Too big to fail
By
Christine St Anne
Thu 25 Feb 2010
There is a seminal moment in Andrew Ross Sorkin's book, Too Big to Fail, when the short-selling ban is met with market euphoria.
In the past month I have been absorbed in Andrew Ross Sorkin's Too Big to Fail. The 600-page book outlines in detail the collapse of the United States banking system.
It makes fascinating reading.
One chapter, in particular, outlines the lobbying efforts of Morgan Stanley and Goldman Sachs as they try to secure a short-selling ban from the Securities and Exchange Commission.
According to the banks, the 'hedgies' (hedge fund managers) were aggressively short-selling their stock as market rumours continued to grow on the back of a deepening market crisis.
On one particular day, Goldman Sachs traders remained glued to their screens as they watched Goldman stock drop to $85.88, its lowest level in six years.
By 1pm that day, however, the bank's stock rose to $87 a share and then $89. Traders had discovered it was the action of the Financial Services Authority (FSA) in the United Kingdom that had been responsible for the lift - the FSA had in fact announced a 30-day ban on short-selling 29 financial stocks, including Goldman Sachs.
According to the book, to commemorate the moment, a young trader broadcast "The Star-Spangled Banner" over the speakers.
"About three dozen traders stood up from their desk, placed their hands over their hearts, and sang aloud, accompanied by rounds of high fives and cheers," according to Sorkin.
"The market was turning around and our flag was still there."
While the short-selling bans subsequently implemented by governments may have been temporary, the financial services industry is set for a raft of new legislation in a bid to avert another crisis.
It was a subject Access Economics' Ian Harper spoke about in detail at this week's annual Australian Custodial Services Association conference in Sydney.
Currently there are a number of regulatory reform measures to be implemented from a number of international groups, including the G20 Pittsburgh Summit, Financial Stability Board, Bank for International Settlements, International Organisation of Securities Commissions, International Accounting Standards Board and Financial Accounting Standards Board.
While these measures may not bring out the same level of patriotic fever and relief from (former) Goldman traders, the measures, Harper said, aimed to ensure that any future systemic risks would be averted.
Harper, however, said the biggest risk for Australia was that the regulatory reforms could be a bit too much.
"A key concern for Australia is that regulatory reforms agreed at the G20 are neither appropriate nor necessary for Australian conditions," he said.
He said any regulatory changes due to international reforms could result in a "higher cost of capital that will be passed though to Australian business, slowing growth and reducing access to intermediated credit".
The quality and efficacy of Australia's regulatory regime was one of the reasons why Australia weathered the global financial crisis, he said.
The big Australian banks did not meet the same fate as their US counterparts. In fact, some of Australia's banks are on the hunt for further acquisitions.
Nevertheless, lessons from the global financial crisis should never be forgotten. Let's not forget the Rudd government still put in place a government guarantee on bank deposits, reminding us all that no institution is too big to fail.
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