The Sky is Falling! The Sky is Falling!

Let’s get a grip. The sky is not falling. It’s just an acorn.

Okay. Maybe a BIG acorn, but we will recover from this bump on the head.

Yes, the financial markets are in a tizzy about mistakes made by company managers, hoping to cash in on the latest trend of the time (sub-prime mortgages). This is opposed to the other times that company managers made mistakes (Enron et al, the tech bubble of 2001, the real estate debacle of the early 1990’s, and all the others that preceded them). So, as we know, this too shall pass.

What can we learn from this current situation? A few things for sure, but here is something that I have learned.

Sarbanes-Oxley is a failure

SOx was created with the intention to stop control failures at US companies. The sub-prime mortgage mess is a prime example of control failure. I’m sure all the forms were filled out, the systems descriptions completed, and the CEO/CFO certifications were filed on time. However, the basics of risk management went out the window when financial companies in the United States did not seriously consider the impact of what a downturn in the economy and an increase in interest rates would have on their sub-prime mortgages.

Hopefully, we won’t see a “new and improved” SOx (although 5 bucks says we will). Shareholders need to be active in the companies they invest in to ensure that the managers and directors properly manage risk. And if the companies don’t manage their risk properly, then shareholders should not be surprised if the value of their shares takes a downturn.