Nick Bendel
Bowling from the Wall Street end
March 14th 2009 07:39
The loss exposed the Australian team’s lack of depth. With the imminent retirements of both Warne and McGrath, suddenly they were not looking as infallible as they had been.
Around the same time, the words ‘sub-prime mortgage’ first entered the wider vernacular. In the United States, lending firms had a long-established practice of lending money to people who may or may not have been able to afford the repayments, depending on prevailing interest rates and house values. The firms knew these mortgages were not as safe as others on their books, so they called them ‘sub-prime’ in order to distinguish them from those which were unlikely to default – their ‘prime’ mortgages.
Due to the risk posed by these mortgages, some financial boffins had packaged them together. Believing that while some of them might default, the majority would be OK, they knew a package of them would be worth something. Put simply, if you have five mortgages worth $100,000 each and 20% of mortgages are likely to default (i.e. one of those five), you can package the five together, take off the value of the one that is going to default, and sell the package for $400,000. Now although you have five mortgages each rated at 20% chance of defaulting, you can say that you’ve discounted for that chance and the product you’ve developed actually bears very little risk. Then you sell the package to ignorant investors, charge them for your services, and suddenly the number of ‘sub-prime’ mortgages that you have on your books is reduced. Voila, from my hat comes a white... elephant.
The problem came when interest rates started to rise and the value of the properties started to drop. Suddenly, the chance that a mortgage would default increased, because people couldn’t afford to pay the higher interest rates. And when a mortgage defaulted and the house had to be sold in a hurry, falling house prices meant that the value of the debt could not be covered by the sale price. Consequently the aforementioned package would be worth a lot less than $400,000. Those ignorant investors had lost their money.
One has to ask how something so obviously flawed was allowed to occur. Rather than a single great leap from sensible lending practices to sub-prime mortgage products, this was an accumulation of decisions, individually not damning but collectively fatal. Risk was incrementally increased as investors and financiers demanded greater returns, all driven by the same motive – greed.
And similarly, it was greed that lead to the problems with the Australian cricket team, though a different type of greed. Rather than maintain a constant approach of building for the future, Cricket Australia continued to select older players. Who could blame them? When you have the greatest team in the world - probably the greatest ever – there’s no need for experimentation. Unfortunately, Cricket Australia was acting as though the good times would last forever. There was no policy to bring on young players, and to give them the chance they needed to prove themselves at the top level. For years, pundits were bemoaning the selection of older back-up players at the expense of young guns. Rather than utilising the wealth of young talent coming through the domestic ranks, there has only been the barest trickle of opportunities for young Australian cricketers, and only the absolute best were able to force their way into the side. This was not a policy designed to build strength in depth.
Greatest in the world? Greatest ever? Apt ways to describe Western economies of the last couple of decades, perhaps? Certainly, they failed to build for the future, believing that the good times would last forever.
The solution is the same on both fronts: expectations must be reduced. Cricket Australia has no choice. Warne, McGrath, Langer, Gilchrist and now Hayden are gone. They have to blood youngsters, and accept the bad results that will follow. Despite the recent resurgence in South Africa, Australia’s dominance is not nearly what it once was. The expectations of the fans of Australian cricket must also be lowered, so that for the immediate future the younger players are encouraged to grow into the best players they can be, not damned for failing to live up to the impossible standards set by their predecessors. Continuing to demand excellent performances, one hundred per cent of the time, is an unrealistic standpoint for fans to have.
The West Indies went through a similar crisis in the early nineties. Through a remarkable lack of direction, and a foolhardy belief in their right to success, they have not been a force since.
As for the global financial crisis, one wonders whether the important players will take the medicine. You can’t just point at Barack Obama, or Ben Bernancke, or their local equivalents, and tell them it’s time to endure a rough patch. Instead, it’s the millions of business owners, shareholders and managers whose expectations must be tempered in these tough times. An economic recovery is likely, though not ordained. If the owners of capital continue to expect, or even demand, such high returns as they’ve had in the past, the consequences will be dire. Expectation of profit in a climate of reduced incomes leads to the driving down of costs, and with that unemployment. Unemployment leads to reduced spending, and therefore lower profits. The vicious cycle this represents bears thinking about, if only as a warning.
For the Australian cricket team Warne was once in a lifetime, McGrath once in a generation. Simliarly, the economic conditions we have experienced were much more the exception than the rule. Only with a healthy dose of reality, and an acceptance of tough times being part of the natural way of things can we expect either to recover.
Mark McGoldrick
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