The Problem of Agency

1. What do you understand by the term ‘Agency Problem’ and what role does asymmetric information play in producing this problem? A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead.

2. Briefly explain the main series of events that led to the collapse of Storm Financial. The collapse of Storm Financial was inevitable due to its reliance on fees from over-leveraged investors. The report represents a withering rebuff to rampant conspiracy theories put out by Storm’s founder, Emmanuel Cassimatis, which the Commonwealth Bank had somehow acted to bring it down.

3. In the article by Barry, outline the similarities in the cases of the Doyles, Phil Green and Steve Reynolds? Townsville investor Phil Green had paid $700,000 in fees and interest to Storm and the banks during the ten years he was with them. He earned $46,000 per year from his job at Townsville Court and owned a house worth less than $400,000 but he had been loaded up with $1.8 million in debt to fund his share portfolio. Storm told Green that it would fund itself.

Reynold was asked to sign a blank form and that someone will fill the figures. “Paperwork relating to loans was often subject to ‘creative’ manipulation, particularly in relation to income and assets.” By breaking the rules and lending money to borrowers who could not afford the repayments.

The Doyles had been wiped out. They pitched up at Storm’s Townsville headquarters with a house worth $450,000 and $640,000 in superannuation. Two-and-a half years later their super had gone, the share portfolio had been sold and they had racked up a debt of $456,000 on their (previously unencumbered) home, with insufficient income to make the repayments.

They would lose everything if markets went down by 30-40%, which they did during 2008.

4. A common feature of such episodes seems to be close and personal relationships between the financial planners and the banks. What evidence does Barry produce that suggests that this was also the case with Storm and their financial backers? Financial backers are other banks who gave Storm customers special treatment and had close relationships with Cassimatis. Macquarie Bank drew up a 13-page agreement in December 2004 headed “Working in Alliance”, in which it agreed to charge Storm clients lower interest rates, allow them higher loan valuation ratios and provide extra time to meet margin calls. The main aim is to have a good relationship with customers. Obviously, they probably get high price of loan from banks which face high risks. The banks even can go bankruptcy. Storm had 115 staffs, $4.5 billion of funds and 14000 clients. However, the highest fees are in the marketplace financed it. Storm investors who were tricked had lost their shares, houses and their super and ASIC still was not interested.

5. Do the findings of the Milgram experiments shed light on why the clients of Storm Financial “…did what they were told without demur”? If so, how? The character of Milgram experiments is similar with Storm Financial in some ways. In the Milgram experiments, the participants are victims. Participants who are tricked to joint this experiment try to escape and stop from this trick, which likes investors who try to quit from Storm Financial. In addition, Authority thought many methods to tempt participants to get wrong decision. They want to and try to stop but they are failure.