November 4, 2010
Two recent articles transported me to lecture hall a decade ago on a brisk Dublin morning. There my fellow MBA classmates and I received a sound dose of advice, delivered with an unmistakable wink of understanding, from a visiting British lecturer: “Banking is fundamentally a confidence game.”
Recently one writer to the Financial Times warned that Keynesians need strategies to avert market panic (“As with the economy, so with finance, it all comes down to confidence”, Letters, 18 Oct). True, but enlightened politicians and regulators must remain wary of bankers’ self-serving agendas to exploit worries of eroding such confidence. Embracing bankers’ stratagems often means submerging debt or re-directing risk which profitably worsen as a function of time and regulatory inattention. Rapid and deep remedial action by officials can stem losses while creating important signaling effects to markets and miscreants alike.
Case in point: the Barings collapse. It was stated that Singapore-based trader Nick Leeson was “… blamed for taking down Barings Bank …” (“Lies, deceit, forgery and missing billions”, FT, 10 Oct). While Leeson’s rogue activities inarguably brought Barings to its knees, London’s oldest merchant bank was dealt the death-blow by an unexpected source. And for reasons most people today would applaud with gusto.
Soon after discovering the Leeson trading fiasco senior Barings executives met in London with Bank of England officials to formulate a rescue plan. My former lecturer knew one of those officials. Barings’ top managers were so maddeningly incessant in demanding their own bonuses as part of the bailout package that the disgusted Bank of England officials immediately ‘pulled the plug’. Barings was flushed into the drainpipe of history.
In 1995 those Bank of England officials displayed insight and backbone by ignoring the sniveling self-dealings of Barings’ top managers. In so doing the former embodied the spirit of 1st century BC Publilius Syrus, a freed slave, who stated “The judge is condemned when the guilty is acquitted.” Could we today coax those eminent officials from retirement to prune the landscape of the banking industry’s current self-inflicted catastrophe?
Since further quantitative easing and bank bailouts are on the immediate horizon perhaps present-day officialdom will recall another observation by that former economic serf: “Some remedies are worse than the disease.” Maintaining confidence requires a double-edged sword best wielded, when necessary, with judicious and swift foresight.
Jim Egan is an Irish citizen and the Principal Partner (since 2000) at privately-held Ferrumar. The company is creating immersive, experiential digital media projects to influence the emotions, brand loyalties and discretionary spending patterns of global 100m-sized online audiences. He also serves on the board of an emerging cleantech company that invents household carbon capture and water reuse devices.Blogactiv Team