Saturday, October 11, 2008

Rebuilding the Global Financial System

It is time for people to think about how to rebuild the global financial system. Do not rely on the old experts, who build the old system based on financial engineering, greed, free market and dishonesty. They have led to the collapse of the system and loss of life savings of many ordinary people.

When Lehman Brother collapsed, it had debt of 30 times of equity. The debt is funded largely by short term credit, which has to be rolled over every 30 or 90 days. Many hedge funds have similar funding structure. When the credit could not be refinanced, they had to sell shares and bonds at any price, leading to the collapse of the markets.

The size of the unrglated credit default swaps (CDS) is USD 50 trillion, more than twice of the global stockmarkets!

The new financial system should, in my view, be build on the following pillars:

1. Stronger regulation
2. Regulated companies, e.g. financial institutions and listed companies, should have debt of not more than 1 time of equity, and it should be funded by bonds of at least 5 year duration.
3. Deriviatives should be regulated and traded on exchanges
4. Complex financial products, build by financial engineers, should be banned

The experts will argue that the "risk based capital" approach can help to prevent the collapse. I agree with this approach, but it has to be considerably simplifed.

We will have a simpler financial world, but a safer and fairer world. There will be less multi-million dollar jobs for financial experts, who milk the old, now collapsed, financial system.


ym said...

the asutrian/misean economists has a sound monetary system... but during boom times, their teachings were forgotten...

we need to do 3 things :
- central banks must stop controlling interest rates and forex rates
- fractional reserve lending must be abolished
- we need have a gold 100% reserve standard

Anonymous said...

Yes, more stringent regulations to protect the interest of the public, and prevent the collapse of the financial system as this will impact most of us. Take for example, the sale of the structured products like minibonds and high notes, the issuers mentioned extensively the obvious risk factors in the pricing statement but say very little about hidden risks and that hidden risks are the riskiest as very few investors are aware or understand them. On top of that, the FIs always use the term "Buyer beware" to safeguard themselves from liabilities of any wrong doings. This is irresponsible and unethical. Therefore more regulations and more transparency are needed.After years of good economic growth, the supervision of our banking industry seems to be laxed. It is time to tighten the control now.

Anonymous said...

Could someone explain to me how the HN5's value was reduced to nothing. I am still waiting for DBS to give me full explanation. I have requested an explantion from DBS on 17thSep. Until today I have not heard from them.

Anonymous said...

Isk, it is a very complicated thing and I don't you can fully understand it even if they call to explain it. Even a lot of the RM cannot explain it themselves. However, you should continue to call your RM to get someone to explain this thing to you. It is not easy to understand and not sufficiently illustrated in the pricing statement that's why many investors relied on what the RM told them (the wrong thing) when they made the investment.

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