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How Stock Market Hounds Smell Bad Loans

15 August 2007 - Features - Editor

Let the stock market call a spade a spade, because euphemisms tend to breed dangerous complacency! Bulls and bears are part of stock market life, but classic lessons from abominable errors are not to be lost. They say that history repeats itself, so every repeat stock market boom is welcome. However, history does not prevent anyone from learning, and what better lesson than a crash? The latter could be too acerbic a term for the sub-prime story, but it is grave enough from a process perspective.

Basel norms for banks have been around for years: there is even a second version. Do executives of financial institutions which flouted these norms, have any accountability for the stock market? Why call lending to entities with bad credit histories sub-prime? How could professional stock market dealers buy such bad debts? There are no alternatives to effective controls-whether from Basel or elsewhere-for stock market integrity.

It is always the small guy who takes the fall. Top financial institutions, and honest ones, have stayed away from bad debts. Unfortunately, the stock market has no collateral for shenanigans by executives playing with their capital out of public scrutiny. No amount of funds from macro and central sources can substitute diligent credit appraisal on the shop floor. It is time for stock market influencers to gird their loins and take charge of cash flows!

Credit rating procedures are rather basic stuff, suitable for students on the first steps of ladders to financial careers. Is that why stock market veterans have overlooked the fundamentals learnt in youth? Can a premium interest rate make up for the lack of credit worthiness? The risk and return balance means less than nothing if it comes up with infeasible solutions.

It is back to basics for the stock market. Use a strong lens to study how your funds are applied by others. Giving a person more than they can afford to pay back is not justified just because customers are suckered in to exorbitant interest rates. Refinancing this kind of transactions is only liable to make things worse. The sub-prime story is based on pure negligence, and it will keep happening if we do not invest in a controlled and deliberate manner.

 


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