Old wine in new bottle
Why the Global credit crisis?I met with the experts (you know the ones who do not make any sense to you and me) after a round of golf. The back drop was the informal setting of the club bar lounge. This is one place where all the loose talk takes place. After downing a couple of vodkas people start talking emotionally about stocks and investments.
First thing I discovered that the so called experts had no clue about the impending doom in the financial markets. The top management of various financial institutions had no clue what was happening around them. The reason for this is the new recruits they hire from worlds’ premier business schools like Harvard, Wharton etc. These brilliant young men (boys) from the top business schools are so bright that the top honchos do not understand how they function or what they are doing.
These young men come up with complex new derivatives. They are repackaging and selling such complex and attractive derivatives that both the selling and buying instituions were not aware of the complete underlying risks. Sub prime mortgage is the prime example of this. Risky loans given to people with bad or no credit ratings were repackaged and sold to top financial institutions the world over. The world stock markets are going through the hangover from that party.
You must have read something about young executive making a British bank bankrupt causing a loss of billions of pounds. The top management of the bank said the executive acted on his own without their knowledge or authorization. What were they doing? Playing golf!! I have a hunch this is not true. The management knew the executive was doing something only they could not understand what he was doing. They just hoped that it would make the bank a pile of money till their dreams came crashing and so did the bank.
I have been around the stock markets for a while now and honestly I can not comprehend more than half of the derivative products that are floating around in the stock markets. The old school managements need to wake up and be aware what is happening in the financial markets. The new boys may be brilliant, but just as you and I will not put our money in something we do not comprehend so should the big financial institutions. There is need for more transparent and easily understandable derivatives.
Repackaging and selling the old wine in a new bottle is all fine but remember the wine bottle will be opened sooner or later and the stink will reveal it all. The new bottle and its label might look very attractive and help sell it but the bad taste will make others throw it down the drain. Back in the club lounge the wine was fine but the mood was negative with the experts talking about further slide in the stock markets. The gloom was not lifted with the best of wines around.
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