Saturday, October 04, 2008

Wall Street wore only false pretenses

By Corazon P. Guidote
Philippine Daily Inquirer
First Posted 06:57:00 10/04/2008

The meltdown in the United States was caused by a mix of factors, not entirely politics. The biggest factor is the loss of an effective moral compass for the government, regulators, a large portion of corporate America and, sadly, even the US academe.

The whole situation reminds me so strongly of the "Emperor's New Clothes" where Wall Street for many years now has been cloaked in nothing but false pretenses of knowing what exactly was being offered on the table. Even Ivy Leaguers working in credit-rating agencies couldn't see past the sophisticated packaging of exotic derivatives. Instead of digging deeper, they put glorious ratings on these items and used elaborate words to mask their doubts and their inability to admit to their clients that many of their products didn't really make much sense.

But beholden as they are to those who pay them, they agreed to many undesirable terms which, if such terms were attached to emerging market products, would fetch noninvestment grade ratings. Now only do we hear of "ninja" loans that are backed by no income, no job and no assets packaged so well as to fetch triple-A ratings.

Second and just as important is the double standard and hypocritical approach that the US Fed has been adopting all these years. They advocate free-market economies, but there was the narcissistic Greenspan suppressing interest rates for so long, even when times called for some tightening and correction. What that created was a monstrous financial bubble that was blown up by the thought that interest rates would forever stay low in the United States.

Greenspan erased from the minds of global banks the risk perception that the American economy can also be vulnerable. This created unimaginable greed and excesses on Wall Street and other allied markets such as the London bourse. Knowingly or unknowingly, Greenspan made it easy for fraudsters in the investment banking world to keep coming up with more and more exotics to satisfy the insatiable thirst for bigger profits and capital gains. Moderation lost its glamour. It was a virtue left only to the most prudent to exercise in near isolation. So, where art thou, Greenspan? Why are you so painfully quiet now ...?

I saw how this greed was eating up governments, including ours. Tough as it is to prove, there is a probability that some government institutions may have been "duped" into buying these exotics, just because they were made to feel "super gwapo" doing it. Believe me, there was so much ego, wining and dining, and rebates that went into the decision-making process of acquiring these exotics.

Third is the long denial of Americans and Europeans that the the bubbles were bursting. When the subprime crisis started to prick the bubble back in August 2007, many large fund managers sold down Asia instead of unloading Wall Street stocks, when Asian fundamentals looked so much better. No one dared to say there was nothing to be gained from hanging on to many US stocks lest they be accused of sounding stupid by the Emperor who was starting to look more and more naked by the day. Many of those fund managers are now paying the heavy price, with the massive wealth destruction we are now seeing and tens of thousands of jobs being lost on Wall Street.

It might be true, therefore, that the United States may go into a depression and some months of disinflation before it finally recovers. My only wish is for egos and deceptive attitudes to go with the disrobing of Wall Street and the massive correction in the global system, so we may begin to witness an era of greater stability and solid wealth creation. Wishful thinking as it may seem, we all got to start somewhere.

Moving forward, putting good money after bad like a massive bailout will mean doubling the damage. The problem is so widespread and does not involve just a few banks. A bailout is to avoid a systemic risk. What the United States has is more than systemic, it's fundamental. The solution, therefore, needs to be surgical, painful as it is, but the guilty should suffer, and I am not referring to the taxpayers.

Here at home, we were lucky to have had the Asian crisis earlier – a blessing in disguise that brought sobriety and grounded our financial markets, save for a handful. But there's no telling where the contagion will take us if we are not careful. There is a great need for transparency, provisioning and vigilance. If certain valves need to be closed just like Mahathir did in Malaysia back in the 1990s, so be it, because a commonsensical solution to a global problem is to go insular in order to protect our system.

Our economy will remain resilient and hedged with manpower exports growing faster in oil-rich nations. Needless to say, we can't just place all our bets solely on our OFWs. That would be unfair. We all have to be part of the solution: Stay calm and take stock of what's good for the soul. It's our best compass during these very turbulent times.

Going back to where I started, what brought this problem to the United States was the loss of things most important: Decency and intellectual honesty.

(The author is former managing director of UBS Securities Philippines Inc. and Citibank Securities Philippines Inc. She was also former chief operating officer of ABN-Amro Securities Philippines Inc. She also served as presidential consultant on investor relations of the Arroyo administration.)

source: Wall Street wore only false pretenses
Inquirer.net, Philippines