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Back to the future

Finance Blogger: Ian Fraser Ian Fraser

Ian Fraser in Doha

Morality and business ethics were on the agenda at the closing session of the QFINANCE debates on the future of finance held in Doha this week.

Following a lively debate, delegates at the CNBC debate on the future of finance (“Same rules, same game”) voted on four possible outcomes of the banking and financial crisis. Each proposition was advanced by a finance practitioner, advisor, or scholar.

In the end, the winning proposition at the debate, anchored by Geoff Cutmore of CNBC, was “There will be another crisis.” The outcome may seem unduly negative or pessimistic, but given the regulatory and industry response to the crisis so far, the audience felt it to be realistic. It’s also worth noting that none of the speakers at the event specified exactly when they expect this future disaster to occur.

In a heart-felt plea for a return to basics, the Egyptian-born academic Dr Hatem El-Karanshawy, founding dean of the Qatar Faculty of Islamic Studies, said that finance is going to have to return to being a servant of the real economy rather acting like its master.

He added that unjustifiably the high returns which until recently were available from convoluted and opaque instruments had meant that parts of the real economy was being starved of much-needed investment by the very industry that was supposed to be supporting it.

El-Karanshawy, former professor of finance at the American University in Cairo and ex-director of the Central Bank of Egypt, said that banking and finance had overdosed on sophistication and become detached from its primary function—to facilitate productivity improvements in the real economy. Unless it remembers what it is there for, he warned there are bound to be future bubbles and there will be another crisis.

El-Karanshawy was criticized for “sounding like an advocate for 1930s or 1960s central planning” by Sir John Stuttard, vice-chairman of “big four” accountancy firm PricewaterhouseCoopers, who was one of CNBC’s “VIP cross-examiners” at the debate. Yet according to a show of hands at the end of the debate in Doha, El-Karanshawy's arguments carried the day.

Other possible outcomes put forward at the debate included “There will be arbitrage” (proposed by former SEC commissioner Paul Atkins), “There will be acceleration East” (advanced by Philippa Malmgreen, president of advisory firm Canonbury Group), and “There will be a return to old values” (proposed by Robert Gray, chairman of debt finance at HSBC).

Malmgreen, a former economic adviser to President George W. Bush, said the cost of bank bailouts in Western economies is going to mean a rising tax burden in these places. She predicted capital and financial expertise will, as a result, migrate to lower tax regimes in the East, bringing exciting growth opportunities for financial centers in Singapore, Qatar, and elsewhere.

PwC’s Stuttard agreed with her thesis but said he did not believe tax would be the driver. He said: “The real driver for financial services is centers of excellence and access to talent.”

Stuttard then added: “I applaud what Qatar is doing with QFINANCE. These sorts of initiatives enable you to build a knowledge base from which you can build a centre of excellence and that’s where people will go for advice.”

For more on the theme of how the crisis will lead to a shift in economic and financial power from west to east, it’s worth reading the Viewpoint written by commodities investor Jim Rogers.

In his contribution, Atkins implied that the G20 is being naive in striving for “stability über alles.” He said: “You cannot outlaw fear, greed, and other emotions, and bureaucrats can never outsmart the marketplace.” (Read a QFINANCE Viewpoint on the risk of regulatory arbitrage).

HSBC’s Gray agreed with El-Karanshawy that banks need to rediscover their former role of being “servants of the economy.” In his view, banks are already moving in the right direction, recognizing that blindly following the herd into high-yielding asset classes and abusing leverage can be treacherous and once again realizing it pays to “know their customers.”

He countered suggestions that a return to old-fashioned values would make innovation impossible, arguing that innovation will still happen but is more likely to have a social and economic purpose. But he said it would be impossible to return to a Glass-Steagall-esque division between investment and retail banking, as advocated by the UK thinker John Kay. “I’m afraid the genie is out of the bottle on that one.”

George Shehadeh, chief executive of Qatar-based investment bank Amwal, another of the VIP cross-examiners, rounded off the debate by saying that financial institutions in the Gulf are to an extent fortunate. This is because in his view they never really lost sight of old-fashioned values, and resisted the urge to get into the churning exotic derivatives, even at the height of the boom.

He said this means “They do not have to change their ways too much.”

In his Viewpoint for QFINANCE, Ravi Nedungadi, CFO of Bangalore-based United Breweries Group, also describes how he resisted the urge to get into exotic derivatives during the boom.

The debate will first be broadcast on CNBC from October 12, 2009.

Tags: banking , business ethics , financial crisis , real economy , regulation
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