Lebanese Recipe For Economic Health: Go With What You Know

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Whether it is Henry Paulson, Tim Geithner or the yammering dipsticks on CNBC, it seems the there has been a headlong rush to seek analysis, wisdom and solutions from the very self proclaimed geniuses that put the US and the world in the problem to start with. Aren’t there any big bankers/finance ministers that really got it right? Turns out there are, and he comes from a most unexpected place. From the Los Angeles Times comes the story of Riad Toufic Salame:

Instead, the silver-haired banker became a hero by playing it very, very safe. In 2005, he defied pressure from the Lebanese business community and bucked international trends to issue what now looks like a prophetic decree: a blanket order barring any bank in his country from investing in mortgage-backed securities, which contributed to the most dramatic collapse of financial institutions since the Great Depression.

So as major banks in America and Europe were shuttered or partly nationalized and thousands of people in the U.S. financial sector were laid off, Lebanon’s banks had one of their best years ever.

Billions in cash continue to pour in to the relative safety of Lebanese savings accounts, with comfy but not extravagant yields of 6%. A nation shunned for years as the quintessential failed state has become a pretty safe bet, or as safe a bet as investors are likely to find in this climate.

Well, that is kind of refreshing, how did Salame do it? By being a rational technocrat, eschewing excesses, turning a deaf ear to cries for irrational rates of return, maintaining tight regulation, imposing conservative balance-sheet requirements, refusing to launder dirty money and, most critically:

When the real estate boom crested this decade and investors began bundling debt into nebulous financial instruments fueled by easy credit, the pressure was on for Salame to let banks take advantage of the high yields.

But Salame steadfastly refused.

He says the mortgage-backed securities worried him from the start. He watched curiously as investment bankers engaged in what he calls "rituals" to please the credit ratings agencies and got back such safe assessments of their products. He didn’t get it. Why were these considered safe investments? They were just too complicated. They went against a major tradition in Lebanese and Middle Eastern banking: Know to whom you’re fronting cash and who’s going to pay you back.

"We could not really sense who would be responsible in the end to collect these loans," he said. "And we do not perceive banking as being a place to speculate on financial instruments that are not really concrete."

There, that wasn’t all that hard was it? Keep it simple, be willing to work and ding the bling. The way to responsibly run a nation’s banking system and economy is to adhere to good old fashioned principles of banking, economics and governmental regulation. It is really not hard, in fact it is blindingly simple.

Go with what you know.

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29 replies
  1. wildethyme says:

    Thanks, Bmaz. Refreshing and reassuring as well. I hope others will be discovered now that prudence is newsworthy.

  2. bell says:

    thanks for pointing this story out bmaz…it has become difficult for the banking industry to maintain any shred of conservativeness to their actions, with the exception of them liking to ’look’ conservative… radical and reckless is a better description for most of them and that is unlikely to change as they have had a long time to cultivate given all the green lights from non leaders like greenspan and etc… the anatomy of a bubble and how to make a really big one, is what most of these bankers will be remembered for by me anyway…

    • readerOfTeaLeaves says:

      This thread gives me a warm, fuzzy feeling — I’d thought that I was the only one who couldn’t stand watching the yammering at CNBC 8^}

      But bmaz, per your post: you make it seem as if what this man did was ‘easy’.
      I disagree.
      Surely, this man had to face down a tremendous amount of pressure to make the same errors that everyone else was making, and that’s not ‘easy’ in my view. It’s difficult.
      All the more reason to admire this man.

      ====================
      BTW: Leen recommended the latest Frontline documentary, “Inside the Meltdown”. I was able to view it yesterday, and recommend it highly. (Google “Frontline + Meltdown” if you have fast Internet; it’s easy to watch parts of it if you don’t have time for the whole program.)

  7. lllphd says:

    excellent catch, bmaz!! thanks so much.

    yesterday npr was running some interview with some nincompoop or other about the stimulus and how the agenda is to eventually get consumers to start consuming again.

    and i thought, well of course that might seem to be what the economy needs from a myopic viewpoint, but getting us to consume again is our doom and our destruction, for at least these two reasons.

    one, consumption is what gives corporations all this (false) power over us and the world, and it has to be dismantled. the best way to do that is to just stop needing what they sell, which is essentially a lot of really needless stuff.

    second, and more importantly (and which should be our real incentive for the first point), the planet simply cannot sustain more consumption. period.

    the logical leap is naturally that stimulating the economy through more consumerism is the short-cut path to our demise. at some point obama is going to have to face the fact that his economic policies will not square with his environmental policies nor his policies on civil justice and poverty.

    hope that’s soon, as in immediately.

    • Stephen says:

      The Corporate Juggernaut wants, needs and promotes population growth. Overpopulation is the direct and indirect cause of all our worldly problems. You are bang on IMO. So lets get back to basics and stop producing more consumers at the source.

  8. MadDog says:

    Banking was never supposed to be that free gambling junket to Atlantic City or Las Vegas, but you wouldn’t know it from the actions of those yahoos on Wall Street.

    Seven/Eight figure stupid is still stupid!

    • lllphd says:

      you know, wall street is nothing more than glorified gambling. it was not originally designed this way, though there was always risk involved in its structure.

      but lord knows banking should never be.

      however, then there is this great piece at bread with circus:
      http://www.breadwithcircus.com…..sdebt.html
      that explains how money and banking evolved, not as value-centered but as debt-centered.

      banks have always to a certain extent been a risk for anyone putting their money in them. the only reasons to keep money in a bank are to secure it and earn interest. the second reason is what puts the first reason at risk and undermines the security: earning interest is only possible because bankers take YOUR money and loan it to someone else at a higher rate of interest. what happens if all the money is loaned out and all the folks want their money back at the same time?

      on this level, the whole damn banking industry – hell, the banking concept! – is one big shell game, but where the peanut shrinks or even disappears, not to be found under any shell at all, because the bankers profit hugely when they loan out more money than they take in.

      check out that video. it’s long, about 45 minutes, but it’s so worth it.

      • MadDog says:

        Some Ponzi schemes illegal but others are legitimatized as “Not Ponzi” schemes.

        Whether it is Banking or Insurance or the fookin’ Powerball Lottery, they all depend on paying off current investors by rolling future investors.

        And like all Ponzi schemes, if the wheel stops turning, the artifice comes crashing down.

  10. LabDancer says:

    Nassim Taleb — anti-Platonist author of The Black Swan & himself a trader at one time, who was advising his clients years back of an impending worldwide financial collapse — was born and raised in Lebanon. Taleb has written of his attributing some part of his skepticism towards theory-based investment strategies to the economic effects on Lebanon in general & his own family’s status in particular from the 1975 Lebanese Civil War.

    How anyone who read Michael Lewis’ Liar’s Poker first published in 1989 — & everyone on Wall Street read it; okay, maybe not Greenspan — failed to foresee the inevitability of a reckoning from the confluence of industry culture corruption, public bubble-mania & government deregulation, now seems grotesquely improbable. But maybe it’s just too hard to think above 40 years of continuing refrains from Big Rock Candy Mountain.

  12. MadDog says:

    Totally OT – An interesting read in Vanity Fair’s latest – Farewell to All That: An Oral History of the Bush White House

    One of the parts I found particularly compelling was this:

    November 15, 2004 Colin Powell announces his resignation as secretary of state. He is succeeded by Condoleezza Rice, who will in time have limited success charting a new direction on issues such as Iran and North Korea.

    Lawrence Wilkerson, top aide and later chief of staff to Secretary of State Colin Powell: I’m not sure even to this day that he’s willing to admit to himself that he was rolled to the extent that he was…

    …I think the clearest indication I got that Rich [Armitage] and he both had finally awakened to the dimensions of the problem was when Rich began—I mean, I’ll be very candid—began to use language to describe the vice president’s office with me as the Gestapo, as the Nazis, and would sometimes late in the evening, when we were having a drink—would sometimes go off rather aggressively on particular characters in the vice president’s office.

  13. spoonful says:

    The cause of the current financial crisis was not the securitization of mortgages. It was the war on terror waged by this past administration against the people of this country and the whole rest of the world. With productivity increasing to help offset rising inflation and an annual budget in surplus, this country was poised before the child president took office for a rise in the overall price of housing. Moreover, housing was a more than adequate substitute for the stock market after the dot com and Enron crashes, so the intrinsic price of real estate, but for the 8 year Bush reign of terror, might have been equal to the current market price. Instead, so much of our national treasure has been devoted not to productivity, but to the false flag war on terror. Any analysis without giving the champion brush cutter his due is surely missing the mark.

  14. MaryCh says:

    Salame’s actions, and the need for ‘heroic’ resistance in the face of “C’mon, all the other kids are doin’ it” in banking circles, are Exhibit A for a modernized version of Glass-Steagall. I especially liked the last paragraph as an understated summary of the problem:

    “We could not really sense who would be responsible in the end to collect these loans,” he said. “And we do not perceive banking as being a place to speculate on financial instruments that are not really concrete.”

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