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Standing next to the bishop

Is it an appropriate position for the financial services industry?

SWELLENDAM – The maxim cautioning advertisers against “standing next to the bishop” means simply that they must be wary of the attention they draw to themselves and their motives.

That saying came to mind over the recent furore sparked by asset manager Futuregrowth’s announcement that it would stop “lending” money to a number of South African state owned enterprises. That in turn set off a number of responses including market jitters with the rand losing 1.5% on the day and most likely playing some part in Moody’s decision to review the ratings of five parastatals.

Futuregrowth, in the form of chief investment officer Andrew Canter, took the stand next to the bishop, not so much by the decision, but by its widely publicised announcement. While some hailed it as brave and even “revolutionary”, I had a very small overripe tomato that I flung as a question on social media regarding a lender unilaterally announcing to the world that it would no longer accommodate a specific borrower. Imagine if your bank blacklisted you publicly after considering a loan application.

Canter has subsequently conceded that there could “have been a fairer process” and that “the story had some remarkable unintended consequences”. Is being fully aware of these things not why one invests in these institutions? That aside, Canter’s integrity is not in question, and he was responding to a situation that was common knowledge.

The problem with hurling a tomato at the one next to the bishop is that you could hit the bishop. As I discovered when my missile was blown off course by a “fiduciary wind” and the argument that these high profile borrowers were being subjected to reckless political meddling. In the words of Pravin Gordhan (in the iOL article), the move was a “useful lesson that we should not think the world is not watching us.” But that should add more concern, because like cluster bombs, the fallout has been much wider and has added further stresses to all levels of the South African population.

With no innuendo intended and as a general hypothesis of the incredible weight of responsibility placed on financial institutions generally, one has to reflect on a conundrum they face.

If an institution can foresee that a certain public announcement could have a marked effect on financial markets, does it not have a duty to protect its own book against such a fallout? Perhaps even exploit that situation for its own or related clients? If it does not do so, and their clients are negatively affected, would they have acted in their best interests? The danger that presents itself under the umbrella of “fiduciary responsibility” is increased exposure to insider trading – albeit unwitting and perhaps even with good intent.

Of course, it would be outrageously illegal if an entire event is staged specifically for that end. This is covered by legislation, but the problem with insider trading is that its trail can so easily be lost from source, via brothers, lovers, uncles to one eventual beneficiary.

It is sometimes very easy to stand next to the bishop in a charged atmosphere. The American banks arguably did that in 1985 when they pulled the plug on South Africa. What was not so well known was that despite trade sanctions, these same banks, backing a commodities upsurge in the preceding years, were seducing the country into issuing more IOU’s. Financial sanctions coincided with American institutions unwinding commodity investments as the boom began to falter.

See chart below, courtesy of Mike Schüssler.

Commodity Super Cycle chart; The Economist All Commodity Index (In real terms)

screen-shot-2016-01-12-at-5-15-58-pm-500x328

Basic source: The Economist – calculations Mike Schussler. 

More on the commodity super cycle here.

Let me emphasise that the South African financial services industry is highly respected, well regulated and acknowledged by august institutions as one of the best in the world. This reputation has to be protected and defended at all costs. Positioning itself as an economic moral compass will ultimately make that task more difficult. No sooner had Futuregrowth gone public, than all kinds of misguided missiles were flying all over the place – from Mining Minister Zwane’s call for an inquiry into bank behaviour towards Oakbay, to some naive interpretations of the role of the Reserve Bank.

At least some of their baskets are filled with the toxic fruit of the global financial industry. It is common cause that reckless behaviour played a large role in the 2008 meltdown – a state that led the then Fed Chairman Alan Greenspan to lament that he was wrong in trusting the industry to act in the interest of its long term survival. It has been rife with scandals, corruption and price manipulation for decades and is constantly being subjected to further controls.

On an individual and product or service level, financial services add little tangible and measureable value, yet their sheer size and spread contributes about 20% to global GDP (See Moneyweb article here.) It has become by far the biggest driver of the world’s economic destiny, with individuals in control using other people’s money to shape that course; being paid large sums to do so, yet risking very little of their own personal wealth.

The industry is widely fragmented and hugely diverse, but as a whole and virtually by default, it has become a “5th estate” perhaps the most powerful outranking others vaguely defined as government, the private sector, general consumers and, of course, the media as the 4th. As a balancing force in a healthy democracy, any additional watchdog with teeth should be welcomed – especially in a country with deep-seated patronage, nepotism and corruption that even institutional bull-terriers and judicial Dobermans have difficulty in controlling. Ultimately, it’s about who is watching the watcher – the 4th estate?

Standing next to the bishop to the point of overwhelming his presence demands a full appreciation of the gravity of that position and an ability to put narrow interests aside for a greater good – especially those with market influence.

Can they do that?

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