Lessons from Lehman Brothers

Apart from hard line anti-capitalists (who must be having a great laugh) all anyone wants now is for the bad news about finance and markets to stop. That the RSA will probably have to write off a few thousands pounds in unpaid room booking fees owed to us by Lehman Brothers is a small symbol of how this bad news will travel a great deal further than the city bankers having to return their Porches to the showroom.

There is no question now that the future will see a radical overhaul of regulation in the banking and financial services sector. The best name of any new legislation might be the Stable Door Act. The problem with regulation is that to a large degree its effectiveness relies on things that are much harder to create than new rules; culture, norms and ethics.

What drove the excesses of sub prime, 125% mortgages, and impossibly complex derivatives was not just lax rules but also a lack of realism, restraint and responsibility. Without these virtues new rules will simply be an invitation to find ever more complex, perverse and risky forms of circumvention.

I am far from an expert but it seems to me that certain key principles stand out if we really want to learn the lessons of the last fifteen years. We need to restore the link between accessing and making money and generating value.

Whether at the national level where countries like the US and UK were spending much more than they were producing, at the corporate level where company finances could be the outcome not of goods and services produced but of abstruse forms of gambling, or at the individual level where almost everyone seemed to be able to borrow at will, the link between producing value and getting hold of money became more and more attenuated.

It may be true – as Government ministers say – that the real economy is much healthier than the collapsing world of finance. But, the hunger for spending and borrowing among nations, companies, the super rich and millions of ordinary people long since became detached from the real economy.

We also need much greater transparency, which is a function both of openness and comprehensibility. Whether it is executive pay and bonus systems, the distribution of risks, the real performance of companies and investments, not only do we need to know the facts, we as citizens need to see the importance of holding people and systems to account.

This afternoon we are holding a seminar to discuss our Tomorrow’s Investor project. At the heart of this is the thesis that there is market failure in the pensions sector. Our work with small and indirect investors suggests they want a product that is low fee, high accountability and ethically robust. Very few of us are willing to be active in making our current investments fit this pattern but if the right product was available to us we would grab it.

A good (albeit hypothetical) measure of such a fund would be that if there were future possibilities to invest in products like sold on sub prime mortgages the fund managers would have to explain clearly to investors the risks involved.

As for investors we too have to take responsibility. I wouldn’t put a bet on a horserace if I didn’t understand the odds or the possible losses I might incur. In the future we need to be similarly circumspect about how we foundations of our future livelihood.