Sunday, August 26, 2007

‘Old fools never learn’

People like to say that “‘suckers’ are born every day”. But some tend to forget the adage that ‘old fools never learn’.

The rational minded cannot be blamed to think that banks, arguably the most regulated industry in the world, would have learnt from past mistakes of bank failures or from the ignominious example of a grand and reputable merchant bank, Barings, single-handedly brought down by a rogue trader who had made several ‘unauthorized’ wrong bets.

Even where formidable safeguards are in place to prevent the ‘old fools’ theory from happening, the best control systems can still be bypassed by the greed of man. No?

Think again, after you read the following bad news at on August 25, 2007 (excerpts):

FRANKFURT (Reuters) - Stricken German state lender SachsenLB is expected to be sold this weekend to another German state bank, Horst Metz, the finance minister of Saxony, said on Saturday.

The eastern state of Saxony and local community savings banks own SachsenLB, the second German casualty after the subprime mortgage crisis led to difficulties in world credit markets.

Last week a group of state banks said they would rescue the bank. In return for a 17 billion euro ($23.1 billion) credit line to keep it afloat, the owners were forced into agreeing to its sale, a milestone in Germany, where few state-owned banks are ever put up for auction.

Germany has taken the brunt of the European fallout so far from problems stemming from subprime home loans as two of the country's banks have almost collapsed, requiring high-profile industry bailouts.

A spokeswoman for BaFin said SachsenLB's Irish subsidiary had already been investigated in 2005 and problems with its risk exposure had been found.

How many more such fragile cases could come out of the closet remains to be seen as each financial reporting session to the Central Banks approaches?

Global banks would have their work cut out to determine the value of, with a reasonable amount of certainty, their net exposure (loans less estimated recoveries) to hedge funds and various derivatives, what with the recent turmoil in the financial markets and the high subprime loans defaults.

No one can say for sure that old fools can ever learn from past mistakes until the current debacle and turbulence finally blows over. It could be a big struggle for an ‘old fool’ to rebuild the foundation once again. (Think of the two ailing German banks and past mistakes)

‘What if it should fail? What if it should fail?’ the Yi has occasion to remind both the Junzi and the Da Ren on what they have been doing.

Therefore like the ancients, and the better managed global banks, be cautious and wary. In uncertain times like these where more skeletons could surprise and leap out from the closet, unless one want to remain an old fool, it may not be far wrong to follow the ancients and play it safe.

Markets never die, live to fight another day.

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