Monday, January 25, 2010

Honest, Mr. President - We Won't do it Again

The Financial Times says this morning that bankers are going to head to Davos to lobby regulators for 'softer reforms'. No surprise there. The thing that caused me to laugh out loud was one banker and Alistair Darling's claims that "inter-connectivity" would solve the problems. Darling says that breaking up the banks and creating separate entities, like President Obama has strongly recommended, is not the point. "The point is the connectivity between them in relation to their financial transactions." Ummm, no that is not the point Mr. Darling. Bankers saying they will use connectivity in future to prevent any further pesky risk issues between departments is akin to your teenaged son saying he promises to use a condom after he got half the Junior class pregnant. You know you can't just lop it off, but surely you would do something fairly draconian to prevent further expensive mistakes.
Preventive measures in the banking industry - the so-called 'connectivity' - have been there for a long time. When I started reporting this technology lark in 1998 there was a massive push for removing product silos using straight through processing and enterprise-wide technology. These solutions have come a long, long way and it is now possible to monitor and control risk on a sub-millisecond basis. Risk across departments can be accessed, measured, monitored. Senior management only has to look at a web page and then say - "Hey, we might be betting the farm here, let's slow down." But they won't. Because moral hazard risk - the biggest risk of all and the one that got us into all this mess - cannot be measured or monitored. Greed is stronger than prudence. Always has been, always will be. Until greed is reined in, moral hazard remains far too tempting. The only way to rein in greed is by tackling the compensation culture of trading firms. Making them stop trading on their own behalf, or at least containing it, is a start. Publicly owned and government regulated banks should not be giving away half of their profits to the traders and management. They should not be betting the farm to make sure those bonus pools stay comfortably bloated. Only when this is under control can the regulators gain control.

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