Deep impact: measuring the fallout of the financial crisis

By Barry Lambert

Most will remember 2008 as the year of the sub-prime credit crisis, near worldwide collapse of the finance and banking systems and the collapse of many highly geared property companies and structured products, resulting in equity markets around the world falling 40 to 50 per cent with many companies and structures collapsing and even more falling 80 to 90 per cent.

This will send shockwaves through our industry and the regulators for years to come and, if we get appropriate responses, 2008 might just be the catalyst for not only some long overdue exposure of morally corrupt US finance executives, but hopefully an appropriate regulatory response.

The impact on our industry will continue for some time:

• early in the year we saw financial planning groups put off proposed ASX listings;
• reports of planners and dealers in financial trouble. There is little doubt we will read a lot more on this and it won’t be nice;
• older advisers will decide it is a good time to retire;
• the number of professional indemnity (PI) claims will skyrocket and so will PI premiums. Those still in business will pay for those who were responsible for the massive increase in claims;
• the reputation of planners will again be dragged through various media and we will all be tarnished with the same brush. No doubt the regulators will respond with more expensive regulation. What our industry needs is a better licensing system that gets rid of those who should not be in our industry.As I have been saying for years, the problem is our licensing system. No point issuing licences to anyone, then overregulating the goodies for the sins of those who should not have been given a licence; and
• it seems to be every month or so that someone is going to jail. And once you have been around for a while you can smell a storm brewing (no pun intended) and everyone knows the disaster it is going to cause. The question that needs to be asked is: could some of these problems be avoided?

Internationally, US President-elect Barrack Obama seems as though he will have the support to clean up the US business houses that caused much of the financial chaos.

When you have the chiefs of Merrill Lynch earning $125 million, Morgan Stanley $62 million and Goldman Sachs $81 million, something needs to be done.

Prime Minister Kevin Rudd also agrees that these rorts on society have to come to an end.

While Australian chief executives don’t earn as much as their US counterparts, the great con that they had to earn millions otherwise they would go overseas has now been exposed.

Paying someone $5 million instead of $500,000 won’t make them any smarter or able to make better decisions. Excessive payments, I suggest, lead to poor decisions as individuals try and justify their payments.

Let them go overseas to earn their fortunes because we can’t afford them.

It is interesting to note that CEOs of Chinese Banks earn much less than $500,000 per annum.

American CEOs have conned US shareholders for a long time as to their value, likewise fund managers in Australia have also rorted the system via higher management expense ratios (MERs).

There is no real evidence that high MERs equal superior performance. By definition, high MERs equal lower returns.

On the back of poor performance, share holders are likely to exert much greater influence on executive and fund managers’ salaries going forward.

If we learn from 2008, it won’t all be bad.

Barry Lambert is the chairman of Count Financial.