Global financial crisis: How New will the New Multilateralism be?

It is safe to assume that many common people of yore might have believed –with typical end-of-tragedy romanticism, that postwar multilateral institutions heralded the advent of an era of understanding among the human beings, and were the touchstone of a common effort towards a better, fairer world for everybody. Now, sheer common sense make us humans recognize that whatever element of truth had involved such vision, something got wrong. Over half a century later, after countless new wars, genocides, poverty, economic inequality, and a thousand other tragedies, we must pronounce such institutions a failure.

Curiously enough, however, the multilateral organization websites keep providing us with all too many business-as-usual advice pieces on what we should be doing right now to face the crisis. All sorts of solutions are being offered, including new financial stability funds, new “G”[roups], study commissions, programs, and, of course, indebtedness facilities.

The IMF- and World Bank Spring Meetings held in Washington on 25-26 April, ended up with horrifying forecasts.

“Developing countries face especially serious consequences, as the financial and economic crisis turns into a human and development calamity.

It is estimated that an additional 55 million people will be trapped in extreme poverty in 2009. The number of chronically hungry people is expected to climb to over 1 billion this year.”

Once again, like in so many other crises, the devastating impact on the real economy –on people– is, sadly enough, just a figure in the statistics.

And once again, like in previous crises, it is said that organization internal governance and voting power reforms are in the workings, particularly in terms of enhancing voice and participation of developing members.

World Bank President Robert Zoellick is now proposing multilateralism and market modernization. Let us see what he has to tell us in this area:

“Looking Back –To See Ahead

National governments are drawn increasingly to provide aid with their flag, not through multilateralism that encourages coherence and building local ownership.

Private financial markets and businesses will continue to be the strongest drivers of global growth and development.

We must learn the lessons from the past, as we build for the future.”

Well, let us remember. Let us look back to what the international organizations were up to while the current catastrophe was being brewed.

Note, first, that Reform is being “talked” about for a decade now. In 2001, under the headline “Reforming the International Financial Architecture–Progress Through 2000”, the IMF stated: “The financial crises of the past few years exposed weaknesses in the international financial system. In response, the international community is strengthening the ‘architecture of the international financial system’ to reduce the risk of crises.”

Subsequent demands for changes in the organizations include the remarkable 2003 debate between Nobel Prize Joseph Stiglitz and IMF Kenneth Rogoff, with the latter expounding the following views:

“Slammed by antiglobalist protesters, developing-country politicians, and Nobel Prize–winning economists, the International Monetary Fund (IMF) has become Global Scapegoat Number One. But IMF economists are not evil, nor are they invariably wrong. It’s time to set the record straight and focus on more pressing economic debates, such as how best to promote global growth and financial stability.

However one apportions blame for the financial crises of the past two decades, misconceptions regarding the merits and drawbacks of capital-market liberalization abound.”

The fact of the matter is, however, that blame was never apportioned, reforms never came true; protesters fell silent once the crisis was over, and the organizations repositioned themselves until the following failure – today’s crash, the worst crisis since the 30s.

Let us then review what the providers of official development assistance were up to after having learned the lessons from such crises.

Since the innovative financial instruments (asset/mortgage-backed securities, hedge funds, etc.) are the source of the current collective disaster, we have chosen to discuss the active encouragement by the World Bank of capital markets opening to, and use of, such instruments.

The international organizations themselves recognize the fact that such financial instruments are complex and hard to value –or even to supervise “in part because financial markets have gotten extremely interconnected and sophisticated so that it is hard to know who is actually bearing the ultimate risk,” and it will be “challenging to find workable, practical ways to correct entrenched incentives and structures –both in the marketplace and in regulatory and supervisory systems– that have led to a deep disruption of financial intermediation.”

So far no one can even discern whether such instruments will ease or deepen the crisis, or whether some time, under a still undefined regulation and supervision framework, help the economies and peoples, or be instrumental to financial speculation.

However, right in the middle of the crisis, the World Bank –after having for a long decade promoted use of such financial products by virtually nonregulated non-bank financial institutions– has hosted a seminar in Eastern Europe to market such financial intermediation model among the region’s nations, some of which are amongst the most hardly hit by the crisis and seekers of IMF’s emergency loans.

First of all, let us just remind the reader the WB is a public international organization and a multilateral development bank financed with public monies from the taxpayers of both rich and poor countries. It has 10,000 staff members, and an administrative budget of around US$2,100 million a year. Its mission, under the institution’s Articles of Agreement, involves facilitating the investment of capital for productive purposes, promote private foreign investment and finance for productive purposes and the long-range balanced growth of international trade, by encouraging international investment for the development of the productive resources of members and conduct its operations with due regard to the effect of international investment on business conditions in the territories of members.

Let us now review just a few of its activities and operations as related to structured financial instruments.

May 1998 INVESTING IT; Yes, Risk-Taking At the World Bank

Interview with Afsaneh Mashayekhl Beschloss, chief investment officer of the World Bank, The New York Times

“’The job is to make money, and do your best at it,’ said Mrs. Beschloss, dismissing suggestions that the bank, which has many impoverished countries as members, might lean on her to invest with the heart as well as the head. ‘There is absolutely no pressure on us to buy anything.’

Mrs. Beschloss…. maneuvers much of her portfolio through what she calls a ‘cutting edge’ investment world of credit derivatives, currency swaps, private stock deals, repurchase agreements and mortgage-backed securities.

The exotic financial tools make it possible for the bank’s $20 billion in short-term investments to beat the benchmark six-month London interbank rate by more than 10 basis points, or one-tenth of a percentage point, a signal achievement when so much money is involved.

‘We’re always on the curve of using new tools, whether it’s using asset-backed securities or the asset-swap market’ said Mrs. Beschloss.

The bank also did well with what she called ‘euro-convergence trades,’ profiting from policies that European countries are following to qualify for the European Monetary Union. Late last year, Mrs. Beschloss bet that the Bank of England would raise interest rates. ‘We made $22 million out of that one’ over a couple of days, she said.

‘What is unique about Afsaneh,’ said Peter Yu, a managing director of AIG Capital Partners in New York, ‘is she has an uncanny ability to create a private-sector climate in a multinational institution’.”

June 2000 Legal and regulatory considerations for residential mortgage backed securitization in developing economies – The cases of Malaysia and Mexico

“While securitization has met with great success in the United States, it is important to bear in mind that the legal and regulatory conditions which facilitated growth of this market may not be easily replicated in other countries.

Introduction to the project: Legal and regulatory issues are, in some jurisdictions, the most complex and costly issues to resolve prior to the initiation of a successful residential mortgage-backed securitization (RMBS) program. Our objective is, via at least two case studies, to work through the legal review and remediation process inherent before any RMBS can be instituted.

Conclusion – Malaysia: At this time, it appears that there exist numerous significant impediments to the development of an effective RMBS market in Malaysia. However these impediments may be overcome legislatively as was done in Mexico. (…)

Conclusion – Mexico: The Mexican legal context is sufficiently developed so as to allow effective RMBS; however, certain legislative amendments are required. (…)

November 2004 – IPDC Securitization of Assets in Bangladesh

Opening remarks – World Bank Senior Officer

“It is a great privilege for me to be here today to participate in the launch of the first ever asset securitization in Bangladesh. The idea of introducing asset securitization in this country originated born in 1999. The World Bank was looking at the problems faced by the non-bank financial institutions, or NBFIs, in mobilizing funds from the market.

Unlike the commercial banks … that can easily access deposits, but often can’t on-lend these funds efficiently to viable borrowers, NBFIs typically have strong loan demand from good borrowers, but are perennially starved of funds.

It was at this time that the World Bank team, working with GOB on the design of Financial Institutions Development Project (FIDP), floated the idea that NBFIs might issue asset-backed securities.

The four-year journey to reach this goal has been rough and bumpy. There were tax and incentive problems, regulatory barriers, and knowledge and skill shortages to overcome. An international securitization expert was brought to familiarize the various actors with the concept of securitization.

I understand that all the PFIs under FIDP are preparing to issue their own asset-backed securities to mobilize funds directly from the market.

It is encouraging that several other financial institutions are also poised to float their own asset-backed securities. There is huge potential: housing finance companies can securitize their mortgages. Microfinance lenders can securitize their microcredits. Credit card companies can securitize receivables; the mobile phone companies their billings.

To make this instrument more popular and less expensive to issue, there are still a few issues for GOB to attend to: (i) removing the 1.5% stamp duty on issue and transfer of unlisted securities; (ii) lowering the rate of tax deducted at source on T-Bills to develop a secondary market; (iii) standardizing the regulatory and accounting treatment for securitization; and (iv) in due course, a securitization law.

I do hope these last few wrinkles will be worked out soon, so that the ‘the financial instrument of the new millennium’ can contribute its part to the broadening and deepening of financial markets in Bangladesh.”

May 2008 – SME Asset-backed financing instrument: Opportunities in Europe – Bratislava, Slovakia

“The World Bank’s Europe and Central Asia Region, in collaboration with the KfW Bankengruppe (KfW) and the World Bank Institute (WBI), is organizing a two-day conference to raise awareness of asset-backed financing mechanisms available for Small and Medium Enterprises (SMEs) in Europe.

Asset-backed financing instruments present an opportunity to enhance financing to SMEs, which play a crucial role in Europe but are often credit-constrained. These mechanisms can increase SME financing by converting illiquid and high-risk SME related assets into tradable securities that have the creditworthiness of institutional investors. They have gained momentum in various parts of the world, often under the impulse of financial authorities, but remain underdeveloped in some parts of Europe.

There are clear benefits in the development of asset-backed financing instruments in Europe. They provide additional sources of funding for SMEs, offer new investment opportunities to institutional investors, and help financial institutions manage their balance sheets, liquidity and risks. However, the recent market turmoil has highlighted the need to adequately regulate and supervise risks while fostering the development of innovative mechanisms.

Conference overview: The conference will provide hands-on experience in the development of asset-backed financing mechanisms for SMEs, including supply chain financing solutions, reverse factoring, and the securitization of SME loans and receivables.”

It is hard to understand how fostering –and financing with public monies– a nonregulated risk transfer, perverse incentives-plagued, return-seeking, highly speculative, virtual money manufacturing system –the term was coined by the Brazilian President at the end of the G-20 meeting– has anything to do with the mandate to promote long term steady growth through productive, development-oriented investments.

If the recent past has taught us anything, and “any” breed of multilateralism can make any sense to the developing world, a lot of things should change, such as public resource discretional use; intangible program- and project results, huge technical assistance costs; private-sector lending; public disclosure of private sector projects, just to mention a few, and all of which can easily be demonstrated through the approach used in this paper.

The nature of the changes announced remains ambiguous. After all, international organizations voting power refurbishing is tantamount to political power shuffling – an idea apt to elicit some misgivings in the developed world.

The developing world, however, has changed. Its weight in the world economy and trade is greater than before, and prompts it to demand greater political power. Four large developing countries –Brazil, Russia, India, and China– expect responses.

Raúl de Sagastizabal
International Consultant
Montevideo, May 2009

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