The next big financial scandal

Two of the most remarkable characteristics of the long stock market boom of the past decade or so have been the almost endemic presence of financial scandal and the persistent attempts  by business leaders to claim that it’s all due to a “few bad apples” and should not lead to “over-regulation”.

Throughout the past few centuries there have been regular cycles of boom and bust; bubbles followed by regulatory crackdowns; and, cries that we have now learnt from our mistakes and it won’t happen again.

Yet, if you think back over the past decade or so the range and frequency of scandals is astonishing. Dodgy research and recommendations; dishonest behaviour over commissions; and lots of examples are just some of the problems. It appears as if not only is there more money washing around but that more of it is getting skimmed off.

The first, and still perhaps the most spectacular, were the savings and loans collapses in the Reagan era. Losses totalling billions of dollars were ultimately met by US taxpayers. Some of the funds – never returned by the way – ended up with Mother Teresa’s operations in India along with the donations from the various dictators that lady cultivated.

Since then – every six months or so – another big name or another industry cops it. The New York attorney general, Eliot Spitzer, alone has uncovered scandals in broking, insurance broking and has now discovered that payola is back in the radio industry.

Perhaps the biggest difference is the sheer size of the sums involved. Admittedly this is relative. The Scottish losses on the Darien venture are, in nominal terms, small change for large companies today, even though the sum wiped out was probably greater than the annual Scottish GDP at the time.

It is also interesting to look again at Trading Places, the very funny film about commodity trading. The surprising thing is that the sums involved were tens of thousands for salaries and millions for deals. Today it would be millions and billions.

But probably the most important question is: where will scandal and/or disaster strike next?

Over the past month or so The Economist has been running a series of articles which suggest that superannuation (pension funds in the US and UK) and mortgage-backed securities might be good places to start looking.

On October 30 The Economist said: “literally billions of dollars have been conjured on to firms’ balance sheets and profit and loss accounts in recent years, flattering reported earnings.” On November 19 it reported that British Airways pension deficit was around 70 per cent of its market capitalization and that companies such as Volkswagen also have hefty deficits as well. In the US the SEC is looking at the problem and there is talk of new accounting standards but one wonders whether a disaster is just around the corner.

In Australia we have systemic rip-off. The super guarantee is, in effect, a tax which is handed over to large financial institutions which then legally skim off fees, charges and commissions. Fortunately more and more Australians have their super savings in either DIY funds or industry funds where the returns are better and the fees are lower. The Government’s long-delayed choice legislation will no doubt channel more of the public’s money out of the hands of the large private funds – a rare example of a beneficial unintended consequence of legislation.

With mortgage-backed securities the problem, according to The Economist, is that changes in interest rates and the housing market could lead to huge losses for US banks. In Australia the Reserve Bank Governor, Ian Macfarlane, has warned about sliding credit quality in Australian bank lending.

So – the apocalypse may not be around the corner but the indications of where the next cries of anguish will come are fairly strong. In the US, with pensions, the answer will be simple – the companies will default and the taxpayers will pick up the bill just as they did with the S&Ls. In the rest of the world it might be messier.

…and as for housing debt, who knows?

Earning capital

George Dubya, speaking after his election win, said: “I earned capital in the campaign”. This could be the most significant feature of the whole election – the first time in his life George has actually earned anything, rather than being handed it, bailed out or generally looked after by various Texan and Saudi businessfolk. But then, I guess, nothing is really different. Others “earned” this for him too, as anyone who thinks about what might have happened if he had been left to his own devices during the campaign can imagine.

Family first

In our local council election we have a candidate who appears to be Family First – or at least that’s the slogan he’s using on his campaign material. What’s fascinating, if he is Family First, is that he has a name straight out of John Bunyan – Ian Goodfellow.

He’s not going to win because it’s a straight two-way contest and the other candidate, Janet Bolitho, has got both community and ALP endorsement. But they do seem to be everywhere.

Arts and values (1)

At an arts organisation meeting last week discussion fell to the fact that we urgently needed– all over again – to argue the case for culture and the arts.

While ever-conscious of George Steiner’s comments about people listening to Mozart, reading Goethe and then going off to tend gas ovens – there is an overwhelming case that the arts are an integral part of the humanist option in the search for values. At a time when everyone is saying values are important, the right-wing media does everything it can to suggest that authentic cultural values flow from Australian Idol and John Howard and not those awful elitist arts. Indeed, even Labor Governments sympathetic to the arts often see them mainly in terms of their impact on innovation and economic development rather than supporting arts for arts sake.

The discussion was still in my mind when I went from the meeting to a performance of the excellent young Australian string quartet, The Flinders Quartet.  For most of the night it was actually a quintet, being supplemented for pieces by Richard Mills and Brahms. But the striking thing about the quarter is that it has done all the right entrepreneurial things. They have a website; have organized stints with ABC Classic FM; arranged a residency at MBS Fine Music; made a CD; organised sponsors; and so on.

Yet at the interval –after they had played the fifth movement of Shostakovich’s Second String Quartet – you couldn’t help but think all the entrepreneurial activity would be irrelevant if it were not for the fact that they are wonderful musicians who can play those last few demanding bars of Shostakovich so well.

Arts and values (2)

At an Opera Australian performance the other night it was delightful to see that the dinner suit seems to be in retreat, even at opera opening nights.

One of the pleasures of being President of the Melbourne International Arts Festival was being able to end the custom of dinner suits on opening night. Along with the Victorian Arts Centre CEO, Tim Jacobs, I’m still trying to end the custom of ties as well but that’s a bit harder. But on Saturday a quick check seemed to suggest that there were more people out of dinner suits than in them – except for the official party.

It has been said that a sociological oddity of western societies is that the upper class male fashion of one generation becomes the standard attire for head waiters in the next generation.

Thus white tie and tails – correct evening attire once – came to be worn by Maitre d’s, who then ended up wearing dinner suits – correct evening attire once for dining domestically – after that fashion passed. Today – even head waiters tend to draw the line at dinner suits. One wonders when others will too.

Fallujah and Vietnam

A week or so ago I wrote about the similarities between US rhetoric around Iraq and Fallujah and that around Vietnam.

Over the past week the similarities grow stronger. Fallujah had to be secured before the election – but it seems some 300,000 of the population won’t be back there until at least February so that explanation now looks a bit problematic. Even sounds a bit like destroying places to save them.

And surprise, surprise. What happened when troops from around the country were brought to Fallujah to pacify it? The insurgents simply took over the places where the troops had left.