beyond their means - I haved lived in many countries and no where have I seen people living off credit like Americans do. Debt is good is the slogan here!
d) A society in which greed is rewarded and often celebrated - this is a very contentious point in some people's view - I believe in a capitalist society - but the invisible hand has been absent in the US economic society - and that's because the visible hand hand has been absent in some sense
e) Excessive compensation programs that are not tied to risk taking and neither do they punish poor judgement. CEOs of financial companies get rewarded well and rightly so - because they are encouraged to take tough decisions, but they do get punished for poor decision making or destroying value. Risk based compensation needs to be built into the compensation architecture
f) Sophisticated derivatives and exchangeable products that were not backed by real assets - but only some computer based models that created money out of paper - and the real economy is now paying for it!


Does this mean that American banks will lose their efficiency and power? I actually believe this system is now getting purged and going through an inflection point - the market and the products are going to get more sophisticated as is regulation and oversight - the current structure with its incumbent players is not going to exist as we know - but I believe 10 years from now, even more money is going to be at risk than before.

Could thsi have been avoided - maybe is the best answer we can give on hindsight? Can this be avoided in the future? Maybe in this form yes - but not entirely. Why - the same reason why people fight new wars each time.

Wow - What a Ride!!

Its been sometime since I graduated now! So mant things have happened! Obama gets the ticket, Apple introduces new iPod, the Indian nuclear deal gets approved, violence worsens in Afgahnistan, I start on a job search, Merril Lynch, Lehman, 700 billion $ being asked - these are very interesting times! The last two months have been a tremendous learning experience. The American love for debate and discussion is fascinating.

Anway, I will be back with a longer post soon.