Thursday, February 26, 2009

LA Times on Riad Salameh

[Ahead of his NYSE ringing debut] the LA Times reports on Central Bank Governor, Riad Salameh's efforts since taking his post, and how they led to an island of stability in Lebanon amid the global financial storm (emphasis mine):
...the silver-haired banker became a hero by playing it very, very safe. In 2005, he defied pressure from the Lebanese business community and bucked international trends to issue what now looks like a prophetic decree: a blanket order barring any bank in his country from investing in mortgage-backed securities, which contributed to the most dramatic collapse of financial institutions since the Great Depression.

...

Billions in cash continue to pour in to the relative safety of Lebanese savings accounts, with comfy but not extravagant yields of 6%. A nation shunned for years as the quintessential failed state has become a pretty safe bet, or as safe a bet as investors are likely to find in this climate.

"Being able to survive and to do well in this crisis," Salame said, savoring a deep sigh. "I can tell you I was proud of this achievement."

...

The country's bankers adore him, speaking of him in glowing terms...

"We are very proud of him," said Nassib Ghobril, head of research at Lebanon's Byblos Bank. "He's a very smart guy, and the regulations of the banking sector here have been kept up to international standards. It's very tightly regulated."

In a country known for windbag politicians prone to soaring oratory, Salame favors mundane technical facts as he describes the effort of growing Lebanon's banking sector from $7 billion in assets in the early 1990s to $91 billion today.

That meant tightening regulations and banking requirements so much that 35 banks were driven out of business. They just couldn't meet Salame's conservative balance-sheet requirements, including a rule that bars banks from lending more than 70% of deposits.

It meant changing transparency rules to do away with Lebanon's reputation as a money-laundering hub.

And it meant resisting temptation for easy money.

"We had criticism and some were saying that Lebanon could have bigger growth in its economy if there was not such regulation for credit," Salame recalled. "We were criticized for putting too much regulation."

When the real estate boom crested this decade and investors began bundling debt into nebulous financial instruments fueled by easy credit, the pressure was on for Salame to let banks take advantage of the high yields.

But Salame steadfastly refused.

He says the mortgage-backed securities worried him from the start. He watched curiously as investment bankers engaged in what he calls "rituals" to please the credit ratings agencies and got back such safe assessments of their products. He didn't get it. Why were these considered safe investments? They were just too complicated. They went against a major tradition in Lebanese and Middle Eastern banking: Know to whom you're fronting cash and who's going to pay you back.

"We could not really sense who would be responsible in the end to collect these loans," he said. "And we do not perceive banking as being a place to speculate on financial instruments that are not really concrete."

He felt vindicated when he received a call from abroad last year after the collapse of Lehman Bros. It was a super-rich Lebanese investor living overseas.

"He was always skeptical about the stability here," Salame recalled. "But he told me, 'I sent all my money to Beirut now to the banks. You were right.' "

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