A loss of trust

It seems barely credible that a financial business could overstate part of its business by $166 billion. Yet this is what China’s biggest broker CITIC Securities has admitted that it did in the second quarter of this year.  It is blaming a software error following a systems upgrade. The financial authorities are now investigating. Ten years ago virtually any financial firm around the world giving an explanation involving a computer error would very probably have had it accepted by regulators. But the world has changed. Trust in banks and capital markets has been battered by a succession of failures and scandals. Trust in regulators who neglected to spot what was going wrong has been no less damaged. It was long assumed that bankers, as they themselves might say, pushed the edge of the envelope in the pursuit of profits. But no one expected the prevalence and scale of misbehavior in the financial world. The outright dishonesty in which so many have been caught out, coupled with the insane risks they took with other people’s money, have turned the bankers of Europe and North America into pariahs. The contempt in which financial professionals are currently held was all the greater for the fabulous salaries they paid themselves and made all the more amazing by massive annual bonuses.  Deutsche Bank’s new chairman John Cryan outraged the industry when he said this week that he didn’t see why bonuses should make bankers work any harder than their already excellent pay.  He was reflecting the public view that if you are paid to do a job, as a matter of course, you should be doing it to the best of your ability anyway. The bonus culture arose with investment bankers in high risk business areas where a successful deal in, for instance, mergers and acquisitions, could bring the institution involved a major income boost. The bonus was characterized as a "thank you" from grateful bosses. But very quickly the bonus degenerated into thanks for people simply turning up to work. It became institutionalized when banks said that they had to be prepared to offer generous incentives in order to hire the very best talent. The bonus even extended to the golden handshake, which was a "thank you" to individuals simply for agreeing to take up highly paid jobs which included other generous bonuses. Indeed, it was bonuses everywhere for these hugely accomplished and valuable bankers. Yet these same people managed to drive the international financial system into the ground, ruin banks, investors and savers and force governments into hock as they bailed out the massive mess. Since then there have been revelations including insider trading, fixing the foreign exchange markets, rigging international interest rates, stuffing investors with worthless securities, charging astronomical fees, false accounting and extensive bending of compliance rules. And yet big bonuses are still being paid. Is it any wonder that the financial industry is so little trusted? Yet trust in big accountants who failed so spectacularly in their duty to check and audit the accounts of fraudulent banks has been far less impacted. A few firms have come to dominate the accounting profession and cannot easily be challenged and replaced. Moreover, their bonus culture has been far lower profile. Nevertheless, as the policemen of the corporate world, their responsibilities are heavy. The failure of trust in financial institutions highlights their own catastrophic lack of diligence.