21st January 2009

A little bit of history repeating itself

Not quite, as no-one is in jail - yet!

I read with some interest today about banking “crashes” and the ways in which regulators and governments of the day dealt with such things. In particular, one article caught my eye about Nick Leeson, the rogue trader whose unchecked risk-taking caused the biggest financial scandal of the 20th century.

The collapse of Barings Bank (personal bank to HM The Queen) in 1995 and Nick Leeson's role in it is one of the most spectacular debacles in modern financial history. How could one trader bring down the banking empire that had funded the Napoleonic Wars?

How indeed, but perhaps more importantly, what happened to him? Well, he was eventually arrested in Frankfurt, Germany, spent a few fraught months trying to escape extradition to Singapore. He failed and in December 1995 a court in Singapore sentenced him to six and a half years in prison.

The scale of losses today seems to indicate that not much has been learned since 1995. Is this the fault of the FSA, the banks, their accountants or is it down to the bad risk management within all of these organizations?

What seems certain is that no one is going to jail this time. Clearly excess and greed to get profit at any cost was good for some, yet the success that generated such extreme reward for some failed to produce returns of more than 7% on many traditional, mainstream investment products in the boom years that ended in a crash landing last year!

For IFAs this has been a difficult time and for all who see complaints in relation to the failure of various investment vehicles, it is the IFA that carries the can, not the manufacturer of the products that have performed so badly.

Last year one of the big four accountancy firms reported that around 40% of fund managers in mainstream investment groups worldwide had brought financial instruments that they did not understand or risks that they could not assess, indeed it is felt that the unwinding of who owes what to whom at Lehman Brothers could take 10 years.

We are where we are, but, the very regulators, bankers, politicians and auditors who are now trying to restore credibility to the financial system are the very individuals on whose watch this crisis occurred.

Should we call a “time out” at this stage and think again about who is accountable and take steps to ensure once and for all that we have a regulatory system that is fit for purpose?

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