Asia Times: Bankers' greed and supervisors' folly

[marmar]

Bankers' greed and supervisors' folly
By Hossein Askari and Noureddine Krichene


We are smack in the middle of a crisis that will only get much worse before getting better, a crisis that could entail the worst recession since the Great Depression and one that could reverse much of the gains from globalization. Policy makers need to react more quickly than they have to contain the crisis from becoming much worse than currently envisaged. An often-overlooked resource is the past.

The world was confronted with the Third World debt crisis in the early 1980s, but the international banking community, especially US banks, and the US treasury and the US Federal Reserve learned very little from that debacle. That's a pity as they might have picked up a few tips on how to tackle the present financial crisis. As in the 1980s, the greed of bankers and the ineptitude of supervisors are today exacerbating financial conditions.

In the run-up to the Third World debt crisis, bankers the world over fell over themselves to make syndicated loans to many developed countries. They did so with little regard to the borrower's ability to service the loans and the risk created by their concentrated lending. A number of banks were ecstatic to be lead managers of syndicated loans for fat upfront fees, and a thousand or more banks were happy to sign on the dotted line and get a piece of the high-yield action.

Any reasonable look at most of the countries the banks were lending to would have revealed the borrowers' increasing inability to service their growing debt. There was no way that they could both service their debt and finance their needed imports for their economies to grow.

Yet bankers adopted Walter Wriston's famous slogan that countries don't go broke! They wanted to believe that because countries did not die or disappear like people and companies, they would eventually get paid back. But they forget that while they waited for payment they might disappear from the scene themselves!

For example, Manufacturers Hanover Trust (a bank that no longer exists on its own today) had lent five times its capital just to heavily indebted Latin American countries that could not service their debt; MHT was not just buried but buried two meters under. The greed of bankers blinded their judgment. And where were the regulators and supervisors when we needed them? How did they let this happen?

All the while, regulators had their heads in the sand. They just did not want to recognize reality even when it hit them in the face. When Mexico started the crisis, they called it simply the Mexican Crisis, and did not want to see that other countries were in the same boat. They did not even want to admit that Mexico could not service its debt and grow, but insisted that it was just a short-term liquidity crisis. So their plan was a bridge loan. .......(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/JK19Dj04.html