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Posted at 4:47 PM ET, 01/25/2011

The Financial Industry Continues to Ignore the Need for Reliable Answers

By Roland Schatz

“All the Devils Are Here” is the title of one of many books which have made headlines since the collapse of Bear Stearns, the insolvency of Lehman Brothers and the ensuing assistance by taxpayers to countless financial institutions in America, Europe and the rest of the world. “Monkey Business” was a second one, “Liar’s Poker” a third and “Casino Capitalism” a fourth in an unending chain of attempts to make the actions of bankers comprehensible. The authors are not tabloid journalists, but employees or experts from science and financial journalism.

The trust meltdown regarding the financial world reached a new level. However, just a few bankers noticed this: Even in 2010, most of the CEOs in hearings put forward the thesis that the subprime crisis had been an “accident“ which nobody could have foreseen and which “had simply engulfed the financial world” like the destructive tsunami which destroyed the Asian coastline in 2005. Even more fatal were the headlines after the hearings in which those responsible for the financial disaster were quoted as saying that, in principle, no one did anything wrong.

In Trust Meltdown I, it was clearly argued that this view of things was only advocated by certain bankers and that the reports in the media worldwide evaluated and judged the events differently: The reputation of the financial industry, already low in the first year after the bank collapses, plummeted to the level of the tobacco industry, an industry of which any newspaper is allowed to write that its products are harmful to the health of consumers. Nothing changed in 2010 in this regard. Quite the contrary: Not least due to the lack of self-assessment and the obvious inability for self-criticism, banks are now rated even lower than the tobacco industry.

This is particularly fatal, as banks themselves could have clearly presented better figures in 2010. This development was, of course, also reported on in the opinion-leading media. Despite this, nothing changed in the evaluation of the industry. Reports in 2010 dealing with management mistakes as well as banks’ lack of willingness to address issues increased it further. Criticism of top management became more vociferous quarter after quarter because they continued to refuse to investigate the real reasons for the loss of money entrusted to them, something which hardly seems likely to prevent a repeat of these mistakes.

If in the first Trust Meltdown Book, the casino metaphor was viewed as a journalistic exaggeration to be taken seriously, then when it comes to this similarly-titled sequel, that lenient view is no longer tenable for one of the most respected economic researchers, Prof. Hans-Werner Sinn. The comparison of an entire industry to an irresponsible gambler who would not even take responsibility for the sequences of his actions is now firmly imprinted in people‘s minds.

Media impact research tells us that such impressions – in particular if they continue unchallenged over a period of more than one year – are difficult to correct. The CEO of Deutsche Bank, Josef Ackermann, (always selected as one of the best amongst its own ranks) might assess this best. Long before the banking crisis, he had to answer to the court in Dusseldorf for a decision customary in the financial world. It is not just the photo of the Swiss-born CEO sporting the victory sign, which was meant in fun, that will haunt the banker until his retirement. All of the participants in those proceedings did not want to read the writing on the wall that, in a functioning democracy, no group is exempted from the norms of society.
It changes nothing in people’s perceptions that Ackermann was able to “buy” his way out of the judgment with an amount in the millions; the CEO of Deutsche Bank will no longer be able to reach the acceptance level of one of his predecessors, Dr. Alfred Herrhausen, despite his multifaceted commitment. One photo is already in place for when the media acknowledge his departure after a 50-year professional career.

In the second year after the Lehman bankruptcy and the largest bank bailout in financial history, the financial world, including stock exchanges, did little to contribute to changing these headlines. Even though most were no longer showing losses for 2009 in 2010, and some had also repaid the tax monies with interest, the same accusations in connection with the subsequent problems (now on the part of countries with low and extremely irresponsibly managed resources that have dried up due to the bailout) dominated the media. Instead of finally seeing themselves as part of society and conducting themselves in an appropriate manner, these same financial institutions that would have filed for insolvency in 2008 had citizens not come to their rescue, got caught out yet again in 2009 and 2010 as they had profit maximization on the agenda at the cost of a part in the community of states. That this was partly done using the monies of those who had just a few months previously saved their workplaces was appropriately picked up by the media. The run on individual banks was introduced in Trust Meltdown I – and in 2010 became reality.

A small ancillary aspect was revealing: an acronym defined by the banking world in 2009 for various states in Europe which had potential or real payment difficulties – PIIGS. This was possibly intended to be a derivation from the readily formulated BRIC neologism coined by a Goldman Sachs expert for the four emerging economic powers of Brazil, Russia, India and China. But after the taxpayers in Portugal, Ireland, Italy, Greece and Spain had paid their contribution in 2008, ensuring that the supposedly creative neologists could carry on with their business, the neologism proved to be telling in more ways than one. To officially describe an entire nation as “pigs” reveals the character of the neologist as well as that of the user. GISIP or SIGIP would also have been conceivable as a letter combination if the creatives had been solely concerned with an abbreviation for the now risky European states. However, it was no accident that PIIGS was chosen.

It makes it clear from the outset that the bankers, now bankrupt thanks to meaningless speculations, again saw themselves as something better directly after their rescue by the taxpayers. In the very second that the acronym PIIGS tripped off the tongue of a Barclays Bank employee, who was, cynically, believed to have previously earned his money at Lehman Brothers, it was clear to journalists that absolutely nothing had been understood by the banks. Likewise, it could also be assumed that almost none of the promised new safety mechanisms to prevent the next bank insolvency would work, because, apparently, it wasn’t just the top executives of Wall Street who had tried to explain their actions that had no sense of responsibility, but their staffs as well. Without this, no turnaround in people‘s behavior can be expected. Middle management is responsible for product development, rarely top management.

This is alarming for one reason in particular: No journalist seriously assumes that his text can actually effect fundamental changes. Only once this text is read and its view shared by several media is hope born. And in the context of Wall Street’s meltdown, the reports were in sync throughout the world. It was then indeed surprising that, despite this, in most of the same banks almost the same conduct was continued by the same people. Particularly as, in the interim, countless specialist books were complementing the headlines and, in 200, 300, 400 or 450 pages, as in “Im Freien Fall – Vom Versagen der Märkte zur Neuordnung der Weltwirtschaft,” by Nobel prize laureate Joseph Stiglitz, in principle revoked licences to operate due to the statements made by Wall Street offenders to the tribunals in Washington:

1. “Yes, they knew what they were doing,”
2. “Yes, they were warned by experts several times,”
3. “Yes, it was clear to them that the products which they bought could not work.”

Everywhere, in the aftermath of such a finding, at least the top management of the respective organizations changed. The current developments in Tunisia show that even in the aftermath of the expulsion of a dictator who ran the affairs of his country into ruin, people expect not only the tyrant and his family to step down, but also, during the subsequent period, painstakingly ensure that his employees do not reappear in government under another title; they must also step down. In the aftermath of the worldwide banking collapse, this was not evident. Here and there a CEO had to step down (the first are now in prison), but a change in the responsible staff did not, in principle, take place anywhere.

And that happened despite hardly a day passing in which people did not read in their media that the controlling bodies did not believe the protestations of Wall Street Managers and imposed significant penalties: the British financial regulator, FSA, decreed that Barclays pay a fine of GBP 7.7 million as well as damages of GBP 59 million to the victims of their incorrect advice. Barclays sold products to the insurer AVIVA without giving buyers the correct information regarding the risks of these two funds.

UBS’ old and new top management made headlines in 2010 with statements that they, in principle, had no knowledge of what they had done. (What CEO of a pharmaceutical company would be left in office by his administrative board or the government if one of his products caused massive damage and he declared publicly that he could not have known that its composition and production might prove harmful?) They were fined by stock exchange regulators in Zurich on Jan. 14, 2011, because they had violated the publicity regulations of the stock exchange previously in 2007. Why did it take so long before the stock exchange finally had the courage to call the proverbial spade a spade? The shareholders of UBS refused to approve the actions of the board for their 2007 annual report – and, despite this, the old and the new management of UBS believed that they could save themselves over time with excuses.

Even the new chairman of the board, Kaspar Villiger, as a former entrepreneur and former member of the Swiss government, was not only highly knowledgeable in the matter but fundamentally also independent in the audit of the company documents, on joining UBS, ultimately had to bear the headlines that he was not delivering the transparency he had promised. His predecessor, Peter Kurer, in an interview with Nzz am Sonntag, even went as far as to say that, in the context of the information demands made of him by experts, the then-CEO Marcel Rohner and the rest of the management, it amounted to “lynch justice in a subtle form.” With the current judgment by the Swiss stock exchange, according to a statement by the commercial lawyer, Daniel Fischer, the way is now clear for an independent body to institute misfeasance proceedings – in particular as the formal approval of the board for 2007 is still pending.

At the head of UBS then was Marcel Rohner, who took over from Peter Wuffli in July in a cloak-and-dagger operation. This event led to massive headlines then. UBS’s corporate customers experienced in 2007 that 9 out of 10 transfers were not carried out by UBS although the amounts were actually shown in their accounts. The chairman of the board was Marcel Ospel, who, similarly to Peter Kurer later, expressed his lack of understanding in response to questions by shareholders, customers and the company and, until 2011, acted as if he and his team had done everything right. But contrary to their protestations of not having known anything – and contrary to the newspaper reports in Wsj, Ft, etc., in which warnings of the massive risks of the subprime business had been sounding since 2001 -- the Swiss stock exchange, after auditing the documents, came to the obvious conclusion that the decisive bodies already knew of the massive valuation losses caused by the effects of the mortgage crisis in the U.S. at the end of July/beginning of August 2007.

This, as a consequence, must of course have had a significant effect on the overall result of the bank. Its own shareholders, and of course the market, would have had to be informed immediately. Instead, the team around Marcel Ospel and Marcel Rohner on Aug. 14, 2007, believed rather in announcing a record result for the second quarter – without mentioning the known risks. That UBS at that time disclosed the loss of CHF 229 million from its DRCM hedge fund indicated that their knowledge of the rule of the duty of disclosure remained unchanged. Why they nevertheless kept the significantly higher risk of their subprime involvement secret, only announcing a general profit warning for the 3rd quarter on Oct. 1, 2007, will have to be explained to the independent bodies in Switzerland and the U.S. by all those responsible during the course of 2011.

As UBS and the conduct of its top management are not isolated cases, it is in the nature of the observer – even if not directly affected by the banks’ conduct – that no new trust can be born in year two after the disaster. After all, all people are ultimately the victims several times over: as taxpayers they (without being asked) had to make their contribution to ensure that an industry was rescued from bankruptcy without being held accountable. An industry which basically owns no product in the actual sense of the word and, consequently, since its establishment, remains liable to prove a service comparable to that of the automobile, pharmaceutical or IT industry. These tax monies are now no longer available for the education of their children, necessary investments in infrastructure, etc. The fact that in Germany the term “no alternative,” used by Angela Merkel when speaking about the various so-called “emergency parachutes,” was chosen as the misnomer of 2010, gives an idea as to how citizens would have voted if a referendum had taken place in 2008 to vote for or against the no-consequences rescue of the banks, and then again in 2010 regarding the support activities for highly indebted countries. But people pay the price not only for the conduct of bankers through the support actions of their governments, to which they did not give their agreement, but, as a matter of course, also receive less interest for the money that they have lying in the accounts of their banks. This does not remain without its consequences: The doubt of people in their elites is growing.

There is almost no sector of society from which people on average receive trust-building information regarding the conduct of its leaders. 2010 revealed not only the continuous violation of the Maastricht Treaty by almost all European governments, and thereby the nonexistent control by the supervisory bodies in Brussels, but the schools and churches also made headlines for their misconduct towards innocent children. Doubt dominates in such a climate. And for the banks, more importantly, the willingness to forgive is not promoted as there is no longer any other leadership group which can credibly stand as an advocate for Wall Street. Governments have again lost the short-term credit they had acquired in 2008 by not claiming the consequences at the latest in 2010. Religious leaders are concerned with themselves, and researchers, two years after the collapse of the financial system, are unable to come up with ideas which would exclude a repeat of that which is not predictable.

For the banks, the problem is exacerbated by the fact that 2010 continued to keep finances at the center of reporting due to the serious crises in Greece and Ireland. People had to read and see that the banks were accused of trying to make money from the weakening of the euro. For people on the other side of Wall Street and the other financial centres, it is not a question of products or market conduct. For them, contributions in the newspapers or interviews, such as with Stéphane Garelli, professor at the IMD in Lausanne and long-time WEF manager, on the “currency war” read very simply: “We have given the banks the shirts off our backs so that the financial system will supposedly not collapse. Two years after the horror stories, we are still seeing no indications as to whether the threats of falling back into a Great Depression were justified or not. We know that our children are no longer receiving the same standard of education in the schools that they did at the time when our tax monies went to the banks. Still, we read that these bankers, who would be unemployed if it weren’t for our money, are again paying themselves bonuses, such as the Credit Suisse boss Brady who has no ethical problems in having CHF 70.9 million paid out to him, and are now under suspicion of weakening our currency.” No politician will be able to constructively argue against such a perception - and keep his position. The increase in extreme parties was announced in Trust Meltdown I – in 2010 this became a reality, and not only in the European elections.

Increasingly, the question is being asked, and the answers, which would have had to be given at least in the opinion-leading media, also do not advocate for an improved climate in favor of banks. Using the example of Germany, the chart shows how, in connection with the crises, the escalation becomes ever greater in the opinion-leading media.

Initially, the intensity of the reporting in the financial system increases. Then, the actual value of the system is questioned ever more extremely due to shocking individual cases. In the end, in the light of this news selection, people come to an assessment of the strength of their own democratic financial system which in no way corresponds to reality: Because the extent to which the people in Germany turned away from the social market economy in surveys, is the same extent to which their personal prosperity increased on average year on year, unemployment figures decreased and, to a degree, workplaces were created, as it should happen only once in the history of Germany. For the first time, more than 40 million officially registered workplaces were reported in 2010 – at an overall population of 80 million. Experts have long talked about full employment, but discussed far more frequently is the fundamental problem that not enough qualified employees are available for the market opportunities on offer.

In principle, at least in the largest national economy in Europe, an excellent environment has been created to sustainably discuss and solve the fundamental problems in the financial world. However, the communication by the financial institutions does not give people the impression that:

a) they are interested in working on the problems which led to the financial crisis, and
b) due to this lack of interest, they are not able to offer any proposals for solutions.

To date, such sets of circumstances have historically always led to action, in particular on the part of those who felt as if they had been fundamentally harmed. Such a “keep it up” attitude toward financial institutions harbors massive risks which they, but even less the responsible politicians, can neither evaluate nor shape.

By Roland Schatz  | January 25, 2011; 4:47 PM ET
Categories:  Roland Schatz  
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