There is a palpable sense of foreboding, fear and anger by investors and the ordinary public at how matters have been allowed to be where they are today. Despite sweet talk and assurances from policy makers and politicians that things will sort out in the end, the lack of confidence in the financial markets is more acute today compared with the last great crash of October 1987. During that crash, investors took on board a sense of globalization, and that markets had become interlinked though computerized share trading which accentuated market falls. Today, both investors and the public are wondering where the current crises will end and if their economic future is now at risk.
However, it is the feeling that some players in the global financial markets have betted on risky financial products, dressed them up as risk-free, and sold them on to less sophisticated investors, and to have got away scott free in the process, that is enraging people. The sense of injustice is compounded by the feeling that no meaningful punishment is meted out to fit these new financial crimes, either at the individual or the institutional levels. Resignations and mealy mouthed apologies — even if they are made before congressional policy makers — are not enough. The public has seen generous payoffs and “golden goodbyes” running into millions of dollars for those that have led their financial ships onto rocks, probably to buy off their silence, while no accountability is made for the enormity of internal lapses in risk management and controls. The public is now baying for blood and an “iron boot” to the backside, rather than golden handshakes and goodbyes.
What is more galling is that those in the know at these financial institutions — and the list are a who’s who of the great and the good — have repeatedly assured us that everything is fine. It has taken the virtual liquidation of Bear Stearns and the unprecedented panic interest rate cuts by the Federal Reserve, as well as concentrated central bank liquidity injections, to suddenly make one aware that the financial system is in a serious state.
The size of the problem is simply too big now to be solved by individual financial institutions, as the amount of debt, subprimes and other fancy derivative products are being slowly released to avoid even further panic. Once again the ordinary taxpayer is asked to bear the burden, as happened with the rescue of Northern Rock in the UK and Bear Stearns in the US, when governments assumed the asset credit risk of these two institutions. No one asked the public whether they wanted to buy these two institutions, and any further losses by these, as well as others, will only pass back to ordinary citizens through higher taxation. Around the world, people have been encouraged to take out mortgages and become home owners and play by the rules. The current credit squeeze is making borrowing for such activities even harder, and the benefit of the recent rate cuts are not being passed down the line to the ordinary public. Suddenly, financial institutions are treating the ordinary borrower with suspicion and raising the barriers, as though they were the cause of the current mess of poor credit judgment and fancy financial packaging in the first place. It is now clear that there is no end in sight to the current turmoil which is sucking in other markets — even those in the Gulf — in a mood of uncertainty, for how else can one explain the sudden jitters of the GCC markets today?
Ultimately, political pressure on governments to intervene will be applied for more drastic action to be taken, to confront the fallout from what has in effect been a gigantic financial fraud perpetrated by the so-called investment banking elites of the world. There has been a catastrophic breakdown of trust and announcements by institutions that they are in good shape are now taken, rightly with a pinch of salt. The bubble has burst, and what we will witness now is a yearning for a more traditional banking regime — maybe less sophisticated and dull, but one that we can sleep well with at night ....
(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)