The clich? is unavoidable?we?ll have to wait and see whether the US government plan to instill confidence in finance markets works. Our columnist today explains why it is in the global interest that the US package should work and why this plan is far bigger in scope than the simplistic ?bailout for capitalists? story some critics are writing. A recent IMF study shows that financial crisis costs much more when governments try ad hoc solutions, and that a comprehensive approach is best for both financial firms and taxpayers. The Paulson-Bernanke package is an attempt at a comprehensive solution and it deserves every rational observer?s best wishes. Assuming confidence returns, the immediate next job is to focus on the big mistakes at the heart of the crisis. And these big mistakes are relevant for India as well, because even in our supposedly utterly safe, no-reform-required system, these mistakes are committed. The two big villains in the US crisis are credit rating agencies and the over-the-counter (OTC) market for financial instruments.
Rating agencies, not for the first time either, have proven that their rating abilities can be very suspect. The dramatic first shocks in this crisis came when securities rated AA and BB just sank. The US authorities must ask why this was the case, whether keeping the business of clients, who were issuing and trading in those securities, was one of the reasons rating agencies were loath to straight talk and whether, like in the case of accounting practices and Arthur Andersen after the Enron bust-up, the whole model needs reinventing. OTCs are basically private trades in securities between two parties that are outside the ambit of exchanges. What this gives in flexibility it more than takes away in terms of a proper market structure?exchange-traded securities are backed by better information, better risk assessment and have the advantage of having a clearing house. Bear Stearns went down principally because it was addicted to home loan-based securities that were traded in the OTC market. Regulators need to look at the OTC market, so do financial firm managements and shareholders, who have rightly been taken to the cleaners in this crisis. India doesn?t have a better business model for credit rating agencies than there is in the US. That our financial scope is smaller is no reason to take this problem less seriously. The ironical thing is that traditionalists like RBI have preferred OTC trading in some instruments, while reformers, and this newspaper, have been asking for Sebi-regulated exchange traded instruments. The US crisis, believe it or not, makes the reformers? case stronger.