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Chinese regulators should learn from Lehman: Experts

By Xin Zhiming (China Daily)
Updated: 2008-09-13 09:47

As question marks hang over the survival of Lehman Brothers Holdings Inc and the prolonged subprime crisis, analysts say Chinese regulators should learn from the situation facing the struggling Wall Street investment bank.

As the investment bank races to talk to potential buyers, its shares have continued to fall. The company's planned strategy of spinning off commercial real estate and selling a stake in its lucrative investment management division has failed to stop the movement in its stock prices.

"The Lehman Brothers case, once again, shows the subprime crisis in the US is far from coming to an end," said Cao Honghui, an economist with the institute of finance and banking at the Chinese Academy of Social Sciences.

The crisis, which erupted last year, was at one point though to be close to its end, but the recent US government's takeover of Fannie Mae and Freddie Mac and the $3.9 billion losses incurred by Lehman Brothers in the second fiscal quarter have re-plunged the market into the abyss of uncertainty, leaving many questioning how long the crisis will continue.

Normally, there would be one or two financial institutions going bust due to fierce compeititon, said Zhao Xijun, finance professor with the Renmin University of China. "But this time, there has been an exceptionally large number of failing institutions."

By the end of August, 10 US banks would have gone bankrupt and financial expert Alan Greenspan warned there may be more bankruptcies to come.

"The Lehman Brothers have put too much of its resources into the real estate and related financial derivatives when their prices were low," said Dong Xian'an, an analyst with the Southwestern Securities. But as the interest rates went up, problems surfaced.

"It has put all the eggs in one basket and when crisis hits, it suffers," he said. The company's problematic assets, including mortgage-backed securities, real estate and other financial assets, are believed to more than double its net assets. In the previous two fiscal quarters, it has recorded a total $6.7 billion of losses.

Analysts said the current situation facing the US financial sector is in part the product of the laissez-faire philosophy that the US regulatory regime adopted previously. Policymakers believed that big market players would be responsible and abide by the rules. But as various derivatives come out, regulators have found it unbearably harder to control financial market risks.

Given China's premature financial market, the country is yet to be concerned that problems facing the US would reoccur in China, analysts said.

But as China moves towards introducing an increased number of financial derivatives, Chinese regulators should be cautious not to repeat US mistake, Dong from Southwest Securities said. "We should not rush to copy what they did."