Investment Adventures in Emerging Markets

Bear Stearns: The Bear That Started It All

It is now two years since the Bear Stearns bail-out, which set the stage for the global financial crisis triggered by the collapse of Lehman Brothers, another established name in the business.

I was in our office in Shanghai, China, on March 15, 2008, when I heard about the Bear Stearns’ fire sale to JP Morgan Chase. My initial reaction was that the timing around the Bear Stearns decision was probably unfortunate. I thought that the deed was sudden and done in a moment of panic. It would have been ideal for the government to have allowed for a more orderly process so that clients and related parties of Bear Stearns who had legitimate interests and holdings would not be disadvantaged. 

One lingering concern of mine is that some of the key issues that led to the global financial crisis still remain unresolved, and could potentially give rise to future problems. I do feel that the governments have not done enough in general; and we are in a situation where we have not sufficiently learned the lessons of the previous crises. While perhaps not popular, I believe it is necessary for governments to insist on a separation of investment banking and regular banking and to ensure complete transparency and liquidity of all derivatives. There is currently over $600 trillion of derivatives outstanding, which is more than 10 times the total global GDP.[1]

That said, I believe that emerging markets have come out of this crisis in relatively strong shape. Some emerging markets now have more foreign reserves, in absolute terms, than some developed countries. In 2005, some emerging markets began to grow foreign reserves faster than developed markets and now we have the situation where China is the largest holder of foreign reserves in the world – over US$ 2 trillion. Russia and Taiwan each have over US$ 300 billion; India, Korea, Hong Kong and Brazil have over US$ 200 billion and so forth. The U.S. has only slightly more than US$ 70 billion in reserves while U.K. and Germany have around US$ 45 billion each. [2] Many Asian governments’ emphasis on fiscal prudency, and the Asian banks’ high cash reserve ratios, were borne out of the Asian Financial Crisis in 1997. As a result, the debt levels and banking systems of some Asian economies are in a better shape currently as compared to some of their Western counterparts. We are optimistic about the growth of emerging markets and the rising financial strength of those markets. This should help them avoid some of the past mistakes.

As I pointed out before, I think that bull markets tend to last longer than bear markets. Hence, if we allow fear to keep us from the markets, we will be sitting on cash (currently yielding less than 1%) and not making much money. Our savings would gradually be eroded by the cost of inflation.

[1] Source: BIS, as of Sep 2009.

[2] Source: EIU, IMF, as of Jun 2009.

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