ASX played its part in orchestrating the instruments of market discord

I FOUND myself sitting next to a corporate lawyer this week and, during a lapse in the conversation, asked her how much of the blame for this year's market meltdown should be slated home to lawyers.

Not much, was the reply. She conceded that the corporate law fraternity had helped build the house of cards, by cross-checking and, in many cases, designing the financial instruments that were now imploding, taking with them the likes of Lehman Brothers.

But to suggest that lawyers should have been throwing down their pens and declaring to anyone who would listen that the structures themselves were inherently flawed was to be wise after the event, she said. One might as well ask where the media was when the bubble was expanding, she asserted - and I had to admit she had a point.

The Fourth Estate is overflowing with opinions these days about how it all went pear-shaped, how this company, bank, securitised product or another was a financial fiction disguised as fact - but financial journalists basically either didn't see the storm brewing, or ignored it.

There were reports about too much money chasing too few assets and, in this market, a steady trickle of sceptical reporting about the asset structurers and the fees they were extracting from satellite funds.

But just like the lawyers, the accountants, the regulators and the bankers, journalists were in the main uncritical observers; and that illustrates one of the defining features of the asset price boom and the traumatic bust that followed it.

It was a securitisation boom, and securitisation is about distributing risk by taking exposure to a single property, group of properties

or takeover, for example,

and dividing it into micro-exposures, each of them backed by a piece of tradeable paper.

The underappreciated

by-product of this process was that the creators and owners of increasingly large agglomerations of micro-risk became distanced from the risk itself, not just financially, but intellectually and morally. And the upshot in many cases was not that critical judgement calls were avoided, but that the need for a judgement call itself was not recognised.

In some cases, that need is still not being recognised. The ASX's umbrage at the decision of institutional voting adviser RiskMetrics to recommend against the re-election of ASX director Russell Aboud is a case in point.

RiskMetrics' recommendation does not mean that the advisory group thinks that ASX should not continue to be the market supervisor - that is a decision Superannuation and Corporate Law Minister Nick Sherry must soon make; as he must also decide whether to allow rival exchanges to set up alongside the ASX. In fact, RiskMetrics' recommendation is predicated on the opposite position: that the ASX occupies unique and valuable monopoly territory at the Government's pleasure, and that it is the interests of ASX's shareholders that it continue to do so.

The voting advice reflects a belief that ASX's performance in the market supervision role during the boom and its aftermath has increased the likelihood that its franchise will be curtailed; it aims to drive home to ASX's board that it needs to lift ASX's supervisory game proactively, not just after the event, as arguably occurred last month, for example, when it announced enhanced disclosure of management agreements, having in the boom allowed details of management agreements between groups including Babcock & Brown and Macquarie and their infrastructure satellites to remain buried.

A laid-back approach to insider trading and share trading by directors is another issue. A survey by RiskMetrics shows that share prices spiked upwards in the two weeks before 18 of 23 recent takeovers, and earlier research by Macquarie had estimated that share prices moved up by 10% in the 40 days before any takeover was launched. This is not a problem unique to Australia, but that does not mean it should be tolerated.

It may be too late for a shareholder gesture of the kind RiskMetrics proposes: Sherry is now very close to taking his recommendations to Cabinet, and it will determine the ASX's future as a monopoly and a supervisor.

But it was still a stretch for ASX to argue this week that RiskMetrics was at odds with the Australian Securities and Investments Commission, which recently found for the sixth year running that ASX was adequately supervising the market, and adequately managing the conflict created by its ownership of the market and dependence on it as an ASX-listed company for profits.

ASIC's report card on the ASX contained an asterisk, for one thing: a total of 10 supervisory changes were agreed on to "further strengthen the way ASX manages conflicts". And ASIC also shares the blame, for another. ASIC chairman Tony D'Aloisio has bought time by restructuring the organisation with the aim of getting it closer to the markets; but ahead of that, ASIC would have copped a protest vote too if an election for its leadership had been called.

ASX was on better ground querying why Aboud was the target. ASX director Trevor Rowe is also up for re-election, and he has been on the board since the end of 2002, while Aboud joined in 2005.

RiskMetrics may have believed that institutional ASX shareholders were less likely to oppose Rowe, who is also chairman of one Australia's biggest investors, QIC, but it really should not have split the recommendation.

A solid vote against Aboud will send a useful message to ASX's board, nonetheless. The ASX wasn't the sole author of this market debacle. There were many. But it certainly was one of them.

mmaiden@theage.com.au