Almost two years after the global credit crisis grew into a full-on financial outbreak, we are still picking up the pieces. Investors are still skittish, most markets are still far from recovering to pre-crisis highs and a wholesale rethink of how the global financial system should work is well under way. Just ask Amir Sadr, the head of wealth management at Merrill Lynch in Dubai. He came to town in September 2008, the same month the US investment bank Lehman Brothers filed for bankruptcy and his own company arranged a hasty marriage with Bank of America.
Those were bizarre, confusing but historic times. Investors - and the financial industry - are still learning the lessons. "It was a very difficult time and clients always ask 'how did you feel and how did your firm feel?'" Mr Sadr says. "In hindsight it was a difficult time for all of us but in many ways I'm glad I went through it because the experience was unbelievable. We've learned so much from it as an organisation: how we run our business, how we should be treating our clients, what is the correct type of service model. The whole industry has evolved now and it's going to continue to evolve a lot over the next few years."
As has been the case for investors globally, Merrill's clients in the Middle East - a mix of wealthy individuals and families - have responded to the changed economic environment with a return to fundamentals, says Mr Sadr, who before his tenure at Merrill worked for four years at Lehman Brothers. They are putting their money more into traditional asset classes such as stocks and bonds, and looking askance at anything they can't easily understand. Collateralised loan obligations are out, of course. So are mortgage-backed securities and other fancy derivatives once touted as prudent and profitable. And amid markets that continue to be volatile, basic service is back in.
As attitudes among investors change, governments the world over have done their part to bring them back to markets. They have tried to reignite stalled lending, get industrial production back on track and reduce unemployment. Hundreds of billions of dollars have been spent on the rescue. In the UAE, banks have received Dh120 billion (US$32.67bn) in deposits and Central Bank borrowing facilities. Interbank loans have been guaranteed.
Abu Dhabi recapitalised its banks with a Dh16bn injection last year and has aided Dubai as it grapples with a debt load estimated at $109bn by the IMF. Abu Dhabi has sent $10bn Dubai's way, and the emirate has received another $10bn from the Central Bank as the government-owned conglomerate Dubai World works out a $24.8bn debt restructuring. Those measures have largely succeeded. The real question now, though - and the key to bringing people such as Mr Sadr's wealthy clients back - is one of regulation.
While there have been plenty of headline-grabbing bailouts and injections of capital to rescue struggling banks and other financial companies, the world has not yet witnessed major regulatory reform, which is to be the next step in resuscitating the economy. Big government rescues may have gone a long way towards restoring confidence but confidence cannot truly return until investors believe there are adequate measures in place to stop a repeat of the destruction.
Regulatory reform has long been on the agenda in the US and Europe but has so far made little serious progress. The US House of Representatives passed a series of reform measures last year but the bill to enact them awaits approval by the Senate, where its passage has become a major priority for Barack Obama, the US president. The new regulations would put curbs on securitisation of debt, limit government involvement in financial institutions and introduce government oversight of credit ratings agencies.
The regulation question is equally important in the Gulf. If the region wants to bring people back to its stock, bond and property markets, a margin of safety in the form of strong legal mechanisms to prevent fraud, ensure sound corporate governance controls and mandate transparency is necessary. The need for such reform is recognised in some quarters. The Emirates Securities and Commodities Authority, which regulates the UAE's local markets, has been pushing for months to enact better corporate governance standards for companies listed on the exchanges it oversees.
Dubai's Real Estate Regulatory Agency stepped up after a major decline last year in property prices. And Saudi Arabia's Capital Markets Authority (CMA) provides perhaps the region's most visible example to date of stricter enforcement of regulations. The CMA, which has a staff of about 500, has become by far the Gulf's most active market enforcer, fining companies left, right and centre for all kinds of infractions in recent months.
But more needs to be done. Gulf governments should introduce regulations that do more than pay lip service to stricter rules about corporate fraud. Regional markets should have better rules covering financial results by public companies that make punctual reporting obligatory and do not leave room for fudging numbers or failing to disclose all relevant figures. Rules for accountants and auditors, and laws covering insolvency should be looked at.
Investors once flocked to the Gulf merely because economic growth was strong and markets bubbly. That is not enough any more. As in other regions across the globe, investors are demanding more. How governments and regulators respond to those demands will play a central role in shaping the future of the region's economies and capital markets. firstname.lastname@example.org