Business | Opinion
Real cause of crash is still unknown
Nations pumping money into system will not help unless the systemic ills are identified and treated.
- By Khalaf Al Habtoor, Special to Gulf News
- Published: 00:55 October 21, 2008
There is madness in the world markets, to the extent that a financial expert invited to give his opinion on Sky News admitted he's out of predictions and if little green men from Mars were to walk into the studio he wouldn't be the slightest bit surprised.
It seems to me that there is no rhyme or reason for this global mess that is affecting everyone from ordinary people struggling to pay their mortgages to viable small business desperate for legitimate loans.
Common wisdom maintains it is all the fault of unprincipled lenders. They flooded the housing market with loans at low non-fixed interest rates and were not too particular about who received them before bundling up those 'sub-prime' mortgages with other securities and hawking them to financial institutions around the world.
This malpractice certainly occurred but are we expected to believe that falling US home values and payment defaulters brought down many major financial houses and banks, leaving others teetering on the brink? There is something about all this that doesn't smell quite right.
Quite honestly, the idea that dodgy American home loans could drag Iceland into bankruptcy or propel Belgium, Luxembourg and the Netherlands to pump billions of euros into the mighty Fortis bank is hardly credible.
And who in their right mind could ever have predicted that Switzerland's largest bank UBS would one day be begging the Swiss government for a $5.3 billion (Dh19.45 billion) bail-out? Swiss banks withstood two world wars and Switzerland has long been considered one of the safest havens for cash, which makes this latest news all the more incredible.
Take a moment to tot up the huge sums that the US, Europe and Britain are ploughing into the system to keep banks afloat and you'll probably find the total mind-blowing. In September, the Bank of Japan injected more than $26 billion into its markets to lessen the repercussions of the Lehman Brothers' bankruptcy. Then there was the US government's $700 billion rescue plan, followed by Britain's £500 billion, France's 360 billion euros and Germany's 500 billion euros bail out as part of a wider European plan.
With bank stocks still falling and driving down share values in other sectors despite the best efforts of governments, it seems that the more than $2 trillion largesse has been nothing more than a band aid. In light of the US Treasury's estimate indicating "93 per cent of homeowners pay their mortgages on time", it's hard to understand why such a huge sum isn't doing the trick.
Now that they are flush with tax-payers' cash, why are recipient banks still refusing to lend to each other and to home-buyers and businesses? Why are they being allowed to hoard cash and thus prolong the liquidity crisis? They are wilfully cutting off the lifeblood of their nations, preventing it trickling through the arteries to provide economic health and they are getting away with it.
Sound fundamentals
Just months ago, the fundamentals of Western economies were considered sound as various governments, including those of the US, Britain and Germany who strove to assure us. Then, we learn that they are facing prolonged recessions while hundreds of billions have been wiped off stocks panicking holders of even the safest blue chips.
Moreover, like a virulent disease, panic has spread to Asian and Middle East markets, which have minor exposure to the sub-prime fall-out.
Make no mistake, some banks, financial institutions, corporations, companies and individuals will walk away from this massacre wealthier than ever. The law of the jungle prevails and the big sharks are poised to snap up vulnerable prey. While the pensions and investment plans of ordinary people are eroded, the more that stocks plunge the pockets of short-sellers bulge.
Directors of failed banks and financial institutions are sitting pretty too. For instance, the Chairman of UBS "earned" a bonus of 24 million Swiss francs (almost $23 million) in one year, which, admittedly, is loose change compared to the $500 million, pocketed by the chief executive of Lehman Brothers since 2000. Most top executives get a hefty "golden parachute" when forced to lock up their offices unlike the 90-year-old American woman Addie Polk, who tragically shot herself when the home she had occupied for 38 years was about to be repossessed. There was nobody willing to help her.
As always, the true victims of corporate arrogance and greed are left to fend for themselves.
Whether this financial tsunami was the result of a systemic failure, caused by incompetence or triggered by a few unscrupulous bad apples, we can't know for sure.
But I, for one, can't help wondering why banks, financial houses and blue chip organisations are not doing their utmost to reassure investors and customers. They need to be as transparent as possible when it comes to their balance sheets and must regain public confidence. Where are the press conferences? Why are not they communicating? I have asked these questions to several and cannot get a straight answer.
Lastly, a chunk of blame must go to financial pundits who seem to enjoy talking down economies. Also, let's not forget the role of the media, which has the power to change fortunes. Enough hysteria! Markets are driven on sentiments and banks need to shore up confidence. If the media does not decide to be part of the solution and help calm fears, this frightening roller coaster ride is set to continue.
I believe that the fundamentals on which Western economies are based haven't changed but, unfortunately, our perceptions of them have. Ultimately, we will have to trust the system again. If we can't, we might as well bin the global economic system devised by 44 nations in 1944 known as Bretton Woods, bid a fond farewell to the golden age of capitalism and wait to see what a new financial World Order has in store.
- The writer is a businessman and chairman of Al Habtoor Group
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