When are we going to stop pretending that banks are solvent when they
really are not?
This morning we're treated to two articles in the Journal bearing on the
issue; we'll start with this
BRUSSELS—European politicians signaled Tuesday that there is no
quick fix to the row over Finland's insistence on receiving collateral for
taking part in Greece's second bailout, even as the European Commission
insisted talks were yielding progress.
Euro-zone governments are looking into alternative forms of collateral
to meet Finland's demand in order for the country to contribute to
Greece's second bailout, after a cash deal reached earlier between Greece
and Finland was rejected by key member countries, including Germany and
Why should Finland provide any more money to Greece at all?
Greece has proved that it will lie, cheat and steal to get what
it wants from the rest of the Euro zone, and it's not
alone. The Euro Zone treaty obligations to keep
deficits to no more than 3% of GDP are not
suggestions. Of course they're treated as such, for
one simple reason: Nations have gotten away with this sort of crap for
years, and banks have gotten away with helping nations to lie.
Nobody has faced sanction, say much less indictment, for what amounts
to deception upon the public and the other nations in Europe (and
elsewhere.) Yet this sort of deception is well-recognized in the
corporate space as actionable conduct - so why isn't it at this level?
Ultimately the problem is that currency unions don't work well without
some sort of enforcement mechanism, and that enforcement mechanism is
problematic when you have nations with disparate economic fortunes.
The premise that opening the door to trade benefits everyone and thus
currency union is a good thing because it obviates exchange-rate
differences and potential tariff problems is a chimera - some
nations will inevitably be bled of capital if there are differences in
productivity, social spending and economic health between the
members. Bereft of the adjustment that normally takes
places when one has floating currencies in the presence of these capital
flows the incentive to cheat becomes strong, as the alternative is an
admission that what you did originally wasn't workable.
Unfortunately what has happened here is more-complex, in that in
addition to pretending that nations could pay infinite debts when they in
fact could not banks were also given the ability to mark their portfolios
to a fantasy, provided they claimed their financing of profligate nations
debts were done "to maturity." Then these nations and
the ECB severed their own femoral artery by allowing banks to consider
government bonds as "risk free" and thus they became part of a
leverage chain that has turned into a monstrous outrage
and yet another fraud upon the public:
Twenty months into the euro-zone's sovereign-debt crisis, this ought to
be obvious. The main reason that the specter of an unruly default keeps
policy makers up at night is its likely consequences for Europe's banks,
whose balance sheets hold some 45% of Europe's government bonds. Repeated
stress tests by bank regulators have ignored the vast majority of those
bonds that are held to maturity.
This flatters bank balance sheets by pretending that a sovereign
default in Europe is impossible, but it has done nothing to increase
investor confidence. The recent volatility in bank stocks and the trouble
some European banks have faced getting all but the shortest-term financing
in the private markets underline the skittishness.
The solution to this problem is to not let banks do that crap.
That is, institutions should be forced to both mark to the market
for all instruments where there is a price, and where there is
not, the "market price" is taken to indicate that the entire loan
is unsecured. If you then force banks to hold one
dollar of actual
capital for each dollar of unsecured lending they do
times then there is no systemic risk.
There's also no levered 50:1 returns, or 20:1, or 30:1 of course, but is
this a good thing or a bad thing?
For the banksters it's a bad thing. But for society as a whole,
the stability of the markets and sustainable economic
policies it is a very good thing.
If banks can't withstand their balance sheets being marked to the truth
then shut them down. That's why we have
bankruptcy - to cover exactly this contingency.
Of course Lagarge argued over the weekend that these institutions
should be "recapitalized" - including by financially raping you,
your children, grandchildren and those not yet born if necessary.
But financial******is really no different than the more-pedestrian sort,
in that both take place through the use of force. That we have
sharply-dressed protagonists in one case and a sweaty, disgusting example
of a thug in the second doesn't change a thing about the essential
character of the act - in both cases you are violated, being forced to do
something for the pleasure of another at gunpoint.
Four years into blindingly-obvious examples of this abuse by Treasury
Secretaries, Congress, Presidents and international organizations such as
the IMF, each of which has endeavored to protect those who took
knowingly and outrageously unsound actions and asset-stripped the populace
through these practices we are long past the point in time where the
public's reactions to such jackals at the door should be to slam said door
on their fingers - or necks.