Revolutionizing Awareness

helping humanity, make choices, more so through awareness, than ignorance

Financial Macrophilia and Shrinking the Banks

Posted by Admin on December 7, 2010

The big bank problem won’t go away anytime soon. There is a simple reason: financial institutions as huge and diversified as our modern universal banks are a persistently lurking threat to financial stability because if any one of them goes down we will have a major systemic problem and, as sure as night follows day, the need for another bailout. And, given their complexity, the risk of such catastrophic failure is likely to be greater than with smaller, less permutatively connected and more easily liquidated financial institutions.

America ducked this problem with the Dodd-Frank Act, though not before a valiant effort by some Senators to address the issue. Europe took some strong action to address it when the European Commission insisted that ING be broken apart and the British government insisted on some downsizing for Lloyds Bank. This week the issue returned.

First, it was reported that British banks threatened to move their headquarters to other countries if faced with the demand that they be broken into smaller units. Then one of the chief issuers of this threat lost his job. Today the British Independent Commission on Banking suggested in a lengthy issues paper that the government should use its ownership stake (read bailout investment) in the Royal Bank of Scotland, Lloyds and other banks to “restructure” them (read break them up). The chairman of the Commission, Sir John Vickers, is quoted in the Financial Times to have said of threats by bankers to pack up toys and leave:

[O]n the idea put about that banking operations would leave the UK if resulting reforms were uncongenial to banks, I sometimes wonder if those who say this realise how sharp a conflict they are suggesting between the interests of the banks and the public interest.

Modular structures, as championed by one of the leading thinkers on the subject, Andy Haldane of the Bank of England (see his “Regulation or prohibition: the $100 billion question”, are the way to go in reducing our global financial system to greater stability. Now the Commission is taking this idea very seriously.

What will we do in the United States? Is macrophilia too overwhelming an obsession or will we have the courage to look at the situation objectively as well, before the collapse of one of the behemoths leads to another round of claims that “we could not have seen it coming”?

The Financial Crisis Inquiry Commission still has time to deal with the issue in its report, expected in November. It has so far shown itself to be a little more willing to address the issue directly than the Congress or Treasury Department so we might still see some November fireworks.

COMMENTS SECTION

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Isn’t it interesting this has been the biggest factor to increasing our recent deficit, but not a word from the Tea Party on the Bailouts, other than to say they are against the TARP, which as horrid as it was, was probably the only option to save us from the abyss???

I mean, for example, have we heard the old hag running for Senator in Nevada say a single word about capital reserve requirements for banks?? And Christine O’Donnell??? Are you kidding me??? If you talked to her about capital reserve requirements O’Donnell would probably tell you she thought that banks should have the freedom to put big letters or small letters on their logo.

We’ll never know what would have happened if Paulson hadn’t pushed for the $700billion, and as angry as it still makes me to this day, I don’t think we would’ve wanted to risk that coin flip.

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Lawrence,
Good of you to highlight what the UK is investigating, although, I’m afraid as with Senator Dodds initial radical overhaul plans, the UK Commissions findings will amount to little – the City is indeed that strong in the governing party.

That said, an a most salient point for us to bare in mind is this little known fact: The UK’s casino banks/ too-big-to-fail exist solely due to the fact of the UK and USA bank bailouts, had these not occurred, all would have become insolvent and failed – this applies to HSBC, Barclays and RBS, HSBC being a special case in that it is listed in both Hong Kong and London.

Now, at the moment, all casino banks/TBTFs are the beneficiaries of near zero interest rates in the UK, USA and Euro Zone, all engage in borrowing funds from their respective central banks and purchasing sovereign debt issued by their national governments, thus earning a risk free 2-3%.

Now, just suppose Barclays Bank was to de-list and move to the Cayman Isles to avoid any form of regulation and enjoy low taxation of earnings/profits. For starters, its balance sheet could not rely on a 2-3% risk free return, the implied notion that the government would step in if it went pear shaped would be gone, hence, its use of wholesale market funds would increase, costs of CDSs for its counterparties would increase, and basically, in a September 2008 style crisis the bank would implode.

The reality is this, would the UK now actually welcome Citigroup to list on the LSE, and vice-versa, which nation would like to gamble on having to bailout a TBTF for the pleasure of earning a few pennies a year in corporate.

Shout as they may, without the implied backdrop of the state behind them, most TBTFs could not conduct business as they have, there shareholders would not stand for it – I mean, imagine bondholders and shareholders losing all their capital, be it in shares, corporate bonds or business deposits.

As with the IIF paper in May suggesting Basel III was a calamity and its imposition lead to a global depression, its really all posturing and hyperbole.

My own view is simple, call their bluff and see what the market does next, given the costs all tax payers have been forced to incur, the resultant loss of earnings due to a recession caused by the TBTFs, the loss of jobs and all other hidden subsidies they receive, it would be cheaper in the long run for sovereign states to actually ask their TBTF’s to move elsewhere, the cost savings alone would pay for those who lost their jobs to enjoy lavish lifestyles if distributed solely between them.

Utter nonsense, and crass nonsense at that.

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Hi Chris,

I very much do get your drift and you make an excellent point about the risk premium Barclays and others would have to pay. It is all mostly bluster and bloviating, with Josef Ackermann losing all credibility this week in a related context by now complaining about a “race to the top”! It is as if these people are so intoxicated by power and ego that they can’t even think straight. Yet we continue to drift, like deer in the headlights, toward identified disaster while doing nothing about it.

Thanks for your thoughtful post. I now appreciate entirely why the threat to move is such baloney.

Lawrence

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Troubled Asset Relief Program – TARP Definition

What Does Troubled Asset Relief Program – TARP Mean?
A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given $250 billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as $100 billion, and then as the final $350 billion is given, Congress has the right to not approve the additional amounts.

Investopedia explains Troubled Asset Relief Program – TARP
Global credit markets came to a near stand still in September 2008, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses that could be felt by the institutions who currently own them.

In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.

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