Sunday 16 September 2007

Baling out trust

No man’s worthy word

Never has there been a situation where a bank and the whole financial infrastructure that supports the banking environment wanted to seek refuge and find strength in the credo “My Word is My Bond”. This is the motto of the London Stock Exchange which in Latin is “dictum meum pactum”.

It takes no rocket science of convoluted mathematical equations that govern the arcane and complex financial instruments popularly known as Collateralised Debt Obligations to realize that the man ingredient for any business transaction is integrity based on trust.

Trust is key

This may sound old-fashioned, but there is a need for trust in many undertakings of everyday life especially the old-time favourites as your priest, your doctor and your bank manager because they underpin a sense of guidance in life, quality of life and affordability in all eventualities; things that have subsumed into a compelling cynicism of humanity in recent times.

The credit crunch that is suffocating the financial markets like a large cloud of rolling mustard gas is a victim of the loss of trust, the fundamentals that allow banks to run through inter-bank lending mechanisms has seized up because banks cannot assuredly guarantee that the borrower banks are not overly exposed to the sub-prime mortgage frauds in the United States.

This becomes a problem when the borrower bank relies more of this borrowing facility than on savings it has accrued, such that in the case of Northern Rock the Bank of England instituted its first bale out since 1970.

Collapse of trust

This was supposed to signify that the Bank of England believes that the situation at Northern Rock is not as critical as to be irredeemable, in fact, it is confidence reposed in the bank and its business model that once this credit crunch is over the bank would be able to continue to continue business as usual.

Unfortunately, after the pensions mis-selling and other financial debacles where the governing bank, financial governance institutions or governments have been slow to guarantee or underwrite the risks that trusting citizens have had in their supposed protectors, people are no more willing to listen to assurances from the bank, the Bank of England or the government.

It is therefore no surprise that people have queued up at branches of Northern Rock to withdraw their nest eggs because if the bank does collapse the people would get nowhere near what they have put into the bank.

Vicious circle begins

There is too much of a track record to show that people have great cause for concern as they have shown with taking about GBP 1 billion out of the bank such that its value has fallen by a third which would eventually increase the need for the bank to draw on support from the Bank of England further diminishing confidence in the whole banking system, the makings of a vicious circle.

We have not heard the last of this matter because there is no doubt that more banks are exposed and as still using all sorts of financial subterfuge mechanisms to cover their exposure till it becomes untenable and the paps of the Bank of England are up for another suckling bank that has been engulfed by a global crisis that shows no sign of going away like a bad storm.

All because of the collapse of trust, the core ingredient for businesses to survive regardless of papers, contracts and assurances.

We need to return to these old-fashioned elements of integrity and good reputation because therein lies the redemption of this economic fallout – the quest for filthy lucre must not be above the need to maintain confidence and trust by doing things according to the rules, transparently and honestly.

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