Abu Dhabi, UAETuesday 11 December 2018

In defence of those forced to adjust

The current financial crisis seems to have unleashed a torrent of latent hostility towards bankers and the financial sector.

To be a banker these days seems to be as bad as having leprosy, on top of which, many are revelling in the misery of the profession. I have been one of the harshest critics of banking executive excesses, but the antipathy towards bankers may prove unhealthy and damaging in the long run to many economies, not least those in the Gulf which aspire to build world-class financial centres and seek to attract some of the brightest and the best talent into the profession.

The current financial crisis seems to have unleashed a torrent of latent hostility towards bankers and the financial sector with calls for the regulation of pay and bonuses for greedy "fat cats". The US bailout plan was only grudgingly passed by Congress after insistence by lawmakers to impose some financial limits on executive pay. Main Street was going after Wall Street with a vengeance. While admittedly there have been examples of exorbitant remuneration packages and bonuses, especially in investment banking, as well as flaunting of greed, selfishness and arrogance by some traders, the financial sector has made significant contributions which should not be overlooked in the current climate of hostility. Before the global financial meltdown, getting rich from globalisation seemed to be an extremely legitimate pursuit for many. Financial services and their products were going global, offering solutions that traditional banking could not, while globalisation meant rolling back government control and intervention and allowing market forces a freer reign.

This unleashed a torrent of new products in the financial sectors. A key problem in trying to understand the current financial mess is that regulators and bank supervisory boards did not keep abreast of new developments or understand the underlying risk-management implications. Everyone was happy as long as the party continued. Bonuses fed into the real economy through rising property values, job creation and support industries such as IT. Shareholders were happy as larger dividends continued to roll in, and financial centres around the world, including the Gulf, vied with each other to attract the boldest and the best of investment banks to set up shop here. Leading business schools could not get enough high-calibre graduates - sophisticated and internationally orientated - to meet market demand for investment bankers. But to suddenly tarnish the whole financial profession with the same brush because of the excessive actions of a few is dangerous, with far-reaching long-term implications.

Bankers, as a whole, will have to endure a certain degree of unpopularity during these extraordinary times, with many losing their jobs and some moving to entirely new professions and bringing their talents to other industries. But for those who remain, as well as for those new recruits thinking of entering the banking and finance world, the message is simple - do not give up hope. There is important and valuable work to be done ahead. Finance is the lifeblood of any modern nation and world economy - and its needs changes.

So will financial services adjust under new terms and conditions? There will certainly be more regulation, an emphasis on risk management and government intervention, but history has always favoured the brave. Bankers can now turn their energies and skills to producing financial solutions to global issues such as carbon emissions, environmental controls, asset-liability management to meet ageing population needs, as well as refining products such as capital preservation and inflation hedging. Innovation - true financial innovation leading to a more sustainable economic growth - should become a key priority going forwards.

This was the theme of the recently held The Banker/FT Investment Banking Awards 2008 in London. While we all seem to have become experts on how and why subprime loans came about - sheer risk management stupidity and greed - few appreciate the innovation shown by some banks in a wide range of badly needed products and services. Without diminishing the hard work of many others that received awards, who would have associated Credit Suisse in being handed accolades as the "most innovative climate-change bank" for overcoming key investors obstacles in carbon credit offsets using techniques from collateralised debt obligations, or for Merrill Lynch, now taken over by Bank of America, as being the "most innovative in sustainability and resource exploitation". Then there was Barclays, judged "most innovative in commodities trading portfolios", as well as in inflation-linked hedging, an issue which is of great concern to many in the Gulf. Investment banking institutions such as Morgan Stanley and Goldman Sachs showed they could be innovative in services closer to the ordinary retail consumer and corporate sectors when they were awarded the most innovative in retail-structured products and initial public offerings respectively, indicating that they would not have a major problem transiting to their new deposit-seeking banking-holding licences. To illustrate that financial innovation knows no boundaries, BNP Paribas was awarded "most innovative Islamic finance services", and not an indigenous Islamic institution.

So, before we all rush in and hurl abuse at bankers, let's just sit back and reflect on some of the good the profession has brought to the world and that we still need them to continue to innovate. If we don't, we stand to lose the best and brightest from the profession. Those in the financial world are a reflection of wider society, and society is demanding a new sense of modesty and decorum from our bankers. The Gulf is trying to establish itself as a global financial player, and can lead the way as well as continue to encourage its most talented nationals to seek a career in finance.

Dr Mohamed Ramady is a former banker and a visiting Associate Professor, Finance and Economics Dept at King Fahd University of Petroleum and Minerals