The New Nation - Internet Edition

Maswood Alam Khan

When you encounter a situation in an alien landscape you grapple with your memory in search for a near experience to conceive the new circumstances in an unknown environment. You transpose your past experience as a backdrop to reconcile with the situation you are facing.

During my present sojourn in USA I am grappling in vain to conceive the state of affairs of American financial activities. I simply don't understand. With 30 years of experience under my belt as a banker from a developing country like Bangladesh it seems I am still in the kindergarten. Either I have to relearn banking from the United States of America or America, I am afraid, has got to learn a lot from the present and the past banking practices in Bangladesh.

Money seems to be growing on trees in America. It is amazing to observe how American government has been committing billions of dollars without batting its eyelashes: $85 billion plus $700 billion plus $250 billion plus bank guarantees--- all within the past three weeks, all for perking the Wall Street up, and all for pleasing the bankers who literally ballooned up the market by their reckless investment.

The more I read news about American government's weird plans to salvage the sick financial institutions the more I pity Mr. Kajal of Court Chandpur of Bangladesh who, through a Ponzi scheme, swindled thousands of rural people by offering monthly interest of Taka ten thousand for investment of Taka one hundred thousand and perhaps has now been passing his bad time in jail since 2001. How pleasant life would be for Mr. Kajal of Court Chandpur had he only been a US citizen and had run his racketeering business in America!

There was a time when it was business as usual for all the banks in Bangladesh to inflate profit in their annual reports on the strength of all loans in their ledgers as solid assets, no matter the loans could ever be recoverable or not and we too were making hay while the sun was shining as happy bankers earning profit for our banks and at the same time pocketing a plethora of fat bonuses that at times were equivalent to five basic pays a year. All on a sudden some American white men on behalf of the World Bank came to Bangladesh to gauze the health of our banks and were surprised at our fraudulent ways of making paper profit without taking into consideration the real worth of assets we showed in our balance sheets.

Sermons from Washington started pouring in for Bangladeshi banks to learn how to compute profit in the truest sense of the term. Their slogan was: "Lesser the government, better it is for the country". For more than a year in early 80s World Bank consultants (mostly Americans) with high pays and perks set up their air-conditioned camps in all the government-owned Bangladeshi commercial banks to reform financial disciplines under the banner "Financial Sector Reform Project", in short FSRP, with a long sight to denationalizing the government-owned banks. They have been superbly successful. Now all the commercial banks in Bangladesh are already public limited companies on their journey to be completely private banks within a year or two. And, of course, we are also grateful to them that they taught us, through FSRP, how to classify performing and nonperforming assets.

A loan amount which is not repaid within a specific period of time is treated as 'past due' or overdue and the banker is put on a red alert when the possibility of recovering the loan gets thinner and thinner with days passing. At one stage the loan is worth nurturing as a special loan to take care of and is termed a nonperforming asset of the bank to be appropriately classified depending upon the loan's present status. Nonperforming assets are categorized mainly as Substandard, Doubtful, and Bad in accordance with the guidelines from our central bank and as was prescribed by World Bank in FSRP. The bank which is too burdened with too many of bad loans and too few of good loans is destined to be liquidated and dead. That is what we know as modern and healthy way of doing banking business based on the capitalistic mantra: 'survival of the fittest'.

'Bad' loan, as we have been taught, is the worst asset to a banker and is usually written off from the ledger when the chance of its recovery is thinnest. To my surprise, I have been introduced by newspaper reports in America to some financial assets which are worse than 'Bad' and are popularly termed here as 'Toxic' assets.

When I first read about American government's plan of gulping toxic assets of sinking banks and financial institutions in an attempt to salvage them through 700 billion dollar bailout package my mind---to grasp the meaning of the word 'toxic'---travelled to nuclear plants where millions of gallons of 'toxic' radioactive wastes are dumped in heavily guarded underground concrete vaults to prevent contamination of soil and water.

My head simply reeled when the other day I watched on TV American bankers---many of whom were primarily responsible to create those toxic assets and who took for themselves millions of dollars as pay, perks, and bonuses---invited and cajoled by the Treasury Department as guests of honor and were reassured that they had nothing to worry about their jobs if only they restart their lending businesses as usual among themselves and to businesses and consumers---not out of their hard-earned deposits, but from new funds of 250 billion dollar the government will make available to help recapitalize their banks. In addition US Treasury Department would also guarantee new debts to be issued by those banks for three years.

To me, a kindergartener, it sounded like "Give the addict a bigger dose of narcotic drugs to calm him". Again in delirium I visualize Mr. Kajal of Court Chandpur in the ornate office of the US Treasury Department shaking hands with Mr. Henry M. Paulson, Secretary of Treasury, while receiving a check amounting 25 billion American dollar!

Markets around the world, to everybody's surprise, have rebounded on just hearing the news of the socialistic efforts of the governments on both sides of the Atlantic to salvage the bad lenders. The Dow Jones industrial average gained 936 points or 11 percent on Monday, the largest single-day gain in the American stock market history since the 1930s.

On Monday, big banks like Citigroup, JP Morgan Chase and Bank of America agreed to take investments totaling about $125 billion. Another $125 billion is allocated for thousands of small and midsize banks.

The government hopes to earn from the recipients of the funds a reasonable return from investments in the form of preferred shares and warrants for common stock. Fantastic! Now the American taxpayers, who should now practically be shareholders in these banks, may keep their fingers crossed that they would also receive some stock dividends from the shares bought by their tax money! Now each and every American citizen should have a say which executives of which banks get hired and fired and how much they get paid. Who knows one day the government, as a fulltime trader in the Wall Street, will soon start earning enough money to completely rid the citizens from the hassles of paying taxes!

But there is a bad news from Britain, which injected its first capital into three newly nationalized banks: Royal Bank of Scotland, HBOS and Lloyds, whose shares slumped on Monday, despite a surge in banks elsewhere.

The whole Occident is now doing what Bangladesh did in 1973 by nationalizing the banks and most of the American bankers are now doing what the nationalized banks in Bangladesh had been doing in the 70s and the early 80s to inflate profit on the balance sheets on the strength of all loans---both toxic and non-toxic.

The governments in Europe and America are becoming bankers either by nationalizing the banks or by injecting funds as equities to transfuse blood into anemic financial institutions with a view to thwarting a repeat scene of 30s economic depression.

Such bottle-feeding the adults may keep them asleep for a while. But, in the long run these drunken adults, I am apprehensive, may not garner enough strength to stand on their own feet. A short-sighted strategy to stabilize the financial system, a poor design to help the economy recover as has been proven time and again in Bangladesh!

For invigorating an economy winners should always be separated from the losers the way weeds and dead plants have to be cleared for healthy growth of a garden of vegetables. By artificially checking the recession---which is a natural business phenomenon---the American and European governments are trying their best to prevent small pox from reappearing---unaware that nature will take its toll of death through a different gateway such as an entry of a new disease like AIDS if the door is sealed for a re-entry of small pox. Recessions are healthy and necessary. Recessions weed out the inefficient and the marginal and expose fraud and corruption.

The way the American government is injecting money directly into banks is creating a bad precedence for future banking industries some of whom may---by fraud, negligence, or pretension---fall sick in the expectation that the Treasury Department, like Social Security, would always be there by their bedside with a briefcase full of dollars.

Some optimists, with the sudden surge in the Wall Street, are finding at last 'the light at the end of the tunnel'. But, many experienced Americans are finding the light at the end of the tunnel 'not as a light of relief', but a dazzling headlight of another giant train rushing from the opposite direction.