It can be argued that the single most significant casualty of the current crisis has been trust. Confidence in the system was substantially eroded as a result of the gross mismanagement of risk by large financial institutions that were blinded by their pursuit for profit in an environment of declining return on investment and a series of high profile fraud cases that have, in some instances, destroyed lives. Although governments across the globe have gone a long way along the path of regaining that trust (so critical for the proper functioning of the financial system), there still remains much to be done. As in the 1930's, new regulation is likely to play a key role in improving things but it will have to be done in a careful manner so as not to be an impediment to innovation. Hedge funds, for example, are likely to become subject to some degree of regulation.
Even if the regulation does not go far enough to restore confidence, however, clients will put pressure by increasingly favoring institutions that adhere to higher ethical standards. On the other hand, the additional regulation and more rigorous standards will not in themselves guarantee a fraud free environment, the con artists of our industry are very cunning and resourceful and will always find new ways to fool the system.
