Off With the Bankers

[David Farber <dave () farber net>]

Begin forwarded message:

From: dewayne () warpspeed com (Dewayne Hendricks)
Date: March 20, 2009 9:47:11 AM EDT
To: Dewayne-Net Technology List <xyzzy () warpspeed com>
Subject: [Dewayne-Net] Off With the Bankers

March 20, 2009
OP-ED CONTRIBUTORS
Off With the Bankers
By SIMON JOHNSON and JAMES KWAK
<http://www.nytimes.com/2009/03/20/opinion/20johnson.html?partner=rss&emc=rss&pagewanted=all 
>
A.I.G. can hardly claim that its generous bonuses attract the best and  
the brightest. So instead, it defends the payments by arguing they’re  
needed to retain employees who are crucial for winding down  
transactions that are “difficult to understand and manage.” In other  
words, only the people who stuck the knife into the American  
International Group can neatly extract it for a decent burial.

There is no reason to believe this.

Similar arguments made during the 1997 Asian financial crisis, when  
currencies and stock markets collapsed in much of Southeast Asia,  
turned out to be a smokescreen to protect the executives who were  
partly responsible for the mess. Recovery from that crisis required  
Indonesia, South Korea and Thailand to close or consolidate banks. In  
all three countries, bankers protested, claiming that their  
connections with borrowers were critical to recovery.

In South Korea, cozy relationships between banks and the large  
conglomerates called chaebols were a major reason for the crisis. But  
after the crisis hit, Korean bankers and companies insisted that the  
complexity of chaebols like Samsung and LG — with their many separate  
but interwoven businesses — meant that outsiders would not be able to  
distinguish good loans from bad.

In Thailand, some argued that the preponderance of family-owned  
businesses — and the lack of clarity about precisely which family  
members were really in charge — meant that only bankers already  
working in big institutions like Bangkok Bank and Siam Commercial Bank  
could determine which borrowers were creditworthy.

The leaders of Thailand and South Korea did not listen to such  
arguments, and thank goodness. Some of the leading Thai banks were  
taken over by the government. After the crisis, a civil servant in  
charge of one such bank noted that its bad loans were much bigger than  
had been indicated before the takeover, largely because of an internal  
coverup. Only when outsiders took over did the public discover the  
full scope of the losses.

The South Korean government also demanded that the banks and the  
chaebols make a clean break. This generated a great deal of political  
noise — particularly when foreign managers were brought in, as when  
the Carlyle Group bought a stake in KorAm Bank in 2000 and Lone Star  
Funds purchased the Korea Exchange Bank in 2003.

But these reforms made all the difference. Banks became healthy and  
resumed lending within a few years after the crisis broke. The  
chaebols that survived are stronger than they were before the crisis.  
They are now withstanding the severe pressure of the global recession  
because they were forced to become better regulated, and more separate  
from banks.

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