29 June 2008 -- Arab News {Saudi Arabia) --
http://www.arabnews.com/?page=7§ion=0&article=111337&d=29&m=6&y=2008 This spring, in developed economies, central banks were pouring money into their banking systems to stave off bankruptcies and what the US Federal Reserve described as a “contagion,” of mistrust when banks refused to lend to each other and thus dried up the key inter-bank credit market. The full extent of this emergency operation becomes clearer with the publication of last March’s US Fed minutes, when billions of taxpayer dollars were pumped into the system to save the failing bank, Bear Stearns, and allow its takeover by a fellow blue-blood rival, JP Morgan.
Three months on and the credit markets are still tight. When banks do lend to each other, it is at far higher rates, reflecting the newly perceived risk in such operations. If this had been merely a crisis that only involved the banking system, it would have been of academic interest to everyone else. Unfortunately the collapse of high-flying and deeply dubious instruments, either underwritten or bought by most leading North American and European banks, has had a dramatic effect on the world economy and triggered a recession from which everyone is beginning to suffer.
During the long boom from the early 1990s, prices rose in part because too many investors were chasing too few opportunities. Economic liberalization brought new pension funds crowding into the market, clamoring for a place in the sun. It was that demand as much as anything that fuelled the rise in stock prices around the world, so that shares began to trade at unrealistic multiples to actual underlying corporate earnings. But in such a bullish market atmosphere, with a shortage of investment products, it seemed there was always another investor prepared to buy something at a higher price.
The boom might have been sustainable for even longer had not investors demanded ever-higher returns. It was no longer sufficient for companies, banks included, to record modest but sustained year-on-year growth. Anything less than double digit growth was regarded as failure and top executives knew they would be fired for underperforming “market expectations.” The problem was that market expectations reached unrealistic levels. Yet instead of pointing out the danger of such a purblind view, investment bankers — who were arguably best placed to understand the fault lines beginning to appear — set out to create yet another investment product, in the form of Special Investment Vehicles (SIVs) in which disparate assets, including notoriously, US subprime mortgages, were bundled up every which way. For the bankers, the deal and a fee was all that mattered. The quality of the various core assets was unimportant. Banks just the same were chasing ever greater returns. What is important here is that highly-paid senior bankers, once famed for their prudence and careful risk assessment turned into little more than riverboat gamblers, dealing from the bottom of the deck whenever they needed to secure another fat transaction fee. Their greed and abandonment of moral practices is what has plunged the world into chaos. It would be pleasant to think that they do not sleep nights but we should not count on it.