The View From Israel

So far Israeli banks seem to be weathering the crisis fairly well.
Only one bank had any sizable holdings in [mortgage-backed securities] and subprime and so forth. Some weren't sufficiently integrated into the global market. They weren't very exposed abroad; they had pretty good diversification of their holdings in foreign banks. But the real reason was that our mortgages are very conservative instruments. Most of the time Israelis complain like heck that they have to put down large down payments. Now that we're in this crisis, that turned out to be a very good thing.

Were you surprised to see Alan Greenspan acknowledge that some derivatives like credit default swaps should have been better regulated?
I agree with that. [But] I'm concerned in this crisis that in a lot of things people will go too far. There are securitizations that have been very successful. The securitization of credit-card receivables has been working very well indeed. I don't think there's necessarily a problem with the securitization of mortgages.

Should securitizers keep a portion of what they're selling?
Somebody has to have the incentive to understand the risk right. The natural place seems to be the originator.

Pakistan's President Asif Ali Zardari was complaining this week about IMF loan conditions. What lessons did you learn about excessive conditionality from your time at the IMF?
There were cases in the 1990s when the fund had too much conditionality on things that weren't essential. There was a period in the early parts of the program when the fund wanted fiscal contraction when fiscal contraction probably wasn't necessary. But you cannot have a program where you say: fine, we'll give them the money, and they're responsible people. Some of the coun-tries do get into crises because they're pursuing the wrong policies. You've got to correct that.

© 2008