Anand Krishna’s musings

Bear Stearns, one of Wall Street’s leading investment banks (it was ranked 5th in the US, I think), collapsed dramatically last week. This is so far the biggest corporate victim of the current financial crisis triggered by indiscreet lending, as it were (the so-called “sub prime crisis). Bear’s clients withdrew over $17B in two days, amid fears of a cash shortage. Bear was on the verge of declaring bankruptcy. The Fed intervened to prevent a larger, systemic collpase of the larger markets and virtually forced Bear to sell out. JP Morgan Chase, one of America’s largest banks (by assets) was the “white knight”, as it were, and agreed to buy Bear’s stocks.

Prima facie, it would appear that the “system” is working. So what’s all the fuss about? Several reasons, as I see the situation:

1. Should Bear not have warned the Fed and SEC earlier?
2. Should the Fed have loaned Bear enough to tide over the crisis (it seems to have agreed to loan money to JP Morgan Chase)?
3. Was it right to have given Bear just a day to find a buyer?
4. Was it right that JPMC was allowed to virtually annihilate Bear’s shareholder interests- they paid $2 per share, when the book value was closer to $80? To offer another data point, Bear stock was trading at $170/share just an year ago.

I think this situation is symptomatic of a bigger malaise. Although regulators and fiancial institutions around the world are talking more and more about “Governance, Risk Management & Compliance” (GRC), the “system” is still leaving a lot to chance. Some of it may be a case of looking the other side even as “financial engineers” come up with newer and newer “products” that are supposedly designed to offer investors a wider choice of risks and returns. But some of it is possibly because the underlying information systems in the financial services industry are not as “real time” as we think they are. Or perhaps executives responsible for GRC do not monitor their “dashboards” as often as they should.

Perhaps financial services companies should focus more on strengthening their GRC capabilities in the next few months, instead of spending money on “improving customer experience”. After all, no customer can experience anything more painful than being told that his/her investments are worth far less than the capital s/he had originally invested.

Just as importantly, regulators around the world should evolve a global GRC standard (before you say ‘Basel II’, let me point out that adherence of Basel II norms varies betwen Europe, America and yes, Asia). And then work hard at making sure people adhere to these standards.