• NOVEMBER 25, 2008

Consolation anyone?

"If there is any consolation in the latest credit crisis it is the vigorous global debate now unfolding on regulatory reform. Regulators and market participants see an opportunity to reassess, and to get organized around guiding principles that can help financial institutions and financial markets handle the mounting complexities of global trends in business, markets and the economy.

In my view, three principles in particular - transparency, a level playing field and systemic oversight - are the essential elements we need to consider as we look at how best to frame these reform discussions." These are the words of the presiding CEO of Citigroup - Mr. Vikram Pandit- on the bank’s website.

The bank which operates in more than 100 countries and serves more than 200 m customers suddenly realised that a lot more transparency and regulatory oversight is desired. Just a couple of months after the biggest rating agencies Fitch, Moody’s and S&P had accredited superior ratings (A+ and above) to the bank’s credit quality, the bank found itself in the midst of a catastrophe. Being on the brink of a collapse, the only factor that saved it was its size and sentimental value to US and global financial system. In other words, it was just another ‘Too Big To Fail’ entity.

Whether or not American taxpayers wish to console the shareholders of Citigroup for the loss of their investment value is not known. However, the US Treasury certainly has gone all out to use the tax payers’ money to remove the immediate risk of a potentially catastrophic banking collapse that could derail the US economy.

Asian markets did not react positively to the Citigroup rescue plan as financial companies around the region became wary of the underlining dire conditions facing banks the world over in terms of unrecoverable loans. Although Asian banks (particularly Indian ones) have relatively much lesser exposure to the risky mortgage-backed securities than the US and European banks, they still run the risk of higher delinquencies on un-collateralised loans going forward. While the Indian BSE Sensex closed flat yesterday, the Japanese and South Korean markets have opened strong in today’s trade.

Further, the bailout of large banks in the US does not signal the revival of the US and global financial system. As per Bloomberg, the looming failure of the large US automakers could deprive the US banks of more than US$ 100 bn worth of recoverable loans, which could only add to their financial distress.

What could, however, console Indian investors is the fact that Mr. Mark Mobius who manages more than US$ 24 bn in emerging- market assets as executive chairman of California based Templeton Asset Management, still believes that Indian banks’ lending for cars and home loans will help the economy ride out a global recession. According to Bloomberg, Mr. Mobius is leading the return of fund managers to the country to buy into the economy’s rural consumption potential.

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