"Now the world need a new openness in international finance that would require private financial institutions to disclose far more information about their loans around the world and force investors to pay their share of the cost of bailing out troubled nations. The global economy cannot live with these kinds of vast and systemic disruptions"

Was the quote above part of a critique of Wall Street's practice of slicing and hiding risky investments in a maze of exotic financial engineering that helped cause the recent financial meltdown?

Nope, it was Robert E. Rubin, United States treasury secretary during the Clinton administration, pointing out the weaknesses in Asian countries' financial systems, including Indonesia, as the main cause of the Asian financial crisis.

In a twist of historical irony, this phrase was delivered in a speech in New York almost exactly 10 years ago before the opening of the annual meetings of the World Bank and the International Monetary Fund in Washington.

Now the doctor has to swallow his own medicine.

The Dutch East India Company, better known by its abbreviation VOC, was the first multinational corporation in the world and the first company to issue stock in 1602. Its demise two centuries later was closely related to shadow bookkeeping and inflated costs to hide from stockholders the irregularities and extravagant lifestyle of top office holders.

While the financial market in U.S. is more tightly regulated than VOC was two century earlier, the regulatory framework still left too much room to wiggle in for handsomely paid financiers. The CEO of Goldman Sach was paid US$53 million in the 2006 fiscal year, and Wall Street remains very creative in finding loopholes for the allocation of rewards.

One of the turning points that led to today's problem was the 1999 repeal of the Glass-Steagall Act of 1933 that allowed Bear Stern, Lehman Brothers and other retail brokers, which once only served individual clients, to expand into investment banking.

Major firms lobbied hard to get Glass-Steagall repealed with consequences rather similar to the way in which Soeharto's Economic Package (Pakto) of 1988 in Indonesia allowed the establishment of hundreds of new banks.

Wall Street rushed immediately afterward to enter the lucrative mew market after repeal and to play fast and loose with the regulations. The problem was exacerbated by eight years of the Bush administration with its quasi-religious belief in the righteousness of the unfettered market, deregulating substantially without inserting proper risk management and early warning mechanisms.

The other important factor was the fair value requirement set by the U.S. Financial Accounting Standard Board. The now famous Statement 157 defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The requirement may seem trivial and innocent but when major players are dumping their stocks and securities then their value will fall, pushing the market into more anxiety and causing a downward spiral.

The bursting of the sub-prime mortgage bubble led to banks and financial companies revaluing their holdings and in many instances their restatement of value and potential earnings led to massive losses. Capital-thirsty financial institutions in Wall Street are now hard pressed to get rid of the red ink from their bottom-line and reluctant to invest and expand. The result is a credit crunch affecting the global economy since U.S. investments sprawl all over the globe.

U.S. Treasury secretary, Hank Paulson, asked for a free hand and non-reviewable leeway in spending $700 billion to buy up the bad assets that have clogged up the financial system and to bring confidence back to the market. Apparently he took note that some BPPN (Indonesian Bank Restructuring Agency) former senior executives subsequently spent time in jail after directing their similar operations.

So what Indonesia probably needs to do is to deflect the worst impacts of the Wall Street meltdown?

Indonesia's institutional investor exposure to U.S. securities is much less than other Asian tigers. Certainly miniscule compare to Japan and China whose combined holdings in U.S. T-bills are more than a trillion dollars, accounting for almost half of the foreign owners of U.S. Treasury Securities.

The impact on Indonesia is likely to materialize in the form of low portfolio investment onward and reduced trade and investment in the coming year.

The United States is Indonesia's second largest export destination after Japan. In 2007 total bilateral trade was $18.54 billion; with $14.3 billion going into Indonesia coffers from our exports. Bilateral trade increased by $2.01 billion in 2007 compared to the same period in 2006. U.S. investment in Indonesia has reached $10.6 billion.

Transparency and accountability would come first on the list of what is needed. Know what you sell! Spreading risky assets among safe ones would only increase risks if they are being sold as safe assets, increasing the likelihood of financial failure.

Second, find a compromise to avoid compounding the cyclical downturn effects of current fair value requirements by having sufficiently accurate reporting of the value of assets held by banks and financial institutions.

Kenneth Rogoff, former IMF chief economist, said that if the U.S. were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three-month U.S. Treasury Bills have now reached 54-year lows. It is almost as if the more the U.S. messes up, the more the world loves it.

But its no use wishing that the U.S economy might reach near bankruptcy and the U.S. President might be forced to go through a humiliating signing ceremony with the IMF Managing director arrogantly standing over him with his hands folded (as happened in Indonesia to Suharto during the last Asian financial crisis).

The U.S. economy is too big to fail. Europe and Asian countries are more likely to pull all the levers to ensure that the U.S. will not collapse.

It is almost as if Wall Street can behave badly and wake up later to realize that it was all just a bad dream, albeit quite a scary one. Life is not always fair.

The writer is PhD candidate in Economics at University of Siena, Italy and is lecturer in master in public policy (MPKP) program at Faculty of Economics, University of Indonesia (FEUI). He can be reached at b.martawardaya@ui.edu

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