Has City Rocket Science Ended?

A lot has happened in a year. The collapse of Lehmans Bros in particular sent a major shock wave through the financial system. The innovative securitisation and distribution models in the Financial Institutions was magnified by repeated leverage, but it was making simply ridiculous ' amounts of 'profit' much of which flowed into bonus pools. In the top 5 or so US banks alone $28bn was paid out in bonus in the last bank fiscal years prior to the system collapse.

While Bear Stearns was rescued, everyone thought it was a momentary blip, but Lehmans changed that. When it was left to implode, a wave went through the financial markets that indicated these leveraged models were over and a new period of new unleveraged products would emerge.

Can We Trust Them?

That really looks good on paper. Back to basics as Warren Buffett would advocate having long ago sagely predicted derivatives and their like would ruin the financial system. Now it seems, as Gordon Brown re-reads Keynes, everyone is having the epiphany that all that excess and daft borrowing was actually silly. 'Let's wipe the slate and start again, only keep it simple this time lads' is the new credo.

£4.5 trillion of slate wiping has occurred globally but in terms of regulation, governance and law little has changed. While everyone smarted that 'shorting' shares was foul play and to be avoided, across the pond in Germany in a single working day €30bn was lost on a single share by shorting. It seems some old party-goers just can't kick the habit. Morgan Stanley and Goldman Sachs were in the kitchen having a few sly swigs with their $10bn bail out money hoping no one would notice they shorted VW shares also. Sadly someone ratted on them as their share price dived 10 and 6% respectively. But was anyone taken to task? No.

Hot Air Rises

The problem is that the whole concept of self-regulation is like leaving the cats in charge of the cream. They simply would find it hard not to be tempted to dip their paw in every now and then when no one was watching. The fact of the matter is - the old boys club that is International Finance is rotten to the core. As I overhear conversations in the lunch spots in the City of young hopefuls, there is still talk of this crisis 'blowing over' and 'getting decent bonuses next year'.

There is a sense that someone dropped a floater into the punch at the party and when someone has worked out how to remove it, everyone can get back to having fun.

The talk is that the markets will recover and that the whole defunct engine, given enough fuel, will miraculously spring back to life and start racing like a Superbike. Back to normal in no time - mine's a champagne.

A Lot of Old Ballacks

Even Premier League Football has felt the pinch as people talk of the vast funding required to run clubs drying up - heaven forbid Middle Eastern money should dry up. At oil's peak price not so long ago around $500m per day was flowing into Dubai alone.

Many other bold schemes have fallen into disrepair. Some while ago it was believed that clean techs would emerge in our booming economy as we all got a conscience about our planet's future. It is clear now, just as many pundits claimed, that growth and clean tech are interconnected. The iShares Global Clean Energy ETF has fallen 48% in a quarter along with all other markets. Clean is off the agenda when bonuses are threatened. And that's the issue - unless we re-evaluate our quest for continued growth, clean technologies will never get a foothold and we will always be net consumers of resources and contributors of carbon. All this carbon offset and carbon neutral rubbish firms come up with is just make-believe. Until they stop contributing carbon gases to the atmosphere nothing has changed except another 'commodities scam' arising.

Regulation and Change

It would be heartening to believe that financial institutions have changed but it is more likely a momentary pause until someone applies a bandage like the bail out to the system, a little tweaking of product mixes and then off they go again to the next trough which if we leave it all unchecked could be far more disastrous than this one.

Would it not be the time to make long term, radical changes to the whole financial market to demystify its complexities and make products far more transparent with proper adherence to underlying values of assets for the future? And would it not be better to have proper governance and regulation to ensure banks do not pay vast bonuses but hold reserves in order to cover future losses or, heaven forbid, give back some of the benefit to the customers whose money they have so freely risked and leveraged to gain the profit?

It's a nice thought - but it won't happen.