A Forbes blog post with a screaming headline pegged to Mark Mobius about a “hellish” financial crisis shortly forthcoming has been generating plenty of fear in the Internet sphere. The article by Addison Wiggin was picked up by the well-read Drudge Report, ensuring lots of reader attention, and has quickly gained the interest of blogs making frequent reference to the word “Armageddon.”
The article, which is very thinly sourced, quotes Franklin-Templeton emerging markets guru Mark Mobius saying "There is definitely going to be another financial crisis around the corner because we haven't solved any of the things that caused the previous crisis." Mobius is reported to have linked said future crisis to the derivatives market.
The article, citing comments Mobius made in Tokyo, said, “Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius' guess of 10 times the world's annual GDP." Mobius also warned the derivatives are unregulated, and growing in volume.
Wiggin's article raises a number of interesting questions, such as what is Mobius, who runs some $50 billion in investor assets, doing to prepare for this crisis and what exactly is the danger he foresees. But a search for Tokyo-based coverage of Mobius’ warning yielded nothing. And the reason for that is that Mobius made those remarks half a year ago. A Franklin-Templeton spokeswoman told AdvisorOne he made the comment in May.
That does not mean there won’t be a fresh financial crisis or that Mobius isn’t worried about derivatives, but the point of the article may have more to do with selling Wiggin’s Agora Financial newsletter products than offering well-sourced news content.
As for the derivatives danger, an Internet search shows frequent mention of a "$600 trillion time bomb"–some 10 times greater than the entire world’s GD –poised to destroy the world’s economy. A check of Bank for International Settlement figures show that that oft-used figure is out of date. The over-the-counter derivatives market has grown to over $700 trillion as of June 2011, so the danger–if it is a danger–may be far more perilous.
Indeed, the Finance Addict blog cites a Reuters story this week reporting that Congress has set “the U.S. Commodity Futures Trading Commission’s budget for fiscal 2012 at $205 million, $103 million less than what was requested by the Obama administration.” This is the same CFTC that has responsibility for regulating the U.S. OTC derivatives market and which failed to prevent the demise of Jon Corzine’s MF Global. So those concerned about financial Armageddon have a fresh worry.
The OTC derivatives market is indeed a quite serious issue. Former CFTC chairperson Brooksley Born was a lone voice warning of the danger of these opaque and unregulated securities a decade before the financial crisis. Congress had explicitly banned the CFTC from regulating them against her advice.
So there may be something to these warnings after all. Look for a planned follow-up report from AdvisorOne on this topic.