The IMF, World Bank, and EBRD have been lecturing us from transition countries for years about financial transparency. And then a pile of garbage is discovered in their own backyard
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Written by: Miodrag Šajatović |
The collapse of the American subprime mortgage market revealed the moral hazard of the most prominent global bankers and investors |
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When ministers, central and commercial bankers, entrepreneurs, and journalists from transition countries gather at an IMF, World Bank, or EBRD meeting, the hosts invariably prepare at least one lecture on the ‘necessity of financial transparency.’ Well-paid consultants lecture newcomers in the circle of modern capitalism on what they must do, how to behave, how to report, and how to avoid the risks of moral hazard in managing public funds or those of investors/savers. Then, in August 2007, a global financial crisis erupts (the fourth in the last 20 years), and it quickly reveals the emperor’s new clothes in American, European, and Asian financial practices. It turns out that financial transparency should have been taught to the big players on Wall Street, in the City of London, or to financial speculators in expensive suits cruising Frankfurt, and not just to provincials from Zagreb, Belgrade, Bucharest, or Sofia. Even at the moments when the latest financial crisis began to uncontrollably spread across global financial markets, in the West, it was politely referred to as the ‘subprime mortgage crisis in the U.S.’ In fact, it is something much more down-to-earth and raw than what that phrase reveals. It is, as they would say in The Hague, a criminal conspiracy that seemingly polished financiers joined years ago. Some directly committed a ‘crime’ against the stability of the global financial order, while others, regardless of command responsibility, turned a blind eye. Or they encouraged the direct perpetrators to commit ‘crimes.’ Simply put, the ‘crime’ was happening somewhere in the U.S., say in a small town in Texas. A local agent was looking for victims to persuade to take out a loan to buy a house. Since all wealthier citizens already had mortgage loans to buy houses, it was time for those who could not afford it under normal circumstances. The agent would approach a single mother and partially fill out a questionnaire with her. Later, he would falsify empty boxes in the questionnaire in his office. He would invent that the woman actually lived with a husband, added fictitious income from a non-existent spouse – and there were the conditions for the loan. The banker to whom such a case ended up on the desk did not want to know the true state of affairs. He would grant the loan because he was sure there was no risk. The mortgage would be ‘sold’ to a hedge fund in the securitization process. They knew that a mass of such non-performing loans could be devastating, but they believed that nothing would happen. Investors in those high-risk funds believed this too. The promised high returns were irresistible. Moreover, credit rating agencies guaranteed with their ratings that fund managers had not overstepped with moral hazard. And, in fact, the guys from the rating agencies also ‘turned a blind eye.’ Similar to how, a few years ago, the most famous auditing firms were caught turning a blind eye to the financial acrobatics of players in Enron and similar subsequently failed companies. When everything is summed up, it turns out that financiers from the most developed countries are no more honest than their colleagues from ’emerging markets.’ Most of the world’s glamour is based on dirty family secrets. In the editorial comment of the latest The Economist, the message is that bankers and investors now need to suffer. And Financial Times columnist Martin Wolf notes that fear is a good thing because ‘without fear – financial markets go crazy.’ At the same time, however, central bankers across the developed world are lending hundreds of billions of dollars to prevent further collapse of the subprime mortgage market, and consequently, stock prices on global exchanges. They have temporarily managed to bring the fire under control, which in local Adriatic terms would be said: ‘Firefighters are monitoring the fire site around the clock.’ But the situation is not under control, no matter how much the panic firefighters try to present it. Another crisis will likely calm down in the end, but the causes remain, and they boil down to moral hazard. All of this should be a message to local players not to delude themselves that similar bubbles can be created in Croatia without the danger of bursting in the not-so-distant future. |
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