PANEL: Global Financial Crisis—Risk, Regulation, Remuneration
Master of Ceremonies:
Matthew Bishop, American Business Editor and NY Bureau Chief, The Economist
Keynote Speakers:
His Excellency Shaukat Aziz, former Prime Minister of Pakistan
President Michelle Bachelet of Chile
Panelists:
Paul Wilmott, Founder, Wilmott Magazine and Wilmott.com
Lex Fenwick, Chief Executive Officer, Bloomberg Ventures
Dr. Benoit Mandelbrot, Sterling Professor Emeritus of Mathematical Sciences, Yale University
Juan-Felipe Muñoz, Managing Director, The Otun Group
John Authers, Investment Editor, Financial Times
Panel summary by Mary Kate Nevin, World Policy Journal
“The world today faces innumerable challenges,” began Former Prime Minister of Pakistan Shaukat Aziz, like climate change, nuclear proliferation, security challenges, and—of course—the global financial crisis. Aziz first explored several factors that precipitated the crisis; for one, risk management systems in most institutions were driven by greed and arrogance and a lack of proper checks and balances. Capability was lacking in the financial system, as well; “regulators, in my view, had big gaps in capacity,” said Aziz. 
Looking forward, he called for a “massive exercise in raising capital.” In the throes of the crisis, governments provided what the markets couldn’t with their massive capital injections, but in his view “governments should remain regulators and only regulators.” He also advocated reforms to executive compensation as well as consolidation and coordination or regulatory activity. But the most important reform to be made is that of leadership. “I would sacrifice everything to get good, strong, hands-on management and leadership” that has wisdom as well as street smarts, he said. “With a little humility, we have to make sure we don’t repeat what happened.”
World-renowned mathematician Dr. Benoit Mandelbrot, the inventor of fractal geometry and chaos theory, spoke next, analyzing the theoretical flaws that drove financial decision-making leading up to the crisis. Traditional theories of pricing, he explained, were outdated and simplistic, “grossly fail[ing] to fit reality.” The real risks were much greater than what traditional theory would imply, and since the risks were oversimplified, brokers were overconfident, prompting market decisions that eventually proved disastrous. He called for more serious research on pricing and expenditures, and pointed to his book, The Misbehavior of Markets: A Fractal View of Risk, Ruin and Reward for a model of market behavior that more accurately reflects reality.
The people ultimately responsible for risk management “simply didn’t understand the risks and the instruments,” emphasized Lex Fenwick, the CEO of Bloomberg LP. And he is not optimistic about the future. He points out that since the crisis, America has consolidated its financial industry into only three or four enterprises, an “infinitely more dangerous position than we ever were before.” Plus, with the lavish salaries of employees at firms such as Goldman Sachs, it will be difficult to attract sharp financiers to regulatory positions, such as the Security and Exchange Commission. To escape the “culture of greed,” he offers the possibility of more holistic remuneration, such as long-term stocks, encouraging people to think beyond short-term gain. But as moderator Matthew Bishop pointed out, that had always been the strategy of Lehman Brothers and it fell the hardest. Overall, “undoubtedly the problem will happen again,” said Fenwick. “I just can’t tell you when.”
Juan-Felipe Muñoz, managing director of the Otun Group, then spoke of the specific implications of the financial crisis in Latin America. Since the financial crisis, some progress has been made. Banks have increased their capital holdings and become more reliable, he said, and transparency has considerably improved. Funds are moving toward infrastructure projects because they provide steady returns, and investors are returning to Latin America to develop global markets. Unlike some of his predecessors, Muñoz had primarily positive things to share.
On the so-called “values crisis,” Paul Wilmott said he is “not sure about the whole ‘greed’ explanation … Greed is what, from an evolutionary standpoint, life is all about,” he said. Instead, the so-called deadly sin responsible for the world’s economic downfall is envy. Envy, he explained, is not about having a certain amount, but about having more than anyone else. In this scorecard mentality, people have to take more and risk more to get more than their peers. More concretely, he attributed the crisis’ ultimate unraveling to abuse of risk management tools. Echoing Mandelbrot, he said “the risk [was] just humongous compared with the simplistic assumptions of normal distributions. The sheer size of derivative instruments was another major factor; they are worth an estimated $1.2 quadrillion (“Fifteen zeros!” Wilmott exclaimed) whereas the world economy is a mere $50 trillion. “You don’t need these,” he said. “You need education, particularly for regulators…. I think we have to simplify things dramatically.”
Financial Times journalist John Authers also doubted the sole responsibility of greed in the lead-up to the financial crisis. “I don’t think there is any particular evidence that people are greedier now than they have been. It’s been a sin since the Bible,” he said. When examining the roots of the financial crisis, a more relevant question would be “why did people get ever less fearful and more confident until the roof fell in?” And how did it occur in such a synchronized manner? The “sheer range of different asset classes and geographies that managed to all fall at once” was astounding, he noted. But no matter its philosophical underpinnings, the financial crisis still provides an impetus for serious reform. Financial innovation is most important, he said, especially in returning responsibility from distant “markets” back to the bankers themselves. In addition, Authers agreed with several other panelists that “the financial system is terrifyingly over-concentrated at the moment,” and called for “one big, aggressive intervention to split them up so no one is too big to fail.” However, he conceded, political impetus for this is lacking.
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Finally, Chilean President Michelle Bachelet presented her thoughts on the economic consequences of the crisis, as well as some lessons to be learned. “Crises such as this one are profoundly socially regressive,” she said, and governments must do everything in their power to both help those who have fallen into poverty and ensure that such a crisis never happens again. This will require major change across the globe, she said, because “business as usual is not good enough.”
First, Bachelet noted, countries must realize that this was more than a terrible economic crisis—it was also a political crisis. It is therefore critical to foster political will and multilateral cooperation going forward. Secondly, she said, we must realize that the world is not a self-regulating marketplace, and the costs of abiding by Keynesian and neoliberal ideologies has been so high that “we cannot allow ourselves the luxury of ignoring it.” In response to the crisis, governments have proven themselves capable of acting quickly in formulating cooperative and effective plans. The crisis thus represented a “paradigm shift that brought us to a new political, economic, and ideological moment,” one which she urged the world to take full advantage. Finally, she said, the world cannot forget about the need for institutional reform of the International Monetary Fund, the World Bank, and other major organizations. The world order has changed since they were created after the second world war, she explained, and must now be reconceived in a more inclusive and representative fashion. “Reform is urgent, and must not be delayed,” she declared.