Bank error - in my favor!

[kojis]

LOL!pretty good joke... our intolerance sure has its limits :smirk:

[Gadfly]

HT: "You've only supplied rhetoric." I only engage in rhetoric, huh? Letâ??s examine HTâ??s key point â?? the linchpin that underlies his entire argument here - see if it holds up or is anything more than empty rhetoric. I am referring to:

 

Gadflyâ??s question: Why did the practices of Thai banks lead to six times as many bad loans?"

 

HTâ??s answer: they weren't in the same business. Second, they [Thai banks] were better money managers. Third, and most significant by far, Thai banks were taking deposits in foreign currency and lending baht taking on massive forex exposure.

 

When HT says that Thai and foreign banks werenâ??t in the â??same businessâ?Â, he obviously canâ??t mean they werenâ??t in the â??same businessâ? of banking and loaning money. He really means Thai banks had bad loan rates six times higherthan foreign banks because Thai borrowers lent to higher risk borrowers. But this response begs the question: why were the loans held by Thai banks so much more likely to go bad in the first place? Why?

 

HT repeatedly argues that the Thai financial markets were liberalized in the 1990s. He says for example: â??You [Gadfly] don't know your history. Thailandâ??s [financial sector] was liberalized in the 90s. The IMF recommended/pushed these principles to the entire region.â? Indeed, his whole argument about why IMF â?? rather than bad local policies and foolish restrictions â?? caused the 1997 crisis and Thailand's current woes is based on this assumption.

 

Now if this is really true, you have an open market where banks can choose their customers, customers can choose their banks and there are no government policies pushing Thai banks to lend to domestic borrowers. You donâ??t have to be an economist or even a businessperson to realize that, when given a choice in an open market, you will borrow from a bank that is willing to lend you money on the most favorable terms. Think about the last time you borrowed money to buy a car or a house. This is commonsense.

 

Now how did the Thai banks end up with six times as many dud loans in Thailandâ??s liberalized financial sector? We donâ??t see an answer to this key question because this is where it gets very interesting and embarrassing for the local banks.

 

If you have connections to a Thai bank and can get a loan for anything irrespective of your ability or intent to re-pay that loan, would you (a) get that loan through your connections with that Thai banks where you will never really be expected to re-pay that loan or ( apply to a foreign bank where you are going to show that you have the ability to re-pay the loan, provide collateral, be judged by the same standards as everyone else and you will be expected to keep your end of the bargain? The question is a no-brainer, right? It was this difference that accounts for the difference in dud loans.

 

Lending in Thai banks wasnâ??t based on the ability of borrowers to re-pay. It was based on connected lending. HT is right when he says: â??they werenâ??t in the same business.â? Chinese-Thai family controlled banks, with an almost lock on domestic deposits, were loaning to their cronies. Foreign banks, answerable to shareholders and regulators in multiple jurisdictions, couldnâ??t and didnâ??t engage in massive connected lending.

 

Now the last two points: First, Thai banks are better money managers? Huh? Six times as many bad loans as foreign banks, and they are better money managers.

 

Second, â??Thai banks were taking deposits in foreign currency and lending baht taking on massive forex exposure.â? And this is the fault of IMF and competing foreign banks? Sounds to me that an overly protected domestic banking industry engaged in dangerous, high risk activities.

 

They expected the Bank of Thailand to protect them if their bets went wrong, but it couldnâ??t because the exposure was too great. And if they did, it will only encourage more speculation. Why not gamble with your depositorsâ?? money if the Bank of Thailand â?? as part of its mission to protect Thai banks from foreign competition â?? is going to cover your bets. But this isnâ??t the IMFâ??s fault. Indeed, its shows why a protected and insular domestic sector that is in bed with regulators is so dangerous.

 

Ask yourself why the bad loan rates in Thailand's bank rates were over 66% - six times higher than the bad loan raters in foreign banks to operate (on a limited basis) in Thailand. Thailand has extremely protectionist policies by current standards, particularly in the financial sector. You won't find anything similiar to the Foreign Business Act in the US. And we see debacle (1997 crisis) after debacle (December 2006 capital controls) here. But according to HT, this primarily the fault of outsiders. Has nothing to do with protectionist and economic nationalistic policies. Anyone really believe this?

 

Palliote sums up HTâ??s argument well: â??Poor innocent Thais, victims of the evil IMF, George Soros and US. Of course, Thailand did nothing wrong and if they did, was conned into doing so...â? Yeah right.

 

 

[HeartThais]

Again, you prove you talk without knowing ANY of the actual facts. For a real description of the financial climate in Thailand pre 1997 :

http://wb-cu.car.chula.ac.th/papers/corpgov/wps2188.pdf

 

"I only engage in rhetoric, huh?"

 

Sometimes you make stuff up too.

 

"When HT says that Thai and foreign banks werenâ??t in the â??same businessâ?Â, he obviously canâ??t mean they werenâ??t in the â??same businessâ? of banking and loaning money."

 

I mean they are not in the same business. Read this carefully excerpted from the link above:

 

--- Although the number of foreign banks was almost equal to the number of domestic banks, they together accounted for around only 5 percent of commercial banking assets."

 

--- Foreign banks faced the following three main restrictions... Thus, foreign banks mainly focussed on financing of international trade

transactions; while they are active in the foreign exchange market, most of their business relates to trade transactions of their own clients. See for more detail World Bank (1990).

 

That's what I mean by not being the same business. They are lending to foreign companies in foreign currency. Thai Banks are lending to domestic companies. I'm sure you will then make the ridiculous statement that Thai Banks should have lent to more secure foreign companies instead of local companies, right?

 

Then your next baseless accusation is that Thailand should have let foreign banks do business openly. Virtually no nation I can think of allows foreign banks to operate under the same conditions as domestic banks. Here is a very detailed explanation of US restrictions on foreign banks, for example.

 

http://www.pwc.com/extweb/pwcpublications.nsf/docid/CB7F1D33087BBAE2852570B5005E1D17/$File/regguide_0506.pdf

 

 

"Indeed, his whole argument about why IMF â?? rather than bad local policies and foolish restrictions â?? caused the 1997 crisis and Thailand's current woes is based on this assumption. "

 

No, Thailand messed up bad by drinking the kool-aid being served. It was as much their fault for buying into the idea of fast-track capitalism. But why not? It's being pushed on them by the most successful economy in the world... except that this nation conveniently forget to mention that they weren't exactly following openness during their rise to power (before you try to dispute this, please google Cold War).

 

"Now if this is really true, you have an open market where banks can choose their customers, customers can choose their banks and there are no government policies pushing Thai banks to lend to domestic borrowers."

 

You claim to be a banker and yet fail to know the most basic history of foreign banking in Thailand. Please read the link above for some education.

 

"Now how did the Thai banks end up with six times as many dud loans in Thailandâ??s liberalized financial sector? We donâ??t see an answer to this key question because this is where it gets very interesting and embarrassing for the local banks."

 

I explained already but you weren't listening. Thai Banks were lending mostly in baht. Foreign banks were lending in foreign currency. Foreign banks did not HAVE to lend to Thai companies because their asset base was tiny, only 5-9% of total banking assets. They were fine just lending to international companies.

 

"Lending in Thai banks wasnâ??t based on the ability of borrowers to re-pay."

 

You don't know basic banking history as I've demonstrated. How could you possibly claim to know Thai underwriting procedures? I don't deny that Thai banking practices were very poor and still are very poor. However, it makes absolutely no logical sense that poor banking practices that have been in existence for decades suddenly causes a meltdown. The logical conclusion is that something else happened. That something else was liberalization of the capital account.

 

"Now the last two points: First, Thai banks are better money managers? Huh? Six times as many bad loans as foreign banks, and they are better money managers."

 

I said Foreign Bankers were better money managers.

 

"Second, â??Thai banks were taking deposits in foreign currency and lending baht taking on massive forex exposure.â? And this is the fault of IMF and competing foreign banks?"

 

It's not the fault of anyone. It's just a reality of unbridled inflows of foreign capital spurred by IMF recommendations. If the US Fed lowers interest rates, you get a ton of shaky subprime loans which could collapse. This is not the fault of anyone because everyone is functioning the way they were supposed to. It's just a consequence of economic policy decisions. Thailand was too inexperienced at the time to think capital inflows could ever be bad. But once that capital came in, they did what they were supposed to do... find places to put it. There was just too much money and too few places. Thailand was too immature as a nation to try and join the big leagues. It still is.

 

"Sounds to me that an overly protected domestic banking industry engaged in dangerous, high risk activities."

 

Because you don't know history. I've provided some research materials for you to start on.

 

"They expected the Bank of Thailand to protect them if their bets went wrong, but it couldnâ??t because the exposure was too great."

 

No, they expected the Bank of Thailand to defend the peg... a peg which the IMF recommended to them primarily to spur foreign investment. This is their one-size-fits-all prescription for all developing countries because a pegged exchange rate allays foreign investor fears of short-term exchange rate risk.

 

"But this isnâ??t the IMFâ??s fault."

 

It is Thailand's fault for accepting IMF and US recommendations and liberalizing haphazardly. They let the wolves into the henhouse. But they aren't alone. Russia did that too. So did Argentina. They were all foolish for taking suggestions from a country not really known for being gentle playmates. What has made the US so powerful has been it's unbridled ruthlessness and cunning in foreign affairs. Well, George Bush is ruthless but not so cunning.

 

"Ask yourself why the bad loan rates in Thailand's bank rates were over 66% - six times higher than the bad loan raters in foreign banks to operate (on a limited basis) in Thailand."

 

If you compare pre-crash non-performing loan rates, I'm sure they are very similar. I could do the research. I doubt you are correct but let's say that 11% was the foreign bank non-performing rate. Pre-crash non-performing rates was 7% for Thai banks according to BOT. If you exclude forex effects, non-performing rates are about the same. And as I've explained and provided backup for, the Foreign Banks did not have as much f/x exposure, but that wasn't because they were smarter. It was because they were discouraged from lending to Thai companies.

 

"You won't find anything similiar to the Foreign Business Act in the US."

 

We are one of the most liberalized countries when it comes to foreign investment and yet we stiall have all sorts of controls. We never let them get to the point where we need to revoke their business charter in the first place. Again, you demonstrate your lack of knowledge in financial regulation. Here's a link to some of those restrictions.

http://www.thelen.com/index.cfm?section=articles&function=ViewArticle&articleID=1533

 

 

I'm pretty much done with you. I just wanted to point out that you make baseless claims, have no support for any of your declarations and often outright lie. Seriously, I doubt anyone here believes you are a banker.

[Gadfly]

Now if this is really true, you have an open market where banks can choose their customers, customers can choose their banks and there are no government policies pushing Thai banks to lend to domestic borrowers. You donâ??t have to be an economist or even a businessperson to realize that, when given a choice in an open market, you will borrow from a bank that is willing to lend you money on the most favorable terms.

 

I am going to add one more point to my quoted comment above because I fear HT will misunderstand it. The question: "Now if this is really true, you have an open market where banks can choose their customers,..." is rhetorical.

 

My point in asking the question is to show the market really isn't open the way HT claims it is. If Thailand's financial markets were truly liberalized (per the IMF agenda), then the events I describe would logically occur.

 

The fact that these events do not occur shows that the market was not liberalized. Indeed, all of this is related: Thailand had and has massive connected lending problems, its domestic banks had six times the amount of dud loans as foreign banks (why?) and its Thailand's financial sector was and is extremely restricted. Does anyone realy believe it is just an accident that we see all of these things in the same place at the same time.

[Gadfly]

If someone actually didn't bother to check your cites, they might get the impression that they support what you say. The don't. To go through all of the examples would take a massive post, and I am not going to bother. Let's just pick your last one.

 

You take issue with my comment how Thailand, unlike other countries, has a Foreign Business Act that restricts foreign ownership, and then supply a link to back up your point. But even that link contradicts your point:

 

The United States has a long history of welcoming investment from abroad-both direct investments (that is, investment in which the foreign investors control or participate significantly in the operations of the U.S. enterprise), and portfolio investments (loans or portfolio equity that do not give the foreign investor significant participation in the operations of the U.S. enterprise). This attitude is reflected in the relative absence of restrictions compared to those imposed by other countries .

 

Huh? "Relative absence of restrictions compared to those imposed by other countries" - Doesn't sound like this cite supports your claim that other countries have laws similiar to Thailand's Foreign Business Act. Yeah, the cites goes onto say that in sensitive areas involving national defense the US has restrictions - I have no problem with that in Thailand or the US.

 

But that is not what the Foreign Business Act is about. US law may, say, restrict a Chinese company buying a Lockheed, but that is not in the same league as the Foreign Business Act. The scope of the Foreign Business Act is incredible - it covers any business providing any service. You are not going to find anything remotely like this in the US.

 

And now, the they are proposing new restrictions that will cause foreigners that control any service providing businesses to divest (sell off cheap their holdings in regular commercial businesses. This is obviously in an entirely different league than restrictions you might find in the US (read your own cite).

 

That is what the Foreign Business Act, and the proposed changes to that law, are all about. Prohibiting foreign ownership in an extraordinarily broad range of businesses.

 

Not only is the thinking sloppy (missing the point about the Foreign Business Act), but the cites you provide don't say what you claim they do.

 

I have confidence in most of the members here to see things for the way they really are. Many, if not most, have spent time in Thailand. They have seen the blunders this government has made and the exonophobic nationalism of the elite, and I don't think you are going to convince very many here that Thailand is in its current mess because it is too open to foreign investment. Quite the opposite.

[HeartThais]

Ok, after this I really am done with you. But you keep lobbing me softballs.

 

"The fact that these events do not occur shows that the market was not liberalized."

 

It was radically liberalized compared to pre 1990. How else do you explain the sudden flow of hot money?

 

"Indeed, all of this is related: Thailand had and has massive connected lending problems"

 

For many decades.

 

"ts domestic banks had six times the amount of dud loans as foreign banks (why?) and its Thailand's financial sector was and is extremely restricted."

 

For many decades.

 

"Does anyone realy believe it is just an accident that we see all of these things in the same place at the same time."

 

No, it happened about the five years after Thailand opened up their markets.

 

Plus, explain South Korea who still has the most famous open cronyism in the world with its Chaebols. I'll explain it. They were smarter about liberalizing. They were super protectionist while they got their act together with extremely tight controls. They made a countrywide decision made from the Administration, not the stock market, on where to focus. They started pumping out product and real productivity growth. Only THEN in the late 80s did they start to liberalize. They planned it, did it slowly, and did it right.

 

The other case is China. China went a similar route but ended different. They kept incredible controls and protectionist policies in place right up until 2005. And then after amassing a trillion dollars of foreign reserves is deciding what to do with all the money they forced their citizens to save.

 

[HeartThais]

I already said the US is very open and the point was that it is open to a point. We don't let them own telecom for example. Well, Thailand went ahead and sold their Telecom. The US wouldn't have let it happen. Thailand screwed up and now they are probably thinking how to unscrew it. Let me spell this out for you. The US doesn't need an FBA because we were smart about what we allow or disallow in the first place. Thailand screwed up somewhere and now they are trying to fix it.

 

I've also said many times I don't know the FBA. However, my point is that based on your track record, I doubt you know what is going on with the FBA either. I'm not making any judgements on the FBA at this point because I haven't researched it. I'm FBA neutral at the moment.

 

"You are basically arguing that restrictions on, say, a Chinese company buying a Lockheed are in the same league as the Foreign Business Act. You can't be serious."

 

I'm not comparing the two. I'm just saying you probably don't know what's going on.

[Gadfly]

You are missing the point. Let's start with:

 

I explained already but you weren't listening. Thai Banks were lending mostly in baht. Foreign banks were lending in foreign currency. Foreign banks did not HAVE to lend to Thai companies because their asset base was tiny, only 5-9% of total banking assets. They were fine just lending to international companies.

 

Oh, I was listening, but I didnâ??t hear an answer. I did not hear an answer to the question about â??whyâ? they held different assets. You claim Thailand liberalized its financial sector (which means open) â?? so why did foreign and Thai banks end up with such different banking assets? You describe the difference in the assets they held, but so what. That doesnâ??t explain why they did they hold such radically different assets in Thailandâ??s â?? to use your words â?? â??open financial marketsâ?Â. Why?

 

If it really was as open as you describe, why did local banks uniformly hold loans that turned into duds while foreign banks held loans that were generally good? A difference between 11% bad loans and 66%+ bad loans is damn significant difference. It is the difference between a functioning economy and the collapse we saw in 1997. So why was there such a big difference?

 

Describing the differences in the assets doesnâ??t explain why they held different assets.

 

If this debate seems like it is repeating itself, itâ??s because you cannot or do now want to answer this question. Part of the answer is that the financial sector wasnâ??t and isnâ??t open. They tinkered around the edges, but Thailand resisted and continues to resist make real changes to its financial sector. If it really was an open market, foreign and local banks should have held similar assets with similiar risks. But they didnâ??t.

 

Thailandâ??s liberalization of its financial markets is a myth. Donâ??t believe me. Ask Prichit Likitkijsomboon, a respected Professor of Economics at Thammasat, who, in a recent Far Eastern Economic Review article, described the Bank of Thailand as an incompetent anti-market a regulatory body that views its role as protecting Thai banks from foreign competition irrespective of how damaging this might be to the Thai economy as a whole.

 

That pretty much describes sentiment in the international banking community here. Read the international financial press (or are they all part of cabal against Thailand?) And the other anti-market blunders - changing the Foreign Business Act to force foreingers to sell out cheap and compulsory licensing - add to a gestalt of economic nationalism.

 

To your credit, you admit that connected lending is a serious problem. Connected lending and corruption created a house of cards in the form of bad debt that would eventually have to collapse. We have seen this in other countries. The problems you cite were simply the breeze that caused the inevitable collapse of this house of cards. But to say that this breeze was the problem is to miss the point â?? when you have a banking system built on an unstable house of cards, it will, of course, fall down. The problem is the foundation, which in this case was a house of cards.

 

Think about this in commonsense terms. Banks are loaning to cronies on the basis of connections with no realisitic expectation those loans will ever be repaid. The loans are extended and extended again. This is not a problem?

 

Be realisitic: we all know a breeze will come along that will cause that house of cards to collapse. It has happended in other countires, and that is what happened in Thailand.

 

Consider Mark Mobiusâ??s description of the situation:

MARK MOBIUS: They have the patina of these. They have "banks," but these banks are really institutions for transferring wealth from the poor to the rich. Why do I say that? Well, what happens is that the poor are putting their deposits in these banks; the money is siphoned off and lent to people related to the bank, the bank owners and their friends and families, and those loans are never paid back. So the banks go bankrupt. And then the depositors are left out in the cold or the government bails the bank out, and then if the government bails the bank out, of course the government's currency becomes worthless, because they are never going to be paid back.

 

He is talking about connected lending. The real question is this: how do you eliminate connected lending? You do so by really (not the pretend stuff you saw here) opening up the financial sector and the economy generally.

 

So that you understand this, let me explain it in terms of capital flow bogeyman that you mention so often. One your biggest fears with rapid capital in flows of this sort is that can result in even faster capital out flows - that is, acting as a â??herdâ? investors quickly withdraw funds devastating the local economy they leave behind. You are right, we did see this in 1998, but how how do reduce this risk without further spooking investors with capital controls?

 

The risk of â??herdingâ? is reduced when there is less corruption. (This is textbook basic by the way). Why? There is less herding in less transparent countries because greater transparency gives investors something more substantial to go on than then what other investors are doing.

 

And you can reduce this sort of corruption by opening up the financial sector. How?

 

â?¢ Financial sector foreign direct investment raises the game. Foreign institutions establish new and higher standards. Connected lending is more difficult when the game is raised. Foreign investors have good reason to monitor what their domestic competitors are doing and to expose corruption when they find it. From their perspective, such corruption provides an unfair competitive advantage to their competitors. And in this sense, the presence of financial sector foreign direct investment creates a powerful economic incentive for members of the private sector to assist in identifying and uncovering fraud. In this sense, we can harness and use market forces to help curb corruption.

 

â?¢ Foreign owned financial institutions have their reputations at home and around the world to consider. They also need to consider the requirements of their home country regulators. By definition, because they operate in multiple jurisdictions, they are subject to more checks and balances. They are answerable to more regulators and more stakeholders.

 

â?¢ Banking sector foreign direct promotes diversification, which helps reduce risk. Foreign banks have a far greater spread of risks. This makes efforts at coercive connected lending less successful, and makes connected lending less of a temptation.

 

The distortions that arise when market mechanisms are not permitted to work are often most apparent in state controlled institutions. Recall KTB in July 0f 2004: a dramatic and unexpected spike in non-performing loans â?? 46 billion Baht in loans â?? that is over one billion US dollars â?? reclassified as non-performing. Connected lending is not simply a consequence of state controlled financial institutions, but the very purposes of such institutions. State controlled financial institutions are reside outside markets, which means they often not responsible to creditors and depositors, and it is therefore much harder to get a clearer picture of what is actually going on.

 

A vicious cycle exists between connected lending, "suspicious wealth" (you know, the unexplaied wealth of Thai officials and politicians) and corruption. One reinforces the other. This cycle thrives best in the dark, where it is hidden from the larger regulatory and market scrutiny that an international marketplace provides. According to THE WALL STREET JOURNAL. May 9, 2005; Page A20

 

Poor countries with the greatest need for entrepreneurs to speed growth and create jobs also put the most obstacles in their way. Corruption is a large part of why these bureaucratic logjams persist: The more roadblocks there are, the more opportunities for underpaid government officials to secure kickbacks.

 

The problem here wasnâ??t liberalization of the economy or the financial sector but the failure to truly liberalize the economy generally and financial sector specifcally. A stubborn refusal to allow markets to operate free from protectionist restrictions.