Saturday, September 27, 2008 Batuhan: In the eye of the storm (part 2) By Allan S.B. Batuhan Foreign Exchange
THEY say that in the land of the blind, the one-eyed is king.
This statement could not be truer than in today’s brewing financial maelstrom.
Since the time we started writing on the current crisis in the world’s major financial markets, things have become even more tangled than anyone could have imagined. No less than the campaign for arguably the world’s most important office has come to a grinding halt, with John McCain calling a unilateral truce to the hostilities, in order to lend his hand to the speedy passage of a bill which is hoped would restore order to the tumultuous global economy.
Everyone, it seems, wants to lend a hand. From former investment-banker-turned-US Treasurer Hank Paulson, to Federal Reserve Chairman Ben Bernanke, to outgoing American president George W. Bush, anyone who seems to matter is pitching in to stave off what is potentially being billed as the greatest catastrophe ever seen in modern economic times.
Not that it is bad to help out. In times of crises, everyone’s help is most welcome. But yet like in all times of crises, we need to be careful that the help given is indeed beneficial, rather than harmful, to the recipient.
Herein, perhaps, lies the problem.
The fact that the current crisis materialized at all is a reflection of the reality that the global financial market is one complicated, chaotic and unpredictable place, led by no one and understood only by a few.
Not many will agree with me here, and some will perhaps say that I am exaggerating when I make this statement. Surely the financial markets are well organized, and the people who run it are very knowledgeable? Otherwise how to explain the millions of dollars of bonuses paid to executives of Wall Street firms, and the record profitability enjoyed by their organizations in recent years?
To those who doubt what I say, please refer to the opening statement of this piece.
Clearly there are those who know what they are talking about, and in fact there are a lot who do. But the fact is that people tend to push the envelope too much, create too many instruments that too few understand, to the extent that the outcomes become more and more unpredictable, as the current crisis so emphatically demonstrates.
When I was a young man, it was junk bonds-financed leveraged buyouts that were all the rage. For some unexplainable reason, anyone at all seemed to have been able to talk their way to having financial institutions fund their grand ambitions to acquire businesses they saw fit to purchase. Many healthy and well-run companies became the victims of the buyout craze, in the process losing their valuable edge in the marketplace as they were acquired, broken up and sold to highest bidders.
As we now know from our financial management history, the era of the junk bonds and leveraged buyouts was a sad chapter in the evolution of financial markets, creating more havoc than the good it was supposed to have brought.
And yet, just a few years later, another accident in the making appeared on the Wall Street horizon – this time in the form of companies with no proven earnings record, being able to raise funding merely on the pretext of catering to the “new economy.”
