Opinion: Trust hung, drawn and quartered

Last year was momentous in so many ways. Financial markets were convulsed with the worst series of shocks since the stock market crash of 1929. The investment banking model was destroyed. International credit markets froze like rabbits in the headlights of the credit crunch. Most of New Zealand's biggest finance companies collapsed. The New Zealand Superannuation Fund lost more than $2 billion in September and October. Governments around the world, including ours, were forced to promise to guarantee deposits in banks and other financial institutions, such as money market funds in the United States and finance companies in New Zealand. Assuming the emergency measures taken by central banks and governments stabilise markets and institutions, eventually, there will be some sort of recovery in asset prices and the financial intermediaries that manage and trade them. But one casualty of the rolling series of credit crunch events will be much harder to rescue or rebuild - trust. At the beginning of last year, most New Zealanders trusted their financial advisers, finance companies and banks. Most investors around the world trusted the big investment banks and hedge funds that had looked after their money for years. Savers assumed their advisers had done some due diligence and that they were regulated closely enough to ensure they could handle some financial market turbulence and any surge in bad loans. What followed was 12 months of shock, denial, pain, anger, and a realisation that no one seemed to know what was going on or how to fix it. The experts looking after the money weren't so expert after all. People asked their financial adviser or finance company for reassurance about the safety of their investments and were told to relax and to keep reinvesting their money. Deep wells of trust, often reinforced with years of cordial relationships, were called on to quell the nerves. News of collapses came like hammer blows. During the past two years, 43 local finance companies, mortgage trusts and investment funds have been frozen or shut down. More than 177,000 accounts with $5.9 billion are inaccessible, and around half of that money is likely to have been lost. Even now, most investors are in denial that they have lost their money. The extraordinarily high votes for delayed repayments by failed finance companies showed that many investors still believe time and the inevitable bounce-back in property markets will heal their wounds. The extraordinary Bernie Madoff scandal reinforces that even the most sophisticated investors were wrong to trust those with reputations and connections. Trust in huge institutions like ANZ and ING has been damaged as funds they managed were shut after huge losses. Now the long grind of recovery starts but investors will never trust so easily again. They should ask a lot more questions. What type of investment is it really? How does the adviser make money? Is this guaranteed by the government? Does it depend on international credit markets operating smoothly? In an age of distrust, investors will have to educate themselves and take the ultimate responsibility for where they put their money. * This opinion piece was first published in the Herald on Sunday, January 4, 2009.