Treasury Secretaries around the developed world are busy with their pails and buckets.They are bailing out sinking ships. These are institutions whose offices are heavily weighted with marble walls and immovable desks. Yet, the faster they bucket out, the faster the sinking flow comes back.

Of course these secretaries are used to it. Their normal working routine is bailing out ministers. The novelty is in those being bailed out. They are banks and investment banks, in our language, stockbrokers.

Banks and investment banks are usually the specialists brought in to do bail outs. They use portentous language and pose loftily and pronounce killer stuff. Then they dole out meagre beans and take control. It is called a bail out. The world has never ended and so there is final survival.

So let me assure you that I shed no tears now when this same bail out language and method is applied to banks and investment banks, starting with those closest to the skies.

Déjà Vu

I cannot help recalling that in 1999/2000, in the throes of the REEL project, I wrote severally to The Island and made public two views that I believe to be facts.

First is that banks and loans should never be the financing method for housing. This is accompanied by the view that buying houses with mortgages is no longer sustainable for developing countries. Secondly, that land, and its major investment housing, should never have an input from planners or anyone outside market forces.

When the treasury secretaries of the advanced countries pause for a breather from their incessant bucket and pail work, they will now agree with me wholeheartedly. For this is why they are in this bucketing problem.

Bailing out, like calling in the accountants, management consultants and Bankers, is just to save face. They can only go on endlessly. Just go to a leading firm of the past in these fields whose whole story is not a commercial secret any longer. They have never added real development anywhere. They can only do bucket and pail work maybe adding a few shovels. But they have no technical research labs to invent new technologies.

Cause

One must look at what is causing this sinking.

In the current USA based scenario, this is quite clear.Many have even being predicting this trillion dollar meltdown, including even a book with this title.

Banks held mortgages. Banks financed housing. Banks securitized, or made these mortgages and financings saleable amongst the financial institutions, through investment banks. Investment banks created funds. Just like the unit trusts and mutual funds of our language. But in the specialised world of financial institutions this means leverage. There is no finance without leverage, anymore than there is any public works engineering worth the name without levers, compression or tension.

What this means is that a good paying customer would be home-owners are made the foundation for a financial structure of no definite limits. The paper value of all the mortgage debt based and securitized and portfolio securities is many times the value of those actual paying customer income streams. This can go on for long. The investment bankers feel it is a matter of wearing a good tie and talking good language, releasing even more of the purple in printed investment research. Fine emblems as Ratings are sported around.

To take an easy to understand example, a few years ago, Vietnam was a stock market darling. Holding Vietnamese securities was supposed to give the owner the massive value addition of fearless and hardworking

Vietnamese labour and tenacity of business purpose. At one time the paper investment in Vietnam based securities was at least 10 to 11 times actual value of all shares issued to the markets by Vietnam corporates. The time of questioning came. The market lost 70% of its value. It is still in that region.

Funny

Larry Fink is attributed with the invention of the leveraged mortgage based security that sold like a Bond. It was called a genuine technical advance. Plaudits came by looking at the security in isolation. The problem is what happens when it is sold and is part of the market. It causes a bubble. The largest investment sector in any market economy became like the situation of Vietnam shares.

There are other considerations. But basically what was wrong was that the banking industry got sucked into long term paper investment, an area that should be alien to bankers.

Funny banking, funny investment banking and finally, funny money has led to the present global situation.

Can bailing out help? That only allows the basic problem to fester on. The banker is allowed to stave off reality. The tap from which the sinking water is flowing remains open.

One real solution would be dramatic. Commercial banks should be returned to the short term in deposits and lending. Similarly, investment banks should be returned to their original businesses. But given all that has gone on, this is unrealistic.

Leaving others to find the global solution, what about considering what will happen here? Most likely quite a lot will happen. It is not a pleasant prospect. The bail out of financial institutions will come at the expense of well performing other real sectors. We who have not had a meltdown will not get the largess.

Worse, developing countries have many banks and financial institutions that need capital infusions and bail outs and write offs. These may not be lumped together with the present debacle. Yet, they will surface more and more in the months to come.

And what of our mortgages and housing? I suspect that these are illiquid and even in arrears in many cases. I doubt there is a banker or lender happy with prospects on the real estate he has lent against. Where land and housing prices have shot up in the developing world, we will face a crunch and face price declines. I don’t see how that can be avoided.

And that is the catch to this. Those who are powerful internationally will get the bailout. Those who are weak, will not.