Mahathirism thriving in US and UK
Mahathir was Prime Minister of Malaysia during the Asian Crisis a decade ago and shocked the world with controversial responses that stretched the limits about how responsible governments are supposed to behave. Looking around the world today, it is clear that Mahathirism is alive and kicking in the heart of the developed world. The actions of the US in the Bear Stearns bail out and of the UK in pursuing the enemies of HBOS smack of the same intolerance of market forces and preference for crony capitalism that characterized Mahathir.
The legal problems with the Bear Stearns deal have been analysed very ably by Prof. Davidoff in a series of articles in his Deal Professor column in the New York Times Dealbook (one, two, three, four, five, six, seven, eight, and nine.) Davidoff argues that the deal violates NYSE listing regulations (but the worst that NYSE can do is to delist Bear Stearns and this is going to happen anyway after the merger) and probably violates Delaware corporate law too. The circumstantial evidence certainly points to a deal that was imposed by the government with scant concern for the requirements of good corporate governance. Davidoff is also right in raising questions about the Bear Stearns directors selling their shares in the market rather than tendering it to the acquirer under the deal that they have approved. It is also evident that the creditors of Bear Stearns (and to a lesser extent, its shareholders) have been bailed out.
The story about HBOS in the UK is Mahathirism of a different kind. Since HBOS is known to have considerable exposure to the mortgage market, it has attracted considerable short interest. After rumours spread about liquidity problems at HBOS, the Bank of England took the extra-ordinary step of denying problems at this bank. The Bank of England does not usually talk about individual institutions. For example, during the Northern Rock hearings, the Chairman of the Treasury Committee of the Parliament had the following exchange with the Governor and another Director of the Bank of England:
Q129 Chairman: ... Are there any others in potential trouble? You do not need to name them!
Mr King: I think you know perfectly well that central bank governors cannot go ---
Q130 Chairman: Governor, I was not even talking to you; I was talking to Paul Tucker.
Mr Tucker: Central bank directors take the same approach.
Yet, the Bank of England went out of its way to deny the HBOS rumours. Moreover, though the BOE statement has been reported very widely in the press, I cannot find the text of the statement at the web site of the Bank of England despite searching its web site and also running down its list of press releases. So much about transparency.
The Financial Services Authority went further with a probe into the short selling episode. Its statement is quite bland, but press reports clearly indicate that the FSA is taking the probe very seriously. The FT Alphaville blog describes an imaginary conversation between the FSA and speculator showing how silly this whole idea of probing the short sales really is:
FSA: Why did you short this bank?
Speculator: Because I thought it might have liquidity problems.
FSA: Why did you then tell the salesman at X broker that you thought this bank had liquidity problems.
Speculator: Because I thought it might have liquidity problems.
FSA: But it doesn’t have liquidity problems.
Speculator: Really?
Posted at 6:52 pm IST on Mon, 14 Apr 2008 permanent link
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