Читать книгу Islamic Finance and the New Financial System - Alrifai Tariq - Страница 7

Monday morning, September 15, 2008, I was sitting in my office settling into my daily routine when I heard a lively discussion among my colleagues who were gathered in our reception area. It was not uncommon for them to gather there and chat, since it was the only open space other than the meeting room where we could all talk. It was also where we had a flat-screen TV mounted on the wall blaring CNBC all day. I never paid much attention to it.

That morning, the chatter was different. I got up from my office to see what the day's topic was. What I saw was my colleagues staring at the TV in disbelief. “Tariq, get over here and check this out,” said one of them. “We're screwed,” said another.

In 2004, I had left my vice president's job at HSBC Bank in New York to join a start-up private equity shop in Chicago. The new firm was to be the U.S. investment arm of a Bahrain-based Islamic investment bank. The bank was also new, having been set up less than a year earlier. I was hired early on to help set up the U.S. operation and build the investment team. Management and shareholders of the bank believed that to be a world-class bank, as they strived to be, they must build up an investment capability in the United States. It was determined that private equity (PE) was the expertise they needed to develop, as they already had a good amount of expertise in real estate, which is a traditional favorite asset class among Middle East investors.

Since the dot-com bust in 2000, private equity had become one of the hottest asset classes on Wall Street, later spreading to Europe, but the Middle East was still way behind in developing a PE industry. Middle East financial institutions were envious of the high returns PE firms in the United States were generating. Middle East investors were successfully courted by these firms and invested heavily in some of the largest shops in the business, such as Carlyle Group and Thomas H. Lee Partners. All the big Wall Street firms also had PE arms and were generating high returns for their investors.

The Bahrain-based bank decided that launching a U.S. private equity office would be the best way to develop expertise in PE and eventually bring it to the Middle East. For the time being, the U.S. office would hire professionals from the PE industry and invest in U.S. companies using equity from the Middle East and leverage/debt from the United States. Thus, not only were we reliant on our parent bank for equity, we needed to source leverage locally through banks and specialized lenders that catered to the PE industry. In addition, since we had to follow Islamic finance guidelines in all of our investments, the leverage we secured from the United States had to comply with Shariah guidelines. This attracted both curiosity and interest on the part of U.S. lenders; some of them liked the concept and were interested in working with us, while others felt it was too strange and foreign and had no interest in our enterprise. I'll explain more about the differences between Islamic finance and conventional finance in Part II of this book. Needless to say, without equity from Bahrain, and without leverage from U.S. firms, we could not invest.

By 2008, we had built a team of eight people and invested in five companies worth more than $300 million, in both equity and leverage financing. For the most part, our parent bank was pleased with our achievements but, at the same time, was under increasing pressure from shareholders to use more of the bank's capital for investments in the Middle East. We were asked to start reducing our reliance on equity from Bahrain and consider sourcing both equity and leverage financing from the United States. This made the events of September 15, 2008, particularly worrisome for us.

The news on CNBC was grim. The Dow Jones Industrial Average had already lost more than 700 points in early trading, and all other markets were sinking fast. The news driving this was the announcement that Lehman Brothers, one of Wall Street's oldest and largest banks, had filed for bankruptcy protection. This seemed to come out of nowhere. When I went home the previous Friday evening, all was well. By Monday morning, all of a sudden Lehman was going out of business. How could this be happening?

I remembered that in March 2008, Bear Stearns, another one of Wall Street's oldest and largest firms, collapsed and was forced to merge with JPMorgan in a Federal Reserve brokerage bailout deal. Back then, the bank's failure didn't cause such ripples through the market. What had changed now?

In the days following September 15, global credit markets froze and major financial institutions around the world were on the brink of failure. The United States, along with regulators and governments from around the world, agreed to pump trillions of dollars into the global financial industry to save it from the worst financial crisis in recent history.

The global financial crisis of 2008 shocked everyone. Much of the world was caught off guard because of its severity and reach. Now, nearly six years since the crisis began, the world is still reeling from its effects. Global growth has not returned to the level it had reached before the crisis, developed countries are saddled with debt, and unemployment rates have yet to recover to what they were at precrisis levels. Much of Europe, as an example, has been seesawing in and out of recession, just as Japan has for the past two decades.

Never in our lifetime have we experienced such a severe recession. Governments and central bankers around the world have not been able to cure the economy of its ills, even after unprecedented government bailouts and central bank money printing.

The events of 2008 caught me and my colleagues off guard as well. We had worked in finance and banking for our entire careers, yet we failed to see this crisis coming. It hit all of us very hard – especially me. In 2006, I got caught up in the housing market. The pressure was on to buy a house before prices rose to an unaffordable level. At that time, the thought of paying rent was crazy because home prices were rising steadily, so owning a home became the best tool for building wealth. The housing market in Chicago was one of the hottest markets in the country. Quality single-family homes in Chicago were hard to find and not cheap. I decided to bite the bullet and “invest” in a new development. To avoid a big mortgage, I decided to make a large down payment (25 percent), since I wanted to build equity fast. I went with a conventional jumbo mortgage. To most financial experts, this was considered to be an excellent and conservative financial move. By the summer of 2009, I had lost my job at the firm and my 25 percent equity in the house went to zero.

So, yes, I was hit especially hard by the financial crisis. The bulk of my savings that was my home equity simply disappeared. The shock of losing my savings as well as my job led me to start asking myself questions, beginning with: How could I let this happen to me and my family? How could I not see this coming? Why didn't the experts in the field, along with all the economists and analysts, tell us about this? I spent the next five years reading, researching, and learning in order to figure out what had happened and how I could protect myself from future financial crises.

Much of what I learned I will share with you in this book. The book is divided into three parts. Part I talks about the financial system and financial crises. It also discusses the financial crisis of 2008 and the solutions that were applied. Part I ends with a discussion of the root causes of financial crises and why the next one will be worse than the last one. Part II is an introduction to Islamic finance. For those of you who are familiar with this industry, it will be nothing new. For those of you who are not familiar with Islamic finance, this will give you a good overview of its principles and practices. You will also see that some of the key principles of Islamic finance are based on sound financial and economic principles. We can all learn from this regardless of our differing faiths. This is not a religious book by any means; it's a book on financial crises and how to prevent them from happening again, for everyone's benefit. Part III outlines some practical solutions the finance industry can take from Islamic finance and apply to building a better system.

As we shall see, identifying the core problem is easy, but the solution is painful. Governments and central bankers do not have the will to take the necessary steps to fix the core of the problem, which is simply the ever-increasing mountain of debt in the world. The cure, therefore, is to reduce the level of debt, which then creates an entirely new set of problems and challenges.

We are now at the stage where the next financial crisis will put too much stress on our current system. As such, governments, economists, and central bankers will need to develop a new system to address the issues of the current one.

Islamic finance might seem like an odd place to look for ideas for a new global financial system, but, as we shall see, many of its key elements are based on sound economic principles. Global leaders may not know they are adopting Islamic financial principles when designing the new system, because they will be looking to build a system that will help protect us from the ills of the current one. Islamic finance has some of the answers to this problem.