MEDIA CENTRE - Opening Remarks by John Zinkin
Friday, 20th October 2008
John Zinkin
CEO, Securities Industry Development Corporation
Introduction to EMP 2008
Linking the 3 ‘C’s to the programme
Distinguished speakers, honoured delegates, ladies and gentlemen,
Good morning and a very warm welcome to Malaysia and the 2008 Emerging Markets Programme.
You have just listened to Dato’ Zarinah’s insightful overview of the policy issues affecting financial markets globally and whether the unfolding crisis will lead to a new form of capitalism, less raw in nature, more regulated; and how it could affect this year’s themes of Competition, Collaboration and Compliance.
These policy issues form the backdrop to this year’s programme, and as such will inevitably affect the way we do our jobs in the next couple of years as our jurisdictions seek to find the right balance: between continued liberalization and re-regulation; between principles and rules based philosophies; between continued innovation in sophisticated products that few understand in the name of efficiency and liquidity and staying with safer products that are transparent.
The accelerating events of the last fourteen months since Bear Stearns closed two problematic funds highlighted a number of contributing factors to the debacle with we are now faced: unsustainable growth in leveraged products that too few people understood; boards of financial institutions driven by greed and consultants to get into lines of business they did not understand, based on toxic products of dubious integrity; regulators who were either powerless or unprepared to act on the warnings they provided as much as four years earlier to prevent the continued growth in unsustainable leveraging; inconsistent actions by regulators once deleveraging set in, creating uncertainty and a freezing of the wholesale money markets globally. Any notion that emerging markets were in some way decoupled from the developed markets of the OECD has also been proven false.
This means that to a greater or lesser degree, we are all in the same boat; we cannot take pleasure from the troubles of the US or Europe and stand on the sidelines as spectators; we are all actors in the unfolding drama. As actors, we must understand our parts and how they fit with those of other players. Just as actors in a play compete for the limelight and yet collaborate at the same time, complying with the roles and scripts assigned to them by the author and producer, so all jurisdictions need to highlight their differences, while cooperating and ensuring compliance.
The challenging environment in which we find ourselves – perhaps the most challenging we will ever face in our careers – means that, as regulators, we will be under the spotlight as never before. We will be expected to make things right even if the bailout law agreed in the US and the interventions by the Bank of England and other central banks in the Eurozone and elsewhere do not work out as expected. The bailouts have introduced new regulation and no doubt there will be more regulation and similar regulation in other jurisdictions that follow the US and UK examples. Yet that is not the most serious concern.
The most serious concern, as explained by Sir Evelyn de Rothschild in his interview on the BBC World Service on October 2nd 2008, was that regulation is not stand-alone; it requires regulators to supervise markets and enforce the rules. In his view the crisis made it clear that neither regulators nor banking leaders understood well enough what they were doing or getting into; and as a result failed to foresee the consequences of sub-prime. Given the size of the market failure, he felt that the bailout should go through in its new form with the proposed added regulation, but he had two important caveats on whether new re-regulation would work: first, is it appropriate and will it be effective; and second will the regulators know the products well enough and understand the motivations of those who create them sufficiently clearly to be able to prevent another sub-prime occurring in the future? In other words in his mind it was clearly not enough to pass new laws. Accompanying these new laws must be people of sufficient intelligence, integrity and experience to be able to interpret and enforce these laws appropriately. Without such people, re-regulation will not do what is expected of it.
Interestingly enough on October 12th Michael Bloomberg on BBC’s Hardtalk and George Soros in an exclusive interview with CNN said much the same thing in response to new recapitalization initiatives being undertaken by the British government and the coordination proposed by leaders of the Eurozone and considered by the US Treasury: Bloomberg was more oblique; Soros, as always, more direct and scathing.
What these three men have in common are two things: first, they understand financial products and markets; second, they believe that the regulators have contributed to the crisis over the past twenty years. Their challenge to all regulators is simple: will we be clever enough; have sufficient integrity and understanding of the markets and products we regulate to make the new laws effective rather than lurch from one crisis to another with well-meant interventions and regulation that merely delay the inevitable and make it worse for having been delayed?
In response to Sir Evelyn de Rothschild’s, Michael Bloomberg’s and George Soros’ challenge, our focus in the coming days will be practical, designed so you can share experiences – good and bad – and so I hope by the end of the week you will feel better equipped to face a more difficult environment than any of us had imagined possible only a few months ago.
Today we will be exploring regulatory challenges from an Asian perspective and looking at the role of hedge funds and rating agencies. We will end the day with a special presentation on what went wrong and why.
On Tuesday we begin in the morning with how collaboration helps in combating turmoil in the US and continue with the theme of collaboration in enforcement from an Asian perspective. In the afternoon we have another special feature on what the US is doing about sub-prime, which must be resolved satisfactorily if any lasting headway is to be made. We close the day with a presentation on collaboration not just between regulators but between regulators and industry as well.
On Wednesday we spend the morning getting a better understanding of the role rating agencies, hedge funds and sovereign wealth funds play in today’s market and whether rating agencies and hedge funds share any blame in what has happened so far. In the afternoon, we will be visiting Bursa Malaysia to get a first hand look at our local stock exchange.
On Thursday morning we explore the right balance of principle versus rules based approaches, incorporating risk consciousness and discuss the appropriate levels of intervention using New Zealand and Malaysia as examples. In the afternoon we discuss the issues of enforcement and compliance, looking at case studies and the different approaches adopted by different Asian jurisdictions.
On Friday morning we share experiences on Shariah financing – an area that will undoubtedly become more prominent as people question the underlying values of the Wall Street model and come to recognise the superior ethical compass of Islamic finance. We then conclude the programme with a panel discussion on how regulators can best work together and finish with an early brunch.
As you will have gathered we have a very full programme ahead of us. I sincerely hope it will help answer the challenge posed by Sir Evelyn de Rothschild, Michael Bloomberg and George Soros; and that at the same time you will enjoy the next few days, making new friends, learning from others’ experiences and building a strong network for future cooperation.
Thank you.