Mobius warns of future derivatives-led crisis
July 16, 2009
By Kevin Hamlin Singapore
A new financial crisis would develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management's Mark Mobius said on Monday.
"Political pressure from investment banks and all the people that make money in derivatives" would prevent adequate regulation, he said.
"We're going to have another crisis coming down," he warned.
Derivatives contributed to almost $1.5 trillion (R12 trillion) in write-downs and losses at the world's biggest banks, brokers and insurers since the start of 2007, according to Bloomberg data. Global share markets lost almost half their value last year, shedding $28.7 trillion, as investors became risk averse amid a global recession.
The US Department of Justice was investigating the market for credit default swaps, Markit Group, the data provider that is majority-owned by Wall Street's largest banks, said on Monday.
Mobius did not explain what he thought was needed for effective regulation of derivatives - contracts used to hedge against changes in financial instruments and commodities.
The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.
"Banks make so much money with these things that they don't want transparency because the spreads are so generous when there's no transparency," Mobius said.
A "very bad" crisis might emerge within five to seven years, as stimulus money added to financial volatility, he added.
Governments have pledged about $2 trillion in stimulus spending. The US Justice Department's antitrust unit sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.
US Treasury Secretary Timothy Geithner urged the US Congress last week to rein in the derivatives market with new US laws that were "difficult to evade". He said strong capital requirements were the key.
Geithner repeated US President Barack Obama's call to force "standardised" contracts onto exchanges or regulated trading platforms, and regulate all dealers.
The plan to regulate derivatives is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers and American International Group froze credit markets and worsened the global recession.
In the US Senate, agriculture committee chairman Tom Harkin is pushing for legislation that would require all over-the-counter derivatives trades to be on regulated exchanges, not just standardised ones, as the Obama administration is seeking. - Bloomberg
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