What We Learn From History ………

When George Bernard Shaw stated: “We learn from history that we learn nothing from history” he was pretty accurate.  What I had hoped, however, is that the lessons of the Global Financial Crisis (GFC) would prevent the risk taking approach to financial due diligence that led to the meltdown of the global economy.

It was with interest, therefore, that I read Matthew Stevens column in the Australian Financial Review (AFR) on 12th February.

He started his article:

“Through the back end of last year (2013) there was a lot of talk that ANZ’s quest for new business had seen it embrace risk that less eager competitors had refused to indulge.

It would seem Forge Group (now in voluntary administration) might have been one of those clients.

He goes on to say:

Forge’s previous banker was NAB, which was among those wondering if ANZ had its risk metrics right.

On 11th February, Forge went into a trading halt saying that ANZ had withdrawn its support for the company – support that had been reaffirmed as recently as 29th January.

ANZ’s reasoning was that it done everything to support Forge through its difficulties but that its cash flows seemed to be deteriorating daily.

There is obviously a balance that needs to be struck by financial lending institutions as an overly risk averse approach to the provision of business funding would certainly dent business confidence and slow the economy in a time when so many sectors are struggling.

In this case, however, we have a situation whereby no other financial institution would touch Forge Group but the ANZ saw fit to support the company.  If Forge’s performance had been as projected then ANZ probably stood to make a significant return on their investment – but what were the risks of the company not meeting these projections?

The fact is – Forge didn’t meet its projections, ANZ withdrew its funding (and I would assume have lost money), the company is in voluntary administration and potential alarm bells are ringing with me in terms of financial lending due diligence.

We certainly need business funding – but we also need due diligence otherwise we run the risk of going down the same path as we did in 2008.

I hope this has been a wake-up call that risk management has, and always will have a crucial role in the due diligence considerations for lending.

What I would like to see is George Bernard Shaw (if he were still alive today) being able to say: We learn from history.  It would appear we are certainly not there yet.

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