FINANCIAL CRISIS REASONS AND REMEDIES

The financial crisis.

The measures taken to avoid a new financial crisis are followed up and commented in the blog category "Financial crisis measures" which starts here.

Since I am often questioned about the reasons for the website, I will deal with the reasons in the form of questions and answers.

Here they come.

As a consultant in the field of finance, with a specialization in securities handling, did you feel any concern preceding the financial crisis ?

During the years, much changed of course. While the financial products became more complex, the understanding of even the least complex products became less spread.

The ground for this deterioration is the pressure on increased short term benefits.

This pressure made the investment in documentation and control - of processes and procedures - less prioritized and finally often abandoned.

The scale of the processes is industrialized. The production participants have a limited view over the proceedings. This contributes to the fragmented knowledge over the colleagues.

An overview of that concern has been written in tempore non suspecto in 2 documents:

- need for data modeling;

- need for a thesaurus;

In my opinion, the risks were and are coming from inside the financial world.

There stood three crosses on Golgotha,

But the farmer he ploughed further.

Magdalena, Maria, Veronica,

But the farmer he ploughed further.

And when his acre came to an end,

Then the farmer turned his plough

And he kneeled besides his plough in the grass,

And the farmer, he was heard.

What else did you do besides pointing to the risks ?

In a risk reduction perspective, I started a search for an optimal documentation on processes and procedures.

The quest is reported here.

So many had a nice dream,

But the farmer he ploughed further.

Thermopylae, Troja, Salamis,

But the farmer he ploughed further.

Are there other factors you feel laying at the source of the problems ?

Maximizing short term profit by notably cost cutting, is at the basis of hiring mainly, also and even certainly on management level, persons with an education in quite exotic professions.

Since that pool of jobless persons was bigger than the pool of jobless economists, they were cheaper.

As an illustration: I remember the human resource manager of the biggest Belgian bank at that time giving away an interview in a job-magazine. The title of the interview was “veterinaries can bring a lot to our bank”.

It certainly is true, other professions and dito educations may bring a fresh view on technical problems.

In my experience their view can help technicians solve problems from a different angle.

I however did not see the veterinary solve a technical problem with stock market order treatments.

Imagine the veterinary discussing with the geologist and the philosopher about the unexisting process of covering the derivative positions.

Can one imagine the United Nations AIDS-fund be led by a veterinary or a geologist ?

Why is this normal procedure in a financial institution ?

To me it is OK to have all kind of views but let’s not exaggerate and keep the management at least in hands of persons capable in understanding what they produce and sell.

Let people, formed in finance, also form the majority of bank's employees.

The young grain became always green,

The stars always bright,

The word of God struggled in the world further

And the farmer did hear it.

Leaders all over the world in the financial sector tell they did not see anything coming, no one warned them.

Did you not try to warn them ?

The financial markets collapsed end of September 2008.

Three months, June 30th 2008, before the crisis broke through, I warned by registered letter following institutions:

Six months before the crisis broke through, I warned by mail following institutions:

The European Central Bank answered.

The European Investment Bank answered.

People burned the farmers’ yard,

Killed his wife and ox,

Then the farmer put himself before the cart,

But the farmer he ploughed further.

Napoleon went up the Alps

And he saw the farmer at work,

He went aboard before Sint-Helena

And the farmer he ploughed further.

What is necessary in the short term to turn the atmosphere ?

Restoring the confidence in the financial system by:

Taking away the mist over the financial positions AND operations
Explaining what products are sold and their associated risk,
Showing the processes and procedures necessary for those service production
Proving those processes are adequate and under control
Changing the management where necessary.

New management attitudes, skills and thus criteria are necessary.

In one and the same documentary on the rise and collapse of a bank the illustration of correct and wrong attitude was clear.

To my feeling correct attitudes:

- The manager of Rabobank tells the interviewer he did not hear about sub-primes until a trip to New York.
There he asked what those products were. When he understood the mechanism, he ordered his Dutch bank NOT to touch those products under any condition.

- The manager of Banco Santander, barely touched by the sub-primes, gives away a few basic rules to avoid disasters: don't lend to people you don't know, don't sell products you won't buy yourself,...

On the other side we could hear 5 top-managers of a bank which is barely worth a penny because the management bought the full subprime emitting team of a competing bank. The common herd attitude at that time thus.
Their lessons learned ? None. Their statements : they did no mistakes, the outside world is the cause of their problems, they would take exactly the same decisions after the crisis as before.

We are in a need of real leaders with vision, less managers administrating what they don't understand.

The build of a finance ontology is one humble, but substantial because tangible, step in the direction of a solution.

And who’s better than a farmer,

Who hears about the world,

And he does not plough, whatever happens

On this acre further.

So many laid down the plough tail;

And did not continue the work,

But the lark sang the same song,

And the farmer he ploughed further.

What conditions should be fulfilled to enable a solution ?

A solution consists of restoring confidence.

Open minds to look for a solution outside the beaten tracks;

Willingness to take production control as in industrial environments, tools to implement those controls and enforcement of those controls; (There the ontology is meant as a proof of concept when finished, of course I stay interested in other concepts)

Clear communication to the public and internally of all features, including risks, of a product. Much like the instruction leaflet of a medicine. (Again the ontology is meant to be a proof of concept and again I stay open for other concepts)

A dramatic switch from the misty product and production situation requires open minded people.

One should be convinced first that things have to move to the better.

A bit more of the same stuff (ratios , internal rules,...) is not sufficient.

As seen above, this is the condition to satisfy most difficultly.

The danger comes from different sides: protectionism, after the holdup of the financial institutions on the tax-payers there will be a revival of ideologies which diminish the burden of sound, ethical entrepreneurship.

One might be quite right, the art is to be put in the right.

Dear God! The farmer laid in the grass,

Then he dreamed that dream:

That finally there was a rest day

Following apostle John’s word.

And the evil passed him on the left

And the good passed him on the right,

But the farmer did not hear his name yet

And the farmer he ploughed further.

Only when the farmer saw that sky

So full of bright shine,

Then he took away his horse from the plough,

And he wiped away the sweat of his face,

And he kneeled besides his still horse,

And he waited for Gods word.

What are your plans ?

Besides my daily duties, I’ll continue with the ontology development, less fast as wished.

Meanwhile looking for like-minded people to help solving this disastrous situation.

A voice spoke to earth, sky and sea

And the farmer did hear her:

“For the sake of the ploughing farmer

Let the world exist further!”

The myth of “Icarus and Daedalus” has been described by Ovidius (183-259).

It is considered as a metaphor pointing to those who wish to raise themselves to the status of pseudo-gods, the proud, the haughty. They were encountered so often in the financial world, unfortunately in their fall, many innocent people went broke.

It also is the source for the saying “pride goes before a fall”.

Many artists have been illustrating the myth of Icarus' flight.

The tale mentions the fisherman, the shepherd and the farmer being astonished about Daedalus and his son Icarus flying as if they were Gods.

Icarus was flying that high, the wax holding his feathers was melting, after which he fell into the sea.

One of the most amazing paintings however is that of Pieter Breughel de Oude.

It can be visited in the Museum of Fine Arts in Brussels and is on his turn the source of new tales.

Searching on the Web will help you find lots of historical information around the painting.

Our special interest in this painting are 2 facts:

1. The painter did not follow the parable as described, like other painters did. Notably the admiration of the crowd for the God-a likes. Instead, the 3 mentioned persons were carrying on with their work, the fall of Icarus was a faits-divers, not worth stopping the performance of their duties.

Four centuries after date, a death body has been found into the bushes on the painting.

A new saying found his way: even a dead man can't stop the plough.

2. A ballad has been written by J.W.F. Werumeus Buning (1891-1956): Ballad of the farmer. (Ballade van de Boer). The ballad is based on the painting described above and is found through the text.