Tuesday, July 8, 2008

Worst crisis I have seen: Wee Cho Yaw


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VETERAN banker Wee Cho Yaw has seen many economic crises in his 48 years in the banking business. Yet UOB’s chairman, who is now in his late 70s, says: “I believe that this current financial crisis is the worst I have encountered.”

“It is a deadly combination of the United States sub-prime mortgage mess, severe credit crunch and unprecedented inflationary pressures,” said Mr Wee, delivering a sombre message to students graduating from National University of Singapore (NUS) and about to enter the job market.

Mr Wee warned more of more possible financial writedowns around the world from an industry that has already chalked up US$400 billion ($544 billion) in losses and writedowns so far.

“But this is still not the end of the story and this is what frightens me most: No one can tell me how much more will be written off because no one really knows the size of the collateralised debt obligations market before its collapse,” said Mr Wee, who was conferred the Honorary Doctor of Letters by NUS yesterday.

The International Monetary Fund estimates global writedowns and losses from the mortgage crisis will hit US$945 billion. Compared to some of their US and European counterparts, Singapore banks have emerged comparatively little scathed.

While Mr Wee believes securitisation started out as “innocuous” to help banks spread their risk, it has turned into a nightmare for credit markets since the first quarter of 2007.

He said the crux of the subprime problem lies in the transformation of the financial industry and corporate culture into one that encourages financial players to focus on short-term gains.

Recalling how the banking industry was “pretty straightforward” when he joined 48 years ago, Mr Wee said banks have now branched out into exotic derivatives and structured products which are not limited by capital ratio considerations.

While he urged regulators around the world to step up bank supervision with tougher rules on issues like transparency and risk management of exotic trades, Mr Wee noted: “There will always be creative people who will find ways to beat the rules.”

“This is driven by a compensation system that encourages people to take excessive risks because the short-term upside is greater than the long-term downside,” he said.