2013 marks the fifth anniversary of the collapse of Lehman Brothers. It is important that we remember the lessons learnt in the tumultuous weeks following the bank’s default, when the financial markets suffered what many felt to be a near-death experience.
So, what have we learnt, and what has changed since Sept. 15 2008? Perhaps an academic perspective might be useful. In psychology, the response to catastrophic events is routinely categorized by practitioners as a multiphased process commonly referred to as the ‘Five Stages of Loss and Grief.’ These stages can be defined as denial and isolation, anger, bargaining, depression and acceptance. If we apply these stages to the global financial crisis, as an industry, where are we in our recovery?
Throughout 2009, market participants displayed many of the phase one characteristics inherent in denial and isolation. The general perception was that the entire financial markets community had failed, and required life support from central banks and tax payer funds. At the time, even those who bore little responsibility for the crisis felt the need to retrench and avoid taking a public posture of any kind. Isolation certainly held true.
Phase two is the anger process and in 2010, there were reprisals. Following the G20 summits in London and Pittsburgh in 2009, governments and policymakers embarked on a period of developing sweeping regulatory reform to address consumer concerns, systemic risk and market instability. Some of these measures were easily embraced as sensible solutions for systemic risk managers; others have continued to be vigorously debated. In particular, concerns centered around the unintended consequences of regulatory mandates and the perceived one size fits all approach to regulatory reform. Disharmony was a predictable response.
Next came bargaining. This process represents a need to regain control and often involves asking rhetorical “what if” questions. In 2011, constructive signs of engagement and collaboration with peers and regulators appeared, as some of the largest securities market firms acknowledged things were changing. The fourth phase, which can overlap with the bargaining phase, is depression. Whilst this sounds like a slump or a negative, it can be the opposite because it is preparation for what is now universally known as “moving on”. Moving on certainly does not mean we forget the past, or that we fail to learn from it, but it does convey a new chapter and beginning. Was this our state of mind in 2012? It certainly sounds familiar.
The final part of the cycle is where we are now – acceptance, otherwise known as the “wake-up” call. This is the realization that we cannot change the past or the circumstances. However, it does mean we can begin to become hopeful about our industry’s future and its potential. Market professionals across operations departments can help to prepare firms for this next phase by learning from the past, removing operational risks, supporting evolving business strategies and setting a solid foundation for the future.
Eloquently expressed in an interview with The Financial Times, Brain Leach, chief risk officer of Citigroup said: “If you can improve the operational side of finance you actually extend the real economy in a positive fashion”. This is may not, at the present time, represent the mainstream perspective, but this view is likely to become more widespread as market participants accept that regulatory change is inevitable, and that a fresh approach to new market infrastructure is a positive. We can continue to transform our industry – and it’s time to move on.