Lesson from Refco: keep it transparent

The event should act as a constant reminder to those in the industry of how not to go about running a business. The notice placed in this week's issue on page 6 relates to Refco Capital Markets. This is the ugly sister that nobody wants.

It is the Bermuda-based offshore business where many unfortunate investors have found that their money was being stored.

Those in the largest institutions may think that such a collapse could never happen to them, but in any large and complex business there is always a danger that there is some neglected corner where bad practice festers.

The ultimate reason that Refco failed was that it had a murky structure that enabled a seemingly compromised chief executive to use the company as his own series of bank accounts. 'I've lost here? Never mind, I'll just dip into the offshore pot, no-one will notice...' Perhaps it's dangerous to try and speculate about the thought processes of those in legal limbo, but there is no doubt that a huge sum of money has gone missing and there's going to be a long and expensive battle to recoup it. It seems the lawyers will be the only winners.

Banks and other financial institutions need to remember that they are not immune. To avoid any danger of suffering the same fate, they would do well to avoid putting money into businesses that lack transparency. It should be remembered that the LTCM crisis in 1997 nearly brought down some top-tier banks as well as severely denting Asian economies. While Refco is a different kettle of fish, both shared a lack of transparency that has led to huge losses.

Banks and professional investors have no excuse. The signs of bad practice at Refco were plain to see. Since 1983, when Phillip Bennett became the chief finance officer, the firm's wrists were slapped on numerous occasions by a variety of regulators.