Tony Fernandes CEO Blog

Ever since the pound was forced out of the ERM (European Exchange Rate Mechanism) in the late 80's, I have always had a strong distaste for financial traders. I saw it once again in 1997 when all of us were affected but till this day I cannot understand how the rupiah went from 2500 per US dollar to at one point 20000.

The world has been living with many bubbles over the last 3 years and for anyone who chose to listen I kept telling people that it's all going to come crashing down soon and we will all hurt but no one seemed to listen or really bother. We were all into believing that the growth will go on forever.

Thank god in Malaysia, Bank Negara has kept a tight rein and hence our financial system is strong. The issue I have been having is profits must come from creating real value. Not paper profits.

I saw with my very own eyes how oil went from 30 US dollars to 150 US dollars in just 2 years. How on earth can oil be worth so much more i.e. 500 percent in such a short period? The answer is that financial speculators saw it as easy profit. The actual volume traded was so far in excess of the actual oil consumed. So it was all just in paper. Hedging is supposed to give certainty to oil producers and oil consumers. But a whole new class came in who never even bought a drop of oil. Banks like Goldman Sachs made calls on oil at 200 US dollars. Did they themselves buy oil for that long? Oil went up for any reason. The worse being a fire in one small refinery in the middle of nowhere and the oil shot up to 4 US dollars.

Follow up:

The shame is many decent companies have been destroyed by the greed of these financial speculators who made nothing while many entrepreneurs who had great ideas were destroyed by these guys who traded papers. And those who bailed out are the Bank of America and the Treasury Secretary who happens to be the ex-CEO of Goldman Sachs's Hank Paulson.

I am a great believer in the free market but in this case the free market failed and for years to come we will all pay for it. Speculation is evil and I hope in future there is a better regulation of it.

Here are some suggestions:

1. Build real value - don't get involved in a business that is trading on paper. If I could, I would stop all speculation. If you want to hedge oil that's fine but it must be backed by the purchase of the physical product. This is the same for currency and interest rates.

2. Do not allow too much leverage. Make sure that the cash flow is robust to deal with leverage.

3. Ban on short selling. Either you have the stock to sell and if not you can't sell.

The trouble is that too much money went into trading and not on building real value and now we are all are going to pay.

However, I feel we are in quite a good position in Malaysia if we use this to strengthen our Asean ties and build closer links to Asean. It's a 600 million market.

So, the lesson here is that there is no quick answer to wealth. The best bets are still building a business that builds real value and is a service to the people.

I think Malaysia will do okay from this. We have been insulated for a while from the world economy but I hope the government grants this opportunity to further enhance productivity.