The World Bank's new mandate: Pumping derivatives

Robert Zoellick wants the bank to be more like Wall Street. The new president may have picked the wrong month to launch his signature campaign.


Andrew Leonard
August 30, 2007 10:34PM (UTC)

Robert Zoellick, reports the International Herald Tribune, is making his mark on the World Bank. He's pushing the notoriously sclerotic bureaucracy to be more like the nimble gazelles of Wall Street. This means, in addition to forcing staffers to get up early and attend 8:30 a.m. meetings, encouraging the bank to start offering its poverty-stricken clients access to state-of-the-art financial products, such as derivatives that would allow countries to hedge "against the risk of a commodity-price collapse or a surge in interest rates." (Thanks to the Private Sector Development Blog for the tip.)

Zoellick has dispatched bank staffers to world capitals to explain the new risk-reducing products to public officials who may not be well versed in complex finance...

He cites as an example hurricane insurance that allowed a group of Caribbean nations to pool risk and cut premiums by 40 percent. He is trying to revive interest in financial instruments known as swaps, which can protect countries from abrupt shifts in the value of their currencies. The bank is trying to be creative, too, in offering loans that would be activated in the event of a natural disaster...

"There is a potential for this new approach to reinvigorate the bank's financial services business," the World Bank treasurer, Kenneth Lay, said during an interview in Washington. "By offering access to the latest risk-management tools to our clients, we can also reduce systemic risk over the next few decades."

One can only wonder how far the jaws of these public officials in world capitals are dropping. At the very least, Zoellick's campaign exhibits some extraordinary tone-deafness to the current state of world markets. After a month of extreme financial market turbulence all over the world, set off precisely because no one is sure whether complex derivative financial products have decreased or increased the chance of systemic risk for the global financial system, Zoellick is sounding the trumpet and shouting "tally ho!" Have some more complexity -- it's good for what ails you!

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Am I the only one who hears echoes of the subprime debacle in the sentence "To lure back customers, Zoellick, 54, wants the bank to offer products that countries with poorer credit profiles cannot get in the private market"?

As we watch the supposedly smartest guys in the financial universe -- hedge fund operators -- burn their fingers in the current ongoing credit crunch, does it really make sense to suggest to struggling developing nations in Asia, Africa and South America that what they really need is a dose of extreme financial innovation? When a hedge fund implodes, the fireworks are fun, but the immediate victims are wealthy investors who, theoretically, can handle the damage to their pocketbook. But if the Democratic Republic of the Congo makes the wrong bet on interest rates, at the urging of the World Bank, can it afford the error?


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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