Abdulkader Thomas started the session by asking Umesh Desai to sum up the lessons to be learnt from the credit crunch. Umesh’s answer was the impertinence of liquidity, which saw the system awash with liquidity but that liquidity did not take long to dissipate once the banks announced writeoffs.

Also, regulators are becoming stricter in capitalization where those banks announcing write offs were to use capital more conservatively.

Another effect is the return to old-fashioned lending practices, basically being more asset-based and getting to know the customers.

In response to Abdulkader’s question on the current situation, and what measures Abu Dhabi Islamic Bank (ADIB) is taking to be more careful, Masarrat Husain said many of the issues due to the crisis were now affecting the markets. The crisis was preceded by the huge flow of liquidity in the market and banks were doing all kinds of transactions which they should refrain from.

Abdulkader then asked Mohamed Ridza Abdullah on the legal concerns and issues that are faced by the issuers coming to Malaysia.

According to Ridza, Malaysia should consider the emergence of other markets such as Hong Kong, Singapore and Indonesia which have made good progress.

However, he said Malaysia has succeeded in making it investor friendly. Issuers have the flexibility to choose either UK law, US law or Malaysian law, where they are to adhere to Securities Commission Malaysia’s guidelines.

Abdulkader then asked Mohammed Rashdan Yusof on the areas that are important in the market and those which new issuers should worry about in terms of structuring, pricing issues and expectations. According to Rashdan, in the past six to nine months, there had been a general risk aversion on the issues of leverage.

The key reason was the subprime crisis, which was due to excessive leverage and that leverage was being shunned. Another issue that did not really concern Malaysia all that much is the excessive view of derivatives increasing leverage even further. Banks in the US and Europe have been chasing high yield and profits using derivatives.

According to Abdulkader the subprime crisis in the west is evidence that Basel II had failed. He then asked Rashdan about marking to market and to comment whether this is a good practice or has a limitation which is important to observe.

Rashdan pointed out that Malaysia has deferred the adoption of the standard of marketing to market. One of the observations is that marking to market instruments cause banks to unwind those portions as they are creating heavy losses.

The act of unwinding creates further liquidity crisis, it lowers the price and the loss is even worse. Observers said that does not reflect the intrinsic value of the underlying asset and marking to market has a standard that does not have liquidity adjustment.

Abdulkader then sought the panel’s view on whether rating agencies are potentially more careful leading to subprime and to what extent should the rating agencies take the blame or whether it is the fault of the banks involved in the process.

Umesh said there is a conflict of interest as it is the issuers that are paying the rating agencies and hence, they will go shopping until they get the ratings that they like.

There should be some changes, where it should be investors involved in paying the rating agencies as ratings are important to investors. As with the investor paying, there is no conflict of interest.

According to Masarrat, rating agencies have their fair share of blame but banks should also bear the burden as they cannot follow the ratings blindly. Banks need to put some effort into understanding the ratings and structure.

Wrapping up the session, Ridza said rating agencies, especially in Malaysia, are more careful as there have been downgrades of bonds and defaults.

The blame should not just be on the rating agencies but also the lead arrangers and banks, which must take a proactive stance in guiding and advising rating agencies on the structures applicable to investors.