Wednesday, September 21, 2011

Who needs banks but the utterly corrupt elites working in the shadows...?

Who needs banks but the utterly corrupt elites working and plotting in the shadows...?
By Chan Akya

Three years ago at the height of the liquidity crisis in 2008 I wrote a series of articles on the outcome of various interventions (see "Related Articles"). It is with grim satisfaction that I note many of the predictions have indeed come through; some of which were:

1. Asia would need to focus on physical assets to maintain purchasing power;
2. European sovereign debt would erupt if governments tried to save their banks (See:
Europe - into the end game, Asia Times Online, September 15, 2011);
3. Anyone who purchased bank shares at the 2008 "lows" would regret their decision.

Over the past 10 days or so, a number of headlines have popped up which take my "banks are not trustworthy" thesis well past its logical end point and into entirely uncharted territory. That point would be the otherwise-unmentionable notion (and that is all it is

for now) that the global financial system may have reached its breaking point, and perhaps even its sell-by date.

Before delving into that conclusion though let us look at recent developments:
  • Firstly, there is the discovery of the trifling US$2.3 billion in losses due to unauthorized trading by UBS in its London operations. That such a loss could happen in a bank that was rescued barely three years ago by the Swiss central bank is bad enough; revelations that the loss pattern (ie the mechanism that keeps the dangerous trades hidden from review and proper risk management) took hold in 2008 and went undiscovered for three years made it a whole lot worse. Singapore's Government Investment Corporation, which is nursing a multi-billion dollar loss on its investment in UBS, issued a terse statement earlier in the week expressing its disappointment. Where is Singapore-style corporal punishment (remember Michael Fay - the young American sentenced to caning in 1994 for theft and vandalism) when you really need it?
  • European newspapers are reporting that large companies in the region, including household names like Siemens and others, have cut their deposits with banks and placed funds directly with the European Central Bank (ECB). This helps them to circumvent credit risk altogether but does bring into question what the role of banks as deposit taking institutions would be.
  • The UK released its much-anticipated "Vickers report" that calls for a split between real banking and its casino counterpart through capital barriers and avoiding all manner of cross-funding. What was a good idea, though, fell on its face during the execution as the report called for an eight-year implementation time-frame (2019); if all other reforms are any indication, then one should expect that the real deadline is "never". This kind of shameless lobbying shouldn't be possible by any industry, let alone one that essentially survives on the public whim.
  • Reports out of the US that Bank of America was considering an idea to place its troubled Countrywide subsidiary into bankruptcy (even if the rumor was strenuously denied) helped to bring forward awkward questions about the rest of the bank and its solidity.
  • The downgrade of French banks has been followed by reports of Asian (mainly Chinese) banks have been pulling swap lines and terminated foreign exchange (FX) trading relationships with the banks.
  • A number of French banks were reported to have put out large portfolios of assets for sale - one bank put up $70 billion for sale on its own. Alarmed by the possibility of European liquidity events driving down prices of American fixed-income assets (deservedly in my opinion, but that is absolutely not the main point here), the US Federal Reserve provided a swap facility to the ECB under which the latter could provide US dollar funding to European banks in return for European (ie euro-denominated) collateral.

    Considering that the ECB accepts all manner of collateral including Greek debt, in effect the Federal Reserve (and ultimately US taxpayers) are now lending money against Greek bonds. If the regulatory and central banking authorities have to resort to such morally bankrupt measures three years after effecting a wide-ranging rescue of the banks, then we all truly have to wonder quite how bad things are below the surface.
  • Bank earnings for the third quarter of 2011 - set to be released in less than a month - are expected to reveal falling profitability due to declining revenues from fixed-income trading as also continued rises in actual defaults by borrowers, particularly in areas such as individual and mortgage borrowers in the US.
  • On the issue of Greece, press reports continue to highlight the gaps in banks' provisions for the country. Recent reports have shown that two state-owned "bad" banks in Germany own almost half of the country's total exposure to Greece. This is a good thing - considering that in various other European countries exposures are more widely spread and far less provisioned. In every possible way, a nightmare for regulators.
  • The really bad part is that I have so many other stories to add here but will not in the interests of space: the little scandals dotting Italian banks, the bigger problems being faced by American banks on their accounting for dodgy assets, rising loan losses in Japan, irrational lending in China, corruption in Indian banks and so on.

    When you step back and think this through, it is apparent that the banking system is failing in its basic functions of taking deposits, making loans and even in terms of transferring payments (as happens when Chinese banks no longer want to face their French counterparts) across borders.

    So what does a world without a developed financial system look like? It is quite likely that international payments will simply shift back to central banks - so when a transfer needs to be made from Hungary to Thailand, it is not branches of private banks that do the transfer but the two countries' central banks. Similar stuff happens within payment zones, for example within the euro-zone where banks seem most chary of facing each other.

    Once the payment functionality is removed from the banks, what remains is the basic lending and deposit taking functions. There isn't a whole lot of evidence that banks can do these functions any better than non-banks; if anything the current evidence is to the contrary. After De-leveraging and significant rises in capital, the consolidated banking system would become a more boring place that is less integral to the global economy. Good thing, that.

  • Weak and corrupt leadership from all around the world, not just one country, but all of them....

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