The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘Lagarde

Too Big to Fail and How Little the Concept is Misunderstood

Sheila Blair Chair of the American FDIC (retail deposit guarantees) speaks clearly yet with words that are hardly reflective of US policy.

The first task is to scrap the “too big to fail” doctrine. To do this, we need to fix weaknesses in our regulatory system, and achieve global reform for effective resolution processes when large firms fail. With these steps, we can foster real market discipline and make international cooperation more successful.

Co-incidentally I watched the BBC World Debate earlier with an interesting group of contrasts (no video online yet)

BBC World Debate – Global Financial Crisis: Can we Afford the Future? (Opening plenary session of Program of Seminars) Speakers: Dominique Strauss-Kahn, Managing Director, IMF; Niall Ferguson, Professor, Harvard Business School; Christine Lagarde, Minister of Economic Affairs, Industry and Employment, France; Jim O’Neill, Chief Economist, Commodities and Strategy Research, Goldman Sachs; and Güler Sabancı, Chairperson,Sabancı Holding, Turkey

The study in contrast in the hour long debate was at its crispest when the facilitator asked Jim O’Neill no less than three or more times if Goldman was chastened by the whole government support, continued profits, and concern over billion dollar bonus thing, and he awkwardly and steadfastly bypassed the question. to which Niall leaped in to help out with the quote of the debate

Niall Ferguson: “you have got to be kidding … off course they are not chastened … They are absolutley gleeful! Their competitors have been knocked out [by government intervention and forced takeovers]”

It was a classic moment. The earlier context had been what lessons have been learned and does the answer lie in regulation. Ferguson had argued that regulation had created the problem through the creation of the Freddies which facilitated the mortgage crisis while operating as quasi government agencies with implicit 100% government guarantees that have since been exercised. Lets not forget that the Freddies accounted for $5.3 trillion in mortgages. That number is almost 50% of the US economy. This is consequential stuff, so to say more regulation is better is not appropriate. Better regulation at best might be acceptable, but not more.

Meantime back to the TBTF’s as Niall has named them. Just how strong are they after all the dust settles on the forced mergers to date. Here is a selection of the largest in US and UK. When looking at these numbers note that banks focus on capital base and on profits in public announcements. I choose to deliberately go back to basics and the debt to equity view – why? If it were not for the shortcomings in debt to equity, government intervention would not have been required by definition. Government assistance to banks is because they are unable to manage their debts – finance 101.

US $ billions

banks capital 2009

Relevance to Bankwatch:

Clearly I am innately pro-bank, otherwise I would not be bothering with this blog. What is really burning me more than anything though is the obvious refusal by the large banks, Canadian included, to openly recognise the role they play in the world economy, and the fundamental risk that is implicit in the pseudo state guarantee that has been in existence over the last 50 years, and that is now explicit. If I were a bank Chairman, what would keep me awake at night is the concern that the pro-state intervention meme that is exemplified in the benignly charming Christine Lagarde, will tomorrow reduce me to being a $50K per annum bureaucrat.

Going back to my earlier ramblings on the future of banking lying in two camps:

  1. financial utilities
  2. innovators

… I remain even more convinced of this evolution. At the moment, the majority or all of TBTF’s are or will be in the financial utility category based on their fiddle while Rome is burning approach.


Banks as exemplified in the impotent Jim O’Neill at the BBC debate are not displaying the desire and action that suggests they apprehend the severity of the issue. Notwithstanding even Niall indicating that bonuses are symptomatic and not causal, they do reflect strategy. What about dividends? What of a Bank that eliminates dividends for 5 years to boost capital by definition, by 50%? Consider the stock impact on the appreciation of risk that would reflect, especially when we consider the coming credit card problem that few speak of.

For those that disagree with this, consider the size of the liabilities above, and the relative size of the money set aside in the back pocket (equity). Consider Barclays – they have $20 bn in outstanding credit cards. If 12% is bad, that is $2.4 Bn. This equates to 5% of the capital base. Not much in percentage terms, but that is just credit cards. There is the commercial lending portfolio, the investment banking portfolio, all of which are driven off the same retail consumer desire to buy.

It is just not clear at all from Bank announcements in the investor relations sections that they have altered their behaviour one iota to reflect potential economic hiccups going forward, which would affect countries and not just themselves.

Written by Colin Henderson

October 4, 2009 at 16:55

A future that has hope for banking innovation only in North America?

In something that is a bit ironic, the Democratic US government is looking the most conservative in management of banks amongst the G-7 scheduled next week in Italy.  Geithner is also looking the most thoughtful of the finance ministers, alongside Lagarde in France.

This is seriously not a time for grandstanding as Brown and Darling continue to do too often.  Time to get it right with a sustainable approach that will not relegate banks to becoming permanent financial utilities which I fear is happening when you read this dire summary of the current state.

Could we have a system in the future that has the private (and presumably innovative) banks existing only in North America?

Question of control over banks awaits Geithner at upcoming G-7 meeting |

Ireland injected €7 billion, or $9 billion, into its two largest banks Wednesday. In return, it gained the right to appoint four directors, limit executive pay, set lending parameters, require the suspension of home foreclosures, as well as an option to buy a 25 percent equity stake at fire sale prices some time in the future. The government already owns 75 percent of Anglo Irish bank.

In Britain, four of the most troubled financial institutions — two of them were officially nationalized — are already under the de facto control of a newly formed government holding company.

Officials are pushing Lloyds Bank and the Royal Bank of Scotland, among others, to pare bonuses and increase lending to British homeowners and businesses.

Both countries’ actions conform to a growing sense in Europe that the best way to revive banks is to put them on the tightest possible leash. But in an interview in advance of the Friday and Saturday G-7 meetings, a senior Treasury official reiterated that the Obama administration is committed to the proposition that banks must remain in private hands.

Written by Colin Henderson

February 13, 2009 at 16:55

France fears backsliding on regulation

Ms Legarde was a bright star and clear thinker at the recent World Economic Forum.  There is not yet broad agreement on the methodology and priorities amongs the countries as to resolve the global crisis.

In another interview she offers some indication of how globalisation actually works, and the comparison of UK and US approaches is stark.  There is a long history between UK and France, and now is not the time to let that get in the way.

Transcript – Christine Lagarde – Finance Minister – France |

BH: Are they retreating in Washington and London?

CL: I cannot put my finger on it. It is latent, it is everywhere. And understandably so. Resuming lending is a priority and stimulating growth is an everyday objective because we want to maintain stable employment and stop the fall. But it is a question of a methodical approach. If we don’t start at the root cause of what started this crisis, then we are curing the symptoms and not necessarily the illness itself.

BH: Gordon Brown wants make the global economy the centrepiece of G20 rather than the regulatory agenda?

CL: I’m not denying that he has a very fair point about the co-ordination of economic policies. Alistair [Darling, UK chancellor of the exchequer] made a point in today’s Handelsblatt, and he’s right. I totally agree with him. We need much more co-ordination. Otherwise we’ll get back to the post-Asian crisis, where by diluting the message and retreating from the causes, we’ll be curing the symptoms.

BH: Has European co-ordination fallen apart after the initial bank rescue plan in October?

CL: I hope we can continue to have a line drawn between distressed banks and sound banks and that in any event we are mindful of distorting effects that could result from one approach rather than another. In that vein, the bad bank principle, to the extent that it pretty much protects the shareholders by holding bad assets separately to the normal operations of the bank, is a bit of a query.

In the main, we worked together on the same doctrine, prompted by the Lehman collapse and the Irish approach to protecting deposits in Ireland.

There is not always a lot of consultation.

In a separate interview:

She also chided Alistair Darling, the UK chancellor, who appealed for greater co-ordination in a German interview on Thursday. Ms Lagarde pointed out that whereas Tim Geithner, the US Treasury secretary, called his French counterpart before unveiling his financial rescue package this week, Mr Darling did not consult before going ahead with his latest bank bail-out package last month.

Written by Colin Henderson

February 13, 2009 at 12:58

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