2008/04/13

'Worst crisis since Depression'

Robert Elstone, ASX Chief Executive, says that Australia faces the 'Worst crisis since Depression'. He explains that

Importantly, issuers (users) of capital will better appreciate that the financial sector is not there to purely be accommodative to the real economy.

I think this alone explains the current crisis.

WE are in the midst of a global financial crisis inspired by a potent combination of forces.

A drift in fiscal and monetary responsibility in the US, care of the "War on Terror", has been accompanied by a meltdown in the US mortgage market and a failure of intermediation by several global investment banks.

In this decade of easy credit, access became a right with fewer obligations and leverage became mainstream for households and investors.

This used to be called 'deregulation'. Now, it is called 'Oh shit! We are all going to die!'.

These forces have coincided to produce the worst financial crisis in the US since the Great Depression, which globalisation has exported to other financial economies, including Australia.

Now, globalisation is a bad thing because we all get to share the pain.

Bank borrowing and lending spreads have substantially widened, diversified financials and banks have been savagely re-rated, financial group failures are openly speculated on, and vocal stakeholders have blamed every regulator in sight, irrespective of where regulatory responsibilities actually lie.

So much for macro-economic reform that remove obstacles to innovation. What were once obstacles are now seen as crash barriers.

In late March 2008, US Treasury Secretary Henry Paulson released a blueprint for reforming the structure of financial services regulation in the US along the lines of the "twin peaks" model that prevails in Australia (recently endorsed in the IMF's Global Financial Stability Report).

Last February, I argued that a mini Wallis-style review of the Australian financial sector was logical, once the new Australian Government had passed its first test of fiscal responsibility with the May Budget.

In other words, once Rudds finishes screwing the battlers, he get around to giving the financiers more assistance and less oversight.

Much has changed in Australia's financial sector in the decade since the Wallis inquiry in terms of the development of opaque OTC derivatives, the depth of transparent exchange-traded derivative markets, credit and collateralisation practices, particularly in the mortgage and (share) margin lending markets, and the enormous growth in self-managed superannuation funds.

There is a lot of shit going on that nobody understands.

Irrespective of whether the Government pursues a "whole of system" inquiry or a series of more targeted Green Papers as referenced by Senator Sherry, the opportunity should not be missed to strengthen Australia's competitive position as a financial economy in much the same way that governments in Singapore, Hong Kong, Ireland, Switzerland, the Middle East and China have done.

The government's attitude should be one of 'Don't Ask', while the financial market's would be 'Don't Tell'. It is not the Government's business to stop the financiers from screwing up the financial system.

The next generation of vital microeconomic reform in Australia will rely heavily on the quality of our financial market infrastructure to deliver longer-dated price discovery for industries with long-dated asset lives, a forward price for carbon to facilitate technology substitution decisions, more transparent risk-sharing arrangements in public/private partnerships, and a regulatory framework that continues to balance the interests of capital providers and users.

What the financiers want is government bail-outs when they stuff up.

Importantly, issuers (users) of capital will better appreciate that the financial sector is not there to purely be accommodative to the real economy.

Meanwhile, on planet Earth, life goes on...

Conversely, supporters of an ever more robust continuous disclosure regime also need to take account of a listed entity's right to preserve confidentiality for competitive reasons and not have to spend its resources quashing constant rumours and often baseless speculation.

Stop asking questions! The financiers have no fucking idea what is going on. Questions can cause a loss of confidence because people might find out things.

Market events in Australia, such as the circumstances surrounding Tricom's woes and Opes Prime's failure (and Lift Capital's entering into administration), have reinforced the case for higher resource levels for corporate regulator ASIC to deal with record numbers of ASX frontline referrals and to address regulatory gaps, rather than for radical surgery to overhaul the entire regulatory framework.

There are a lot more bad apples. This does not mean that the whole orchard is bad, just a sizeable portion of it.

Calls in the media for severance of market supervision from market operation and risk management, or for the dismantling of the "twin peak" separation of corporate and prudential regulation, carry their own costs, risks and unintended consequences, which those making the calls would seem to have little interest in taking accountability for.

Stop trying to find out what is going on! Nobody knows. But nobody should know that nobody knows.

Legislative initiatives in the area of "short selling" of equity securities, a Treasury review of disclosure requirements for equity (swap and contracts for difference) derivatives and an RBA review of settlement risks with stock lending are necessary and welcome moves from the new Government.

Damm that free market! How dare the free market determine that the real price of those assets is lower than whale shit!

Recent market events in Australia have spanned the gamut of corporate and prudential regulation, as well as the market for corporate control.

Not that the whole system is fucked! No! That is merely an incorrect impression.

They have an impact on the policy considerations for the evolving market microstructure of Australia's wholesale markets in a way that the Financial Services Reform legislation of 2002 did not cater for. Any claim that such legislation envisaged a world of competition for market services is very different from it providing the practical apparatus for implementation.

Look, how could anyone know that relaxing rules would allow dodgy practices to arise? These were all nice people with ideas that turned out to be crap. Besides that, how could anyone know?

The investment community has every right to expect that policy decision-makers would only allow a significant structural change after a rigorous cost/benefit and risk analysis, conducted with the hindsight of recent market events, and with a high level of confidence in the outcomes. Moving towards such a world without appropriate planning and transitioning milestones, as well as clear market integrity protection mechanisms, would be unwise.

The panic starts now!

Recent market events will create a linkage between what were hitherto considered private contractual arrangements, in areas like stock and margin lending, and the Corporations Law.

They certainly provide the case for ongoing review of areas of vulnerability and opportunity.

This is especially so if we are to pursue our national interests in infrastructure, climate change and the growth of national savings for an ageing population, and ensure the Prime Minister's stated aspirations for our financial economy are realised.

White collar crime is such a nasty term. It may be appropriate and applicable but there is no need to use such gutter language.

And for you people, remember that the stock market holds your life savings hostage. So be nice to them. They might return some of it to you some day. Might!


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