Take lessons from financial follies

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By Hong Liang (China Daily)
Updated: 2008-10-14 07:49

Since the outbreak of the US credit crisis that is threatening to send the world economy into a tailspin, many economists have been asking what lessons can be learned from this financial calamity.

Probably a lot. But none of these lessons will likely be very effective in preventing future blowouts. Past experience has shown that financial intermediaries and the customers they serve tend to have short memories.

My first job in a newspaper was to assist the senior banking reporter in covering the third-world debt crisis that involved numerous countries and territories from South America to Southeast Asia. The assignment afforded me a glimpse into the world of high finance, in which outwardly staid bankers climbed over each other to court petty dictators, garrulous army generals and their minions for loan mandates.

Hundreds of billions of syndicated loans were put together in financial centers around the world to help fund natural resources development projects in various third-world countries with little regard to political and market risks. The commodity bust triggered a flurry of defaults, requiring emergency measures to reschedule those loans that were deemed salvageable and writing off others that weren't.

Before the smoke of the third-world debt crisis was cleared, bankers had turned their attention to the paper tycoons who built property empires in various cities entirely on borrowed funds. The collapse of one such developer in Hong Kong in the early 1980s exposed the follies of the financial community, and kept outsiders wondering why so many bankers and institutional investors, who were supposed to exemplify discretion and astuteness, would fall over each other to throw money at a house of cards fabricated by an out-of-town stranger .

The rapid development of financial derivative products since the 1990s was a boon to commerce and industry. But the abuse of this new power of capital creation by some financial intermediaries had perpetuated the ballooning of asset bubbles in economies from Thailand to Korea, resulting in the outbreak of the Asian financial crisis in 1997.

In my short stint at a bank in Hong Kong in the late 1980s, I learned by experience what old-fashioned banking was all about. At that particular bank, credit-worthiness was judged by untainted credit history, credible performance records and real and marketable net assets. The management board rejected a proposal to issue credit cards to university students because it didn't deem it appropriate to be seen to be encouraging young people to spend beyond their means.

Indeed, austerity was the guiding principle. The then chairman of the bank reprimanded its underlings for trying to please him by appropriating an over-sized office for him at the new bank headquarters. Unusual for Hong Kong, the bank, despite its size and profitability, did not own a corporate yacht, and only two most senior executives were entitled to the personal use of corporate limousines.

That bank may not be the most profitable bank in Hong Kong. But it has weathered numerous economic hard times without having to dig too deeply into its reserves.

If I tell you what is the major selling point that has catapulted that bank from a money changer to one of the largest financial institutions in Hong Kong in less than five decades, you can probably guess which one I am talking about. But I'll tell you anyway: it's consistent good service to depositors and borrowers.

But too many bankers are too preoccupied with maximizing profits for their shareholders and themselves that they have forgotten the interest of their customers. That's when they have failed their duties as financial intermediaries.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 10/14/2008 page8)