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Anniversary Lessons

ANNIVERSARIES are an effective way of reminding us that we are all a year older. The question when it comes to the global financial crisis is whether we are any the wiser.

The collapse of Lehmann Brothers, the badly run Wall Street investment bank that collapsed a year ago plunging the world’s banking and financial systems into unchartered waters has come to be celebrated as the trigger point of the crisis.

It was the signal event – a long way removed from every day life in Australia - when suddenly the unthinkable became possible and the financial system was staring into an abyss.

A year on the world seems a distinctly brighter place.

But what have we learned? More importantly will the experience of the past year prevent the same mistakes being made in the future?

The first lesson that a lot of Australians learnt was about their superannuation. The shift to a defined contribution retirement savings systems for the vast majority of Australians more than 20 years ago meant that the market risk was borne by fund members – and suddenly the connection between the world’s financial markets and your super nest egg was driven home via your member statement or online account value.

Super fund managers often complain about member apathy or lack of engagement. A byproduct of the GFC may be that super fund members pay a lot more attention to what their funds are doing and their relative performance. That will be a positive thing going forward even if we would have all preferred the motivation to have been something more positive than a financial crisis.

Still a lifetime’s education in market risk came free with the global financial crisis. After four or more benign years risk returned to wreak havoc on the undiversified portfolio. Suddenly boring old bonds became the asset class of choice as they proved to be a true safe harbor as sharemarket storms raged around us.

Like all good sports teams, investors have learned that a good defence is just as fundamental to long-term success and wealth protection as the pursuit of high performance.

The financial industry runs on numbers. Some people would have you believe it is only the numbers that matter. But in this highly technical and computer modeled world the GFC exposed two other key ingredients to a successful global financial system – confidence and certainty. The really scary thing after the Lehmann collapse was the destruction of confidence between banks – suddenly no-one could afford to trust anyone which meant there was no option but for governments to stand in the market to provide bailouts and guarantees. For a time it looked like we might end up with a nationalised or at best socialised banking system.

The impact of the government guarantees for bank deposits cannot be underestimated for the way it allowed certainty to return to the system although the challenge now facing the regulators and politicians is how to wean the banking system off those guarantees because clearly it has had a disruptive effect on market competition.

Regulators have also had to learn some tough lessons. While not to blame for the excesses of the financial services industry clearly the underlying principle of investor protection in Australia – full disclosure – did not work and many investors suffered because of inappropriate products and investment strategies.

ASIC is encouraging public debate about getting the regulatory framework right. So it should because if this generation of investors can help the next generation avoid the type of wealth destruction that occurred in the past 12 months it will mean that the GFC will have left something of a positive legacy.

The chairman of Federal Reserve in the US, Ben Bernanke, this week made his strongest statements that he feels the recession is over – albeit it is couched in terms that suggest the recovery will at best be slow for some time to yet.

But if we are to pick one lesson out of the GFC surely it would have to be that forecasting the future is incredibly difficult. The US and most of the developed world have been through a deep and painful recession so we should be cautious about the speed of the recovery – particularly in the US.

Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia.


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