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WORLD BANK-BROOKINGS INSTITUTION CONFERENCE

FINANCIAL MARKETS AND DEVELOPMENT

PREVENTING CRISES IN EMERGING MARKETS

SESSION 3:

A CLOSER LOOK AT EQUITY FLOWS TO EMERGING MARKETS

March 26, 1999

TAPE TRANSCRIPTION

C O N T E N T S

Moderator - Phillip Turner

Bank for International Settlements

Presenter - R. Michael Barth

Director, Capital Markets Development

The World Bank

Discussants:

John D. Rea

Chief Economist and Vice President of Research

Investment Company Institute

Uri B. Dadush

Director, Developments Prospects Group

The World Bank

P R O C E E D I N G S

MR. TURNER: This session focuses more closely on equity flows to emerging markets. Attitudes to equity flows differ quite a lot even in the industrial world. And if you look at the attitudes of investment companies in English-speaking countries you'll find that, I don't know, about half of their assets go to equities. If you look at the situation of investment companies in continental Europe and Japan, the proportion is much less, maybe about a quarter. A much greater investment into bonds and money market instruments.

MR. TURNER: So the attitude towards equity investment is quite different even among countries at the same level of development. It's all the more likely that the attitude to equity investment in countries of different levels of development is going to be quite different.

MR. TURNER: I think Michael Barth and his colleagues at the World Bank have done us a very useful service in looking at a number of facts, as many facts as they could find, and putting on the table what we know and what we don't know about equity markets and equity market participants in Asia in particular.

MR. TURNER: Our two discussants are, first, Uri Dadush, who is the director of the Development Prospects Group (World Bank Development Economics Prospects Group)  at the World Bank. In his function he's the editor of the annual Global Development Finance (Global Development Finance 1999) , which I believe is going to be published next week.

MR. TURNER: Second discussant is John Rae, who is chief economist at Investment Company Institute (Investment Company Institute - Home Page)  and formerly assistant director of the capital market section of the Federal Reserve Board.

MR. TURNER: John will start. I'll ask each discussant to limit their remarks to around 15 minutes so that we can have a good general discussion.

MR. TURNER: John, the floor is yours.

MR. RAE: All right, thank you. This format is a little new to me. I have a summary, but I'm not sure that it's complete enough to be of tremendous use for those who have not read the paper. I thought it was a very interesting paper, and I'm glad to have the opportunity to comment on it. And I'll say from the outset I don't have anything negative to say about the paper. I found myself somewhat in agreement with it throughout it. And what I will do with most of my remarks is build upon that paper to discuss some aspects of the mutual fund industry.

MR. RAE: I work for the Investment Company Institute, which is a trade association here in the U.S. for U.S. mutual funds. And that's where I'll focus my comments on and their activities in the Asian markets generally.

MR. RAE: As I said, I thought it was a very interesting paper. And it provided some new perspective on the Asian financial crisis over the past two years. As I see the paper I think it's ultimately aimed at strengthening the case for continued development, expansion of capital markets and emerging markets.

MR. RAE: As the authors recognize, recent crises have damped some of the earlier enthusiasm and endorsement for unfettered foreign access to securities markets in these countries. To develop the argument for further capital market expansion, the authors take a disaggregated approach to foreign equity flows to Asian emerging markets over the past several years. They disaggregate by type of equity investment and by type of investor, showing that certain types of equity securities are not likely -- or likely to be more stable sources of capital than others. And that foreign investors do not all behave alike.

MR. RAE: To be more specific, the paper distinguishes between three types of foreign investors -- mutual funds, pension funds, and hedge funds -- and between three avenues in which investors may hold and purchase domestic stocks -- equity investments in local markets, international placements of publicly traded depository receipts or privately placed securities, and finally, private equity funds that invest directly in foreign markets.

MR. RAE: The authors conclude that international placements and private equity funds were stable sources of finance during the Asian crises. With regard to local equity investments by foreign institutions, the authors provide a variety of evidence pointing to the conclusion that foreign investors may not have been destabilizing factors in Asian stock markets.

MR. RAE: For example, these investors are shown to have economic horizons, investment horizons that are longer than those of local or domestic investors, to be motivated by economic fundamentals, and to have suffered significant losses during the crisis.

MR. RAE: I would suspect that those who are actively involved in the debate over the role of foreign investors in these crises might not find this evidence to be the last word.

MR. RAE: None the less, when these empirical findings are viewed in conjunction with other information on investors and types of investments, the authors make a strong argument that capital markets are positive to economic growth and the development of emerging markets.

MR. RAE: I'd like to add further to that argument by elaborating upon the behavior of mutual funds during the Asian crises. In the aftermath of those events the U.S. mutual fund industry has been asked in a variety of contexts to account for the behavior of mutual funds during the crises. While I cannot vouchsafe that each and every mutual fund with a position in emerging markets was on its best behavior, I do want to show, as the authors have done, that the mutual fund industry collectively -- or mutual funds collectively -- have not been and are not likely to be a source of short-term volatility in foreign markets.

MR. RAE: Concern that mutual funds have the potential to disrupt securities markets is by no means confined to emerging markets. The same concern has arisen repeatedly in recent years with respect to the U.S. stock market, or the rapid growth of assets in equity funds has led many policy-makers and economists to wonder whether mutual funds pose a threat to the stability of U.S. financial markets.

MR. RAE: Let me elaborate a bit on this concern in the U.S. before turning to Asian markets. The potential for mutual funds to disrupt financial markets arises from two sources. One is the individual owners of mutual funds. The fear is that they might panic in the event of a sharp market downturn, thereby redeeming their shares en masse. This would in turn force mutual funds to liquidate their holdings of stocks and other securities to raise the cash necessary to pay redeeming shareholders. Such action could accelerate the collapse of stock prices, causing stock prices to fall significantly below their fundamental values.

MR. RAE: This source of potential sales pressure on securities prices is unique to mutual funds, which must redeem shares virtually on demand. Other institutional investors, such as pension funds and hedge funds, are not subject to this requirement.

MR. RAE: The second potential source of instability is sales of securities by mutual fund portfolio managers that are not the direct result of shareholder redemptions. Like every institutional investor, portfolio managers can readjust their holdings in light of current or anticipated market developments.

MR. RAE: Of the two potential sources of market instability, it is widely believed that the mutual fund shareholder is by far the greater threat to disrupt financial markets. From this perspective it is important to note that mutual fund shareholders have never redeemed shares in massive amounts over a short period of time. This includes the 1987 market break as well as the more recent sell-offs in October of 1997 and August of last year. This is not to imply that mutual fund owners do not care about the performance of their investments, but rather, their sensitivity to returns tends to occur over longer periods of time.

MR. RAE: For example, in the year and a half following the 1987 market break, stock funds experienced small monthly outflows. This pattern has been seen before, showing that fund investors tend to space a response over time in a pattern that allows for orderly price adjustments.

MR. RAE: Thus, it comes as no surprise that mutual fund shareholders have responded to the emerging market crises in a similar fashion. This first came to light with the Mexican peso devaluation in 1994. Almost overnight, Latin American stock funds experienced losses of as much as 30 percent. Outflows in the first two weeks after the collapse in Mexican securities prices were surprisingly small in spite of the enormous losses absorbed by fund shareholders.

MR. RAE: In March of 1995, inflows had resumed to Latin American funds. And by the end of April the inflows had exceeded the cumulative outflow precipitated by the crisis. Similarly, fund investors have shown remarkable restraint in response to the Asian financial crises, which also resulted in substantial losses to fund investors in emerging market and Asian stock funds.

MR. RAE: As the authors have observed in their paper, emerging market stock funds experienced inflows throughout 1997, with the exception of the month of December. The inflows continued into1998 before turning into very small outflows at the middle of the year. Those emerging market funds that invest primarily in Asia and outside of Japan experienced steady but small outflows in 1997. These outflows began early that year, well before the devaluation of the baht in July. In 1998 the outflows from these types of emerging markets, Asian concentrated funds, moderated considerably.

MR. RAE: The conclusion I draw from these experiences is that investors in U.S. mutual funds are not likely to be a volatile source of capital in emerging markets or, for that matter, in developed markets. These investors have not shown a tendency to abandon their investments en masse at a moment's notice. Rather, they tend to respond to falling prices by spreading redemptions over an extended period of time. In other words, as market crises develop, mutual fund investors tend to withdraw from those markets at a measured pace, thereby permitting securities prices to adjust in an orderly manner.

MR. RAE: In light of this behavior it is of interest to speculate about the reasons mutual funds owners have behaved, or have been relatively insensitive to short-term market volatility. I'm not sure there is a single explanation. Fund owners have indicated in surveys that they are long-term investors using mutual funds for retirement purposes. They're generally willing to take investment risk and seem to understand that the stock market is a risky investment.

MR. RAE: Moreover, half of the owners of mutual funds have been in funds for a considerable period of time and most are not strangers to market volatility.

MR. RAE: None of these, I will admit, provides great insight into the mind-set of the typical mutual fund owner. What is most striking and of greatest significance is the consistency of the behavior over the past 60 years for which we have data to track the responses to market developments.

MR. RAE: This period includes a variety of stock market breaks, not just those of recent origin, and a considerable number of stock market cycles. This also encompasses a large number of changes in the make-up of fund owners, including their investment experience and demographic and financial characteristics.

MR. RAE: Thus, the simple fact that mutual fund owners have not panicked and overwhelmed securities markets with their selling activity should be a source of confidence that mutual funds are unlikely to be a source of hot money in emerging markets.

MR. TURNER: Thank you. Uri?

MR. DADUSH: Okay, thank you very much. Can you hear me at the back? No?

A PARTICIPANT: You may want to put on your --

MR. DADUSH: Good morning. Thank you very much, pleased to be here.

MR. DADUSH: I, too, found the paper very interesting. It provides an overview of the dynamics of foreign portfolio investments in Asia during the crisis. And it raises several questions that I feel deserve deeper exploration and I think will get deeper exploration.

MR. DADUSH: Michael Barth and Xin Zhang make a strong case for the benefits of foreign portfolio equity flows. In particular, they argue -- they make four arguments, I think. One is that equity flows did not contribute to the crisis in a significant way. Second, that they shouldered fully the cost of adjustment. Third, that they're badly needed to emerge from the crisis. And fourth, at least implicitly, that they should be encouraged and not controlled.

MR. DADUSH: And what I'd like to do is to summarize and comment on the paper by addressing each of these four points in the form of questions.

MR. DADUSH: So the first question then is, did equity flows contribute to the crisis? And Barth and Zhang point out that equity flows may be more resilient in the face of crises then is generally understood. When account is taken of value compression there is no evidence that mutual funds have withdrawn from Asia in a major way.

MR. DADUSH: Now, data in the current edition of our Global Development Finance Report, which as Philip mentioned will be published next week, also suggests that portfolio equity flows to the crisis countries actually increased in 1998 compared to 1997.

MR. DADUSH: Nevertheless, there are very important data problems associated with these flows. And of course, this is a very limited sample from which to draw strong conclusions.

MR. DADUSH: For example, according to the same Global Development Finance figures, equity flows to all developing countries fell from $49 billion in '96 to $30 billion in 1997 and to $14 billion in 1998. And in here there is no doubt important valuation effects at play. But nevertheless, as Richard Cooper pointed out this morning, these falls, be they due to valuation or other, are important in terms of their effects on the balance of payments of these economies.

MR. DADUSH: Also, when you look at new issues there were virtually no new equity issues out of Southeast Asia in the four months following the Thai devaluations. The authors present data suggesting that foreign equity investors will present a very high share of the free float in Asian emerging markets and that foreign investors have much longer holding periods.

MR. DADUSH: So it seems unlikely that we would have seen such a large collapse in stock markets during the crisis without a partial withdraw even if that withdrawal was (inaudible) or incipient of foreign investors. And I think any discussion of the effect of foreign investors needs to consider wealth effects as well as the direct effects of withdrawal of funds onto the balance of payments.

MR. DADUSH: Second question which I'd like to address, how do these features of portfolio equity, this behavior of portfolio equity in the crisis, compare to other sources of capital? And with the benefits of the data from the report that we are about to publish I can make some generalizations, some of which Dick Cooper has already identified.

MR. DADUSH: There are three points, really, three contrasts. First, we now have accumulated very strong evidence that foreign direct investment, which is by far the largest source of capital going into developing countries now, was remarkably resilient throughout the period of crisis. As happened in Mexico in '95 and '96, FDI held up in all the crisis countries except the special case of Indonesia.

MR. DADUSH: Second, we have also, I believe, strong evidence from the BIS (Bank for International Settlements) statistics, because I tend to believe the BIS (Bank for International Settlements) statistics, that if you're the World Bank you believe the BIS (Bank for International Settlements) statistics. If you're the BIS (Bank for International Settlements) you believe the World Bank statistics.

MR. LITAN: We have a joint publication.

MR. DADUSH: We should do it jointly, yes. And so we have evidence from the BIS (Bank for International Settlements) statistics that the crisis in Asia was accompanied by a massive withdrawal of short-term lending by international banks. In this respect I don't agree with Richard Cooper's point on that.

MR. DADUSH: Let me just quote some figures. Whereas in the first half of 1997 $8 billion in short-term bank loans flowed into Indonesia, Korea, Malaysia, and Thailand, in the second half of 1997 $18 billion flowed out.

In the first half of 1998 the outflow of short-term debt, just the outflow - - that's not the comparison of the outflow with the inflow in the previous period -- the outflow of short-term debt from these economies amounted to 10 percent of that period GDP, $48 billion.

MR. DADUSH: The third point is that we now suspect from the very large increase in the areas in admission entries in the balance of payments in the crisis countries that about 50 or $60 billion flowed out of the countries in '97 and '98 as domestic residents purchased foreign assets, thus engaging in capital flight.

MR. DADUSH: So really the big story, the big drama, of the outflows from Asia was played on two stages -- short-term bank debt and capital flight of domestic residents.

MR. DADUSH: Under any circumstance, under any analysis and data set, the inflows on portfolio equity, which only amounted to about $10 billion a year and anyway remain positive according to our statistics in both '97 and '98, were only a sideshow to the main drama. And I think the authors pay good service by pointing out the fact that this was not a major play.

MR. DADUSH: Of course, equity also fulfilled its role as risk-taker and shock absorber. It absorbed both the asset price decline and the currency devaluation. Viewed from the standpoint of the policy-maker in the borrowing country, the equity investor who did withdraw his money got only a fraction of his money back and was in no need of a bail-out and did not raise, therefore, any concerns about moral hazard.

MR. DADUSH: This is in stark contrast to bank loans, particularly bank loans into the banking sector. There were a lot of losses on bank loans, at least provision bank loans to the corporate sector, but not to the banking sector.

MR. DADUSH: Third question, can foreign equity investors help overcome the crisis? I am among those who believes that recapitalizing the banks and restructuring corporates unable to repay their debts is a necessary condition to resumption of rapid growth in Asia.

MR. DADUSH: And the authors quote studies suggesting that recapitalizing the banks and reducing the debt equity ratio of the large corporations to somewhere near international averages will require an equity injection worth somewhere near $200 billion, which is about 10 times the total foreign direct investment and portfolio equity investment in these countries in 1998.

MR. DADUSH: In the situation of systemic distress in the domestic private sectors, governments are the only other possible source of domestic equity. But the government has no special skill in corporate restructuring. So the case for increased equity investment by foreigners becomes even more compelling.

MR. DADUSH: However, as the authors point out, the appetite for international equity investment in Asia is limited. Not only have returns been extremely disappointing and volatility huge, but the advantages of diversification, which in any event is always a second order effect, in my view, have been reduced at least in these markets, have been reduced by the (inaudible) increase in correlation with the U.S. stock market.

MR. DADUSH: Despite these obstacles I agree with the author's view that investment in emerging markets is likely to resume in the medium term, reflecting the reality, as they put it, that emerging markets are an important part of the world economy. And there are a number of other arguments that could be made.

MR. DADUSH: But I would go a little further than them and highlight the pent-up demand that currently exists for equity capital in Asia and the pent-up supply that exists in the rest of the world of financial capital in general. In other words, I would add a cyclical argument for the resumptions of the flows to be added to the structural.

MR. DADUSH: On the demand side, let me just belabor a little bit this cyclical argument, on the demand side imports in the Asia crisis countries are now about 30 percent below the long-term trend we estimated before the crisis.

MR. DADUSH: On the supply side, supply of funds side, Europe, Japan, and Asia have a large excess of savings over investment. And virtually all of the world's extra savings are being channeled towards the United States at present whose currency and stock market are widely believed to be overvalued. So that's the cyclical argument to be added to the structural argument.

MR. DADUSH: Fourth and last question I'd like to address if I have a moment, which I didn't really want to address but Michael insisted that I do, which is that duty arguments in favor of moderating short-term capital inflows apply to portfolio equity as well.

MR. DADUSH: The authors argue that those in favor of tighter regulation of short-term capital inflows tend not to distinguish between different types of flows. Equity portfolio flows tend to be lumped together with other types of flows, such as short-term bank lending, with very different characteristics.

MR. DADUSH: In the report that we issued in December on the Asian crisis, the Global Economic Prospects Report, we concluded that there may be grounds in some instances for measures to moderate non-FDI capital inflows to developing countries. Or if you like, we came out in a somewhat positive tone towards capital controls in some cases. Joe Stiglitz (phonetic) doesn't like us to use the words "capital controls," but there you are.

MR. DADUSH: Now, I do not have the time here to go into all the considerations that led to that except to say that we looked at it very, very carefully before we voted. But there are two main points I would want to highlight that led us to this.

MR. DADUSH: First, that endemic institutional weaknesses in developing countries, such as fragile financial systems and precarious government finances, can cause shocks coming from a capital flow reversal to be greatly magnified. And these shocks are devastating in the absence of social safety nets. That's the first consideration.

MR. DADUSH: The second consideration, which is quite different, is that developing countries are marginally creditworthy borrowers in the international markets. And as such, we can demonstrate that they're subject to much greater volatility of capital flows.

MR. DADUSH: Now, not only are capital flows to developing countries more volatile, but in times of strength they tend to augment other shocks coming from the real side of the economy. For example, as happened in Brazil and Russia, the deterioration in export earnings of these economies eventually contributed to a massive loss of confidence and a withdrawal of capital instead of opening the way for increased foreign borrowing, as might have happened in countries with high credit ratings.

MR. DADUSH: So in other words, not only do you have a lot of volatility but the finance tends to behave perversely. Instead of financing shocks when you're marginally creditworthy and you have a shock, the finances actually withdraw.

MR. DADUSH: All this, then, argues for careful preparation before capital accounts are fully opened in developing countries. Although we are not asking -- we're not suggesting that we have the same 500 years' preparation that was the case in western Europe, you know, before they opened about 15 years ago. Sorry, just being a bit --

MR. DADUSH: Now, whether these kinds of concerns apply to portfolio investment I think cannot be answered in the abstract but needs to be looked at on a case-by-case basis. As the authors show, equity flows are very important risk-bearing characteristics.

MR. DADUSH: And right now, of course, the problem is not that we have too much equity coming in, but we have too little equity coming in. However, we have to think about the world when the flows resume and the risk of boom and bust will rise again. And the fact is that in the immediate crisis period even the numbers that we have in front of us suggest that equity flows can contribute to the crisis.

MR. DADUSH: We clearly need a more careful study of behavior of equity flows in the period immediately surrounding the crisis. And I think we've taken the first step.

MR. DADUSH: Now, it's true that equity flows are a small part of the total. But at the same time experience suggests that selective measures to moderate capital inflows inevitably compound the enforcement problems, as flows can be reclassified and also can be distorting.

MR. DADUSH: I suspect that Chile-type controls which tax inflows uniformly solely on the basis of holding period that's penalizing short-term flows of all kinds may be a good compromise, especially since the size of the tax or the holding period can be varied in function of international capital market conditions and domestic market conditions.

MR. DADUSH: So in conclusion, let me say that the authors have made a worthy case for greater reliance on foreign portfolio equity investments. I believe that their arguments deserve more careful and complete and  thorough substantiation. And I think researchers will certainly take their cue from Barth and Zhang's paper.

MR. TURNER: Thank you, Uri.

MR. TURNER: We have half and hour now for a general discussion. Let me put on the table two general issues that seem -- that arise from the paper and the discussion.

MR. TURNER: The first one is, how does one assess how a country can have an effective capital market. I noted five elements in Michael Barth's paper. A, the quality of financial disclosure; B, the number of local investors. Is it better to float shares in large markets where there are many investors? For example, the (inaudible). C, the representativeness of companies issuing shares. A lot of discussion about the excessive weight of financial firms in Asian equities not really representative of the whole economy. Is this something that we need to be concerned about? D, proportion of shares closely held. The government, local families, cross-shareholding and so on. The corporate share ownership in Asia highly concentrated. The question is, is this really changing? And finally, the quality of the trading infrastructure and regulation. Is this really -- is this improving as a result of the crisis?

MR. TURNER: Subsidiary question of course is towards the impact of foreign investors on the behavior of Asian markets during the crisis. John Rae echoed Dick Cooper's view that it was not foreigners primarily who triggered the crisis.

MR. TURNER: A second main question is, what are the main economic functions of portfolio investments? The first, obvious, one is allocation of capital. From capital-rich aging countries to capital-poor young countries and so on.

MR. TURNER: Second one, diversification of risk. Uri Dadush said he regarded this as a rather second order mechanism. There are a number of other people who believe that there are other mechanisms for diversifying risk other than portfolio flows. An obvious one is the use of greater -- the activities of multi-national companies active in many countries.

MR. TURNER: The third function of the equity market is to force a more efficient use of resources. And privatization has been a major force in emerging markets. And this obviously will have a big effect on the effectiveness of which capital is utilized. And it forces also more attention on shareholder value in private companies, forcing better use of capital.

MR. TURNER: Uri echoed Michael Barth's comments in the paper about the massive need for recapitalization for banks, capital necessary to reduce the debt equity ratios in the corporate sector. So on the face of it there is a huge demand in the emerging markets for equity capital. So I think those are the two sort of key issues that struck me.

MR. TURNER: There's someone in the back who had his hand up. Right at the back.

MR. ADLER: Michael Adler, Columbia University. I'd like to raise one issue that I didn't find in the paper. It occurs to me that the emerging markets themselves have a pent-up demand for portfolio diversification and that we should be looking for increased diversification in equity capital flows out of emerging markets into the developing country markets.

MR. ADLER: Don't we need, therefore, to balance the two effects and take into account some of the considerations that have just been raised? Because if you, for example, unravel the family control and concentrated shareholdings in the emerging markets, won't you create more capital flows out than in?

MR. TURNER: Thank you. Yes?

MR. WILSON: Tim Wilson, Morgan Stanley Dean Witter. I'm in the risk management group at Morgan Stanley and there's a lot of problems that we struggle with on a day-to-day basis that are pretty similar to those of a small country and the big global capital market which we have to worry about, you know, what's the world's confidence in us. We have asset liability mismatches potentially that we have to manage.

MR. WILSON: And there was one thing that in that context had occurred to me I thought I'd bring up. And it's relevant to the comment our chair made about the relative roles for portfolio investment and direct investment. Particularly, if anybody has thoughts with regard to the financial sector on the point where there's actually quite a big difference between those two kinds of investment in the case of banks, because a local bank has to have capital sufficient to cover itself against its idiosyncratic risk, its total risk, really.

MR. WILSON: And therefore, it strikes me that just as in the U.S. a Texas bank is not an economic entity -- it can't be run economically because it's not diversified -- that in many cases many countries may be facing a situation where their banking systems, if they remain purely local, may well themselves also be too subject -- first of all, subject to shocks, which is a problem, but also even if they were able to operate with a very high capital requirement, which is another possible way of approaching it, they would then be not providing loans to local residents at an economically efficient price.

MR. WILSON: Now, I don't say this out of any self-serving interest, because Morgan Stanley doesn't want to open up banks around the world, but it does seem to me that from a policy perspective, from developing countries' point of view, there are a lot of advantages to direct investment in the financial sector as opposed to portfolio investment.

MR. TURNER: Thank you. Yes, Andrew?

MR. SHENG: Andrew Sheng from Hong Kong Securities and Futures Commission. I find this discussion very, very important because I think there has been - - the interpretation of the data is critical. Now, there is -- I think John Rae's point, I mean, building on Michael Barth and Zhang's paper, John Rae was quite correct to say that the long-term fund managers did not shift out. And that I think the data proves. I think Uri Dadush then said, well, the two major culprits are the banks and the domestic capital flight.

MR. SHENG: Now, I find that, if you interpret those numbers according to that, that really is wrong interpretation of the data. Why do I say this? Because it is not the hedge funds, it's the hedging activities that actually shift the capital out.  And it is hedged through the banks, through the banks. And very often these hedging activities is below the line. Now, and I think, you know, you must understand how foreign direct investment -- and there's always this myth that foreign direct investment is good and safe. But they have not understood that in today's world when you can hedge that foreign direct investment it is equivalent, that hedge is equivalent to a capital outflow not shown through the multi-nationals. Even if it was multi- national who has shown below the line, but shown through the banking system. Okay? Right?

MR. SHENG: So let me give you a very simple illustration. Shell invests -- and this is true also of a foreign direct investor as well as a domestic investor. And in Asia this interpretation must be very clearly understood. Shell invests $100 billion in Indonesia. And traditionally they would invest it -- they would fund this. And it is the funding of that that is very, very critical. They could fund it through a U.S. dollar borrowing or it could be funded through its capital.

MR. SHENG: And that money goes into Indonesia and when the plant is built the money flows out, so the central bank no longer has that reserve on the balance sheet. But the foreign direct inflow has been monetized.

MR. SHENG: If Shell headquarters without even telling Shell Indonesia that they want to hedge that, what effectively is that it will go to a bank, a foreign bank or domestic bank, to borrow the rupiah to buy the dollars. Correct? Right?

MR. SHENG: So it's shown, in fact, from the banking system as a bank outflow. Right? Now therefore, even though there was no -- the plant is still there. You can't take the plant away, but actually the dollars have already flown out of the country and is reported as if it was a bank lending, no longer bank lending to Indonesia but a bank lending to head off as Shell in London dollars. But it showed up as a below the line rupiah increase, which is not seen to Bank Indonesia, who is trying to defend the exchange rate and didn't understand what the hell was going on.

MR. SHENG: The other issue about the capital flows, about domestic capital flows -- I mean, sorry, capital flight issue, should also be interpreted in the context of tax distortions over domestic investors against foreign investments, because a foreign investment receives massive tax incentives. A lot of domestic investors in Asia booked their investments in that country through offshore centers and borrowed dollars and invested through a nominee company to show that it is a foreign direct investment. Correct? Right?

MR. SHENG: So when the banks begin to panic and pull in Singapore and Hong Kong, what happens? That borrower does not have the dollars to pay back, and therefore sells the rupiah or the baht or the yuan or whatever to raise the foreign currency to pay that. And that looks as if it was capital flight but it was actually trying to raise the funds to match their foreign liability exposure, which is a normal activity. And that of course in turn drives down the exchange rate, which in turn creates the foreign exchange losses for the corporation, which in turn creates that crisis.

MR. SHENG: So I urge you, Uri, to interpret, to qualify that statistic very carefully, because otherwise you will be blaming the wrong -- you know, blaming the wrong people. The banks are only the intermediaries. I'm not saying that the banks did not pull. And I'm not saying that the foreign direct investor, you know, did not pull, either. I'm saying that the mechanism of the hedge, a lot of which is reported below the line, creates huge shifts in that portfolio that traditional central bankers and policy-makers, you know, have not understood.

MR. SHENG: And therefore, I urge you to interpret that number much more carefully than to have a flash headline saying A is good, B is bad. It's not as simple as that. Thank you very much.

MS. HESSING: Karen Hessing from the Evergreen Fund. In terms of portfolio investment, over the next decade or so large numbers of people will be retiring, the baby boom generation -- the United States, Europe, Japan. Looking forward, what implications do you speculate will occur in terms of portfolio investment and its impact on emerging market countries?

MR. TURNER: Thank you. Bob?

MR. LITAN: Yeah, I've got two points. I found this a fascinating paper. And in particular I'm going to advance a tentative hypothesis based on table three that's in the paper, it's on page 11, which shows foreign ownership on holding periods in the different countries. And there's some very interesting statistics on that table.

MR. LITAN: That table shows first that of the total market cap there is the highest degree of foreign ownership in Malaysia. And when you go to the ownership of free float it's even more imbalanced. Roughly 70 percent in Malaysia is foreign-owned. And free float is more important in Malaysia than in any of the other countries listed. And those numbers by themselves suggest to me it's not an accident that Malaysia was so antagonistic to foreign investment, was so tempted to blame foreigners.

MR. LITAN: Now, it doesn't apply a cause or connection in every case. But I would suggest that that table at least implies that there is a political risk to some degree in relying so much on foreign investment because foreign investors become an easy target for blame when a crisis hits. And I think foreign investment is generally good, but I think that table just -- it gives you a suggestion of at least a political risk.

MR. LITAN: The second point I would make is I don't know how many of you saw this series in the New York Times by David Sanger about the Asia crisis. How many? Probably half the room, right? I thought it was an excellent piece. And I've been around to a number of places around the country since then. And a lot of people have seen the piece.

MR. LITAN: But that piece had one major flaw, which is demonstrated actually by this paper that we have before us. And that is, there is a temptation when people write about this crisis and capital flows, to lump all capital together and mush it all together, long term is the same as short term and equity is the same as debt and it's all sloshing around it goes in, it goes out, and that's the big problem.

MR. LITAN: And what this paper does I think and why it deserves -- its findings I think deserve some amplification in the media -- is that it points out that capital is not all alike. And in particular, even portfolio equity was not destabilizing in a crisis. And I think that's a very important conclusion that needs to be emphasized by the media. Capital is not all alike.

MR. TURNER: Thank you. Yes?

MR. ARNHEIM: I'd like to offer a couple of comments and respond to Andrew Sheng's comments. My name is Walter Arnheim. I'm the treasurer of Mobil Corporation. There was a reference made to how multi-national Shell, in particular, invests in this part of the world. I wanted to share with you some of my experiences. I can't tell you how Andrew Hodge does it for Shell. But I don't believe that the way he funds and operates his company is any different than the way we operate for Mobil.

MR. ARNHEIM: I think the first thing to keep in mind, in this part of the world, that multi-nationals are investing. They're generally investing in very, very big projects that are export-oriented. And when they're export-oriented the cash flow that's being generated from these projects tends to be in dollars. And one of the first rules in financing, and we've seen how the consequences of when it is violated, what happens is to match the cash flow that you're generating with the debt that you're borrowing.

MR. ARNHEIM: So when we go into a country like Indonesia, when we finance a multi-billion dollar LNG facility, we're going to be looking for the revenue stream. That revenue stream is going to be in dollars. Our direct foreign investment is going to be in dollars. We may try and mitigate our political risk through involving banks as part of that financing on a non-recourse basis. But when you're talking about the type of projects that multi-nationals are talking about, the local banking markets are generally not ones that are conducive to this.

MR. ARNHEIM: There are, however, times when you're going to in a much smaller scale be involved in a new market entry in an emerging market country where the cash flow that's being generated from that project is the local currency. Go back to rule 101 of finance. You want to match the cash flow with the type of borrowing against that. In that case we would be looking to either put in dollars and hedge them or borrow in the local country in the local currency. Often the banking system isn't there, and to a large extent those type of investments come in as equity capital.

MR. ARNHEIM: But I think it would be an extraordinary case where there would be large amounts of money borrowed from a local bank to fund a major investment in the country that's generating export-oriented because number one, the banks aren't there to support it and number two, you'd have a basic mismatch in the currency. 

MR. TURNER:  Thank you very much indeed.  If I could ask a question of the bankers in the audience who have been involved in lending to Asia. And we know from BIS (Bank for International Settlements) statistics that there's a massive decline in the total exposure to Asia since the crisis -- the figures I have in mind. They might have been (inaudible.) I think over the -- from the fourth quarter of 1997 to the third quarter of 1998, which is the latest quarter to which figures are available, exposure of decline by about $80 billion to the five crisis-hit countries.

MR. TURNER: Now, what we don't know is was it the bank lenders who were the ones who initiated the reduction of credit lines or was it the borrowers in the emerging markets themselves decided to substitute local currency borrowing for dollar denominated borrowing? This was a major problem in Korea in January.

A PARTICIPANT: What happened before Korean interest rates were increased Korean dollar debtors were eagerly paying off their foreign banks. At the same time the  international financial community was telling the foreign banks they shouldn't be cutting credit lines. They were not in fact cutting credit lines. What was happening was that local Korean borrowers were borrowing local currency at relatively low interest rates in effect from the Central Bank and then paying back their dollar debt because they expected the yuan to fall still further.

A PARTICIPANT: So the question is, what was the trigger of the sharp reduction in international bank credit? Did it come primarily from the lender's side as Uri suggested or did it come primarily from the borrower's side as Professor Cooper I believe suggested? If there are any bankers here with some experience?

A PARTICIPANT: Maybe people do not want to admit they're bankers.

MR. TURNER: Do you know the activities of any other banks that did that?

A PARTICIPANT: Do you have any friends?

A PARTICIPANT: It really is a critical question.

A PARTICIPANT: It is.

MR. TURNER: There are no answers? Pity. Yes, there is.

A PARTICIPANT: No answer. I just have --

A PARTICIPANT: Go to the mike.

A PARTICIPANT: -- to follow-up.

MR. TURNER: Follow-up, yeah.

A PARTICIPANT: I found this debate here really extremely interesting and I think very, very important to get to the truth and the bottom line of this. And I have a question that maybe any of the two could answer and that is in line with the question you just asked as well, which is was the behavior of the multi-national corporations prior to the crisis during the crisis was it different from their normal behavior over time?

A PARTICIPANT: It is one thing to match cash flows. And it's another thing to see devaluation coming down the pike. The behavior of corporations at that time, and I think this is what (inaudible) is suggesting, may be different. And I'm just wondering. I'm really curious.

MR. TURNER: Yes?

MR. ARNHEIM:  I hesitate generalizing from a data point of one. So take that as it is.

MR. TURNER: But it's a big data point.

A PARTICIPANT: Big data point, right.

MR. ARNHEIM: I can tell you that there are currencies that we see out there that are weaker than others. And I have in Mobil Corporation a foreign exchange bank which manages the exposure of the corporation in all of the major currencies around the world. We pool our efforts together. We have certain, I'll call it "valuate risk limits" where our traders can take an exposure here, there, and the other place.

MR. ARNHEIM: Generally we will have exposures where valuate risk, that is the movement of a gain or a loss, one day a year is in the order of magnitude of for the whole corporation $5 million, peanuts. It is peanuts. And this is something that is reported on our annual report and it's one of the things when we talk about transparency to think about later. So it's a very, very small number. And it's one that does not vary very much.

MR. ARNHEIM: When you run a large corporation you want to have certain basic strategies. You don't want to have volatility in earnings. You don't want to be speculating in where foreign exchange rates are going to be going. That's not what we as stewards for the shareholders of the corporation are paid to do. We're paid to invest long term. We're paid to manage those investments and fund them the right way, both in terms of the duration of the debt, the composition of the equity and the overall running of the corporation.

MR. ARNHEIM: I think it would be very unusual for a corporation to be a major factor in the foreign exchange markets or trying to speculate or guess where foreign exchange rates are going to be going. We may move a dividend forward by a week or two because we're concerned about the currency. I don't view that as speculation. I don't view it as a major impact in the marketplace.

MR. TURNER: Thank you. Andrew?

MR. SHENG: Thank you. I think I want to clarify my comments. It's not meant to be negative to MNC's. I think I -- what the point that I really want to make was that the instrument of hedging, which was not prevalent five years ago, ten years ago, is today a very normal risk-management tool. But your risk diversification could be somebody else's risk concentration. It's a point that I really want to make sure you understand this.

MR. SHENG: So therefore, when a fund manager or a corporate manager at headquarters says that I see a headline news about country A in which one has probably 0.001 percent of their portfolio, they will retain -- the portfolio fund manager behaves no differently from the long-term direct investment manager. The new 101 finance is to hedge. And that's very normal activity. Now, but the cumulative effect of a headline about country A having some problems - the instruction goes down, "hedge that." The cumulative effect of everybody hedging 0.001 percent adds up, on that particular market creates huge risk concentration for that small emerging market. Something nobody, you know, totally appreciated.

MR. SHENG: Now, it may be right, it may be wrong. The market should take care of itself. And Asia's mistake to a large extent was the inconsistency as you know between interest rate policy and to extent some exchange rate policy because theoretically, you know, if your interest rates should rise, you know, to adjust for the downward appreciation of the exchange rate.

MR. SHENG: So the combination of these factors, this is what I'm saying, that the hedging being -- risk management being a very major tool today creates huge risk concentrations for small economies. And you must understand there is a problem. What is a very small transaction for a very large fund manager in a small relatively (inaudible) market, you know, can create some volatilities.

MR. SHENG: And it's that problem about too much funds into too small, you know, markets that creates that massive volatility. And into some extent scares, you know, it's the elephant in the pond problem. The elephant may be benign, but if it moves into the pond and the small fish see the big elephant coming they may jump out themselves.

MR. SHENG: You know, it is an issue that we have not yet totally, you know, reconciled because domestic small economies and policy-makers do not totally understand the full implications of globalization. And the problem is that global fund managers and investors have not fully understood the implications of large funds investing in very, very small markets which are too small perhaps to take some of these huge floats. That's the only point I wanted to make. Thank you.

MR. TURNER: Thank you very much. Yes, please? And then Michael Pomerleano.

A PARTICIPANT: Well, I must confess I'm a banker.

MR. TURNER: Tell us about the other banks.

A PARTICIPANT: Yes, exactly. Well, there's some general comments. I think first of all we go back to the '80s and we look at the behavior of various kinds of repayments and we see that tradelines, for example, generally have been exempt from reschedulings and they've been paid on time. So there's a clear distinction made between tradelines and also bank-to-bank money market plans.

A PARTICIPANT: And if you look at the Asia crisis, Korea for example, the crisis occurred on a bank-to-bank money market plans. And those were the ones that were rescheduled. Similarly in Thailand, Malaysia, Indonesia where you saw the big drop was -- the big drop came in two phases. The first one was essentially money market lines were withdrawn. And secondly, as the volume of trade dropped then trade finance dropped. So that was almost like a natural consequence. And that part would probably pick up.

A PARTICIPANT: The other distinction I think is important is that Asia by and large were investment-grade countries. In Latin America, Chile is an investment-grade country, so is Uruguay, but that's a small country. But by and large all of the large Latin countries, according to rating agencies, are non-investment grade. And that made a very big difference in the type of relationships there were between bank to bank.

A PARTICIPANT: So in Asia I think the effect was much larger because banks were -- overall the volume of bank-to-bank lines was much larger. So that's I think the distinction. And as banks go back in they will start going back on the short end with more trade finance and gradually maybe expand into bank-to-bank lines. But the funding of the local banks is much less dependent now on foreign bank deposits. And that's a very I think -- the distinction to be made.

MR. TURNER: Thank you very much. That's very useful. Could I have Michael Pomerleano and then --

A PARTICIPANT: Almost running out of time.

MR. TURNER: Yeah.

MR. POMERLEANO: One thing that Bob Litan and I have an advantage is sort of insider advantage that we read the papers before. But one thing that -- I want to point out again to the same table that Bob pointed out to but from a different perspective, that when you look at granted  table three that you have stronger hands in terms of foreign holding. However, having 75 percent -- and this is an advocate of participation in foreign markets speaking -- having 80 percent or 70 percent of your free float held by foreigners is virtually obscene in my mind. There is something wrong with that. Imagine the same situation happening in the U.S.

MR. POMERLEANO: So I think that something -- probably early warning systems for investment mangers is when they see they are the overwhelming presence in a market that that's not a situation that is desirable. So I don't know what the gravity is, is it 0 percent or is it 10 percent, 15 percent? But something is wrong with Indonesia having 76 percent being held by foreigners of the free float. You know the innate vulnerabilities this creates.

MR. POMERLEANO: Point number two. Again, because we have a lot of investment managers in the audience is that -- and this is probably not gracious to offend your guests -- but investment managements have not shined in emerging markets. Even before the crisis if you look at another table with the performance the average performance is not that remarkable.

MR. POMERLEANO: In fact, the sharp adjusted ratio is very small even before the crisis. So if you take account of risk, people were not paying for it. You were better off putting Treasury bills. The sharp ratio will have been better. So that's my second comment. Thank you.

MR. TURNER: Thank you.

MR. KUSAKABE: Motoo Kusakabe with the World Bank. I'm just writing some questions and some statistical fact of the questions which raised by the chairman. Whether the sharp decrease in the banking capital is due to the decrease of the exposure of the foreign banks or that some result of the hedging activity of the domestic banking sector.

MR. KUSAKABE: I think there are two statistics. One is BIS (Bank for International Settlements) statistics that is some breakdown of the bank exposure by countries of the origin. And according to this statistics I think the Japanese banks are decreasing the total exposure but not so much -- and most of the European and  American banks in total is  almost maintaining the exposure better.

MR. KUSAKABE: So I don't think that the very big chapter outflows, which is emerged in the bonds or payment statistics which appears in the other capital flows -  this is a very big outflow of the -- maybe 10 percent of the GDP in various crisis country. It's not due to the sudden withdraw of the banking exposure by the creditor banks. But maybe this could be attributable to some of the hedging activities through banking sector. Both either by the local banks or the sum of the companies, local companies.

MR. KUSAKABE: And in this respect I also read some statistics that Japanese corporate sector's exposure to these crisis countries actually increasing during the past one year after the crisis. So I think the multi-lateral corporations or the manufacturing corporations who invested in these crisis countries actually contributed in the last one year on the increased exposure.

MR. KUSAKABE: So I think that in summary that the capital withdrawal from these countries are mainly I think  attributable to some hedging activities of the various local players. Thank you.

MR. TURNER: Thank you very much. We have about four minutes before I must hand over to Michael Barth. Two last questions.

A PARTICIPANT: The comment I want to make I've heard in this seminar as many of us -- the comments about foreign holdings, local holdings, about foreigners taking out the moneys and nothing mentioning about the locals.

A PARTICIPANT: Our experience, and not only the last year's but on all the years of inflation we have had, the first ones to react and take out the money are the local ones. They are very fast because they know exactly what's happening. The same thing happens when we had the Tequila Crisis that everybody was saying, "The foreigners are taking out the money."

A PARTICIPANT: We made a study at our commission about the holdings. Our holdings had changed. It's true, many foreigners sold their holdings of equities in Argentina, but they were all bought by other foreigners. So this question of the foreigners taking out the money and not mentioning the locals I think can induce a mistake.

MR. TURNER: Thank you. One last comment, then I'd ask for the floor.

A PARTICIPANT: I just want to point to what seems to be a massive confusion of data. If you take Michael Adler's paper, which I looked at, at table one where he has I think Institute of International Finance data on the sources and usable funds in emerging markets, those data seem to show a huge withdrawal of commercial banks from these markets. That's also what I as an investment manager noted.

A PARTICIPANT: Now, Richard Cooper, who was my old professor, and the gentleman just now seemed to clearly look at different data. So I think we should get a table together that shows us what the right data are, because there seems to be very different interpretations and that's very critical.

MR. TURNER: We'll resolve the data during lunch.

MR. TURNER: Michael Barth, you have 10 minutes before we have lunch to reply. And the advantage of a short time is you don't have to answer all the points that were raised.

MR. BARTH: Well, I'm going on the assumption that you're really eager to go to lunch, so I'll only deal with the easy questions. Given the constraints on time, I'll leave summarizing the paper by now. My extraordinarily capable discussants have done a better job than I could do. Thank you very much. And as I'm talking about words of thanks I don't want to forget thanking my co-author, Xin Zhang.

MR. BARTH: Let me pick up, if I may, some of the points that have come up in the last half-hour, add a few of my own, and see how far we get.

MR. BARTH: The issues raised by Andrew Sheng I think deserve an extraordinary amount of additional attention. It has struck me in reading various reviews, papers, that especially when there is writing on hedging activity and a lot of these aspects of the financial picture that are not in the headlines, the level of understanding really is not where it should be.

MR. BARTH: And I think not only has the final word not been spoken there, even the next-to-final word hasn't been spoken. I think it's a very interesting challenge to look at these things. And I'm sure that there will be more interest in getting to the bottom of that.

MR. BARTH: The question that was raised on what does emerging markets investing look like for a lot of the money that is going to become available in the next decade as retirement picks up and these fund flows can be extraordinarily large, I must say that I've never felt that to be a particularly difficult question to answer because when you are dealing with half the world's population and a good chunk of the world's GMP it is very difficult to imagine investing in a balanced and international way in the future without having some representation of emerging markets in there.

MR. BARTH: To answer the question somewhat differently, I would like to quote the president of a very prominent investment management firm who said that 10 years ago when he had client visits they would ask him about emerging markets. He said more recently -- and this is updated until the crisis at least -- they wouldn't ask about emerging markets. They would ask about, let us say, the cement sector and found that they could not get a complete picture if they did not talk about Cemex (phonetic) in Mexico or Sime (phonetic) Cement in Thailand simply because there was enough substance in emerging markets, substantive companies that were part of the picture. It's an indirect way of getting to the question. But I believe that if one assumes that the internationalization, globalization of the economy will continue, it's hard to imagine how emerging markets will not play a role in it. I'm not a neutral observer, as you might imagine.

MR. BARTH: I couldn't agree more with some of the comments made by Andrew and also by Bob about the tendency to mush together these various capital flows. And I think if we had one main objective in presenting this paper it was to unmush at least some of them. Here I'm reminded of the first meeting we had of the advisory board where people from academia, policy people, business people, all echoed the same message. There are simply areas where the facts are not well known and the assumptions run rampant.

MR. BARTH: Michael's point about the high percentage of free float, I wouldn't quite use the word "obscene," but it's very difficult to argue that 75 percent of a free float ought to be the target for any country. I do believe, though, that when you look at the behavior of the foreign investors that held that free float that these numbers say more about what isn't there that should be than what is there and should be diminished or restricted or kicked out.

MR. BARTH: And this gets me to my, by coincidence, you know, I'm the director of the Capital Markets Development Department -- gets me by coincidence to my favorite topic for the next two minutes, that of building stronger capital markets as part of a more balanced financial sector in developing countries.

MR. BARTH: Without going into too much detail, I wanted to mention one or two things about this. If one compares the activity that went on in Asia in building capital markets in the '80s and compare this to the initiatives that are being taken right now I have noticed an important difference. The way I like to put it is that in the '80s it was about the notes and today it is about the music. That is why we are talking today of a second generation of -- second generation capital markets development agenda.

MR. BARTH: In the mid-'80s if you would have gone to Thailand or Korea and said, " What are you doing in the area of capital markets development?" there would be a list of 25 things that ought to be done. And if 23 of them were done -- trading system, clearance and settlement and regulation, supervision, you know, self-regulatory organizations -- the more of these were ticked off in a way, the more one could assume that the capital market was developed.

MR. BARTH: Well, of course, these things do not grow up, as we all know in countries like the United States or the U.K. they do not grow up overnight. And what the small benefit, if you will, that can be taken from these awful developments is that there is truly a broader recognition of the interplay of factors, the interconnection between capital markets and banking and government capacity and currency markets.

MR. BARTH: It strikes me that the discussion about these things is at a different level of insight and maturity, not only as far as the domestic players are concerned but also as far as the international players are concerned.

MR. BARTH: Here I'm reminded of a story told us by a Brazilian investment banker when we held a seminar at the IMF World Bank meetings in Washington last September. And we had this wonderful seminar about all the things that needed to be done to develop as a matter of urgent priority the debt markets and emerging markets.

MR. BARTH: And he told us the story of the Brazilian football team that went during the summer to visit the United Kingdom to practice there. And they were struck by the incredibly beautiful state of the fields, because they were used to something a lot more rough- and-tumble.

MR. BARTH: And the Brazilian coach asked his counterpart, "Could you please tell me what the secret is to having such a beautiful grassy field?" And the answer was that, you know, you had to take this very special seed and plant it just at the right time and then you had to make sure that the temperature was right and then you had to make sure it had so much sunlight and not too much. He said, "And then all you do is you water it twice a day for 100 years."

MR. BARTH:  I want to close with two very quick points that really hark back to this morning's discussion. One on disclosure. It is extremely difficult to argue when you look at the situation in Asia and its aftermath that there is not enormous scope for additional transparency and disclosure.

MR. BARTH: By the same token, looking at it in detail I'm always struck at how much information was available before the crisis and how low the propensity was of a lot of the players to take heed of this information.

MR. BARTH: I think for me the pinnacle was when in the summer of 1997 junk paper was being offered in Wall Street and the biggest investors were Korean commercial banks and Russian high net worth individuals. Now, there's an interesting thing to look at when you devise monitoring systems.

MR. BARTH: A final point, which harks back to Professor Cooper's comment of this morning. What is interesting is that among some of the most sophisticated investors that had global portfolios to run in the emerging markets you did see a discernible trend away from Asia towards Latin America as early as 1996.

MR. BARTH: And what is most interesting to me about that is that I do not believe that that was with any kind of anticipation of this kind of turmoil. It was rather that there was not sufficient value to be had based on the information that is available.

MR. BARTH: So there are some fund managers who can do it right, although I certainly do agree that when it comes to fund managers or international institutions like the World Bank there certainly is enough blame to go around for everybody. Thank you.

MR. TURNER: Thank you very much indeed. You provided a stimulating discussion.

MR. TURNER: We're due to break for lunch now. And we can reconvene at 1:30.

MR. LITAN: We will reconvene at 1:30. Lunch is downstairs where we had breakfast.

(Applause.)

(End side B, tape P153.)

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