American's Banks Failed Corporate Governance! (Part I)

-related to P1 and P3 of ACCA, and to a certain extend American taxpayers

American Capitol Hill interviewing Top 4 largest Banks’ CEO
On January 13, 2010, four bankers of the apocalypse strode into the Congressional hearing room and formed a crooked line. They raised their hands haltingly, looking at one another as if to see whether the other guys were going to do it, too. It was one of the more indecisive swearings-in you will ever see on Capitol Hill.




Pic 01: Super-millionaires CEO taking oath






Wall Street bankers took oaths at Wednesday's hearing, from left, Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America.


Pic 02: CEOs who are also Chairmen in their firms







Four of the nation’s highest financial fliers took their places before the 10-member Financial Crisis Inquiry Commission charged with determining the causes of the nation’s financial debacle.

The bankers — Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America — joined a gallery of titans who have suffered through this ritual: tobacco executives, automakers and baseball’s steroid users, among others. Few Americans remember what they said, but the images endure as cultural mug shots.

These financial leaders with their colleagues of other failed banks collectively almost brought the financial sector to a standstill where banks froze and daren’t lend to another fearing that the borrowers may go bust like Bear Sterns, Fannie May, Freddie Mac and Merrill Lynch. Since the finance sector is internationally connected, it quickly brought an economic tsunami of chain reaction, the worst seen since World War II.

What is shocking is these CEOs justifications of “We didn’t know” and superficial apologies for the great risks they took which if turns out to be profitable, they take huge bonus and if losses incurred, then the stockholders suffer with the balance paid by taxpayers. Is a case of “Heads I win, Tails you lose” scenario. For the record, Goldman Sachs bonus will increase over 80% to a staggering US$9.1billion. These guys have quickly forgotten that Taxpayers bailed them out, giving them new breathe of life and went on blatantly congratulate themselves on profit recovery with huge bonus.

Here are some issues, and see if you can apply P1 (ACCA Professional Accountant) which advocates Anglo-Saxon Corporate Governance. Interesting to note that the financial tsunami was in USA and not United Kingdom. Bear in mind that ACCA adopts principle base governance of United Kingdom instead of USA Rules base governance.

1. Failed risk management. John Mack of Morgan Stanley said that the derivatives trader high income could be matched by a risk manager. This implies that risk manager too will profit if a derivative trade turns profitable. There is serious self-interests threat as the risk manager who is suppose to watch stockholders interests would go hand in hand with traders to bet big and win big.


Pic 03 : The sharp chairman, Philip Angelides.










2. Nonsense arbitrage. Lloyd Blankfein said that when they are uncomfortable with a trade position, they would go out and buy insurance on the downside risk. The chairman, Philip Angelides, sums it so well saying, “Silly! Its like you sell a car with faulty brakes to a customer and then quickly buy insurance on it (in case the customer sues you).”

3. Failed governance. Clearly institutional investors are partly blamed since they egged these fat cats to take excessive risks in exchange for short term gains.




Pic 04: Sach's office (USA), fast way make millions using fools' (i.e. stockholders and Taxpayers) money.









4. “Smart” bankers as a veil of greedy bankers. These men claimed and even boasted that they have top talents to develop sophisticated banking intrusments to suit the market. But in truth, its plain ridiculous like how can you extend a housing loan of 110% of the purchase price? Note that the housing prices has escalated to a bubble level ie ridiculous valuation? Though warned in the market that house prices were unrealistic, they claimed that they are caught unaware of the arupt 40% drop in sub-prime properties. I don’t know if they are stupid (highly unlikely case, Mack is a banker for 40 years!)or this is plain greed of self interest.


5. Over leveraging risk. The four banks collectively holds derivative exchange rate contracts worth US$266 trillion which is 20% of world currency derivative trade. If the contracts turn against them, this time financial meltdown we saw will be peanuts. It will be Financial Armegeddon! American currency will turn valueless since no American banks can honor their contract and there is no alternative currency to flee to. We could be thrown back to Stone Age.

6. Powerful lobbying. Blankfein openly and shamelessly lobbied on live television that despite the mess he and colleagues created, he pleaded, “Please do not regulate us!... Let us contribute to the economy!” Yes, that is right, they helped make 26 million Americans unemployed. Here politics are at play. Government makes craziest decision as they too are humans being arm twisted to bow to pressure from powerful lobbyists.

In my next article i will highlight the lessons we can from Krugman, Nobel Laureate and professor of economics at Princeton University on the current financial and economic recession.