By Aaron Pan and Jake Lee
Sept. 26 (Bloomberg) -- Joseph Yam, ridiculed a decade ago for directing $15 billion of government stock purchases to defend the Hong Kong dollar, can relate to U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke as they attempt to rescue Wall Street from collapse.
Yam, chief executive of the Hong Kong Monetary Authority since 1993, favors U.S. government intervention to cure a seizure in credit markets. He also wants regulators to safeguard the public by tightening bank industry rules and issuing ``health warnings'' on investments they consider risky.
``If the market is failing then authorities have the responsibility to put it right,'' Yam, 60, said in an interview this week on the 56th floor of the tallest building in Hong Kong as the clouds of typhoon Hagupit swept across the city. ``The market does not exist to serve the interests of financial intermediaries. It exists to serve the public.''
Yam offers a unique perspective on the credit crunch having guided Hong Kong through the Asian financial crisis that started in 1997 and a subsequent economic slump that wiped 65 percent off home prices in five years. The longest-serving head of a central bank in a global finance hub also manages the $181 billion pool of assets that backs the Hong Kong dollar's fixed exchange rate.
Yam's purchase of stocks to restore confidence in the Hong Kong dollar in August 1998 was criticized at the time by former Federal Reserve Chairman Alan Greenspan, who said the intervention eroded the HKMA's credibility.
U.S. Bailout
Ten years later, Paulson and Bernanke's $700 billion plan to bail out banks by purchasing their troubled assets is under fire from some U.S. lawmakers. Senator John Cornyn, a Republican from Texas, said ``as long as this is portrayed as a bailout for Wall Street, it's a loser.''
Presidential candidates Barack Obama and John McCain say any proposal must include provisions for recouping government money and returning it to taxpayers.
The HKMA recovered the HK$118 billion ($15 billion) spent on its intervention within two and a half years, by selling shares and collecting dividends, and still held stock worth HK$110 billion. The Hang Seng Index has almost tripled from its low in August 1998.
HKMA rules requiring homebuyers pay at least 30 percent of a property's value as a deposit helped the banking industry survive the city's housing crash. Hong Kong's mortgage delinquency rate reached 1.4 percent in 2001, compared with more than 6 percent in the U.S. currently.
`Wild Conditions'
``Yam will be celebrated for overseeing the economy during some wild conditions,'' said Tim Condon, head of Asia research in Singapore at ING Groep NV, the biggest Dutch finance company. ``His place in history is assured and he won't have to worry about having to defend his actions of 10 years ago.''
Yam says confidence in Hong Kong's fixed exchange rate is so solid that there is no pressure on it to weaken, even as a slide in stock markets causes currencies across Asia to decline. The city's currency has been fixed at about HK$7.8 per U.S. dollar since 1983, a year before the U.K. signed an agreement to transfer Hong Kong to Chinese sovereignty in 1997, and is allowed to trade 5 cents either side of that level.
The Hong Kong dollar's 0.3 percent gain since June 30 compares with declines of 10 percent in the South Korean won and 9 percent in the Indian rupee. The currencies depreciated even as the Bank of Korea spent a record $20.9 billion and the Reserve Bank of India $7.9 billion buying their currencies in August, according to HSBC Holdings Plc.
`Heaven Help Us'
``If the U.S. plan is not enacted as soon as possible, with the speed of financial markets today, heaven help us all because it will be a severe drag on the global economy,'' Hong Kong Chief Secretary Henry Tang said in a separate interview. ``People around the world will end up footing the bill.''
Yam's critics say the peg distorts markets and has fueled inflation as the Hong Kong dollar followed the U.S. currency lower, making imported goods more expensive. Consumer prices rose 6.3 percent in July from a year earlier, the biggest increase in more than a decade, before government rent waivers reduced it to 4.6 percent last month.
``It's ironic that Hong Kong is described as the freest economy in the world when there's still a currency peg in place,'' said Willy Wo-Lap Lam, adjunct professor of history at the Chinese University of Hong Kong. ``It comes down to a lack of political courage from the Hong Kong bureaucrats.''
`Alphabet Soup'
The credit crisis is likely to make governments even more cautious towards market reforms, ING's Condon says. Lehman Brothers Holdings Inc. filed for protection from creditors this month in the biggest bankruptcy in history and the U.S. government took over the world's biggest insurer and its two largest mortgage-finance companies, Fannie Mae and Freddie Mac.
The HKMA pledged this week to support more than 10,000 individuals who say they suffered losses on investments in credit-linked securities arranged by Lehman. Yam also had to reassure depositors that Bank of East Asia Ltd. has ``ample capital,'' after a run at the city's third-largest lender. Yam favors tighter regulation of financial products.
``What's happening is a result of financial innovation getting out of control,'' said Yam. ``You have an alphabet soup that is too thick that you can't see the bottom and when you finish you've had too much,'' he said, referring to derivatives such as collateralized debt obligations, or CDOs, and credit- default swaps, or CDS.
Asian central banks have tightened controls on corporate debt since 1997, built up more than $4 trillion in reserves and set up an $80 billion pool among 13 Asian countries that can be used to protect currencies.
Greenspan Criticism
A decade ago, Yam said his stock purchases would hit speculators ``where it hurts'' by causing losses on short positions on the city's shares and currency. His success earned him the nickname ``Yambo'' after the movie about the vengeful Vietnam veteran ``Rambo.'' A short position profits from declines in a security.
Greenspan slammed the move, telling members of the House Banking Committee the step ``won't succeed'' and that it eroded ``some of the extraordinary credibility'' of the HKMA.
Yam responded by writing a letter to his U.S. counterpart on Sept. 17, 1998, blaming a ``sophisticated assault'' on the city by finance companies acting in concert and calling for world leaders to regulate against such attacks.
``I hated having to intervene in the markets,'' Yam said in this week's interview. ``I'm a believer in free markets and at the time I felt like I was betrayed by a best friend.''
Shielding the City
Yam's management of the peg has shielded the city against the worst effects of the current crisis this month, according to John Greenwood, the chief international economist at Invesco Asset Management in London. Greenwood designed the 25-year-old Hong Kong dollar peg.
``It's extraordinary how stable the peg has been,'' he said. ``If in addition to panic over the equity and bond markets, Hong Kong had had to deal with a currency crisis like other Asian economies, that would really have intensified the problems.''
Tang, Hong Kong's No. 2 official, said the U.S. must take ``leadership in terms of cleaning up its own house.'' Yam says regulators need to ensure more transparency, rigorous debt ratings and minimum standards for assets sold to investors.
``You need regulators to take a view,'' said Yam. ``You need a health warning.''
To contact the reporters on this story: Aaron Pan in Hong Kong at Apan8@bloomberg.net; Jake Lee in Hong Kong at jlee127@bloomberg.net.
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