The Global Credit Crisis: Another Flavor Of Pessimism

Investor Mark Mobius gets placed in the pantheon of money men including Soros and Buffett. He may not be as rich, but he has been in the market for decades and has posted an extraordinary performance.

He is the latest prominent financial figure to say the the worst of the credit crisis is not over, and the financial markets may actually get worse.

Mobius recently talked to Bloomerg. His concerns are simple, almost commonplace. The derivatives that nearly ruined the global banking system are still unregulated. Stimulus money put into the large national economies in the US and EU will provide capital to bid up the value of these financial instruments. The world is looking forward to a replaying of late 2008 sometime in the next few years.

Mobius is probably not popular on Wall St. His viewpoint is in the minority among mainstream financiers. Leaders like the heads of Goldman Sachs want the government to believe that they have learned their lessons and to go back to a period of “self regulation.”  Many members of Congress and the Administration say that is no regulation at all.

Major banks claim that they cannot maximize returns on their capital if they cannot use a certain amount of leverage to enter rapidly expanding markets. It is obviously the same arguments that the managements of Bank of America (BAC), Merrill Lynch, AIG (AIG), and Citigroup (C) made to their boards, if they told their boards about these investments at all.

Derivatives regulation is not going to be uniform across all of the countries that have major financial centers. Bankers in the US will argue the Swiss banks, or German bank, of Chinese banks will tap a market that may represent most of the industry”s profits. The US government will be left with a decision that would challenge Solomon. Do they let US financial firms compete for mammoth returns or do they create prophylactic laws that Congress can hope will prevent another brush with a financial catastrophe? The first course of action takes the US out of the global credit arms race.

Douglas A. McIntyre