The raw, rainy weather in Vienna serves as a metaphor for the bleak feelings of many attendees at this year's Sibos payments conference, which is taking place during what is commonly being called a meltdown, crisis, or, as Martin Wolf, chief economics editor of the Financial Times, described it when he kicked off Monday's opening session, "an extraordinary moment in financial history."Seizing the weather metaphor, William Rhodes, senior vice chairman at Citi, contended that the industry is in "the eye of a storm." Referring to the extreme leverage many firms took on, and the real estate bubble, he said, "We were living in a Goldilocks economy. Now there is dislocation in the credit markets worldwide, we're in the worst housing downturn since the Great Depression, there's a lack of confidence between and among financial institutions." Other factors were "lapses in regulatory oversight and corporate governance." According to Willem Buiter, a professor at the London School of Economics, policy makers are responsible for "half the problem, but financial institutions are at least as guilty" since they chased the questionable business and vanishing spreads. Speaking of regulation, Buiter said, "'Soft touch' regulation regulated names rather than risks. Some of the changes that are necessary can only be effectively done at the global level." As if the audience wasn't anxious enough, Buiter predicted, "The next crisis will be even more interesting than the current one. We haven't seen the hurricane. We could be in for a long and persistent recession in the North Atlantic area, and the U.S. hasn't been in a recession yet." Based on the comments of the panelists, the FT's Wolf observed, "So the answer to the question,' Is the worst over?' is a resounding, 'No.'" In terms of lessons learned, David Hodgkinson, group chief operating officer, HSBC, remarked, "When you're in a hole, stop digging, but that's not enough." The industry has to be much more proactive about risk and addressing dangerous practices, he said. In terms of risk, he added, "exposures need to be looked at holistically," also stressing the necessity of "building the independence of the risk function and building management understanding or risk. It should report to the CEO and have access to the board. While defending the concept of securitization as "vital to the future of our industry," Hodgkinson also said there is "a need to return to simpler, more transparent instruments." Ultimately, the LSE's Buiter said, "There is a real governance problem in financial institutions. It's more acute in finance because finance is inherently unstable. [Institutions] trade in trust and promises." Furthermore, since "governments will not let large financial institutions go broke, it means there must be more wide-ranging regulation -- uniform regulation for all highly leveraged financial institutions." As far as regulators' current actions, Buiter noted, "The amount of moral hazard that has been created is staggering." In terms of lessons that have been learned -- or should be learned -- from the current troubles, Citi's Rhodes provided a long list: "I hope we finally get international accounting standards and international regulatory norms that are adhered to. Basel II has to be looked at again. Securitization has to be done in a prudent, transparent way. There has to be an understanding between regulators and those they regulate on these issues. "But," Rhodes added, " I don't want to see innovation killed." But innovation must take place "in a proper, prudent, transparent way. That's essential for a financial system." Responding to the panelists' emphasis on management knowledge and insight, the FT's Wolf suggested (I think only half jokingly), "There should be on one in management under 50! It would be so helpful if there were bankers who were around in the 1920s" -- the last time in modern history that the very existence of the world's financial system was questionable. It's an appealing concept -- if only repairing the financial system was as simple as having senior citizen greeters at Walmart.
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio