Derivative problem ? another financial crisis looming

The Star Online > Business
Wednesday June 1, 2011

Derivative problem ? another financial crisis looming

Plain Speaking - By Yap Leng Kuen


HOT on the heels of the last financial debacle, a fresh crisis is looming round the corner, said Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group.

The derivative problem that had plagued the last crisis in 2008 has not been solved and the financial world is still awash with derivative trading, Bloomberg reported, quoting Mobius.

'The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10,'' he had said at the Foreign Correspondents' Club of Japan in Tokyo on Monday, in response to a question about price swings. “With that volume of bets in different directions, volatility and equity market crises will occur.''

According to data compiled by Bloomberg, the largest US banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40% over the next 15 years.

In a May 27 report, staff at the International Monetary Fund cautioned that higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures.

It has been only three years since the near collapse of the global financial system and economies in the West are not out of the woods yet.

It is quite unbelievable to hear warnings of another financial crisis so soon.

Perhaps the large amount of money made in the last steep fall has whet the appetites for more opportunities to buy cheap.

Are the financial vultures back at work?

For as long as the financial world is bracing for another fall, it may jolly well be self-fulfilling prophecy that it will probably happen again, possibly at a faster speed than anticipated.

The conviction that things will take a dive for the worse, may dampen the will to prevent another crisis at all costs.

The spate of news in the last two years of various efforts to come up with new rules and regulations for derivative trading, credit rating agencies and proprietary trading, seems to have dried up.

Instead, the bubbles seemed to have quickly formed again and world attention is drawn to other gripping events related to war, terrorism and nuclear disasters.

People have short memories and lobbies can be quite powerful.

The gyrations of the stock markets are an indication of the powerful forces at work, dictating the direction of markets.

The MSCI AC World Index of developed and emerging market stocks tumbled 46% between Lehman's downfall and the market bottom on March 9, 2009.

The MSCI AC World gauge surged 99% from its March 2009 low through May 27.

Bloomberg estimated that the freezing of global credit markets caused governments from Washington to Beijing to London to pump more than US$3 trillion into the financial system to shore up the global economy.

Alas, what has happened to the plans for reform of the global financial architecture? And what will happen when governments are no longer pumping in the money to support their economies?

Associate editor Yap Leng Kuen considers that not everyone can be as sanguine as Mobius in saying that “with every crisis comes great opportunity.''

Source/转贴/Extract/: The Star Online
Publish date:01/06/11