The “10’s” will see more use of the words caution, reflect, risk management and reserves.
Those who showed no caution or had no effective risk management or reserves are paying the price.
In the banking world the Spanish Bank, Santander, has trumped the other “standard” banks by coming out on top in the Euro zone. It is not surprising Santander won the banking medals because it stuck to the old practice of managing its own money, unlike to the gung-ho US Banks who sold mortgages through commission agents (brokers) then on sold packaged securities many times over. These securities were eventually lodged in highly leveraged firms who couldn’t stand any downturn. Lesson one is there is a tomorrow and sometimes things go bad.
The winners are those who controlled their own risk and didn’t delegate it to people (brokers) who were only motivated by commission income.
Reserves was a dirty word in the corporate accounting of the 90’s. This was money set aside in highly liquid (cash) boxes that didn’t earn much interest if any at all. (Eastern Europeans, Indians and Taiwanese have long known from history how important conservative reserves are). The increased price of gold signals an increase in nervousness in the world order. Many Indians walk around with “reserves” in their mouth and on their wrists, knowing you have to keep your reserves close to you at all times. The lack of ability to manage a non-performing loan has been clearly identified in the nominee mortgage business where money conservative “looking” loans have turned out to be very embarrassing problems. Even conservative giants, Government Life and Public Trust, have more than their normal share of these. Trouble is many nominee companies can’t do anything with the asset. They are prevented in law from doing many of the things a private investor would do to “manage” the loan, eg raise money, re cap and otherwise improve the business. This is a disaster in a general downturn as the nominee investors have to simply wait for a buyer to come along and rescue the non performing asset. This is where reflect and risk management come back into vogue. Remember the old saying “if you don’t know your history you are bound to repeat it”. Luckily for us the worlds finances were saved by someone who knew his history. Mr Ben Bernanke, Chairman of the Federal Reserve USA, described to reporters “we came very close to a depression – the markets were in anaphylactic shock”. Luckily Ben knew that the 30’s depression was caused by banks refusing to loan and money generally being very tight. Ben did the opposite and threw money at the system to save it from immediate shutdown.
We have escaped the worst of this ironically because our Banks are Australian and our neighbours have largely escaped the world recession. There are many investment lessons to be learned by us out of this near thing.
David Wood (Director of Financial Navigation Company Limited, 3 King George Place, Timaru)
