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Friday, October 10, 2008

The Concert for Iceland

Henry Kissinger in 1971 remarked Bangladesh is the "basket case". Fast forward to 2008, Iceland, as a country, is threading on shaky ground after the sub-prime mortgage fallout. While I am not celebrating this news, I would like to remind everyone Bangladesh's accomplishment in preventing this type of 'basket case' scenario.

Clearly the laws of nature are against Bangladesh where we have been bombarded with every natural calamity possible. But bankruptcy is a man-made disaster and by the gesture of not acting (or doing anything) we have succeeded remarkably. We lack the financial instruments, the financial maturity and the financial knowledge that are being used in other developed countries. But even with this lack of knowledge our banks and financial institutions did not invest in "asset backed securities". Thereby avoiding a larger man-made disaster than puts some natural ones to shame. Congratulations.


Anonymous said...

Not doing anything is, by definition, not an "accomplishment" of any kind. Also, asset backed securities are not the culprit in this insanely complicated global financial meltdown. Inadequate regulation, non-existent risk management, predatory lending, speculative trading, etc., are ahead in the queue on that one. Just like you can’t blame your tools when your behavior gets you in trouble, you can't really congratulate yourself for being on the sidewalk when there's an accident on the highway. Not to mention that this crisis will still affect us quite negatively in the months to come.

Ahmed Ali said...

Yes, Bangladesh did stand on the sidewalk. But it is akin to standing on the sidewalk when everyone else is running on the road. For a moment it feels you are missing something until a car crashes into the crowd.

As a disclosure, even the bank I am working at bought into them were I was directly involved. It is not as obvious as the news media makes it look like. Home prices were rising, and if you did default on the loan the house price will be more than enough to pay for it.

Considering that so many people were convinced of this, it would be extremely easy for Bangladeshi banks to do the same. But they didn't.

Anonymous said...

Thanks for the reply. I will have to defer to your involvement, and am willing to give you the benefit of the doubt on your assertions. I just suspect that recent headlines like 'Bangladesh's Billions Safe" to be a little disingenous when our exposure (direct or indirect) to US sub-prime mortgages and asset backed securities was probably negligible not because we were wiser but because we were less able to ante up and play. I mean, the US banks so far have *lost* (or wrote down/off) entire multiples of our total GDP (even almost so when under purchasing power parity!). Hell, their "bailout" package alone was twice our PPP GDP.

Although, if you have any insight on how much our exposure was as a nation, it would really be appreciated.

Or, for example, how much of your bank's portfolio was exposed to those assets at that time and did your bank hedge those investments? And was it really "extremely easy" for Bangladeshi banks (I exclude foreign banks like Stan Char, HSBC or Citi because I doubt their domestic operations in Bangladesh have enough autonomy or capital to take/hold significant market positions in non-domestic markets).

I differ on your opinion that it was not so obvious. While bubbles are only widely recognized after they burst and all of a sudden everyone becomes very knowing, mortgage banks knew they were overselling mortgages to risky customers who sometimes weren't even making down payments on homes, investment banks knew they were further levering up assets that are already based on highly leveraged assets (homes) and reselling them, consumers knew they were buying houses they could not afford. The traded value of all that paper versus the assets was becoming alarming.

The example of Goldman Sachs, which in some instances made profits when the bubble burst, is an actual example of good(although not perfect) management that ought to be congratulated. Maybe it was dumb luck, but it seems more likely to have been foresight and proper execution of their fiduciary responsibility.

I hope our banks had that in them, but I still suspect it was more of standing on the sidewalk because we didn't have proper running shoes as opposed to the foresight to not join the mob.