Beijing: A new financial crisis will develop from a failure to effectively regulate derivatives and the extra global liquidity from stimulus spending,Templeton Asset Management Ltd’s Mark Mobius said.
“Political pressure from investment banks and all the people that make money in derivatives will prevent adequate regulation,” said Mobius, who oversees $25 billion (Rs1.2 trillion) as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on 13 July.
The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product. Opaque financial products contributed to almost $1.5 trillion in write-downs and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.
The US justice department is investigating the market for credit default swaps, Markit Group Ltd, the data provider majority-owned by Wall Street’s largest banks, said on 13 July.
Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather.
Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency, he said.
A very bad crisis may emerge within five-seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.
The justice department’s anti-trust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.
US treasury secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new US laws that are difficult to evade. He said strong capital requirements were the key.
Geithner repeated President Barack Obama’s call to force standardized contracts onto exchanges or regulated trading platforms, and regulate all dealers.
The plan to regulate the derivatives market is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets and worsened the global recession.
In the US Senate, agriculture committee chairman Tom Harkin, an Iowa Democrat, is pushing for legislation that would require all over-the-counter derivatives trades to be traded on regulated exchanges, not just standardized ones as the Obama administration is seeking.
UK banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said last month, while stopping short of seeking to separate their lending and securities units.
Mobius also predicted a number of short, dramatic corrections in the stock markets in the short term, saying that a 15-20% correction is nothing when people are nervous.
Emerging-market stocks aren’t expensive and will continue to climb, Mobius said. He said he favours commodities and companies such as London-based Anglo American Plc., which has interests in platinum, gold, diamonds, coal and base metals. In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.