Better late than never, I suppose. Finally the powers that be acknowledge the role of leverage in our financial crisis and vow to do better next time.
From the Independent:
The governments of the world’s largest economies have moved decisively to prevent any recurrence of the collapse of the global financial system.
The Financial Stability Forum, an umbrella body that comprises individual governments and central banks as well as international bodies such as the IMF, has proposed that, in future, banks will be prevented from borrowing – or creating “leverage” – on the scale seen in recent years, and will have to set aside more of their own resources, or capital, so that they can withstand any future turbulence. Mario Draghi, chairman of the forum and governor of the Bank of Italy, said it had taken an unprecedented financial crisis to drive home to financial institutions that they have to have “less debt, more capital”. Firms have resisted because they refused to believe “profits are going to be lower in the future” in the financial sector.
Mr Draghi’s views were endorsed by the chairman of the Financial Services Authority, Adair Turner. He told a meeting of the International Institute of Finance, a group representing the world’s private banks, that he foresees a “large-scale disappearance” of independent investment banks and of the type of highly leveraged “shadow” vehicles used by banks to keep assets and transactions away from public scrutiny.
The managing director of the IMF, Dominique Strauss-Kahn warned that more countries could follow Iceland into virtual national bankruptcy. He identified Estonia, Latvia and Lithuania as being especially at risk.
He said that some banks in eastern Europe had become increasingly exposed to struggling property markets, having raised funds on international money markets, as did the ill-fated Icelandic banks. These banks may be forced to reduce credit and the risk of such a scenario has risen, for instance, in the Baltic states, where house prices and credit growth have fallen, Mr Strauss-Kahn said. Unlike Iceland, Estonia, Latvia and Lithuania are full members of the European Union, and may turn to the EU for help. Argentina, Ukraine and Kazakhstan are also increasingly mentioned as especially vulnerable.
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Leverage is fine. But no person can legitimately claim that leverage of 125 to 1, employed by Freddie on certain positions, is rational.
In terms of bankrupt sovereigns, a few weeks ago I mentioned in this forum that Iceland and the Baltics were prime candidates. Looks like the IMF publicly agrees.
At the time, I also stated that England may well follow those four nations within the next two years.
Still very unlikely.
But we wouldn’t even be TALKING about such a shocking event if hyperleveraging had not been so fashionable.
Matt Dubuque
Had to laugh at this one. They’re looking at the shards of their balloon and vowing not to allow it to overinflate again. Humpty Dumpty and all that.
Every six or seven generations, or so, we get to confront economic-political-financial reality.
Leverage.
We tend to think of it as borrowing money.
But it’s not.
It’s creating NEW money as debt, and then lending that money.
If the money supply in existence at any point in time is the correct amount to provide for both economic growth and prevent inflation, then why do we need to use leveraging?
Why do we need to create MORE so-called money, really issuing more debt?
Debt-moneyed leveraging, issued in the name of the US taxpayer, the only source for US Dollars, must be repaid three times over.
Why can’t banks lend all the money they can attract as deposits and investments, and earn their spread that way?
Why do banks need to create new money, as debts?
Bankers should manage the money system AFTER the money has been created, operating with a 100 percent reserve system.
To say “leveraging” is the problem is to say “debt-money” is the problem.
Looking for the forest through the trees here.
We’re all doomed. Debt clock runs out of numbers.
http://www.msnbc.msn.com/id/27150961/
How about putting demand deposits under a 100% reserve scheme. Banks can still leverage on their time deposits, but limited so. And you could do away with that pesky deposit insurance scheme as well :-)
Interesting article on credit crisis in UK. Mortgage fallen by 95% last month. Which is shocking.
http://www.guardian.co.uk/business/2008/oct/13/economics-creditcrunch
Juan F.
Recall that the de facto zero reserve ratio through sweeps grew out of a somewhat earlier fed attempts to recap the banking system after the S&L debacle, that money market funds had grown very substantially, that the GSEs were being expanded and that all of above interacted with international flows until, I believe it was in 2001, Larry Lindsey called the whole process "nuclear credit fission".
But of course there had to be limits, which I happen to believe began being imposed by the (global) real economy so early as the mid-1990s, limits which the frenzy seemed to overcome even as uncontrollability rose to its now evident position.
“..banks … will have to set aside more of their own resources, or capital…” Set aside where? If there’s one thing I think I’m learning here, it is this: For any pile of money or financial instruments, someone will try to make more money or financial instruments out of it. Set aside capital won’t be stuffed in matresses, so where is it put so it cannot be abused?
"Bankers should manage the money system AFTER the money has been created, operating with a 100 percent reserve system."
interesting…that's how gramman, the microfinance bank in Bangladesh does it.
checkit — http://www.theworld.org/?q=node/21433
now check out their balance sheet:
http://www.grameen-info.org/
(under data & reports)
elegantly simple and simply elegant
so they basically want to undo what the SEC allowed the top 5 ibanks to do a few years ago? great.
http://www.nytimes.com/2008/10/03/business/03sec.html
“On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. “
Being a latvian I have to make a comment when my country gets dumped on (again). The latvian govt would be stupid to guarantee any of this debt (good, bad or otherwise), because most of it was taken by foreigners or non-resident latvians. I suspect Lithuania and Estonia have similar issues, Turkey as well in some areas. We had flats going for 90-200K euros, no local has that kind of money. It was coming from Sweden, England and Russia mostly. Probably the bigger worry would be for someone like Hansabank (or any number of swedish banks), who were lending into this wildly appreciating market.
Now the govt will pay for the mistakes of foreign banks, as well as some local idiots, who were given free reign because they understood “western” ways. Ugh. Hopefully not many locals were sucked into this to lose savings. It’s taken a long time to get this populus interested in common banking (16 years since independence) because it was so untrusted in soviet times. [Previously house/land prices were low because all transactions were cash/trade settled immediately]. Now they’re getting burned in the fast, wild and free times too.
What can they do now? I think they’re screwed either way. They either dish out money they don’t have (and have to raise taxes and drive away foreign investment), or have to step in and severely regulate foreign banks and/or oversee land and property acquisitions very strictly, which again hurts people who are trying to do it the right way. When I see stuff like this, I have to fight my populist feelings to say ‘stop all foreclosures and screw the banks’.
Pardon my French, but these retards @ The Financial Stability Forum are about 20 years too late to the derivative party. OK, I wont swear!
On trying to stock pick at the bottom and leveraging, there was a guest presenter on CNBC Europe (sorry, can’t remember his name) who said that over the next 12-18 months, cashflow and a robust balance sheet is king. I guess this is the great DELEVERAGING. He said he’d be dusting off a few text books from the early ’80s.
@Mara: Being Danish myself I fully understand the desire for f.ex. Swedbank to be burned seriously on it’s exposure to Eastern Europe ;-)
It is sad that your government wants to waste your tax money on a bunch of foreign speculators. Unfortunately this is the global trend!
Mara,
What you describe is not so dissimilar to what took place in a number of South American nations as dictators and their cronnies happily borrowed from intl banks, wasted some of it, offshored the rest and left populations to pay. But then that was only a few decades ago and came to involve the favors of IMF austerity programs.