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How bankers threw the world into crisis

“Houses of cards, chickens coming home to roost – pick your cliche. The new low in the financial crisis, which has prompted comparisons with the 1929 Wall Street crash, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.
We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures – yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.”

Joseph Stiglitz, The Guardian (16 September, 2008)

At the time of writing, the American stockmarket has just recorded its greatest one-day fall since ‘9-11’. Merrill Lynch, one of America’s largest investment banks, has just been sold in distress to Bank of America. Lehman Brothers has sought bankruptcy protection – after a proud 158-year history. Earlier in the year Bear Stearns was picked up for a song by J.P. Morgan. The world-famous (and once world-leading) Citi had to be bailed out by Dubai financiers. AIG, one of the world’s leading insurers, is also in deep doo-da.

What is happening here? How have we got to a place of such high drama? Joseph Stiglitz, renowned Nobel prize-winning economist, pulled no punches in The Guardian this week: “The present financial crisis springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complex transactions were designed to move risk and disguise the sliding value of assets… as people wake up to the smoke and mirrors in the financial system, as people grow averse to risk, losses occur; the market as a whole plummets and everyone loses. Financial markets hinge on trust, and that trust has eroded.”

Sadly, the reverberations will be felt most acutely by those at the bottom. Layoffs by US banks are expected to number in the tens of thousands. Families are going to be stranded without income, and without any immediate prospect of new employment in the current climate. Job losses (and insecurity) will have an impact on consumption, leaving a demand hole in the world economy that is going to afflict many other countries and industries.

We in Kenya must watch and learn. The irresponsibility of a few hundred executives is going to lead to misery for millions. The abdication of duty by boards of directors is going to be catastrophic. And the willingness of regulators to look the other way while bankers play markets like a casino is an utter shame. The infection came from a few, but was allowed to spread unchecked.

It is not enough to have innovative strategies, set stretch targets, reinvent industries and create ‘blue oceans’. Those who designed the dangerous new financial instruments based on sub-prime mortgages (the cause of the contagion) thought they were doing all those things. Business needs an ethical core to be great, and this places a great burden of responsibility on CEOS and directors to do the right thing – whatever the circumstances. Without trust and confidence in the system, capitalism has no basis; everything falls like a house of cards.

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