The Hindu Business Line : Missed distress signals

Numbers, they say, leave a trail. No wonder then, ordinary people drawing non-descript salaries are flummoxed at how the fraternity of number-crunchers, (read analysts, consultants, even journalists) did not see the red-mark on the report cards of global institutions that have since fallen dramatically like nine pins across continents.

As Governments across the globe try to cobble together solutions to bring that elusive creature called confidence back into the financial system, it is with a gulp that one harks back to those rose-tinted views.

Reflecting real life, Hollywood portrayed the stock broker as the one with swank cars, fat salary and mouth-watering bonuses; companies held their breath when rating agencies, consultants or experts with financial institutions gave their views on how it had run its business. Crude prices were tipped to go up, up and away, with $200 per barrel punctuating conversations of several sector analysts. And back home, the capital markets at a healthy 21,000 was expected to romp on.

As the year draws to a close, the picture has lost much of its sheen. Global institutions have been brought to heel by the sub-prime crisis, now a house-hold term. And whether the blame lies with the American people for defaulting on loans taken to buy houses, or with the financial institutions and banks for re-packaging bad loans and selling it in other markets as attractive goodies, what is disturbing for a ring-side observer is that distress signals were missed.

Time for introspection

Companies that were once given glowing reports on their performance now stand beleaguered and so are some of those companies that wrote those report cards! Crude prices hover at $70 per barrel, and the Sensex is languishing at about half the peak that it touched in January.

Ever wondered why the high decibel projections have crumbled like the proverbial cookie? Well, number chasers certainly need to introspect, why published data and research reports did not scream from the roof-top of tumultuous times to come. Was it because the numbers were so finely stitched together that nothing showed? Or, then again, was it because there were too few nay-sayers to say the Emperor wore no clothes?

Except for a few, like the Nobel winner for economics, Paul Krugman, who saw the catastrophe coming, it seems others did not smell an economic crisis until it flared up in the face of corporates and investors. And it was not that there were no fire signals.

They came in different forms — profit warnings from HSBC early last year, rumblings from RBS, there was Britain’s home-lender Northern Rock that floundered last year and got bailed out by the UK government. But the alarm bells seemed to blare out only when the US investment bank Bear Stearns and mortgage finance companies, Freddie Mac and Fannie, Mae were driven to the brink.

Independent investigations, needed

As heads roll and blame is fixed in the aftermath of the credit crunch, the fraternity of number-watchers too need to soul search on why distress signs were missed? Was it that the numbers revealed less than they concealed?

In which case, the fraternity needs to rely less on this routine exercise of published financial statements, and do independent investigations instead.

Or then again, if the numbers did indeed hint of bad times to come — then, was the crisis not sniffed out as they were unwilling to scratch the glitzy surface of “robust” financial health? An uncomfortable thought that will leave a bitter taste, as people on the streets try to digest the enormity of the crisis that has now begun to touch their lives.

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