The Changing Face of the Financial Sector

Justin Gowen
March 30, 2009 — 1,613 views  
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After more than 10 years spearheading the US and UK economies, the unprecedented events of last year - which saw a whole host of financial behemoths bailed out by their respective governments - are still playing out, and the whole industry is undergoing a huge transformational change.

As the world reels from the aftershocks, the epicentre of the crisis is having to do some very quick, and often painful adjustments to cope with the public scrutiny it now faces. Banks are recognising their corporate social responsibility; a concept that previously seemed not to apply. The immediate need to downsize is not exclusive to the financial sector, but after years of over hiring and seemingly overpaying those who posted huge paper profits, the world at large feels that heads should roll.

It remains to be seen whether 2009 will be another annus horbilis. At least in terms of the results one certainly hopes that the write downs have hit their peak. However, the new corporate culture of drastically lowering of cash bonuses will result in much less risk taking associated with high flying banking executives and traders. This will clearly have an impact on profits for the coming years, and so it is hard to see why the share prices of banks will see a sharp recovery any time soon.

Another element that is widely believed to have contributed to the crisis is the failure by the Regulators (SEC in the US, and FSA in the UK) to effectively monitor the exponential growth and question why this growth was occurring and whether it was in the best interests of an efficient market. The much talked about alphabet soup of derivative instruments that were created by banking geniuses - CDS, CDO, CLN and so on - created risk profiles that seemingly neither the regulators nor the ratings agencies understood sufficiently. It was only when the underlying asset values slipped that everyone suddenly realised that the true unwind values of these assets were so hard to accurately price. Although there could clearly be an argument that the Regulators' involvement now being a little late in the day, the fact remains that it will now play a much greater role in the day to day running of the financial sector.

The final point that needs to be mentioned here is the involvement of leverage in the system. The ease of access to credit was as prevalent in the professional side of the financial markets as it was to the man on the street. New hedge funds appeared with alarming regularity, and banks were only too keen to allow them to leverage in multiples of their true worth. It has been reported that many of these funds have since disappeared from whence they came, and many more are expected to over the coming year or so as 'traditional' lending practices are restored.

It seems the worst could well be over, however let us not speak too soon. The latest plan by Obama has caused a decent relief rally in the stock markets, however it remains to be seen whether the latest plan will actually work.

About the Author

Justin Gowen is a bond and derivative broker, having previously been a market maker at CS and HSBC with a total of 13 years as a market professional. He contributes regular articles to the popular business site KnowledgeBrief, and is on the advisory panel for the business guide BusinessBrief

Justin Gowen