It's the banks, stupid.That's the message Nicholas Brady brings to Asia. It may seem like an obvious point -- that a sound banking system is important to an economy -- but the former US Treasury secretary fears some still aren't getting it.
"I'm just amazed at how often people seem to forget the central role banks play in everything," Brady says in an interview. "It may seem self-evident to many, but it's not."
Coming from Brady -- who knows a thing or two about bank crises -- the observation is a troublesome one. These days, he's chairman of Darby Overseas Investments Ltd, a Washington-based private-equity firm he founded a year after leaving the Treasury in 1993. But in the late 1980s and early 1990s, he was at the epicenter of two of modern history's worst banking crises.
First there was the US savings and loan debacle, a dark time that saw nearly 1,000 banks slide toward insolvency. On its heels came the Latin American debt crisis, which caused chaos in developing nations and also slammed many of the biggest US banks. Together, the shocks posed serious risks to global prosperity and political stability.
Much of Brady's 1988-1993 tenure at the Treasury was spent trying to restore calm to the global financial system. Washington marshaled through an S&L bailout and restructuring program to do that at home. As part of Latin America's rehabilitation, a new asset class, "Brady Bonds," was created to help embattled economies raise funds.
Nowadays, Brady doesn't like what he sees in some corners of the globe. In Argentina, for example, shoddy banking policies left the economy vulnerable amid recession and defaults on debt. Here in Japan, he says, "it doesn't seem to me that the banking problem is getting any better." And in China, he adds, "it's clear that non-performing loans present a problem that will have to be addressed."
While Brady worries about banking systems, it's equally significant that his firm is choosing to make its first foray into Asia now. Darby recently acquired a US$246 million Asian mezzanine debt fund from Prudential Financial Inc. Even though Japan is comatose and China's banking system is wobbly, Brady sees value in many parts of the Asia.
"Our philosophy is value oriented and this is a good time to deploy money in Asia," Brady explains. "Values have come down to reasonable levels, and expanding into Asia now seemed a natural thing to do."
Brady's taking a go-slow approach to Asia. The firm's real expertise is in Latin America, where it's been digging around for buying opportunities for years. Given his hands-on work in the region, Latin America was a natural investment arena for Brady.
Most investors try to build credibility putting their money where their mouths are. But if you're Nick Brady, you can go one better by also putting your money where your name is.
Now, Asia's post-crisis recovery efforts have caught Brady's attention. When Asia slid into chaos in 1997, dodgy banking systems got much of the blame. Too many risky loans, fragile financial infrastructures and inadequate transparency left many Southeast Asian banks on the verge of failure.
Since then, officials in Bangkok, Jakarta, Kuala Lumpur, Manila and Seoul, to varying degrees, have worked to stabilize things. The trick, of course, is figuring out which countries are safer investments than others at the moment. For that, Brady puts great stock in the views of Richard Frank, Darby's chief executive officer. Brady hired Frank, a former World Bank managing director, in 1997.
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