How Shari'a-compliant finance is preparing the next wave of Enrons.
[…] Major banks from Citigroup, HSBC, Chase, Bank of America and Lloyds TSB -- probably unaware of the etymology of Islamic finance -- established subsidiaries offering Shari'a-compliant products. Mutual funds at Principal Financial Group, UBS, Amana Funds and SEI Investments, among others, followed suit. Especially late last year as the devastating toll of sub-prime mortgage lending mounted, clients were assured that Islamic banking -- in many respects a dangerous financial fad -- was much safer than other banks and investment houses.
[…] “Islamic banking is in the toxic derivatives genre,” says Brighton. Each counter-party agreement within its complex “boxes” of interwoven counter-party risks, is a contract for “payment” and “delivery/receipt of funds.” Issuers create derivatives when they “peel off and resell pieces” from individual securities containing multiple counter-party contracts. One default by a party to any of the interwoven contracts in a “box” can cause its whole structure to collapse.
Moreover, Islamic finance is doubly toxic. Many banking corporations have created Islamic subsidiaries, says Brighton -- segregated oil wealth managed by “outside money managers” and Islamic radicals who don't circulate money globally, but keep it “within the Islamic community, as a charity- and jihad-funding mechanism.” They're just another economic time bomb that financiers have blindly bought.