Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation. This blog is currently suspended.

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Mon, 27 Oct 2008

Policy Choices for India

Most of my posts in recent days have focused on the risks that I see for the Indian economy and the financial system rather than on the policy responses. Jahangir Aziz, Ila Patnaik and Ajay Shah (APS) address the question of policy responses in a paper that I mentioned in an earlier post. They recommend among other things that the policy makers should undertake the following measures:

I agree with the broad thrust of most of these recommendations. Unlike APS, I do not worry that these proposals would amount to over reaction, rather I fear that they would not be enough. I look at what Korea has done and believe that India’s responses can be only mildly milder than theirs. Neither India nor Korea needs to go to the IMF for dollar funds, but the good news really stops there.

Our reserves are sufficient to finance the current account deficit for a couple of years and to take care of the dollar needs of the banking system and a few systemically important entities. As in the case of Korea, the reserves are not enough for anything more ambitious, and we will have to take harsh decisions beyond that. Meeting the dollar needs of the entire corporate sector as APS appear to suggest would risk depleting the reserves to alarming levels. Defending the currency as the RBI has been doing is of course plainly unsustainable.

My main complaint with the APS paper is its title which makes it appear as if we are faced with only a liquidity crunch. No, I think we are faced with a much bigger threat to our economy than during the Asian crisis of 1997. As I have written in earlier posts, in terms of the evolution of the current crisis, we are only where the US was in September 2007. The big shocks are yet to come.

We have not yet had our Bear Stearns moment, but that moment will surely come. We have not yet had a collapse of the real estate market. The big real estate companies have been borrowing at 35-40% interest rates in the hope that the festive season (Diwali) will bring much needed home sales. This has clearly not happened, and November will perhaps see the first distress sales of property. Non performing assets in the financial system will probably start climb rapidly from then on. At least some banks, mutual funds and systemically important non bank finance companies will need some kind of bail out.

For the corporate sector, the real distress is still in the future as the large capacity expansion of recent years encounters a slowing economy. We are also yet to see the flood of cheap imports from countries like Korea that have let their currencies fall sharply. I fear that some East European currencies could collapse to the point where they become competitive with Indian IT and BPO companies unless the rupee itself goes into free fall. It is likely that aggregate Indian corporate earnings will decline significantly. A wave of corporate defaults will of course put further strains on the financial system.

As in the US and Europe, our government too cannot stop the carnage. The government can only try to mitigate its worst ill effects. Moreover the Indian government will have to be even more selective than other governments because it enters the battle with a rather weak fiscal position. If it tries to save everybody, then it will be in need of succour itself. Moreover, the government will face intense pressure for fiscal measures to boost the economy if necessary by monetizing the deficit.

Posted at 15:47 on Mon, 27 Oct 2008     View/Post Comments (8)     permanent link

Will Asia go on a fiscal binge?

In my last post, I argued that Asian currencies are likely to witness a round of competitive devaluations. The purpose of this post is to consider whether this could be accompanied by a fiscal binge as well.

But first some elaboration of my two fold argument for Asian devaluations. The first part of the argument is that reserves are large but not infinite – reserves may be drained rather quickly if the country tries to defend the currency. The Koreans found this out quickly. (My definition of Asia does not include Russia, but the Russians may also be in the same boat right now. Their half trillion dollar reserves are the third largest in the world, but they have already lost a tenth of it and clearly, this rate of reserve loss can not last forever).

Faced with this reality many countries will let the currency find its level and let the rest of the world deal with its consequences. Korea is today telling the rest of Asia what US Treasury Secretary, Jim Connally told his European counterparts back in the 1970s: “The dollar may be our currency, but it is your problem.” The added twist is that Korea is also telling its own corporate sector that the won is their problem, not that of the government. Many Asian companies will hear the same message. Any emerging market company with lots of foreign currency debt will lilkely find itself staring into the abyss.

The second part of the argument was that faced with a global recession that threatens to be a global deflation, currency depreciation becomes a desparate attempt to maintain exports. Commentators on my earlier post asked whether this can succeed. Of course, beggar thy neighbour cannot succeed if everybody tries it as the world found in the great depression, but that does not prevent everybody from trying it.

There will therefore be two kinds of currencies – those that are taken down by the markets and those that are taken down by their own governments. Some currencies will be somewhere in between – the markets will begin the job and the governments will finish it.

Now back to the fiscal implications. During the 1997 crisis, the discipline of currency markets was a strong factor in favour of fiscal restraint. This time around, that restraint will be lacking. In fact, the governments will be tempted to use fiscal boosts to lift the economy out of recession. Two statements from the just concluded Seventh Asia-Europe Meeting were interesting in this regard:

The fiscal binge (particularly when financed by the printing press) is just the currency debasement strategy applied internally rather than externally. It is a very powerful weapon against “debt deflation”, but the remedy can sometimes be worse than the disease.

Can the fisc substitute for the lost foreign demand? The fisc is ill suited to buying the stuff that Asia is used to selling to the now retrenching American consumer. The fisc is best suited to building roads to nowhere providing some support to the steel and cement industries which are now gasping for breath.

Posted at 04:11 on Mon, 27 Oct 2008     View/Post Comments (2)     permanent link

Fri, 24 Oct 2008

The coming wave of competitive devaluations in Asia

We are today seeing a significantly altered re-run of the 1997 crisis in large parts of Asia. Once again, there is a “sudden stop” and reversal of capital flows. The big difference is the the large reserves that Asian countries accumulated during the crisis.

Korea was the first to realize a few weeks ago that unless they threw the reserves away in a futile defence of the currency, the reserves were large enough to cover the sovereign debts as well as the debts of the banking system. A crashing currency could bankrupt reckless companies, but the country would be safe. They have therefore let the currency collapse and have been free to use the reserves to lend to their over extended banks. In 1997, Asians did not have this option. They thought that the only way to prevent a run on the country was to defend the currency and signal to the rest of the world that they were sound.

I believe that the Korean currency depreciation of recent weeks is going to be the new pattern in Asia. Under normal conditions, most Asian governments are suborned by their corporate sectors, but under conditions like this, these same governments would let reckless companies stew in their own brew. An added incentive this time is that with a slowing global economy, the Asians are going to be fighting for a share of a shrinking export pie. We will therefore see more of the beggar thy neighbour game that the Europeans and Americans played during the great depression. This time around, the western world does not seem inclined to play this game leaving the field wide open to the Asians.

We in India know how ten years ago the Koreans used their depreciated currency to capture the white goods market in India. Now that the won is again at 1400 (closer to 1450 as I write) to the dollar, I see an even bigger onslaught by the Koreans because the best run conglomerates are in far better shape than they were in 1998. It will not just be white goods but every industry where there is global excess capacity (which probably means just about everything).

The won will also put pressure on Japan to embark on large scale intervention (possibly half a trillion dollars over the next year or so) to keep the yen down. The Japanese are possibly more concerned about the euro-yen cross today and their intervention could indirectly help the Europeans. But the Chinese would feel the heat of a declining won and yen.

For a couple of months now, the smart money has been shorting the renminbi (what a change a few months makes!). As Chinese exports slow down, a depreciation of the renminbi would be just what the doctor ordered. Since probably as much as half a trillion dollars of hot money flowed into China in the last couple of years, the Chinese government would just have to sit back and watch this money flow out and pull the renminbi down as it leaves. I would not be surprised if a year from today, Japan once again has the world’s largest foreign currency reserves.

Competitive devaluation by Korea, Japan and China would leave India with no choice but to let the rupee fall to levels which would be frightening (if not bankruptcy threatening) to those who have been stupid enough to borrow in dollars. Beggar thy neighbour is a very ugly game when countries start playing it in right earnest.

Posted at 06:05 on Fri, 24 Oct 2008     View/Post Comments (5)     permanent link

Thu, 23 Oct 2008

More on India being in September 2007

I received several comments on my post yesterday in which I argued that India is now where the US was in September 2007. Several focused on the large correction that has taken place in the equity markets and argued that in this sense, much of the pain is over. I disagree. India had a most outlandish bubble in the equity market and a partial correction of this is not what I mean by pain. At this point, only momentum investors in Indian equities are suffering; longer term buy and hold investors are in the money.

Two reference dates that allow stock markets across the world to be compared are the highs that most markets reached in early 2000 at the height of the dot com bubble and the low points that many markets reached after the 9/11 event in 2001.

Let us for the moment put aside the possibility of the Sensex returning to its post 9/11 low – that would be a drop of almost 75% from yesterday’s levels. But what about the Sensex returning to its dot com highs (a 40% fall from yesterday’s level)? Is that possible? Well if aggregate corporate earnings were to fall as they well might in a recession and if the PE multiples were to shrink in line with slower global growth opportunities, this is by no means beyond the realm of possiblity.

India and China are essentially leveraged bets on the global economy. When the global economy goes into recession, stock markets in these two countries will fall much more than global markets just as they rose much more than global markets on the way up.

Other commentators argue that India will not see much pain because we did not have the wild excesses of the US. The UK has had very little of the teaser rate mortgages and other such toxic stuff that we talk about in the US context, but the picture that the Governor of the Bank of England painted in his speech earlier this week was quite dismal. And did we not have excesses in India? Did we not reach a point last year where many companies found that it was cheaper to hire a senior manager in the US than in India, that it was cheaper to rent office space almost anywhere in the world than in India?

Posted at 10:13 on Thu, 23 Oct 2008     View/Post Comments (11)     permanent link

Wed, 22 Oct 2008

Comments have been enabled again

I am happy to inform my readers that I have finally enabled comments once again on my main blog site. I had to disable comments temporarily last month after somebody starting spamming me at the rate of one spam comment every minute. It took me 45 minutes to realize what was happening and disable comments. It took much longer to manually take out the offending comments. Had he done it at a time when I was not watching, he might have had a comment spam on every one of my blog posts!. I used to think that my CAPTCHA’s will stop spam, but they stop only automated spam. They do not stop somebody who starts spamming manually.

It took me a lot longer to write some code in my blogging software to allow comments to be moderated. I have now done this and tested it out. It seems to work. Please email me if there are any problems.

It is my intention to use moderation only to filter out spam. I do not mince words on my blog and I do not expect you to mince words in the comments. Comments are also moderated on my Wordpress mirror.

Posted at 12:10 on Wed, 22 Oct 2008     View/Post Comments (0)     permanent link

India is now in September 2007

In terms of the financial crisis in India, I believe we are where the US and Europe were in August/September 2007. This is how the comparative chronology stacks up.

US and Europe: August/September 2007 India: October 2008
August 9/10, 2007. Liquidity strains in the money market becomes acute. ECB injects liquidity of € 95 billion. Fed injects $ 38 billion. October 10, 2008. Liquidity strains in the money market become acute. RBI injects liquidity of Rs 600 billion by cutting the cash reserve ratio (CRR).
September 18, 2007. Fed cuts Fed funds target by 50 basis points (0.5%). It also cuts discount rate by 100 basis points (1%) including a cut a month earlier. October 20, 2008. RBI cuts repo rate by 100 basis points (1%).
Q3 2007. Real estate prices (Case Shiller index) after peaking in the second quarter of 2006 has been declining for five quarters but has fallen by only 5% from the peak. October 2008. Real estate prices in India probably peaked in late 2006 or early 2007 and has also been declining unofficially for several quarters, but the sticker price has not yet fallen significantly.
Q3 2007. The ABX index of AAA rated sub prime securities indicates losses of only 5-10% of par value. Actual defaults and even downgrades of AAA securities are yet to come: the infamous downgrade of nearly 2,000 AAA securities over a mere two days came only in April 2008. October 2008. Lenders still believe that the best real estate lending will hold up reasonably well and think that losses will be confined to the really low quality loans.

If we assume that the peak to trough decline in real estate prices in India will be comparable to what we have seen in the US, then it is clear that most of the pain still lies ahead.

Posted at 11:11 on Wed, 22 Oct 2008     View/Post Comments (4)     permanent link

Tue, 21 Oct 2008

India and its two giant hedge funds

I like to think of what has been happening to India on the external front in recent months in terms of the two giant hedge funds that we as a country have been running. The first hedge fund is the product of our (Foreign Institutional Investors) FII regime and the Reserve Bank of India’s policy of reserve accumulation. Up to 1997, FIIs bought stocks in India and the RBI stashed away the dollar inflows in its foreign exchange reserves in the form of US Treasuries and other assets. As a nation therefore we were short Indian stocks and long US Treasuries.

During the past year or so this has been an immensely profitable trade for India. Think of an FII that brought a billion dollars into India when the exchange rate was say Rs 40/$ and the stock market index (Sensex) was say 20,000. The billion dollars fetched Rs 40 billion and these rupees in turn fetched 2 millions “units” of the Sensex. Today, the FIIs are stampeding out of the exits when the Sensex is say 10,000 and the exchange rate is say Rs 50/$ (let us choose nice round numbers). The 2 million Sensex “units” can now be sold for Rs 20 billion and these rupees fetch $400 million. The RBI sells $400 million of US Treasuries and pays off the FIIs. The remaining $600 million of US Treasuries are now ours to keep as they will never have to be paid back. India as a nation makes a cool profit of $600 million through our “FII hedge fund”. And that is not counting the profits that we made on the US Treasuries as the global turmoil pushed their yields down to ridiculously low levels. This is a fabulous return and any hedge fund anywhere in the world would give an arm and a leg for this kind of performance.

But India has been running another giant hedge fund which is doing very badly indeed. Unlike the open door policy that we had towards FII investments in Indian equity, we kept our corporate bond markets largely closed to foreigners. In a policy regime which can only be described as incredibly perverse, we did however allow the Indian corporate sector to borrow practically unlimited amounts in foreign currency in global markets. We did have a cap on External Commercial Borrowings (ECBs), but in practice, this cap was simply raised whenever it was approached. This coupled with the inefficiency of the domestic financial system (because of incomplete deregulation) drove the Indian corporate sector to borrow large amounts overseas. Consumed by some amount of hubris, Indian companies splurged billions of dollars on buying marquee companies around the world even when the domestic stock market told them in clear terms that they were overpaying.

This is the second giant hedge fund (the “ECB hedge fund”) that we as a nation have been running – long cyclically sensitive assets in India and around the world, short US dollars. A large part of the dollar borrowings were also in relatively short term funding which has to be renewed at today’s punitive interest rates. The credit spread on Indian paper has risen by around 500 basis points (5 percentage points), the dollar has risen, cyclical assets have been hammered down due to global recessionary fears – the “ECB hedge fund” has been living through a nightmare. Aziz, Patnaik and Shah estimate that the Indian corporate sector will require at least $50 billion of dollar liquidity in the coming year. This is one reason why there is so much shortage of liquidity in India today: with dollar borrowing next to impossible, dollar borrowings are being repaid our of rupee borrowings.

So all in all, the “ECB hedge fund” has performed disastrously and could conceivably end up losing more money for us as a nation than the “FII hedge fund” makes for us.

In the fullness of time, when we come around to reviewing our capital account policy frameworks, we will hopefully keep this in mind.

Posted at 11:21 on Tue, 21 Oct 2008     View/Post Comments (5)     permanent link

Fri, 17 Oct 2008

Mutual funds cannot borrow their way out of redemption trouble

Indian mutual funds have been facing redemption pressure for some time now and the policy response to this was to allow them to borrow more easily. The Reserve Bank of India early this week created a special repo facility of Rs 200 billion to enable banks to meet the liquidity needs of banks. This facility has thankfully not been very popular so far and I hope that it does not become popular because it is a prescription for disaster.

A mutual fund is very different from a bank. When a bank borrows to repay depositors, there is a capital cushion that can take losses on the assets side. When this capital is gone, the bank also needs to be recapitalized and cannot solve its problems by borrowing from the central bank. A mutual fund does not have any capital separate from the unit holders. This means that the only prudent way for a mutual fund to repay unit holders is by selling assets. If it borrows, then it is exposing remaining unit holders to leveraged losses.

Imagine a mutual fund with assets of Rs 1,000 (worth par) and 100 units of Rs 10 outstanding. The net asset value (NAV) of the fund is Rs 10.00 at this point. Suppose now that some of the assets deteriorate in quality and the true value of the assets is only 88% of par value. If the instruments were liquid and well traded, the mutual fund would mark its holdings down to market value, and the NAV would drop to 880/100 = Rs 8.80 per unit. But because the instrument is illiquid and not well traded, the mutual fund would avoid doing this by pretending that the assets are all good. The NAV would on paper remain as 10.00 instead of 8.80. If the mutual fund borrows 200 to meet a redemption request at the old NAV then only 80 units are remaining to absorb the loss on the assets. The true NAV at this point is only (880-200)/80 = 680/80 = Rs 8.50. Every unit holder who remains in the fund has lost Rs 0.30 in order to allow the redeeming unit holder to exit without a loss.

What this means is that every intelligent unit holder now has the incentive to redeem and exit at 10.00 rather than wait and be left with only 8.50. It is far better to force the fund to sell assets at distress prices if necessary. Suppose in the above example, the market prices are distressed and the assets which are truly worth 88% of par can be sold only at 80% of par. In this case, the NAV of the fund drops to 8.00 by being marked to market. Suppose 20 units want to redeem and the fund sells assets with a face value of Rs 200 at 80% to pay out the NAV of 8.00 x 20 or 160. Suppose the remaining unit holders sit out the distress and hold on to their units till the assets rise to their fundamental value of 88% of par, the assets of the fund at this point would be Rs 800 of face value which are worth 88% x 800 = 704. The NAV of the remaining 80 units would then be 704/80 = 8.80. Thus the remaining unit holders have a gain of 0.30 per unit at the expense of the redeeming unit holders. This is as it should be. Those who demand liquidity during troubled times should pay for it and the patient capital that sits out the storm should be rewarded. What this would also do is to reduce the incentive to redeem. Only those with pressing liquidity needs would redeeem.

The questions therefore is whether Indian mutual funds are facing only a liquidity pressure or whether they are also facing the problem of hidden non performing assets. I think the latter is clearly the case today. The liquid funds and fixed maturity plans that are facing redemption pressure today have broadly four clases of assets in the portfolio:

In the current scenario, therefore, the NAVs of many debt oriented mutual funds today are not very credible. The only way to establish true NAVs is if the underlying paper is sold. Giving the mutual funds a credit line delays this day of reckoning. The danger is that the sophisticated corporates who are redeeming today get a good deal and the unsophisticated retail investors still holding on to their units will be left with all the rotten assets.

All of this is not to deny that a policy response is needed to the liquidity problem of mutual funds. If lending them money is not the answer, then what is the solution? There are two models available.

At the very least what is required today is a partial redemption freeze to ensure that nobody is able to redeem units of mutual funds at above the true NAV of the fund. Anybody who wants to redeem should be paid 70% or 80% of the published NAV under the assumption that the true NAV would not be below this. The balance should be paid only after the true NAV is credibly determined through asset sales. If this is done, then the Rs 200 billion line of credit would make sense to avoid distress sale of assets.

Posted at 17:18 on Fri, 17 Oct 2008     View/Post Comments (0)     permanent link

Wed, 15 Oct 2008

Bubble in our backyard

I wrote a piece in the Financial Express on Saturday about India’s home grown financial bubble.

While Indians have been worrying about the spillover from the global financial crisis, a homegrown crisis has been brewing gradually. Like in the US, this crisis has its origins in a bursting real estate bubble and its effects are likely to be similar.

It is a mistake to assume that the US financial crisis was caused by the kind of securitisation and financial innovation that has been repressed in India. The deadliest financial innovation at the heart of the global financial crisis is a millennia-old innovation called the mortgage loan. We have had plenty of that in India.

During the last few years, India experienced a bubble in both residential and commercial real estate fuelled by easy availability of credit. Indians have been buying expensive houses almost completely financed by banks. The cumulative loan to value ratio including “furniture loans” and other forms of financing has been close to (and has sometimes exceeded) 100%. Unlike in the past, many of these transactions have been largely free of black money and therefore there is no hidden cushion in the loan to value ratio. Moreover, our young upwardly mobile professionals have been taking on large mortgage payments (EMIs) assuming that these would be affordable on the basis of projected salaries one or two years down the line. With declining salary growth, the affordability of these mortgages is now questionable.

Commercial real estate has been equally if not more frothy. Much of recent corporate lending by the banks has been to sectors like infrastructure, SEZs and retailing that have been essentially real estate plays. The real estate bubble has also helped banks to reduce non performing assets as companies have been eager to settle old problem dues in order to monetise their real estate.

The real estate bubble in India is clearly bursting. Anecdotal evidence points to declines of 20% or more in key markets. But this understates the severity of the problem. Real estate prices are sticky and they fall only gradually. Hidden discounts are more common than public price cuts. Evidence from the stock prices of real estate companies indicates that the value of their land bank has fallen by over 50%. Even if this is exaggerated, it is clear that a 30-40% nationwide fall in real estate prices from peak to trough is very likely.

Under this assumption, a large fraction of recent home buyers would have negative equity in their homes. They would also face increasingly unaffordable mortgage payments as the job market deteriorates. As in the US, we too have witnessed a significant easing of credit standards in retail lending in the last few years. We have anecdotal evidence that the retail unsecured lending portfolio of some large finance companies (including some foreign owned ones) received exit valuations of as little as 30% of face value early this year, and are probably worth even less currently. If credit standards in mortgages were similar, the home loan portfolio of the banking system could see severe losses as home prices fall.

I do hear people argue that while property loans in the US are without recourse, this is not the case in India. Actually, only in a few states of the US is it true that mortgages are without recourse to the borrower by law. However, elsewhere in the US and in other countries, where legally the lender has recourse to the other assets of the borrower, this makes very little difference in practice. The part of the loan that is in excess of the sale value of the house is an unsecured personal loan whose recovery in default is quite low and often lower than the costs of litigation.

Globally, therefore prudent lenders regard mortgages as being without recourse in practice. The lenders’ best bet is to modify the mortgage terms to persuade the borrower to stay on in the house and keep paying the reduced EMIs. This is because a house is typically worth more to the existing owner than to a potential buyer.

The picture in Indian commercial real estate is even worse because of the greater possibility of negative cash flows and acute liquidity stresses. There is of course a lag between dropping footfalls in malls to rising vacancy rates and then to negative cash flows, but the trends are clearly in evidence. It does appear that the situation in Indian commercial real estate is worse than that in the US.

Indian banks, mutual funds and other intermediaries have large exposures to residential and commercial real estate and there is a significant risk of their facing liquidity and solvency stresses similar to those faced by global banks. A “quiet run” is already beginning on some of these institutions. The question is whether Indian policy makers would respond to these stresses with the same speed and flexibility that the Americans and Europeans have exhibited.

Posted at 15:46 on Wed, 15 Oct 2008     View/Post Comments (1)     permanent link

Sat, 11 Oct 2008

Securitization has little to do with crisis

I have been arguing for sometime now that the global financial crisis has little to do with securitization and CDOs and everything to do with real estate lending. The data in the IMF Global Financial Stability Review released this week confirms this view. Of the estimated losses (Table 1.1) of $1.4 trillion, as much as 30% are in unsecuritized loans. The corresponding percentage was only 24% in March 2008 and as little as 17% in October 2007. During the last year, the percentage of losses attributable to unsecuritized loans has almost doubled.

What we see is that because of the mark to market approach, securitized assets show losses earlier while the held to maturity approach allows losses on loans to be concealed and deferred. In this sense, the securitized paper was the canary in the mine that alerted us to problems quite early. Policy makers are completely mistaken in believing that absent securitization, we would not have had any problem. All that would have happened is that banks would have been in a state of denial longer.

Another interesting thing that we have seen in recent days is that the global stock markets can take something like a trillion dollars of losses in a single day without stock exchanges collapsing. When banks take less than a trillion dollars of losses over more than a year, it looks like the end of the world. This tells us something about the inherent fragility of a bank dominated financial system and the need to move towards a world dominated by liquid financial markets. We also see that under conditions of extreme stress, liquidity collapses in inter bank markets, but not in stock markets and other non bank markets. Yet another reason to reduce the dependence on banks in the long run.

Posted at 13:57 on Sat, 11 Oct 2008     View/Post Comments (2)     permanent link

Sat, 04 Oct 2008

SEC Audit Report on Bear Stearns

At the beginning of this week, the SEC released two reports of its Inspector General on the Bear Stearns failure and more generally the SEC’s supervision of the broker dealers. I am quite disappointed about this report which I approached with high expectations. This was a report requested by the US congress and the Inspector General had retained the services of one of the world’s leading authorities on market microstructure as an outside expert. The redactions in this report are not very large and I do not believe that the unredacted report would contain anything more useful.

The critical question in the SEC’s supervision of the broker dealers relates to the capital and liquidity regulations. On this the audit report states:

Bear Stearns was compliant with the CSE program’s capital and liquidity requirements; however, its collapse raises questions about the adequacy of these requirements;

One expects an audit report to go beyond such an inane statement.

I read the audit report once again in the light of the management response by the SEC’s Division of Trading and Markets. I found myself agreeing more with the management response than with the audit report.

I remember being quite critical of the UK FSA’s internal audit report on Northern Rock, but today I must confess that the FSA report was definitely superior to this SEC report. We are reconciled to regulators being reactive rather than proactive, but if a regulator cannot do even a proper post mortem, then it is a matter of serious concern.

Posted at 13:41 on Sat, 04 Oct 2008     View/Post Comments (0)     permanent link