11 February 2009

The whistleblower who got it right... and got sacked for his trouble

Very interesting interview on Channel 4 News today with Paul Moore, an HBOS executive who got sacked by HBOS CEO (and now deputy head of the Financial Services Authority) Sir James Crosby when he expressed the opinion that the bank might be over-stretching itself.

Of course, we now know he was absolutely right. However, back in 2003 when this happened, the consensus opinion was that people like Moore were over-cautious pessimists, and people with his views were probably hounded out of many institutions for their trouble.

Of course, now everybody is rushing to join the other side of the bandwagon. For example, today's Bank of England Inflation Report forecasts that GDP growth in 2009 will be minus 2.9 per cent. That's a post-war record... in the wrong direction.

There's a pattern to this herd behaviour and unwillingness to speak out. A major problem with market sentiment in the financial sector - typified by the 'animal spirits' described by Keynes as far back as the 1930s - is that the rewards to employees who "run with the pack" - with making an "average" assessment of how markets are going to perform - are pretty good. Compare that with the risk of falling flat on your face - or getting sacked for being "out of line" if you take a position contrary to the overall market sentiment - and it's not surprising that so few financial decision-makers 'rock the boat'. In other words, being a Paul Moore makes you a troublemaker. Why bother when you can play it safe and get a cushy bonus for doing so (provided your bank, hedge fund, commodity trading - or whatever - performace is close enough to average so as not to be really crap?

For a profession that is often caricatured as the epitome of rugged free-market individualism, it's actually probably one of the most collectivist and unimaginative parts of the economy (apart of course from the people who were designing ever-more complex financial instruments for parcelling up and selling on risky assets, who did the job so well that many institutions still seem to have no clue how large their bad debts are. Great job, guys.)

We can certainly reform financial regulation, but you can't really regulate market sentiment - which may be one of the biggest problems contributing to the crazy market swings we've seen over the last decade. So, perhaps time to junk the system completely and try a less capricious approach? Certainly food for thought.

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