How caution saves Kasikorn

CDOs, one of the reasons behind the "Hamburger" crisis, which has claimed the scalps of many big banks, solid investment banks, and needed several trillion dollars of rescue and stimulus packages in the developed world, also inflicted some losses on some Thai banks.

Prasarn, a former Bank of Thailand official and also former secretarygeneral of the Securities and Exchange Commission, said Thailand was "lucky by default" for not being contaminated too greatly by the global financial crisis.

Four years ago, foreign financiers twice visited KBank trying to sell CDOs to the country's fourthlargest bank. But he said the reason he was not convinced to invest in CDOs was not a banking or academic matter, but his instinct for risk management.

"It's like, there are a number of people dying in coal mines every day. But when there's a problem in nuclear plants, it always becomes a frontpage story in newspapers. Similarly, when the management has to write off NPLs [nonperforming loans], the board of directors just gets used to it. But if we suffer a loss from CDO investment, how can I explain to them [the board]. They won't understand it. This is the selfish reason of management not wanting to explain," Prasarn said, explaining his decision about turning down CDOs, which was the most popular financial innovation four years ago.

Only a day after KBank decided against investing in CDOs, some other Thai banks agreed to put their money into the innovative product. Fortunately, the CDOs have caused only slight damage to the Thai banking system. Many have explained this as Thai banks not being very aware of the innovation, hence they have not been greatly exposed to CDOs or other innovative financial products.

Besides, the BOT has so far been quite discouraging about financial innovations that it does not really know about, particularly derivatives.

While in the United States the regulator will allow "you to do what you want, if we don't prohibit it", in Thailand any innovative product must be approved first. The BOT's conservative style was a boon for Thai banks this time.

"This time, the BOT has done the country a favour," Prasarn said. Unlike Thailand, regulators in the US invite the big six banks to explain what are their operating problems. Then the regulators use their answers to warn other financial institutions. The different regulation models in Thailand and the US were due mainly to the fact that big banks in the US have been much more sophisticated than their own regulators.

Despite looking a technically reasonable investment, Prasarn said there were three points that he could not "think through" about CDOs.

l The leverage had been overdone, with mortgage transformed into debt instruments before being leveraged into another financial asset. With highly leveraged products, the momentum was extremely strong when it came to the deleveraging process, as equities worldwide were sold at all cost for cash.

l The financial innovations were too complicated to follow. Only a few can understand what they are, while top management does not know what is going on. With several transfers to numerous buyers, who had no proper knowledge about the products, pricing was not reasonable.

People may forget that liquidity could be a big problem in the event of a CDO default.

Looking ahead, Prasarn believes conservative regulations on financial innovations will be put in place, though he does not believe that global capitalism will fail. For Thailand, despite the minimal direct impact, there could be severe indirect effects in the near future.

The Thai banking industry hardly expanded in the first five years after the 1997 financial crisis. It then grew gradually between 2003 and 2007. This was another reason behind escaping the Hamburger crisis, by default.

"In 1997, we got a fever from the flu but we were in an environment that economically supported us. Western countries absorbed our trade. Then, in only five years, we recovered. Now, we don't have a fever, but we're living among a lot of infectious diseases. So, it depends how long these diseases will last, which will challenge our immunity. Those who have a short capital lifeline will face difficulty," Prasarn said.

He does not believe Thailand will have a liquidity shortage at the macroeconomic level, as the balance of payments still shows a surplus. The BOT will soon gradually redeem its shortterm bonds worth around Bt1.4 trillion that were issued during the period of its 30percent reserve requirement on capital inflow.

However, he warned of a liquidity shortage among many "junctions" of credit at the micro level: not only the junction between banks and customers, but also that between customers and customers. The junction of international trade will face liquidity problems, too. Now, many Thai banks offer their customers confirmation on whether foreign banks with which export clients open letters of credit, are trustworthy. And all trade transactions are recommended to be carried out with letters of credit.

Prasarn is optimistic that the financial crisis will last only this year, when gross domestic product could grow by between zero and minus 2 per cent, and hopes that it will at worst not extend beyond 2010.

"We'll take a holiday this year. Some could take this opportunity to fix their machine tools. If the crisis does not last longer than 2009, it's okay. But if it prolongs beyond that, the Thai economy might not be able to bear the burden," he said.