Greed, fear and crisis

Transparency, strict discipline keys to preventing financial disaster

By Kim Jae-kyoung

History repeats itself. So do financial crises

The 2008-2009 global financial crisis triggered by the U.S. subprime mortgage meltdown was not the first crisis although it was quite severe. Since the Great Depression, many crises have occurred on a regular basis, offering painful lessons to the world.

Unfortunately, the lessons have failed to teach much. Only two years after the Wall Street crisis, there are renewed fears that another crisis will take place but this time in a different form a “sovereign debt crisis.”

Policymakers and investors cite as key culprits many factors, such as lax monetary policy and excessive deregulation. But they are not sufficient to explain the recurrence of crises. The root cause of every crisis, many argue, is always the twin evils of greed and fear.

In the financial market, greed disenables investors from seeing risks, resulting in overconfidence and overtrading. Financial innovation is the epitome of human greed. It made market participants believe that they could reduce risks to zero by diversifying them through securitization.

As it turns out, risk reduction through financial innovation was an illusion. The perceived reduction in risk was due to the bubble that the belief in risk reduction caused. If the bubble formed by greed bursts, fear takes the stage, leading to risk aversion and finally to a market crash.

Greed and fear are balancing forces, because they have corresponding balancing emotional forces in the human brain. Every crisis takes place when the two forces are out of balance with greed stimulating a moral meltdown in the financial market place.

Regulators and economists are struggling to seek ways to control greed and fear as this can be the best way to prevent another crisis. For many, controlling human emotions may sound impossible but one global financial expert indicates that if you stick to two important values ― transparency and investment disciplines, it can help head off a crisis.

Gordon Watson, executive vice president of AIA Group, is one of the few financial executives who witnessed the 2008 credit crisis from the very heart. He has been with American International Group (AIG) and AIA for over 25 years in leadership positions in New York, London and Korea.

Together with Lehman Brothers, AIG, the former parent group of AIA, was considered the symbol of financial crisis. In the wake of the crisis, the group received bailouts from the U.S. government to stave off bankruptcy. AIA has since been divested from the group.

During an interview held at AIA’s Seoul office, Gordon, like many others, refused to share his experience at AIG. Asked about what went wrong with AIG, once one of the most respected financial companies in the world, he dodged the question.

“I work for AIA, which is independently listed in Hong Kong. We are no longer affiliated with AIG, we are totally independent. I don’t think that it’s appropriate to comment on the company I don’t work for,” he said.

However, the AIA’s regional managing director, who oversees Korea, Hong Kong, Philippines and Taiwan, hinted that human greed may be behind the crisis, stressing that financial firms should secure transparency and seek ways to ensure disciplined investments.

“There are two important values in the financial business (to prevent a crisis). One is transparency and the other is discipline to do the right thing. You need to be disciplined, you need to have a risk management system and you have management systems in check,” he said.

Greater transparency in Watson’s words can be ensured through proper regulation, which he believes can prevent market participants from getting involved in greedy investments.

In other words, the main problem with a lack of transparency is that secrecy always makes it easier for bad behavior to occur.

AIA’s investment principles are well manifested in the group’s globalization strategy. Unlike many other global players, AIA has a focused strategy in globalization, which Watson believes is the key to AIA’s success across Asia. The insurance group has been focusing only on Asia for more than 90 years.

This is the reason why the insurer recovered from the crisis relatively unscathed. It has sent an important message for local financial companies seeking overseas expansion with no focused strategy.

Sticking to Asian market

“Asia is our home and focus. We grew up here and are a well-respected brand. We have deep local knowledge in each of our markets,” said Watson, the AIA’s regional managing director, who oversees Korea, Hong Kong, the Philippines and Taiwan. AIA has 100 percent ownership in 14 out of its 15 markets in the region.

What’s behind the Asia-focused strategy was the firm’s principle that they don’t go to markets where they don’t have a deep understanding. It seems that they believe sticking to what they do well is much better than trying to expand without knowing the risks.

“We really are omnipresent in Asia. Even though we are just in Asia, we are a leader globally as well. In terms of market cap we are larger than all the other global insurers,” he said.

“In the short-term, we have no plan to expand beyond Asia. We have so much opportunity in Asia. If you look at economies of the world, Asia is where growth is. That’s where we are and where we want to be.”

Organic growth

The veteran insurer, who rejoined AIA Group in January 2011 after serving as global vice chairman and regional CEO of ALICO Japan and Asia, said that its strategy in Korea involves organic growth through localization.

“Localization is a key to success in every market and we are focusing on growing organically. We are not looking for M&A or anything,” he said.

For organic growth, AIA has come up with a two-pronged strategy. “Strategy one is connecting with quality agents locally. Strategy two is to focus on selling protection products, not necessarily what they want but what they need…. we want to make sure that they buy the way they want to buy,” he said.

One good example of its localization efforts in Korea is its unique direct marketing channel. Considering the Korean’s preference for a speedy, simple way of life, it has created a direct marketing insurance operation.

“We want to make sure that everything is in Asia. A lot of companies try to do much too soon but we are very disciplined. We don’t want to buy off too much focus and we are prepared to grow organically. That’s our philosophy.”