Vinod Sejpal
14 October 2008
On September 29, the Dow Jones index fell by 777.70 points wiping out share values of companies quoted on the US stock exchange by one trillion dollars in a single day. All across the world financial markets over the past twelve months have taken a big knock in the wake of the credit crunch crisis.
It all began in September 2007 when financial institutions in the USA started disclosing their exposure to sub-prime lending.
These institutions were long before aware of the consequences that were emanating as a result of their high risk policies but it only all came out in the open late last year.
The truth of the matter as it now appears is that these so called bankers and financial advisors were reluctant to get exposed on their exceptionally poor business acumen and opaque manner in which they conducted the affairs of their financial institutions.
The unethical governance of major banks has resulted in a global financial crisis hitherto not evidenced and which has robbed the wealth of ordinary people who entrusted these institutions with their money and that which has left thousands jobless.
Sub-prime lending is very simply a toned down phrase for bad lending. Over the past decade banks have been lending recklessly to individuals for the purchase of freehold properties be it residential for own occupation or residential buy to let or commercial.
During the last fourteen years mortgage lenders went berserk lending in the most imprudent way and as much as 120 per cent of the value of the property with very little regard to the borrower's income and credit history.
These mindless and reckless lending policies simply ended up with borrowers failing to meet the loan repayment obligation which significantly cut into the liquidity of the financial institutions who were involved in all such lending.
These senseless policies have resulted in the collapse of the financial markets and with governments in the USA, the UK and Europe having to intervene to rescue the ailing plight of banks and mortgage lenders that have gone bankrupt as a result. The first casualty was Northern Rock in the UK when in February 2008 the UK government was forced to nationalise the bank at a cost of $215b.
Considering that UK's GDP is $2,470b the cost of nationalisation is very significant. In the USA mortgage lenders Fennie Mae and Freddie Mac were bailed out by the US government at a cost of $200b followed by a further bailout of AIG at a cost of $85b. Most recently Bradford & Bingley in the UK was nationalised at a cost of $25b.
In between we have seen the collapse of major investment banks Bear Sterns and Lehman Bros whilst leading investment bank Merrill Lynch, American banking giant Wachovia and UK's largest mortgage and savings provider HBOS have been taken over, the latter still in the process of completing a deal.
The question that arises is why is it that those involved in the current collapse of financial institutions are not being punished for their misdemeanours.
The criminality of their actions has had far reaching consequences and does not come anywhere close to the downfall of Baring Brothers brought about by the infamous trader Nick Leeson who was sentenced to prison for six years.
The list of individuals who have brought down major corporates is long but suffice to say that these individuals have been brought to justice and have been rightly punished. Equally those that are currently guilty should not be allowed to get away.
Mr Sejpal is an accounting consultant based in the UK, FCCA.
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