6th May 2009
Seven deadly sins
As with all the financial crises that the world has experienced since the Tulip Bulb mania of the 1600s, commentators look for analogies to try and explain what went wrong, and over the next few years, 100s of books will be written analysing the causes of the Global Financial Crisis of 2008.
Rob Prugue, Senior Managing Director of Lazard Asset Management and leading investment expert was a speaker at the recently held Conference of Major Superannuation Funds and the analogy that he used in analysing the current global financial crisis was the Seven Deadly Sins - lechery, gluttony, greed, sloth, envy, wrath, and pride, as they apply to the banking and funds management industry.
In his speech, he highlighted the "seven deadly sins" that brought the market down to its knees – perpetrated in his view by a breakdown in ethics, a misalignment of objectives and cracks in due diligence, among others.
First is lechery - a collapse in ethics and governance. Almost daily we read in the papers instances where ethics and good corporate governance are lacking. Readers will be familiar with the Madoff case in New York, where his funds management empire was based on a lie. Prugue was particularly critical of the funds management industry. "Do we ask ourselves, do we employ the same yardsticks which define good governance internally? This is where we fall short," said Prugue.
The second is gluttony, where large economies of scale enable banks and funds management organisations to be drunk on power and charge high fees for services where a smaller firm might be less inclined to do so. At La Trobe, as a smaller funds management group, we always focus on fees and make sure investors get value for money. Examples of gluttony also include the excesses of executive remuneration, now the subject of a Federal Government enquiry, and excessive borrowing using assets with inflated values.
The third is greed, which sees the mismatch of the investment industry's short-term gains and investors' long-term objectives. "[We're] consumed by wealth accumulation," said Prugue, when in fact it should be about "wealth preservation". One outcome that might come out of this will be waves of investors opting out of their equity funds and putting their money into cash and fixed interest return funds, as the trust that they placed in super funds and investment managers evaporates.
The fourth, fifth, and sixth are sloth, wrath and envy, which go hand in hand. The lack of transparency, particularly among alternative assets, has been swept under the table because people have become complacent in good times. Some are in denial, and are angry about the market and continue to seek bail-outs. Others put the blame on other parties, such as regulators and agencies. Others, in better times, have been struck by envy and believe the "grass is greener on the other side" - prompting some investors to take unnecessary risks. When optimism overwhelms the markets, investors and investment managers tend to be lazy and let the markets do the work.
Last but not least is pride, said Prugue, who was critical of the funds management industry itself. In his view, the industry became excessively proud of its self importance. "We are proud individuals - but are we necessarily more important in our contribution to humanity?" said Prugue.
Until the industry acknowledges its downfalls and addresses its issues with pride, governance and ethics, crises such as these are bound to visit us again.
> About Us
> PDS - Want to invest?
> Subscribe Free
> Independent Ratings
> Mortgage Shopping List
Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer