End of an Era for Global Financial System, Says Aberdeen's Amstad

Hong Kong, 19 September 2008 - With Wall Street in shellshock as some of its mightiest names disappear, it's the end of an era for the global financial system, according to Donald Amstad, a regional sales director at Aberdeen Asset Management Asia Limited. But the consolidation we are seeing now is the start of a necessary catharsis.

Speaking ahead of a summit organised by Scottish Development International as part of the 5th China Financial Forum in Shanghai, Mr Amstad observed:

"The old global financial system was based on continuously rising asset prices for real estate, both commercial and residential, especially in the United States. This was underpinned by copious amounts of leverage, derivatives and securitisation. And in turn by very low interest rates.

“As long as house prices were going up, it seemed high-yielding products could be created that were risk-free, almost at will. This encouraged more issuance, more debt-driven demand and soon a parallel universe of SIVs and CDOs. Now the boot's on the other foot: property losses are forcing deleveraging, with writedowns and bank losses on an equal – and epic – scale,” he explained.

Why the bubble was allowed to inflate for so long will be debated for years. One flaw was the imbalance between risk and reward. The dealmakers got paid because fees went up, which in turn drove profits that kept the shareholders onside.

But as the rescue of Fannie Mae and Freddie Mac, and Bear Stearns before them, show, it's the taxpayer who suffers when things go wrong – an asymmetry that in effect means profits are privatised and losses socialised.

Mr Amstad believes the problem now is that banks are in no position to lend, either to each other or into the 'real' economy whose lifeblood is credit. To judge from Lehman's fall, the Treasury's stance may be hardening towards further bailouts, even as bank failure spreads from the US to Europe, accelerating the global slowdown.

When will it end?

Mr Amstad is cautious about the timing saying housing needs to stabilise and confidence return. There is no immediate prospect of the first because of over-supply; besides, job losses are on the rise. The second requires transparency in the financial system, with an overhaul in the boardroom as well as in regulation. Fundamentally, he notes, no one knows who owns what..

There is good news, however. Mr Amstad, who covers Asia as a fixed income specialist, says the inevitable deleveraging means that good quality assets will have to be jettisoned to pay for those gone bad, a process that will throw up bargains. The winners here will be those individuals, companies and countries that have nursed their savings and kept debt to a minimum.

"If the real distinction is between those who are highly leveraged and those who are less leveraged, then the established categories of developed and emerging economies no longer apply. Asia should fare a lot better than the highly leveraged West," he concluded, ‘because in the new era, cash is king.”