Richard North has done the work so why reinvent the wheel ?
I’m glad that Cameron, gets some credeit as just about the only
politician to have spotted this
I follow this resumé with Ambrose Evans-Pritchard’s overview of the
future of the euro [which you will have seen yesterday Will Hutton
of The Guardian - where else? - wants Britain to join] in which he
includes the startling “we may find that it destroys the European
Union” - nb NOT the euro - the EU itself!
And then there is the bizarre outcome of all the money the European
Bank has lent to individual banks! When they get it they don’t know
what to do with it and so they put it on deposit at a loss with - er
- the European Bank! Mad!
===========
EUREFERENDUM 2.10.08
The heart of the crisis
A number of British newspapers have picked up on the US "mark to
market" story. Bizarrely, though, none cross-link the story with
Cameron's speech on Tuesday.
One of the very small crowd is The Daily Telegraph which headlines,
"Financial crisis: SEC cheers finance companies with mark-to-market
ruling".
Writer Jonathan Sibun then tells us that the Securities and Exchange
Commission brought some much needed cheer to the US financial sector
after issuing accounting guidelines that could help curb the billions
of dollars of writedowns reported by the country's leading banks.
The US regulator, according to Siburn, has told banks that despite
fair-value accounting regulations they did not have to use only fire-
sale prices to value bad assets but could also use their judgement.
What is really interesting though is the response of the New York
Stock Exchange, which conjured up a "late rally" leaving the Dow
Jones index up 485.2 to 10850.7 and the S&P 500 up 58.3 to 1164.7,
its biggest one-day rise in six years.
As background, Siburn tell us that: "Fair-value accounting requires
companies to value their assets at current market prices." He adds
that, "Banks have been forced to push through billions of dollars of
writedowns in recent months after valuing assets at the same prices
raised by ailing companies undergoing last-ditch sale." Thus, we are
told that the SEC move effectively allows banks to switch from mark-
to-market accounting to hold-to-maturity accounting.
Actually, one of the value of forums and engaging on blog comment
section is that these lazy assertions are challenged, prompting more
research.
The problem, per se, is neither "mark to market" (or "marking to
market" as Cameron inexpertly put it). Nor is it that other jargon
issue: "fair value accounting". As Wikipedia helpfully tells us, both
accounting devices developed among traders in the 19th Century. There
is nothing new about either.
Where the problem lies is in the extraordinarily laborious system of
risk assessment, combined with a requirement to structure different
types of asset, giving rise to entirely artificial under-valuation,
which is the current cause of the bank liquidity problems.
It was this system which emerged from the Basel II process and which
was adopted by the United States, the EU and other financial
administrations.
Interestingly, the inherent problems with the system were recognised
months before the Basel II agreement was signed, when in January
2004, none other than the Financial Services Authority noted:
"There's a potential that the capital requirements for some banks and
investment firms could rise during a slowdown in economic activity,
at the same time that asset values are reduced and mark-to-market
losses are incurred."
This is the precise problem that the US authorities have addressed
and to which Cameron referred on Tuesday.
It now emerges that EU financial services commissioner Charlie
McCreevy was fully aware of the problem in March 2008 when, in front
of the Chartered Insurance Institute in London, he questioned the
"mark to market" rule, asking whether it was: "always the correct
rule when it comes to illiquid assets - or to liabilities for that
matter." He continued:
Does it make sense for example that the worse the credit or liquidity
risk attached to a company's bond liabilities gets, the greater the
boost to that company's balance sheet net assets becomes, as the
"mark to market" value of those bond liability falls? Are the "mark
to market" rules having unintended consequences especially in these
times of turmoil?
It was then that he announced that he was calling for an "analysis"
of the issue in order to "draw the lessons from the use of 'mark to
market' in the light of current market conditions."
Yet, nothing of this percolates the Telegraph story, even though the
very same rules that applied to the US until yesterday still apply to
the UK and all other EU member states. All we get is the bland
statement that, "Nicholas Sarkozy, the French President, is expected
to call for a relaxation of fair-value accounting regulations in
Europe…".
We do not even get that much from The Guardian, which is another
paper to cover the story. It offers the headline, "SEC gives banks
more leeway on mark-to-market," but has nothing on the EU dimension
and, like the Telegraph fails to make the Cameron link.
The Times, on the other hand, does frame its story on UK experience,
oddly not referring to Cameron either. It tells us that:
The heavy losses that many banks have taken on these assets have
seriously weakened their balance sheets, forcing them either to raise
more capital or rein in new lending. A number of leading banks have
pressed for a suspension of the mark-to-market rules. But others,
notably Goldman Sachs, have argued strongly against.
The critics say that such a move would be very dangerous and point to
the experience of the US savings and loan crisis, in which the lack
of such accounting rules meant that the insolvency of scores of
lenders went unrecognised for a prolonged period with very costly
consequences.
But if it would be dangerous to scrap fair-value accounting
permanently, that does not mean it should be ruled out as a temporary
emergency measure. If the American bank bailout plan fails, it should
be seriously considered.
Then the great Anatole Kaletsky has a go. He informs us:
In recent years, however, accountants and regulators have replaced
such probabilistic judgements of economic fundamentals with a
principle called "mark to market". Under this new approach, promoted
passionately by conservative financiers and academics who believe
that "the market is always right", banks base their profits not on
how much income they expect to receive in the future but on how much
money they could raise immediately if they sold all their loans and
mortgages in the market at the best price they could fetch.
This reform didn't make much difference when markets were working
smoothly and financial prices reflected long-term asset values. But
in the wildly volatile and panicky conditions of the past 12 months,
mark-to-market accounting has contributed hugely to the crisis.
That last sentence ties in exactly with the warning given by the FSA
in 2004 and so the conditions have come to pass where the banking
system is frozen into immobility by a system devised for the good
times, and which is wholly inappropriate for the current crisis.
What is so bizarre about all this is that the MSM around the world is
full stories about the freezing of London inter-bank lending – the so-
called Libor system.
There can be no doubt of the severity of this aspect of the crisis.
The Sidney Morning Herald - to name but one newspaper – is noting
that the market is seizing up but, like so many, is missing the real
cause and putting the reluctance to lend down to "trust" – something
completely dismissed by Prof. Peter Spencer. Thus, says this paper:
All the banks are hoarding their cash, bolstering their balance
sheets so they can settle their own obligations. They won't let the
cash out of their sight. The total disintegration of trust and
confidence is feeding on itself and the disaster scenario is,
according to some observers "the mother of all bank runs" should
foreign banks panic further and pull their money out of the US system.
Not one media organ has put the whole story together, linking this
seizure with Basel II and the EU's implementing directives, the heart
of this current phase of the crisis and the very mechanism that
prevents it being solved.
=-=-=-=-=-=-=-=-=-=-=-=-=-
Posted by Richard North
=====================
TELEGRAPH 2.10.08
So much for tirades against American greed
Ambrose Evans-Pritchard says it is ironic that European banks have
turned out to be deeper in debt than their US counterparts.
It took a weekend to shatter the complacency of German finance
minister Peer Steinbrück. Last Thursday he told us that the financial
crisis was an "American problem", the fruit of Anglo-Saxon greed and
inept regulation that would cost the United States its "superpower
status". Pleas from US Treasury Secretary Hank Paulson for a joint US-
European rescue plan to halt the downward spiral were rebuffed as
unnecessary.
By Monday, Mr Steinbrück was having to orchestrate Germany's biggest
bank bail-out, putting together a €35 billion loan package to save
Hypo Real Estate. By then Europe was "staring into the abyss," he
admitted. Belgium faced worse. It had to nationalise Fortis (with
Dutch help), a 300-year-old bastion of Flemish finance, followed a
day later by a bail-out for Dexia (with French help).
Within hours they were all trumped by Dublin. The Irish government
issued a blanket guarantee of the deposits and debts of its six
largest lenders in the most radical bank bail-out since the
Scandinavian rescues in the early 1990s. Then France upped the ante
with a €300 billion pan-European lifeboat for the banks. The drama
has exposed Europe's dark secret for all to see. EU banks took on
even more debt leverage than their US counterparts, despite the
tirades against ''le capitalisme sauvage'' of the Anglo-Saxons.
We now know that it was French finance minister Christine Lagarde who
begged Mr Paulson to save the US insurer AIG last week. AIG had
written $300 billion in credit protection for European banks,
admitting that it was for "regulatory capital relief rather than risk
mitigation". In other words, it was underpinning a disguised
extension of credit leverage. Its collapse would have set off a
lending crunch across Europe as banking capital sank below water level.
It turns out that European regulators have allowed even greater use
of "off-books" chicanery than the Americans. Mr Paulson may have
saved Europe.
Most eyes are still on Washington, but the core danger is shifting
across the Atlantic. Germany and Italy have been contracting since
the spring, with France close behind. They are sliding into a deeper
downturn than the US.
The interest spreads on Italian 10-year bonds have jumped to 92
points above German Bunds, a post-EMU high. These spreads are the
most closely watched stress barometer for Europe's monetary union.
Traders are starting to "price in" an appreciable risk that EMU will
break apart.
The European Commission's top economists warned the politicians in
the 1990s that the euro might not survive a crisis, at least in its
current form. There is no EU treasury or debt union to back it up.
The one-size-fits-all regime of interest rates caters badly to the
different needs of Club Med and the German bloc.
The euro fathers did not dispute this. But they saw EMU as an
instrument to force the pace of political union. They welcomed the
idea of a "beneficial crisis". As ex-Commission chief Romano Prodi
remarked, it would allow Brussels to break taboos and accelerate the
move to a full-fledged EU economic government.
As events now unfold with vertiginous speed, we may find that it
destroys the European Union instead. Spain is on the cusp of
depression (I use the word to mean a systemic rupture). Unemployment
has risen from 8.3 to 11.3 per cent in a year as the property market
implodes. Yet the cost of borrowing (Euribor) is going up. You can
imagine how the Spanish felt when German-led hawks pushed the
European Central Bank into raising interest rates in July.
This may go down as the greatest monetary error of the post-war era.
The ECB responded to the external shock of an oil and food spike with
anti-inflation overkill, compounding the onset of an accelerating
debt deflation that poses a greater danger. Has it committed the
classic mistake of central banks, fighting the last war (1970s)
instead of the last war but one (1930s)?
After years of acquiescence, the markets have started to ask whether
the euro zone has the machinery to launch a Paulson-style rescue in a
fast-moving crisis. Who has the authority to take charge? The ECB is
not allowed to bail out countries under EU treaty law. The Stability
Pact bans the sort of fiscal blitz that has kept America afloat. Yes,
treaties can be ignored. But as we are learning, a banking system can
implode in less time than it would take for EU ministers to
congregate from the far corners of euroland. [= 2 weeks! -cs]
France's Christine Lagarde called yesterday for an EU emergency fund.
"What happens if a smaller EU country faces the threat of a bank
going bankrupt? Perhaps the country doesn't have the means to save
the institution. The question of a European safety net arises," she
said.
The storyline is evolving much as eurosceptics predicted, yet the
final chapter could end either way as the recriminations fly. Germany
has already shot down the French idea. The nationalists are digging
in their heels in Berlin and Madrid. We are fast approaching the
moment when events decide whether Europe will bind together to save
monetary union, or fracture into angry camps. Will the Teutons bail
out Club Med? If not, check those serial numbers on your euro notes
for the country of issue. It may start to matter.
=====================
EU OBSERVER 2.10.08
ECB liquidity injections not working
LEIGH PHILLIPS
BRUSSELS - The billions of euros the European Central Bank has been
injecting into money markets since the start of the crisis in an
attempt to get banks to start loaning money to each other and other
businesses is not working.
Instead, banks are redepositing some of the monies back with the ECB
itself - over €100 billion overnight as of Tuesday (30 September -
the latest available figures) - as they are worried that the central
bank is the last safe place left to stash their cash.
As of last Tuesday (23 September), banks had "parked" €1.4 billion
with the ECB's "deposit facility." By Thursday, the figure had
climbed to €4.2 billion and jumping to €28 billion the next day.
On Monday, banks were now depositing €44 billion with the ECB and as
of yesterday, the latest figures available, the cash placed with the
bank for safekeeping had more than doubled to €102.8 billion.
An official with the ECB told the EUobserver that "never before" had
this happened. "It's very strange that banks are doing this."
"If you didn't have the economic turmoil in the back of your mind,
you would think this is an uneconomic decision," the official said,
explaining that banks are borrowing from the ECB at a rate of 4.8
percent but when they deposit the same money back in Frankfurt, they
are only earning 3.8 percent.
"So they're losing money," the official said. "The deposit facility
is not meant for parking your money. It's meant as a last resort when
a bank can't do anything else with its money.
"It shows that there's no trust, no confidence out there," the
official continued. "They're thinking if they're going to lose money,
at least parked at the ECB is the safest way to lose it."
Joking blackly, the official said: "At least the ECB is making some
money on these transactions."
Thursday, 2 October 2008
The Crisis - Cause, Effects and Madness!
I had thought to give the original sources to this first story but
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