JOHN J. BRANDON: Hedge fund bailout a U.S. double standard?
Copyright © 1998 Nando.net
Copyright © 1998 The Christian Science Monitor
(November 3, 1998 12:26 p.m. EST
nandotimes.com) -- Last month's bailout of
Long-Term Capital Management, a hedge fund that
leveraged megabillions more than its capital and lost,
raises some serious public policy questions that may
have significant foreign-policy implications. The
biggest question might be: How can the United
States speak with a straight face to Asians about
"moral hazard" when U.S. authorities do the exact
opposite of what they preach?
"Moral hazard" is the temptation by financial
institutions and banks to make risky loans and
investments on the assumption they will be bailed out
if they fail.
Though no U.S. government funds were used, U.S.
authorities viewed the unprecedented bailout of
Long-Term Capital Management by 14 major banks
and brokerage houses as necessary. It was feared
the hedge fund's failure would send tremors
throughout the world's financial markets at a delicate
moment. Asians, however, are viewing the bailout as
a demonstration of U.S. self-interest in protecting its
own system.
Just 15 months ago, when the financial contagion
was spreading like wildfire across Asia, the region's
leaders were asking the US and European nations to
prevent a financial fallout in Asia. Instead, Asians
heard the U.S. and the International Monetary Fund
extol the virtues of "non-intervention in the economy,"
to "let market forces decide."
In retort, one of Asia's most outspoken leaders,
Malaysian Prime Minister Mahathir Mohammad,
blamed hedge funds for his country's economic
meltdown. (These funds are largely unregulated
investment pools designed to protect against market
downturns while providing larger than normal returns
on investments in stocks, bonds, or currencies.)
Just prior to Long-Term Capital Management's
bailout, Malaysia implemented foreign exchange
controls that prohibited both short-term investment in
Malaysia's stock market and off-shore currency
trading.
Hong Kong's monetary authorities have spent $15
billion to defend their currency and nearly as much to
prop up the stock market. Hong Kong officials are
also blaming hedge fund speculators and are trying
to track movements of money going in and out of the
city.
Thailand, where the financial crisis began, has strictly
adhered to the conditions laid down by the IMF and
the U.S. The Thai government shut down two-thirds of
the country's financial companies and is reeling
under the weight of similarly leveraged operations, as
are other Asian economies.
While the people who ran Long-Term Capital
Management into the ground keep their jobs (though
management's ownership was greatly reduced) and
even reap a management fee on their rescue fund,
2,000 people in Thailand are losing their jobs each
day. The situation in Indonesia is much worse - the
financial system is a shambles, unemployment is at
20 percent, and 100 million people will live on less
than $1 per day by the end of 1998. How can the Thai
and Indonesian Governments explain that the
hardship economic reform entails is necessary when
the U.S. signals approval for rescuing a hedge fund
comprised of some of America's wealthiest
investors?
The Thai and Indonesian governments, as well as
others in Asia, can only be lost for words.
Transparency is constantly evoked by the IMF, the
World Bank, and the U.S., yet hedge funds aren't
regulated and aren't responsible to anyone but a
relatively small number of investors.
Prime Minister Mahathir's much-reported
shortcomings aside, Long-Term Capital
Management's bailout gives the Malaysian prime
minister's criticism of the destructive forces of hedge
funds some degree of credence. Hedge funds need
to be regulated, and investors in hedge funds should
gain or lose as market forces dictate.
The key to Asia's economic recovery is Japan. This
will require recapitalizing Japanese banks,
mandating greater transparency, and, perhaps most
painfully, allowing failing financial houses to fall. But
how can the U.S. complain to Japan about insider
dealings when it encourages U.S. banks and
brokerage houses to bail out some of America's
allegedly most savvy investors?
If the U.S. is to have credibility as the world's financial
leader, then it must learn to practice what it preaches
and shun double standards. If the U.S. fails to do so,
then America's policymakers should not be surprised
to hear more Asian leaders beginning to sound like
Malaysia's prime minister. If this happens, Asia's
crisis may become America's mess.
(John J. Brandon, a Southeast Asia specialist, is
assistant director of The Asia Foundation's
Washington office.)
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