The Absurdity of our financial system

The absurdity of our financial system.

I think that when there is a crisis, there is opportunity. There is no doubt that we are going through the deepest and most dangerous crises in our life time and it would really be a shame if our leaders don’t extract valuable lessons out of this crises so that we can first of all come out of it and then make sure we never repeat the same mistakes.

We must accept that over the past 40 years the social norms and solid institutions that encouraged frugality and not spending more than what you earn, have suffered major setbacks. Our society has fallen victim to a mind set that encourages debt, living beyond your means and living for the moment instead of planning for the long term.
In business, we place too much emphasis on money and not enough on trusting and being trusted.
When we should be looking at our careers as a way to help society and do the most good to the most people, we behave more in materialistic ways forgetting our mission and our values and selling our souls to the devil.
We think more like managers whose main task is to do things right, than as leaders, whose most important task is to do the right thing.
In life, we allow illusions to overcome reality. We concentrate too much on things and not enough on the intangibles that make life worthwhile. Too much on making money and not enough on character, without which money is meaningless and life would be a nightmare.

It seems that throughout history human beings have wrestled with the same problems. More than 2500 years ago Socrates delivered a very interesting challenge to the citizens of Athens:
“I honor and love you: but why do you who are citizens of this great and mighty nation care so much about laying up the greatest amount of money and honor and reputation, and so little about wisdom and truth and the greatest improvement of the soul? Are you not ashamed of this? I do nothing but go about persuading you all, not to take thought for our persons and properties, but first and chiefly to care about the greatest improvement of the soul. I tell you that virtue is not given by money, but that from virtue comes money and every other good of man”.

This speech is more than appropriate today; it is in fact very much needed.

It has just been announced that AIG which has received billions of dollars in tax payer’s money, is paying millions of dollars in bonuses to some of their executives.

New York Attorney General Andrew Cuomo said that AIG granted retention bonuses of more than a million dollars to 73 people in its Financial Products subsidiary including 11 persons who no longer work for the company. The top 10 bonus recipients combined received $42 million with the top recipient getting more than $6.4 million.

What is really funny, although I should use the word sad, is that the financial products division of AIG is the one that got AIG in trouble and brought it to her knees.

We are in reality, rewarding incompetence.

I recall the situation with Stanley O’Neal CEO of Merrill Lynch. The bad risks and decisions made during his watch in its investment portfolio exploded in late in 2007 when they had to write down more than 19 billion dollars. Yet Mr. O’Neil’s earnings of $161 million during 2002 to 2007 wasn’t affected at all and the parachute deal he had worked with the firm was paid in full by the board, $160 million more to bring the total to $321 million dollars. Can you believe this? What was that board thinking about?
Merrill Lynch never recovered and it had to be taken over by Bank of America in September 2008.
There is no doubt that on balance; the financial system has subtracted value from our society.
We are in a world that I frankly don’t understand. It seems too many of us apparently don’t make anything. We are simply trading pieces of paper, swapping stocks, bonds, securities back and forth with one another and paying the financial institutions a whole bunch of money. We have now created a monster that could very well swallow us all if we allow that to happen.
According to Jack Bogle, one of the investment’s industry “four giants of the 20th century” by Fortune magazine in 1999, the direct costs of the mutual fund system (management fees, and operating and marketing expenses) totaled $100 billion in 2007. In addition, those funds pay tens of billions of dollars in transaction fees to brokerage firms and investment bankers and indirectly to their lawyers and other “facilitators”. Fund investors are also paying another estimated $10 billion of fees each year to financial advisers. Add to that $100 billion in mutual fund costs a mere $380 billion in additional investment banking and brokerage costs, plus all those fees paid to the managers of hedge funds and pension funds, to bank trust departments and financial advisers and for legal and accounting fees, and the bill comes to around $620 billion annually, at least in the year 2007. God knows what the figure was in 2008 when everything collapsed.

You don’t have to be a rocket scientist to understand that this situation was unsustainable and that the piper has to be paid sooner or later.

Let’s hope that it can be put back together with better regulations, a lot more common sense and less greed and irresponsibility.

I do worry about the amount of debt we are now as a nation incurring in and what the consequences of that will be. If this was or wasn’t the right step to take will very soon be apparent. I still believe that we are a strong and resourceful nation and that in the long run, we will come out of the crisis stronger and wiser.
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