US Sub-Prime Solution Flies In Face Of '97 Advice To Asia

Source : The Business Times, October 26, 2007

By WILLIAM PESEK JR

ASIANS could be excused for looking askance at Henry Paulson's plan to calm credit markets. The reason: It's the sort of thing that had US Treasury secretaries browbeating Asians a decade ago. One thinks back to the whistle-stop Asian tours then-treasury secretary Robert Rubin did 10 years ago. Such trips became more numerous as Asia's financial crisis spread from Bangkok to Jakarta to Seoul to Kuala Lumpur and beyond.

At every stop, Treasury bigwigs lectured leaders to scrap the financial socialism and crony capitalism feeding the excesses behind Asia's turmoil. They counselled fiscal belt-tightening, higher interest rates, stronger currencies, avoiding asset bubbles and for limits on bailing out reckless investors.

Basically, the US told Asia to avoid doing much of what the US is doing today amid its own crisis. Take the Federal Reserve, which cut interest rates twice and hinted at doing more. Investor Marc Faber is absolutely right when he says the Fed acted 'like a bartender' and that its actions are contributing to asset bubbles. The US also has avoided reining in imbalances, including huge current-account and budget deficits.

The US is arguably devaluing its way to faster growth, something Treasury officials chastised Asians for in 1997. Mr Paulson puts on a good poker face, saying he favours a strong US dollar to placate Europe's concerns. He hardly seems bothered by the euro's 14 per cent surge against the dollar this year.

As for crony capitalism, Asians can turn the mirror on the US with one word: Halliburton. The region also watched with a mixture of horror and satisfaction when free-market symbols such as WorldCom Inc and Enron Corp blew up a few years back.

Asians were berated for a lack of transparency. In the late 1990s, the US demanded that reserves figures be published and that clear lines be drawn between governments and private sectors. In the US, dubious mortgage products were sold, repackaged and resold with negligible transparency, while ratings companies approved of the process. The government and the Fed just stood by.

Now, the US is at the centre of what Nouriel Roubini, chairman of Roubini Global Economics LLC in New York, calls the 'first crisis of financial globalisation and securitisation'. And what is the US doing? Playing a role in hypocritically bailing out those who should have known better.

Mr Paulson's team brokered negotiations between US banks, leading to the creation of what is essentially a bailout fund. His involvement is drawing criticism that the US is shielding gamblers from the consequences of poor bets. It doesn't help that White House officials are simultaneously deflecting calls for regulation to keep the sub-prime crisis from happening again.

The advent of what investors are terming a 'superfund' is hardly in the best interest of the world's No 1 economy. Just as Asians did a decade ago, the US is bailing out financiers who made bad decisions. But it's one thing for Bank of America Corp to throw Countrywide Financial Corp a US$2 billion lifeline. It's another thing for the Treasury to involve itself in creating a company that will buy assets from structured investment vehicles (SIVs), which were set up to purchase securities such as bank bonds and sub-prime mortgage debt.

Mr Paulson and Robert Steel, the Treasury's top domestic finance official, seem to think the end justifies the means. Their plan would help SIVs to avoid dumping their US$320 billion in holdings, further roiling the credit markets. The banks would instead create a fund to absorb the debt, using the proceeds of new commercial paper sales to finance the purchases. The new assets would be financed by selling medium-term notes and commercial paper to investors.

Appearances matter. To many Asians, there's a whiff of two former Goldman Sachs Group Inc guys - Mr Paulson and Mr Steel - helping their buddies out of a rough spot, including Mr Rubin, now head of the executive committee of Citigroup Inc, the bank that stands to gain most from such a bailout.

Critics such as former Fed chairman Alan Greenspan and former International Monetary Fund managing director Michel Camdessus are right to warn about the so-called moral hazard being created here. If banks and investors avoid the consequences of their mistakes, they will make even bigger ones next time. The notion that a safety net will be rolled out each time things go awry makes the global economy more dangerous.

It's this and other lessons the US tried to teach Asia 10 years ago. Officials in Washington may want to begin listening to their own lectures. -- Bloomberg

William Pesek is a Bloomberg News columnist.
The opinions expressed are his own