New book reveals the power and greed behind the global financial crisis

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Banking expert warns we are destined for future financial crises if institutional practices don’t change

A new book by a University of Wollongong (UOW) banking and finance specialist explores the US investment banking industry and the institutional drivers behind the Global Financial Crisis (GFC).

Countdown to the Global Financial Crisis: A Story of Power and Greed (Cambridge Scholars, 2022) by Dr Paul Mazzola traces the pattern of crises that have affected the American investment banking industry to reveal the long-standing banking culture that was established at the birth of the United States and culminated in the GFC.

Dr Mazzola, a lecturer at the School of Business, said the book is an apt reminder that bank behavior has not improved since the 2008 GFC.

“With banking culture, it seems the more things change, the more things stay the same,” Dr. Mazzola said.

“While writing my book, I found faulty patterns of behavior repeated before every crisis, from the American Revolutionary War to the present day.”

The book finds that industry culture, individual behavior and regulatory bodies have all played a role in GFC. Dr. Mazzola, a former investment banker, explores how America, the stalwart defender of capitalism, endured a litany of characters who succumbed to the corrupting influence of power.

One of the most prominent figures Dr. Mazzola analyzes critically is former Lehman Brothers Chairman and CEO Richard Fuld.

Dr Mazzola reveals how Fuld’s strategy has tended to push the boundaries of risk even further than its predecessors in the areas of leverage, product innovation and asset positions, such as overexposure misinformed to the real estate market during the formation of the real estate bubble.

“Fuld’s focus on trying to generate ever-increasing profits was also self-serving, as a large part of Fuld’s compensation consisted of bonuses aligned with company performance,” Dr. Mazzola said.

“Fuld’s authoritarian decision-making style should act as a warning against future governance failures. He lit the wick of the GFC flame that was fueled by decades of greed.

Dr Mazzola said Australia’s banking culture was not much better, despite calls for reform.

“Unfortunately, I am not optimistic that things will change dramatically. In Australia, we are two years away from the Banking Royal Commission and there has not been the progress that one would expect in the scandal-prone industry,” he said.

“The exploitation of customers, the misalignment of governance frameworks and practices, and profit-driven performance incentives that drive self-interest combine to maintain a culture based on power and greed.”

“I hope my book offers the industry a cautionary tale because until the dysfunctional human behaviors that led to the GFC are changed, we are destined to suffer similar crises.”

Countdown to the Global Financial Crisis: A Story of Power and Greed will be officially launched by the recently retired Chief Executive of the Financial Services Institute of Australasia (FINSIA), Chris Whitehead, on Friday July 1, 2022 at Sydney Business School.

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