Alessio Rastani: Three lessons banks didn't learn from the financial crisis

Remember the trader who told the BBC that “Goldman Sachs rules the world”? This is his column

Our columnist Alessio Rastani is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own, and in no way endorsed by LondonlovesBusiness.com)

In case you’re thinking that this is another article aimed at bashing bankers, well, you’re wrong. I know “banker bashing” is back in fashion but personally I am not subscribing.

However, the current scandal surrounding LIBOR and its implications for London, not to mention the trading losses made by JP Morgan, means the banks have still not learnt any lessons from 2008.

So here are 3 lessons the banks must learn if we are going to see any changes in the way matters are run.

1. The strongest currency

If I asked you “what is the strongest currency in the financial world”, what would you tell me?

The British Pound? The US Dollar? Japanese Yen? The Euro? Surely not!

Believe it or not the strongest currency in the world is still Trust.

Trust is the very foundation of business. It is what gives us peace of mind when we deposit our money in a bank.

Trust also depends on relationships. It is the relationship between a merchant and a customer. 

This is why one of the most important tenets of business is “relationships first, business second”. You are more likely to buy from someone you already have a relationship with than someone you have never heard of.

The recent scandals purporting that major financial institutions have been rigging LIBOR have done nothing but to destroy the bridges needed to build trust between people and financial institutions.

One of my trading partners recently joked that in the US, people have more faith in the existence of UFOs than in their financial system.

At a time when financial institutions can manipulate a trusted benchmark, inflating it or deflating it, to suit what benefits them most, isn’t it legitimate for people to be cynical about the banks?

2.  Short termism

One of the things that can destroy business relationships very fast is trying to achieve rewards with no consideration of the permanent damage it may do to that relationship.

The fallacy of “short termism” was one of the causes of the 2008 financial crisis. 

The entire economy came to the brink of a global depression thanks to the short-term thinking of many institutions. They profited from selling loans to less than credit-worthy clients all for the sake of a quick reward.

This mindset of quick rewards irrespective of long term damage has forced many private traders to blow up their trading account. 

In the case of major financial firms, such as JP Morgan, we learnt recently that the extent of their trading losses was not $2bn but close to $9bn.

Again, long term goals and objectives are sacrificed for the sake of the short-term rewards of receiving a hefty bonus.

 3.  Lack of disincentives

In my previous article for LondonlovesBusiness.com, I wrote that another failure of the banking system which led to the 2008 financial crisis is the lack of any incentives to curb excessive risk-taking.

Take the example of an airplane pilot: he has a responsibility to fly the aeroplane as safely as possible so that the passengers arrive unhurt. If he fails in this duty, both his life and the lives of the passengers on his plane are at risk.

The same can be said for the construction engineer: it’s his duty to make sure the building does not fall upon its occupants. Otherwise he’s failed in his duty of care.

When you compare this to the financial industry, what safeguards are there to ensure traders feel the same responsibility to the people whose money they are trading?

Until we address these problems and the banks learn from these three lessons, we are forced to repeat the mistakes of 2008.

At the heart of the problem lies the lack of transparency, breach of trust and not the mindset of fiscal responsibility but “let’s see how much we can get away with”.

Until these issues are taken care of, history will have no choice but to repeat itself.

For further information about trading the markets visit my website www.LeadingTrader.com.

Alessio Rastani gained fame and caused controversy last year by stating live on BBC news that he “dreams of another recession” and that “Goldman Sachs, not governments, rule the world”. The YouTube clip has since been watched over two million times, and Alessio has subsequently been interviewed by figures such as Sir David Frost. His website is LeadingTrader.com.