IMF Surveillance Raised the issue of Sub Prime in May 2007

The IMF has a mandate for surveillance of the international monetary system. I thought I might take a look at how well the surveillance was carried out.The IMF appears to have been right on the money BUT…

It does appear it is really a paper tiger when it comes to doing anything to influence nations. In fact it appears to be more concerned with countries not losing face with “bad press” than actually trying to ensure bad behaviour is publicly reported and corrected.

What might be more concerning though it the lack of interest of the board members in attending Board meetings. Maybe that says it all.

The IMF Surveillance Mandate states;

“The IMF is mandated to oversee the international monetary system and monitor the economic and financial policies of its 185 member countries. This activity is known as surveillance. During this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and growth and advises on needed policy adjustments. In this way, it helps the international monetary system serve its essential purpose of facilitating the exchange of goods, services, and capital among countries, thereby sustaining sound economic growth.”

There doesn’t seem to be any real way to enforce any of its findings on member countries through sanctions, fines or other systems. So it can only report a problem when it sees it.

Jaime Caruana, Monetary and Capital Markets Development Director of the IMF gave a speech in May 2007 to the Association for Financial Professionals, Global Corporate Treasurers Forum where he said,

“I’ll particularly highlight the growing concerns that we have surrounding the weakening of lending standards in some areas, after a long period of benign financial conditions. Examples are the mortgage market in this country, or some leveraged loans that are being used to finance the dramatic increase in leveraged buyouts, particularly in Europe and the U.S. I’ll leave it to you to decide whether this is a risk or an opportunity from the perspective of a corporate treasurer—depending on which side of the acquisition fence you are sitting.”

Whilst reading the  speech take a look at the Presentation, ” Identifying Risks and Opportunities: A Global View” Only one thing needs to be noted – The Chart are Parabolic. Any chart that goes parabolic should send you running for the hills as the Tsunami is on its way.

You may recall my post, “You May be Speculating in Oil with your Retirement Money” written in June when Oil was in a parabolic rise. Look what happened to Oil. I didn’t forecast the dramatic drop in oil prices, the parabolic rise virtually guaranteed it.

Now back to the IMF Speech. The last sentence beginning, “Ill leave you to decide whether this is a risk or an opportunity …” is a major concern because of who attended this forum.

So what is the Association for Financial Professionals, Global Corporate Treasurers anyway?

“AFP members are drawn from a wide range of industries, comprising corporate practitioners (two thirds) and banks and other financial services providers (one third). The typical corporate practitioner member has 16 years of experience in the profession and works for a company with more than $1 billion in annual revenues. These members hold positions as CFO, vice president of finance, treasurer, assistant treasurer, director, financial analyst, or cash manager.”

One third of its members are from banks and other financial services. From where I sit they must have all assumed it was an opportunity and not a risk.

These guys get together to exchange ideas and keep each other informed of financial developments. By early 2007 the sub prime crisis was becoming apparent as New Century Financial one of the largest sub prime lenders filed for bankruptcy. I wonder if they were a member of the Association for Financial Professionals?

By June two hedge funds run by Bear Stearns failed and the financial melt-down had begun.

Jaime Caruana goes on to say;

“A second area that has received a lot of media attention is the rapid deterioration in the U.S. sub prime mortgage market. This was initially prompted by a sharp rise in early payment defaults, See slide 7 perhaps due to a rash of questionable mortgage applications at the top of the housing market. This has resulted in 2006 vintage of loans being the poorest quality thus far this decade. Slide 8 While the sub prime market is only about 14 percent of the U.S. mortgage market, credit deterioration has also occurred in the riskiest segments of `Alt – A’ mortgages and the impact of declining credit quality of sub prime loans has translated into wider spreads on securities collateralized by them, affecting a wide range of investors, including international investors. So far, however, mortgage-related losses look manageable, as lower-rated tranches will absorb most of the risk of default first. While the tightening of lending standards and rise in foreclosures may prolong the U.S. housing slowdown and may cause distress in some local housing markets, the situation does not appear sufficient to cause a systemic problem to the U.S. or global financial system, due in part, to the dispersal of risk through derivatives and structured credit markets to a wide variety of investors. However, two concerns remain. Rising subprime losses have highlighted a general trend towards falling lending standards in the U.S. mortgage market, making households more vulnerable to a macroeconomic shock to employment or incomes. And they have raised questions about the extent to which similar weaknesses in underwriting standards have spread to other loan markets.”

It seems to me everyone was fiddling while Rome burned. One thing I found really amusing about the speech was how Jaime he ended it;

“Perhaps I can best summarize the current situation for the global corporate treasurer by quoting Charles Dickens – “It was the best of times, it was the worst of times….””

I used the same quote as the subject of my post on October 8th about the results of this debacle and what the future might hold.

I cannot believe these captains of industry that included banks and financial institutions did not see a train wreck about to happen. But like all the other financial experts and organizations who should have done something, they appear to have ignored the risks and gone for the opportunities, assuming it was still the best of times.

I’m sorry that the IMF doesn’t have more teeth and is better supported as it might then have forced the world to change it’s ways and avoided destroying Baby Boomer Nest Eggs along with many other peoples wealth.

One Response to “IMF Surveillance Raised the issue of Sub Prime in May 2007”

  1. […] Financial Institutions’ Senior Executives and Boards are guilty of not doing something about the credit crisis well before it became one. They knew what was going […]

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