The International Olympic Committee (IOC) and financial market regulators should compare notes.
With the London Games now in full swing, the IOC is continuing its fight against doping and the growing threats of match fixing and illegal bookmaking. But while the IOC strives to stamp out these unsavoury aspects, it seems market regulators have been less effective in recent times.
To a degree, regulators have had limited clout against some powerful lobby interests over the years. And when global markets have been subject to systematic doping in the form of a debt overdose, the adjustment process does need to be gradual.
Regulators and policy makers alike clearly have a way to go before finding the balance between austerity and growth. Hoping for another cycle based on consumption and asset leverage seems farfetched, though this isn’t preventing some unconventional monetary responses.
Olympian scandal
This year’s medals may yet prove to be worth their weight in gold.
For August at least, London will be the centre of the sporting universe. But as a financial centre, the City’s reputation has been undermined by a series of recent scandals.
In so far as match fixing is concerned, London has the dubious honour of the London Interbank Offered Rate (LIBOR) scandal currently reverberating though financial circles.
Perhaps unfairly, the City is also home to JP Morgan’s ‘whale trades’, in which losses continue to mount, and not too long ago, UBS disclosed that traders in its London office had lost in excess of $2 billion from unauthorised positions.
Piling on the misery, a number of major UK banks are currently compensating customers after misselling insurance and derivative products, and another has been engulfed in a money-laundering scheme involving Mexican drug cartels.
It’s been a Weill
As a result, the size and complexity of banks are once again in focus and provide policymakers the opportunity to assert tighter regulations. Those in favour of such regulations have also seized on recent comments from former Citigroup boss, Sandy Weill, who has called for big banks to be broken up.
While the argument is not new, the fact that the comment came from Weill was always going to raise eyebrows.
He is best known as the man who ‘shattered’ the Glass-Steagall Act, the depression-era legislation separating retail and investment banking, with the merger of Travellers Group and Citicorp back in 1998.
His comments certainly appear to be a spectacular backflip. However, it is also possible that his comments were directed to the many banks trading below book value.
A break-up could be worth more to shareholders if some were broken up into smaller parts. However, this is little consolation for long-term holders of Citigroup stock, with PIMCO co-founder Bill Gross wryly noting the stock now trades at 10 cents to its 1998-merger dollar.
How to mount the podium
Nevertheless, breaking up banks is easier said than done. The market in effect is telling the mega-banks that their size and complexity makes them too big to manage. Regulation or not, management teams will need to address these issues.
The problem of course is not confined to financials. Indeed, many corporations are becoming increasingly complex.
Over the longer term, the gold medals will go to companies that can simplify their organisation or adapt to the shifting environment.
Those harbouring too much complexity will find it hard to even make the podium.
Patrick Noble is a senior investment strategist at Zurich Investments
