Financial giants let down investors and clients

In the old days, people felt reassured if their hard-earned cash was stuffed under their bedding or glittering around their wrists. They opted to risk attracting rats or thieves rather than hand it over to strangers in pin-striped suits.

Given the current global financial meltdown, our cautious ancestors might not have been as eccentric as we once believed.

Today's rats and thieves are nameless and faceless, but even more pernicious and together with incompetence can strip ordinary people of savings and pensions without even blinking.

And instead of being responsible custodians of money and assets that belong to their shareholders, investors and clients, some financial institutions are behaving like casinos, gambling on high-risk ventures or fast profits.

Could any financial guru have predicted 18 months ago that a 150-year-old rock solid investment bank, Lehman Bros would be forced to file for bankruptcy or that one of the world's largest financial management companies, Merrill Lynch, would be snapped up in a fire sale?

The planet's largest insurance company AIG received financial relief from the Federal Reserve System. Earlier, there were fears that this giant, whose tentacles criss-cross around the globe, was about to topple, with repercussions that even the slickest financial whiz kid is unable to fathom.

The bankers and the financial houses have created a monster that is so massive and so complex that even its masters are perplexed.

This week has been one of the worst for investors, shareholders and ordinary savers - certainly in my lifetime. The former chairman of the US Federal Reserve, Alan Greenspan - whose words of wisdom could once send markets soaring or toppling - said it was the worst he'd ever seen; one that only happens once every century.

In that case, most of us won't be around for the next one, but what should be done to prevent this crisis spiralling and who or what should be blamed for the devastation?

Its causes are well known. Greedy US mortgage companies recklessly lent to would-be homeowners on a variable interest basis regardless of the applicant's credit rating or ability to maintain payments.

They then packaged up the "no income, no job and no assets loans" called "sub-prime" mortgages and sold them on to financial institutions as investments.

Defaulting borrowers and the decline in house prices have not only eroded the value of those investment packages, they have damaged inter-bank trust. Lehman Bros. was a casualty, witnessing a 73 per cent drop in its stock value during the first six months of this year.

More reluctant

Banks are now not only more reluctant to lend to one another, which has triggered a crisis in liquidity, but are also wary of lending to anyone, whose collateral is less than platinum, meaning potentially viable businesses are being choked of financing and home buyers prevented from the first rung of the property ladder.

This obvious recipe for disaster has led to central banks stepping in to inject billions of dollars into the system to help liquidity.

In some cases, governments are underwriting savings accounts to prevent the type of emotional customer flight that Britain's Northern Rock experienced and which led to its eventual nationalisation.

The US federal government has rescued two mortgage giants, Fannie Mae and Freddie Mac, this month that may fly in the face of its capitalist ethic but was, nevertheless, the right thing to do.

Some US and UK taxpayers are grumbling. They say their tax monies should not be used to prop up "fat cats". But I believe that if governments don't intervene, the consequences could be catastrophic - not only for shareholders and investors but for everyone.

America and Britain have already seen the toll this crisis has taken on jobs and the increased risk of recession posed by it.

But governments can only do so much. Markets are driven as much on sentiment as anything else. So all concerned (including media and press) should work at boosting investor confidence and instead of putting out messages of doom and gloom, experts should be talking economies up rather than down.

If enough individuals look sorrowfully at a healthy man and tell him how ill he looks, chances are he'll visit the doctor.

A recent culprit is Britain's Chancellor of the Exchequer, Alistair Darling, who warned that Britain was facing its worst economic crisis in 60 years and that the slump would be "more profound and long-lasting than people thought".

His shocking assessment caused Sterling to take a beating and speculation as to whether he was the right man for the job.

In the US, both presidential candidates John McCain and Barack Obama have put out ads, referring to the economy as "broken" or "in crisis", just so that they can present themselves as its saviour.

Essentially, the big boys who broke it should fix it. Banks can start by replacing secrecy for transparency, enabling customers and investors to know exactly where they stand, instead of having to make uninformed guesses.

Stopping ruthless speculators

Secondly, banks and financial institutions should be subjected to more oversight while the system should be tightened-up to prevent ruthless speculators from manipulating market vulnerabilities so as to create a bargain basement.

Thirdly, laws must facilitate shareholders to hold directors and managers to account for bad practice and bad decision making. Those who deliberately bluff their shareholders should have to pay.

Fourthly, new regulations must control how directors and managers of financial institute are remunerated. The days of managers earning huge bonuses and accepting no responsibility for losses, must end. Remuneration should be replaced with performance-linked pay.

Finally, the media must quit exaggerating the true picture for the sake of dramatic headlines. One of today's headlines "British banks gripped by fear" hardly instils confidence.

It's hardly surprising that investors are running scared and turning to the relative safety of gold. Few of us will be stuffing notes into our mattresses any time soon, but if Western markets can't get their act together, we may just decide in the short-run that there's no place like home.

Khalaf Al Habtoor is a businessman and chairman of Al Habtoor Group.