Investors should also command the procedures, technology and internal controls needed to trade an instrument and manage the risks associated with it, the policy group says. Furthermore, they should be wealthy enough to be able to absorb potential losses. Authorization to invest in complex, high-risk investments should come from the highest levels of management.
UBS AG, Merrill Lynch & Co., Citigroup Inc., HSBC and Wachovia Corp. presumably satisfy these criteria and surely regard themselves as financially sophisticated. Yet they and other institutions worldwide have racked up $505.5 billion in losses and writedowns because of the mortgage meltdown. http://www.bloomberg.com/apps/news?pid=20601039&sid=aK7GbFbB2OHc&refer=home
Aug. 22 (Bloomberg) -- It's hard to forget your first Nouriel Roubini experience.
Fifteen months ago, I watched an Asian Development Bank audience in Kyoto squirm and fidget as the chairman of Roubini Global Economics LLC gave his bleak, contrarian opinion that the global financial system was about to hit a wall.
``After listening to you, I feel like I need a drink or a hug or something,'' I joked to him afterward. Roubini gets a lot of such quips, and as his direst predictions about a once-in-a- lifetime bust in the U.S. economy come ever closer to reality I find myself hoping he'll be proven wrong.
Hats off to Roubini. How many times in the past year did we hear people say ``this credit crisis is containable'' or ``the worst is over'' or ``subprime-loan problems won't spread to other asset classes,'' and the like?
Roubini didn't waver, and he took considerable flack for it.
That said, Asia had better hope Roubini's economic fears are proven wrong. Ditto for the gloomy predictions of Oppenheimer & Co. analyst Meredith Whitney, who recently was toasted on the cover of Fortune magazine.
Perhaps the magazine-cover curse will kick in and the attention being tossed at Roubini, profiled last week by the New York Times, and Whitney means the worst really is over. Of course, they might say it's just a matter of public perception catching up with the reality -- a financial system in tatters.
Subprime System
One reason to think Roubini won't be proven wrong is his argument that the problem isn't the subprime mortgage market -- it's a subprime U.S. financial system. Fixing the problems sending financial contagion around the globe will require tough decisions in Washington and reforms in Wall Street's securitization system. And that's hardly happening.
How far Wall Street's reputation has fallen since the collapse of Bear Stearns Cos. was revealed by the Aiful Corp. saga. Japan's biggest consumer lender by assets threatened to sue Lehman Brothers Holdings Inc. in June after analyst Walter Altherr called Aiful ``arguably insolvent'' in a report.
Lehman retracted the report earlier this month, yet not before Japan's investment community had a good chuckle. The fourth-largest U.S. securities firm, with a share price down 79 percent this year, calling another institution shaky? Talk about the proverbial pot calling the kettle black.
`Muddle Along'
Even the best-case scenario for Asia looks gloomy. As analysts like Mark Matthews of Merrill Lynch & Co. in Hong Kong point out, the next few years will see Asia-Pacific markets excluding Japan ``muddle along.'' Wasn't it just a year ago that investors were claiming Asia had decoupled from the U.S. economy?
The reasons Asia should hope Roubini eats some crow are many.
For one, the region remains too reliant on exports. While Asia made some progress boosting domestic demand, slowing U.S. growth will chip away at living standards from Seoul to Jakarta. For another, emerging markets may slide further if global investors become even more risk adverse.
Mark Mobius, executive chairman of Templeton Asset Management, may indeed be right to call the decline in emerging- market stocks ``overdone.'' Still, a deep recession in the world's biggest economy could accelerate those losses.
Asia central banks amassed trillions of dollars of currency reserves in recent years, a move that won't seem illogical if Roubini is proved correct. That cash will be needed to provide insurance to global investors that the region won't see a repeat of its 1997 crisis.
U.S. Contagion
A decade ago, Asia was exporting financial contagion potent enough to send the Dow Jones Industrial Average down hundreds of points here and there. These days, the U.S. is returning the favor, just as Diwa Guinigundo, deputy governor of the Philippine central bank, predicted to me a year ago. Hats off to Guinigundo; he was absolutely right.
Where do we stand now? ``One year later, in the U.S. the lack of improvement in the money markets is still taking center stage,'' Roubini said yesterday. And the Federal Reserve, on top of cutting its benchmark interest rate 325 basis points, continues to expand its liquidity facilities ``without significant impact on credit creation.''
That's affecting emerging markets. For example, Roubini said, ``the global credit crisis has exacerbated home-grown liquidity squeezes in countries like South Korea.''
The question is how Asia would weather further weakness in the U.S. China's boom has provided some cushion, yet officials in Beijing are busily working to tame inflation. It also would be a mistake to think a U.S. recession won't slam China.
So here's to Roubini for having a good couple of years of economic prognosticating. And here's to hoping he'll be less right in the future. Asia's prosperity may depend on it.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
Last Updated: August 21, 2008 20:23 EDT
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