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James Montier: banks need a Hippocratic oath
James Montier, the investment author, believes we could face another financial crisis unless fundamental reform is taken to root out sickness in the financial system.
Investment author James Montier believes we could face another crisis on the same scale as 2008, unless fundamental reform takes place in the financial system.
Speaking at the CFA Society of the UK's annual conference Montier said 'another crisis probably of a similar ilk' represented the most 'predictable surprise' facing investors.
Montier, who has written books on behavioural investing and value investing, said the crisis would largely come as a result of a failure to address the true causes of the credit crisis – namely bad behaviour, immorality and poor policies and incentives that pervaded the financial system.
'Banks should be capable of failing,' said Montier, who works in the asset allocation team at GMO, a US investment firm that focuses on delivering absolute, or positive, returns to its investors.
Montier argued the finance industry and regulators alike should stop relying on flawed models, such as 'capital asset pricing' (CAPM) and 'value at risk' (VAR), commenting: 'Bad models with bad assumptions are never a substitute for common sense.'
He said fund managers and financiers should move away from a dependency on maths and 'obsession with complexity' and shift towards something which is more akin to the Hippocratic oath in the medical profession. This could help to rectify the issue of bad morals, which in turn has led to poor policy by regulators and bad incentives.
Putting forward a manifesto for change, he said: 'We have to stop defining risk by numbers, like VAR or standard deviation. It is the permanent impairment of capital. If we put this at the centre we would all be better off,' he said.
Financial services should also move away from a tendency to reinvent the wheel, he said, and focus on the longer-term interests of investors.
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