1. the gulf | February 21-27, 2009 33
opinion
A
topic that is attracting
more and more atten-
tion, both in the Gulf
and internationally, is the need
for greater disclosure. Indeed,
the economic slowdown is, in
large part, driven by a lack of
fair disclosure.
Investment banks took low-
grade credits, bundled them up
with collateral and sold them
to unsuspecting customers as
AAA-rated and secured. Now,
of course, the same credits
are referred to as toxic assets.
Had buyers of such debt been
given fair warning of the risks
of such ‘assets’, it is unlikely
the market’s appetite for them
would have been as great.
Yet one must take care not to
enforce draconian penalties for
a lack of disclosure. In mid to
late 2008, many chief execu-
tives of banks claimed that
their balance sheets were strong
and that they would not require
a capital infusion. Lehman
Brothers and Merrill Lynch
made similar statements only
days before filing for bankrupt-
cy or being forced to merge.
What would have been the
outcome had Dick Fuld or
John Thain, chief executives
respectively of the two institu-
tions in question, stepped up
and told the market that things
were in bad shape and that, if
they did not receive a bailout,
they would go into bankruptcy
by the end of the week? We
thus have a dilemma. Should
management be forced to make
full and frank disclosure at
all times? Or should they be
allowed discretion? I would
argue that fair disclosure is
insufficient; the real issue is
one of ethics and accountabil-
ity. Had the industry operated
in a more ethical way, with
those involved taking responsi-
bility for their actions, I doubt
we would be in the situation
we find ourselves in today.
What drives many to break
ethical boundaries – either by
misinforming investors, running
ponzi schemes or by failing to
comply with regulations – is
greed. The system fails when
malign interests find that, for
them at least, it is an asym-
metrical bet, giving them all the
upside but little of the down-
side risk.
Indeed, many chief execu-
tives of banks and managers
of hedge funds made millions
in incentive payments, not by
running organisations that were
best of breed but by leveraging
their balance sheets. Yet when
their organisations eventually
failed, few such managers were
made accountable. If bank-
ers, investment managers and
others in the financial markets
knew that their own capital
or savings were at risk, they
would have been far more
conservative in the way they
operated.
For ethical behaviour to
become the norm, regula-
tors must claw back bonuses.
Chief executives found to run
organisations for their own
benefit, rather than that of all
shareholders, should pay a
price. Fuld made close to $500
million in salary and bonuses
between 2000 and 2008. Has
he been required to
pay back a cent to
Lehman Brothers’
creditors? No.
What role should
government play? The
US administration has already
spent billions of dollars bailing
out the country’s banks. The
same is happening elsewhere
and in the Gulf. While many
in the market and government
argue that this is imperative,
the way in which the bailout is
being done is open to ques-
tion. By buying toxic assets or
providing debt financing to fail-
ing institutions, the government
is bailing out the shareholders
and management at the tax
payers’ expense. This opens
up the issue of moral hazard
under which bankers have little
to lose by leveraging up and
chasing profits (and bonuses)
because the government will be
there to rescue them.
It also means that, once they
are bailed out, these organisa-
tions, which are often poorly
managed, debt-ridden and
bloated, can compete with a
lower cost of capital than their
rivals who did not require help.
As Jim Rogers, co-founder with
George Soros of the Quantum
Fund, puts it, this is akin to
taking money from
competent people
and giving it to incom-
petents.
It is therefore up to
governments, regula-
tors and others, such as
the sovereign wealth funds, to
make accountable the organisa-
tions they rescue. Any bailout
should be carried out at the
level of common equity, giving
the rescuer the ability to dictate
terms and to cut manage-
ment where justified. By the
same token, regulators need
to ensure that practitioners
are properly trained and that
rules are enforced. Above all,
regulators need to be proac-
tive, not reactive. Those who
transgress accepted standards
of behaviour need to suffer
financial pain. Only then will
there be symmetry between the
interests of managers and those
of investors; and only then will
institutions operate in the best
interest of shareholders. <
Robert Aspin has more than
14 years of international experience in
the financial sector. He has submitted
an application to the Central Bank
of Bahrain to establish an asset
management firm
Disclosure
No gain without pain
Illustration:TimGravestock
Any news? Any views? Email managing editor Stan Szecowka – stang@tradearabia.net – your opinion counts
by Robert Aspin
thegulf@tradearabia.net