Is bankers' bailout a boon to Red China?

0 Comments | Insight on the News, Feb 16, 1998 | by Timothy W. Maier

The Asian crisis has Americans fingering their purse strings. But would bailouts simply benefit New York bankers or prevent the United States from sliding into a major recession?

Yes, they've been falling like dominos since July. Indonesia, Thailand since July. Indonesia, Thailand, South Korea -- perhaps next to walk the plank may be the People's Republic of China, or PRC, at least 40 percent of whose bank loans are nonperforming. So much for economic engagement with Beijing. In fact, as former Hong Kong investment banker Randolph Quon predicts: "In six months the Chinese economy will slide into recession and all this talk of engagement will be gone."

Beijing restructured its banking industry by setting aside $6 billion to help liquidate bad loans, but financial experts call that a lot of show -- a paltry 1 percent of the $600 billion worth of bad loans cited recently by the DRI/McGraw-Hill Global Risk Service. Even Beijing's $136 billion in reserves is believed to have been encumbered.

So Quon might be right. If so, will Americans open their wallets and cut yet another check to allow the International Monetary Fund, or IMF, to bail out New York banks heavily invested in Beijing?. That's what the huge effort to replenish IMF is really about, according to nationally syndicated columnist Walter Williams, chairman of the economics department at George Mason University in Fairfax, Va. The main impetus behind IMF loans "is bailing out New York banks that have made bad loans," he says. "There's no reason we should bail them out. No one bails me out when I lose on risky investments."

Naturally the Wall Street crowd, which stands to lose billions, says it would be a mistake if the United States fails to come to the rescue when 30 percent of U.S. exports go to developing countries in Asia, supporting millions of U.S. jobs.

"It would be a sad event if the U.S. chooses not to support the IMF," says Amit Khandwala, a portfolio manager for Wright Investors' Services in Bridgeport, Conn. "In my opinion it would not be the best decision-making. We are living in a global economy and whether we choose the IMF or Western banks to bail out Asia, something has got to be done. We are underestimating what might happen if we don't."

Maybe. A new wrinkle soon may be added to the debate. Insight has learned that price ramming, insider trading, lax accounting standards and corrupt governments that contributed to the Asian financial crisis and banking fiasco in Beijing may have led to the January collapse of Peregrine Investment Holdings, the Hong Kong finance house that triggered Indonesia's crash.

House Rules Committee Chairman Gerald Solomon of New York has asked Manhattan District Attorney Robert Morgenthau to review allegations that the PRC has been "conspiring to manipulate stock prices" in what Solomon describes as a "pump-and-dump" scheme. According to recent letters written by Solomon to Morgenthau and to Securities and Exchange Commission Chairman Arthur Levitt Jr., investors may have fallen prey to "criminal fraud" by being enticed to invest in Beijing companies whose shares were marketed to U.S. institutional investors by Peregrine, using corporate backers such as billionaire Hong Kong investor Li Ka-shing as bait to pump investors for cash with promises of major growth that never materialized. The result? Investors lost big time and, as one congressional investigator puts it, "Someone got rich off of this."

It is this type of alleged Corruption that has leading economists calling for IMF reforms and, in some cases, abolition of that world regulatory agency. IMF needs American taxpayers to drop $3.5 billion for an emergency lending facility and another $15 billion to cover the U.S. share of a quota to replenish IME The Clinton administration supports the funding to keep the 182-nation IMF strong because it says it is the only organization that can step into a crisis as the lender of last resort.

But a growing number of financial experts are suggesting that the United States let the bankruptcies roll to teach a hard lesson to undisciplined investors before more casualties occur this economic war. It's an argument that is gaining momentum on Capitol Hill, with both liberals and conservatives joining an alliance to defeat funding for IMF, says Ian Vasquez of the free-market Cato Institute.

"The bailouts are an expensive, bureaucratic and unjust solution to what would occur quickly and fairly under market conditions," Vasquez tells Insight. "The more the IMF bails out countries the more we can see further countries in trouble in the future. Risky behavior should be a part of evaluating investors and governments."

Roger Robinson, a senior director of international economic affairs at the National Security Council under President Reagan, warns that the United States shouldn't be subjected to this "moral hazard" that began with the 1995 bailout in Mexico and now appears to be happening again by allowing private-sector investors and bankers to be repaid in full (and in some case with profit) by American taxpayers to save investors in Indonesia, South Korea and Thailand.