Fear in the Financial Landscape

By M. Duvernet

It is interesting to note that if you can get enough people to fear something, you pretty much have their attention. One of our greatest president’s said, “There is nothing to fear, but fear itself.”  If that is the case, then fear must be a product of our imagination!  Although, when it comes to the financial downturn and the lingering problems of our economy, these problems are very real. So, how much of a part does the imagination play in these problems related to finance? Is there a way to turn that fear into fearlessness? As analysts we know that fearlessness begins by knowing “the facts.”

Facts are defined as, “something known to exist – or – a known truth” and are often the basis of information that leads to making hard choices. However, choices can also be motivated by fear.

When it comes to the current financial landscape, there are three facts that I find particularly interesting regarding money and finance. These three facts deal with the historical truths around the creation of money and the policies of Glass-Steagall and Sarbanes-Oxley.

The idea of printed paper money came from China. The Chinese were the first civilization to deal with rates of exchange, they started with tortoise shells and jade and then began using paper money in AD 960. They saw the need to carry something light, as tortoise shells and jade, and even gold coins, were hard to carry around, especially if you had a lot of them. Part of what motivated the creation of paper money was the fear of traveling around with loads of money and the risks associated with that.

The Chinese dollar is known as the “Yuan” – pronounced “wren” – which means “round object” or “round coin.” Currency exchange experts reference the Yuan using the ISO (International Organization of Standards) code CNY, for Chinese Yuan. Alongside the Yuan there is a relational reference to the Renminbi (RMB), which is the English word that refers to the Yuan. The Renminbi is the legal tender used across mainland China issued by the People’s Bank of China, reminbi actually means “people’s currency.”

For many years the Renminbi was fixed – or pegged – at 8.28 to 1 US dollar, which made the Yuan worth about twelve cents. But, then in 2005 China changed their views, fearing that they were not leveraging the exchange rate to get the best results, and today the Yuan fluctuates based on baskets of global currency rates. By doing this the Chinese “depegged” their currency from the U.S. Dollar and are taking full advantage of the floating exchange rates, as managed by the foreign exchange market. Today, 1 Yuan is 0.1587 per US Dollar.

Ideas come from everywhere and anywhere.  The idea of the Glass-Steagall Act came about as a result of the Great Depression. In the early twentieth century, the depression was a terrible blow to the US economic infrastructure, the building blocks that were to be the foundation of our nation’s economy simply crumbled. The depression started with the Stock Market Crash of 1929. Now, after years of looking at what caused the depression, research and analysis show that it was caused by the banks “discounting” assets that were resold to other banks, which were in part subsidiaries of other banks. Not wanting to expose their mistakes the banks simply “closed” their doors and the fear set in.

To ensure that another depression never occurred again, President Franklin Roosevelt introduced banking reforms and The Banking Act of 1933, also known as the Glass-Steagall Act for the men who sponsored the legislation. This legislation was put in place to establish the Federal Deposit Insurance Corporation (FDIC). Thoughtful reforms, as part of this Glass-Steagall Act, were designed to put constraints around the various investment areas. Today, the FDIC ensures that banks who buy the insurance are able to provide their customers with coverage on accounts of up to 250 thousand dollars. These FDIC certified banks are able to guarantee that all their customer accounts are refundable by the federal government. This sort of federal guarantee was good for the weary consumer, as it calmed their fears and made them once again trust in the banks.

However, in 1999 this all changed again when a little known Act called the Gramm-Leach-Billey Act repealed part of the 1933 Glass-Steagall Act removing all the constraints that separated investment banking from the institutions that issued securities, and all the deposits made at commercial banks. So today, all money in all banks is moving all the time. For once a consumer makes a deposit, the money does not just sit there… the banks use that money to invest in other things. This includes things like hedge funds, mortgage bundles, certificates of deposit, bonds, money markets, and more. So, like many investments, there is the element of risk, and with risk comes fear.

Finding the root cause of problems like these is part of what analysts do, for when it came to the mortgage crisis there is substantial proof that the mortgage bubble and financial meltdown of 2008 wouldn’t have happened if Glass-Steagall had still been in place. So there are very valid reasons to keep processes in place when there is the knowledge that it will protect the customer, especially if that customer participates in using the infrastructure of something as important as the US economy. By the way, those people – Gramm-Leach-Billey – who brought that legislation forward in 1999 made millions when it was passed.

Now for Sarbanes-Oxley, any analyst that has worked in the financial industry after 2002 is familiar with Sarbanes-Oxley.  Back in 2002 these federal regulations were put in place to guard against tactics like “Insider Trading”, “Market Timing” and “Late Trading.” Sarbanes-Oxley ensured that publicly owned corporations did not take advantage of their situation and compromise a company’s integrity by throwing these thoughtful regulations by the wayside. And as the Clinton administration upheld these laws, the Bush administration relaxed the enforcement of these laws, calling for less regulation. This meant that under Bush, the auditing of accounts and practices toward compliance were not under the strict constraints that made it the powerhouse it had become. Now we are paying the price for not enforcing those regulations. Yet, some are still asking the poignant question, “Why were these regulations not enforced?” Well, one can presume that it was because by not adhering to the regulations, it created a bigger better financial smorgasbord for those who wanted to help themselves. This created a financial fiasco where some high-financiers are finding themselves with felonies.

There is no doubt the imagination can perpetuate some amazing ideas. And that fear can motivate choices that are not the wisest for everyone. While some of these ideas have strengthened our economy and made our world a better place, still others have caused us to fear the very idea of more reforms. All we can do as analysts is clarify the truth and document the facts. Capture all the business needs and rules in a way that will be a reference for those who come after us. And since the Business Analysts role became formally recognized in 2003, we have an important role ensuring that the facts are captured and their legacy is able to strengthen the future.

Like the ancient Chinese saying goes: “An inch of time is worth an inch of gold, but you can’t buy that inch of time with an inch of gold.” This is a known fact, for knowing the facts nurtures the neutrality needed for turning fear into fearlessness. That is the bottomline.

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