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Thursday, February 12, 2009
Management Broke The Banks
Image: © 2009 theirEarth

Searching For Effective Management In Banking

Yesterday, the CEO's of eight of the United States's top banks came to Washington to speak before the United States Congress in front of the House Financial Services Committee. Speaking before House Chairman Barney Frank and the other Committee Congressmen, just two of the bank chiefs, Lloyd Blankfein, CEO and Chairman of Goldman Sachs, and Jamie Dimon, CEO and Chairman of J.P. Morgan Chase & Co. were able to deliver performances that would be considered exemplary for their financial acumen. For the others, unfortunately, there did not appear to be an overall understanding of the banks total operations, including risk management, that they could articulate well or wanted to articulate. 

During the introduction of the Sarbanes-Oxley Act in the United States, which was enacted on July 30, 2002, those investment banks with operations and corporate reporting responsibilities in the United States undertook the steps to put their operations in compliance with Sarbanes-Oxley regulations. This involved a thorough introduction of higher degrees of risk management driven by the Act and driven by the earlier bizarre and illegal behaviour of the corporate executives from companies such as Enron, Tyco International, and Worldcom. Some people blame Sarbanes-Oxley for the current financial crisis but in effect what appears to have failed is the implementation of the Act and the enforcement by the SEC (U.S. Securities and Exchange Commission) of its regulations.

Approximately six years ago, all of the banks in question would have had to have put in place strict internal reporting and risk management processes, driven by Title VIII and Title IX of the Sarbanes-Oxley Act titled "Corporate and Criminal Fraud Act of 2002" and "White Collar Crime Penalty Enhancement Act 2002". In the United Kingdom, for instance, in 2002-2003, Lehman Brothers conducted internal assessments of their UK operations and were creating a risk matrix in all exposure areas with thorough professional analysis of their internal processes.

Somewhere in the period of six years, 2002-2008, some individuals in policy setting positions would have had to have re-manipulated some of their internal risk management processes to inspire the internal leverage chaos that grew within their own accounting regimes. What is interesting now is that the strongest global banks today have leaders who actually know what they are talking about when it comes to risk management, and at least two U.S. bank CEO's were able to demonstrate this yesterday before the United States Congress.

Recent evidence has made it clear that some bank managers have put their own financial compensation ahead of their banks success. For the general public and the corporates from whom the bank's base capital originated, their welfare seemed to be a distant second place. The best executive bank managers understand their bank's operations from the teller to the trade, and in intricate detail, just like the best car executive can put the car together himself and break down its manufacturing costs. Smart bankers understand the risk inherent throughout their operations and put the long-term sustainability of their operations at the core.

A sustainable bank cannot exceed the total combined risk volatility potential that could put them out of business, yet many did this and absolutely needed government cash injections to survive. What is also interesting is that some of the lending projects that the banks undertook under huge leverage, are illiquid and only have massive negative capital value. The decisions made spoke just of sheer ineptitude in understanding business concepts in general, and these are usually part of the first week of a business school.

Globally, it appears the the worst performing bank managers have thought only of themselves, their options, their bonuses, rewarding the collective crew that supports them, and choosing the right time to get out with their personal hoard so they could display it amongst their network. The absolute worst of the crew appears to have brought no real capital growth to society or their bank, but instead capital disintegration. They searched for real capital that they could manipulate, grab, electronically leverage to massive multiples, and eventually destroy, and their own internal accounting was thrown out the window in the process. Thus, here we are today in our present financial crisis that has now culminated in an 'out of tune orchestra' of global proportions. 

But it is definitely possible to hear a better symphony, and how glorious are the best bankers who build real capital to ever increasing capital multiples through clever lending to valid sustainable growth companies. This is the future - investing in sustainable energy (solar, wind, wave and safe geothermal), and then low or zero emissions vehicles, high speed trains, inner-city bicycle paths and bicycle roads for efficient commuting. Re-investing in town communities and the re-establishment of town centres, which in some instances are distant shadows of their former selves also speaks for sustainability. Community satisfaction, economic growth, and total stability starts at the village (town) level and works its way up from there and not visa versa.

Effective global bankers can support individuals and their capital growth ideas, and return honour to the profession. Behind all of this they should have a moral philosophy that cares for people. Through hard work, these bankers assure the continuity of societies around the world by significantly helping to form a strong capital foundation to inspire the collective good inherent in mankind. The opposite behaviour gives no future to this Planet and is no legacy you want to carry out the door!

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