Let them default. The radical solution to the sovereign debt crisis.

Uploaded by NewsOnABC on Sep 15, 2011

Economist Ann Pettifor predicted the GFC. Her solution to the sovereign debt crisis is to let those countries default, then bail out the banks in return for major reforms.

Occupy Wall St. to a Bank in the Public Interest: M Hudson/The Real News

Michael Hudson: A public option in banking will be a structural answer to the power of finance

#GFC2 Challenges & Solutions

Posted on October 9, 2011 by Mike Parker

 

@Frances_coppola wrote in her recent blog  http://coppolacomment.blogspot.com/2011/10/fear-that-paralyses.html that ‘Fear is probably our biggest enemy at the moment”. She rightly cautioned against doom mongering that could become a self fulfilling prophecy and highlighted how some commentators who should know much better, are making highly questionable assertions in pursuit of particular ideological goals.

This is not fear itself but it is an attempt to use fear to manipulate viewpoints and seek a particular type of outcome based on pre-conceived cookie-cutter notions.

From my point of view I find the idea that government should nationalise the banks horrific as there seems to be absolutely no concept in the minds of the protagonists that this would be subject to all the old sins of greed, cronyism and fraud.

Equally laughable is the ‘free’ market zero-regulation school of thinking which thinks it is possible for orgnaisations founded on an ethic of profit-above-all-else to effectively self regulate. Just as laughable is the idea that competition in a tiny oilgopoly of mega-banks will drive efficient operation.

Against this background most of the folks contributing and discussing on #gfc2 have been pretty clear and refreshingly honest about the international finance system, the levels of fraud & corruption involved in it and the fact that it has in many ways become a pathological threat to the societies which host it.

At the same time in the past 4 – 5 months of participating and observing I haven’t seen a fatalistic negativity or , as some have claimed, any pleasure in being right about what was / is happening.

On the contrary I HAVE seen a lot of genuinely helpful analyses and ideas about what could be done surface.

This includes looking at ways of breaking up banks such that systemically essential services like clearing and payments can be distributed across a network of providers or possibly bought into public domain as part of Critical National Infrastructure.

However that removal of systemic monopoly from a few big players is done doesn’t matter. What matters is that it is done. Then if a private banking institution fails, hard luck it fails (given of course that regulatory requirements for depositor protection are in place, as they are). There is no longer the blackmail leverage of systemic necessity for banks to fall back on.

This casts another light on the kind of panic and fear mongering going on. It is in the interests of huge banks for people to be convinced that if they fail then tomorrow is doomsday.

No it isn’t. As Frances and I have discussed, practically speaking it isn’t that hard to split out and maintain systemically essential functions like payments.

In fact it might just be a really good opportunity to re-assess the position of those functions and whether there IS a case for nationalisation or indeed (my preference) opening up the market to a much wider range of competition by considering ways of mitigating barriers to market entry.

Another key point to emerge and to be repeated again and again is the utter injustice of privatising profits among a tiny minority and then socialising losses to ordinary people. And be in no doubt that bailing out e.g. Greece is just another bank bailout by proxy (BBBP).

These are just a couple of the ideas that have been surfaced on #GFC2. I thought them worth highlighting in order to point out how concerned I’m sure most of us are to find genuine, workable and humane solutions to a crisis rather than try to leverage fear in pursuit of ideological goals.

Does that mean there’#s no room for ideological or political debate in relation to #gfc2? well that would be bl**dy stupid wouldn’t it?

Actually the levels of genuine debate (as opposed to infantile name-calling) are great. But that is utterly different to attempting to leverage a desperate situation and the insecurity and worry it creates to further any dogma. To do that strikes me as being as immoral and despicable as the frequently fraudulent and constantly immoral and unethical behaviour of a tiny powerful cabal of vested interest that has bought us (once more) to the brink of this abyss.

Note: I have referenced Frances’ thinking and writing here but the opinions and conclusions expressed are my own.

I hope #GFC2 continues to attract no-bullshit, incisive analysis and justified outrage along with attempts to seek for genuine workable solutions. I think the fact that we can now have such a forum is a major cause for celebration in itself.

http://www.project-syndicate.org/commentary/taleb1/English

The Great Bank Robbery

Nassim Nicholas Taleb and Mark Spitznagel

2011-09-02

The Great Bank Robbery

NEW YORK – For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.

That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting.

Mainstream megabanks are puzzling in many respects. It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact “Black Swan” events and benefiting from the free backstop of implicit public guarantees. Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers.

In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.

Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. Moreover, low-interest-rate policies transfer inflation risk to all savers – and to future generations. Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level.

Of course, before being bailed out by governments, banks had never made any return in their history, assuming that their assets are properly marked to market. Nor should they produce any return in the long run, as their business model remains identical to what it was before, with only cosmetic modifications concerning trading risks.

So the facts are clear. But, as individual taxpayers, we are helpless, because we do not control outcomes, owing to the concerted efforts of lobbyists, or, worse, economic policymakers. Our subsidizing of bank managers and executives is completely involuntary.

But the puzzle represents an even bigger elephant. Why does any investment manager buy the stocks of banks that pay out very large portions of their earnings to their employees?

The promise of replicating past returns cannot be the reason, given the inadequacy of those returns. In fact, filtering out stocks in accordance with payouts would have lowered the draw-downs on investment in the financial sector by well over half over the past 20 years, with no loss in returns.

Why do portfolio and pension-fund managers hope to receive impunity from their investors? Isn’t it obvious to investors that they are voluntarily transferring their clients’ funds to the pockets of bankers? Aren’t fund managers violating both fiduciary responsibilities and moral rules? Are they missing the only opportunity we have to discipline the banks and force them to compete for responsible risk-taking?

It is hard to understand why the market mechanism does not eliminate such questions. A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance.

One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all?  The answer is the so-called “beta”: banks represent a large share of the S&P 500, and managers need to be invested in them.

We don’t believe that regulation is a panacea for this state of affairs. The largest, most sophisticated banks have become expert at remaining one step ahead of regulators – constantly creating complex financial products and derivatives that skirt the letter of  the rules. In these circumstances, more complicated regulations merely mean more billable hours for lawyers, more income for regulators switching sides, and more profits for derivatives traders.

Investment managers have a moral and professional responsibility to play their role in bringing some discipline into the banking system. Their first step should be to separate banks according to their compensation criteria.

Investors have used ethical grounds in the past – excluding, say, tobacco companies or corporations abetting apartheid in South Africa – and have been successful in generating pressure on the underlying stocks. Investing in banks constitutes a double breach – ethical and professional. Investors, and the rest of us, would be much better off if these funds flowed to more productive companies, perhaps with an amount equivalent to what would be transferred to bankers’ bonuses redirected to well-managed charities.

Nassim Nicholas Taleb is Professor of Risk Engineering at New York University and the author of The Black Swan. Mark Spitznagel is a hedge-fund manager. The authors own positions that profit if bank stocks decline in value.

Copyright: Project Syndicate, 2011.
www.project-syndicate.org

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Once Unthinkable, Breakup of Big Banks Now Seems Feasible

by Jesse Eisinger
ProPublica, July 27, 2011, 3:50 p.m

Note: The Trade is not subject to our Creative Commons license.

What was made can be unmade.

JPMorgan Chase and Wells Fargo may have venerable names, but they and the pseudo-venerable Citigroup and Bank of America are all products of countless mergers and agglomerations.

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me atjesse@propublica.org

There is no rule of markets that requires a financial system dominated by four cobbled-together, lumbering behemoths.

Lawmakers and regulators have failed to remake our system with smaller, safer institutions. What about investors?

Big bank stocks have been persistently weak, making breakups that seemed politically impossible no longer unthinkable.

Bank of America’s recent quarterly earnings were so weak that investors and commentators wondered whether the bank should sell off Merrill Lynch, the investment bank for which it foolishly overpaid at the height of the crisis. Bank of America trades at half of its book value (the stated value of its assets minus its liabilities), an indication that investors view its asset quality and prospects just a notch below abominable, as Jonathan Weil of Bloomberg News pointed out last week.

For Bank of America, the question is whether it will have to raise capital. Selling shares at such depressed prices would be costly. Regulators won’t push for it. They just gave stress tests to the biggest banks and merely restricted the bank from paying out a dividend. The logical solution is that Bank of America shed business lines in a bid to improve its prospects in the eyes of Wall Street.

Citigroup’s stock, revenue and earnings have lagged for a decade.

“Look, if you can’t compete in the major leagues for over a decade, it’s time to go back to the minors,” said the always outspoken Mike Mayo, an analyst with CLSA. His chronicle of ruffling bank management feathers, “Exile on Wall Street” (Wiley), will be published in the fall.

JPMorgan Chase is as well managed as any gargantuan bank can be. But if you look at its businesses, it’s hard to see any area where it is clearly the best, something even its own executives concede. Not in credit cards, where the premier name is American Express. Not in money management, where you might offer up T. Rowe Price. Investment banking—Goldman Sachs (the last quarter notwithstanding). Back-office transactions, State Street.

Yet even JPMorgan is merely trading at book value. Put another way, the market regards the value that JPMorgan provides as a financial services conglomerate as zilch. How well do all of JPMorgan’s divisions work together? In presentations to investors, JPMorgan executives show how much revenue they gain from existing clients. But these measures are hardly unbiased. Executives have an incentive to defend their empires. Who is to say that a certain division of JPMorgan wouldn’t have won that business anyway? And nobody measures how much a bank loses through conflicts of interest.

Even in the face of investor pressure, there are forces that would hold bank breakups back. Mainly pay.

“The biggest motivation for not breaking up is that top managers would earn less,” Mayo said. “That is part of the breakdown in the owner/manager relationship. That’s a breakdown in capitalism.”

Institutional investors—the major owners of the banks—are passive and conflicted. They don’t like to go public with complaints. They have extensive business ties with the banks. The few hedge fund activist investors who aren’t cowed would most likely balk at taking on such an enormous target.

Also, there are reasons to think that smaller banks wouldn’t necessarily make the system safer. A wave of small bank failures can have systemic effects, as was the case in the Great Depression. Focused companies like Washington Mutual and Bear Stearns failed in the recent crisis, worsening it.

Making a nuanced argument, John Hempton, a blogger, investor and former regulator in Australia, says that it’s better for shareholders—and societies—to have large banks with lots of market power. That makes them more profitable and leads them to take less risk, making them safer and more enticing for investors.

Another oft-trotted-out argument against breakups: The United States needs global banks to service its giant, multinational corporations and to preserve our position in world markets.

Color me unconvinced. When a giant corporation wants to do a major bond offering or a big company goes public, the banks, despite their size, don’t want to shoulder all the risk themselves, preferring to share the responsibility.

If the stocks continue to lag for quarters upon years, these arguments will seem less convincing, while institutional reluctance will begin to erode.

Investors don’t care about size, they care about performance. It’s undeniable that smaller banks are easier to manage. And they are easier for regulators to unwind—and therefore less terrifying to trading partners—when they fail.

One of the most remarkable aspects of the debate about overhauling the financial system after the great crisis was the absence of serious contemplation of breaking up the largest banks.

It’s not a perfect solution. Banks responding to investor pressure would react haphazardly. But it’s a good start.