The Bankwatch

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Posts Tagged ‘“bank crisis” regulation

Sep 18th 2008 | Russian Missile Crisis – banking crisis version

I heard the headline earlier today but only after listening to this video now do I appreciate the depth of this.  We know the Lehman Brothers collapse was serious but only now do we know to what extent.  This was the economic version of the Russian missile crisis.

It also explains for the first time, the awkward and otherwise inexplicable overnight shift in TARP approach by Paulson.

Listen to the comments at 2 minutes 20 seconds and from then on.  Kanjorski is the Chair of the Capital Markets Committee.  The key comments are:

  • “it was about September 15th [note his days and dates don’t match] ….  on Thursday at about 11 o’clock in the morning the federal reserve noticed a tremendous draw down of money market accounts in the United States to the tune of 550 billion dollars being drawn out in a matter of an hour or two.  The Treasury opened up its window to help. They pumped  105 billion into the system and realised they could not stem the tide  …  they realised there was an electronic run on the banks and we closed it down” .
  • They decided to close down the operation and announced a guarantee of $250,000 per account so there would not be further panic out there.  Thats what actually happened.  If they had not done that ………………. the estimate was that by 2 o;clock that afternoon 5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States and within 24 hours the world economy would have collapsed.
  • Now we talked about what would have happened if that happened… the end of the economic and political system as we know it.
  • it would have taken 3  or 4 trillion to buy the bad bank assets, and UK came up with the idea of injection capital ….  we only had 750 billion … so we did that
  • it was much cheaper to put money in banks than buy bad assets

Written by Colin Henderson

February 12, 2009 at 00:00

Bank nationalisation by a thousand cuts is distracting us from the root problem

In the series “The Great Unwinding” last week two types of banks, Financial Utilities and Risk Takers were highlighted to appear.  This direction received strong support this weekend with Alistair Darlings order to perform a complete review of bank practices.

The review is the not so thin edge of a large wedge when the ramifications are considered.

The chancellor said on Sunday that the review would look at risk management by boards including how pay affects risk taking; it would also look at the way boards operate and the role of institutional investors.

Mr Osborne (Shadow Chancellor)  added: “The party is over for the banks. You can’t go on paying yourselves 20 times what a heart surgeon earns.”

Last October I wrote that RBS and Lloyds/ HBOS were effectively nationalised by the actions taken by the Government and since copied in other jurisdictions, mainly US.  You will recall that the original intent promoted by TARP in US was to carve off the toxic loans into a “bad loan bank” which would have had the role of managing those loans.  That approach would have allowed banks to continue to operate as smaller banks, with adequate capital.  Additional controls on operations of banks to ensure stabiity of the system  could have been implemented through appropriate regulation.  Credibiilty and confidence in the banking system would have been restored quicker because the doubts about asset quality would be removed and presumably the remaining assets (bank loans) would have been operating normally and since there would have been less assets (investment) the capital base would have been relatively stronger.

However the British Government went straight to their socialist roots and went down the ownership route taking significant stakes.  This is akin to taking a tiger by the tail – once you start you cannot stop as they are now finding.  The rapidity which the US followed suit surprised me as they took stakes in the banks too.  And just last week Obama found himself regulating bank executive pay limiting it to $500K.  Neither government should be surprised by this.  Of course their is popular outrage at bank executive pay and bonuses, and of course that outrage is directed at … the owners!  The owners are the government who are politicians first, so now we have the politicians running around managing messages such as bankers bonuses. Once government starts with a review of internal governance and practices it is impossible to retreat from that slippery slope.  Each item in the review will drive out sets of others that once viewed in the public eye will bring out additional political issues that will require additional political influence, and the snowball will grow and grow.

I am not agreeing or disagreeing with bankers bonuses.  I am suggesting that that debate is irrelevant and distracting when it comes to solving the crisis of confidence in the banking system that is created by assets that are not accurately valued – in fact the doubts are such that a value of zero is the only rational value and this is displayed in the stock prices of those banks.

In fact nationalisation may be an appropriate approach even though I would not pick it.  However the half in/ half out situation that the banks are in now is doing irreparable harm to those banks and to the economy both through failure to address the central issue of asset valuation, and through ensuring politically oriented non-management by those half in banks.  Those same banks are destined to the category of Financial Utilities.

One a separate note,  it probably is too late to create the bad bank now – and as Niall Ferguson recently wrote, that bank already exists.  [emphasis mine]

Now the talk is of a new “bad bank” to buy the toxic assets that the Troubled Asset Relief Program couldn’t cure. No one seems to have noticed that there already is a “bad bank.” It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.

Written by Colin Henderson

February 8, 2009 at 13:20

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