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Posts Tagged ‘financial times’

Here is a excellent analysis from Willem Buiter´s blog at FT.com.

“The too big to fail problem has been central to the degeneration and corruption of the financial system in the north Atlantic region over the past two decades. The ‘too large to fail’ category is sometimes extended to become the ‘too big to fail’, ‘too interconnected to fail’, ‘too complex to fail’ and ‘too international’ to fail problem, but the real issue is size.  The real issue is size.  Even if a financial business is highly interconnected, that is, if its total exposure to the rest of the world and the exposure of the rest of the world to the financial entity are complex and far-reaching, it can still be allowed to fail if the total amounts involved are small.  A complex but small business is no threat to systemic stability; neither is a highly international but small business.  Size is the core of the problem; the other dimensions (interconnectedness, complexity and international linkages) only matter (and indeed worsen the instability problem) if the institution in question is big.  So how do we prevent banks and other financial businesses from becoming too large to fail?”

Mr Buiter suggests a series of meassures in his article, to read the analogy, please see link below.

  • Become too big to save
  • Restore narrow banking or public utility banking
  • Create mono-product central counterparties and providers of custodial services, central wholesale and securities payment, clearing and settlement platforms
  • Keep a lid on the size of investment banks
  • Tax bank size
  • Use competition policy
  • Restrict limited liability to prevent excessive risk taking and reduce the size of banks
  • Create effective special resolution mechanisms for all systemically important financial institutions

He concludes:

“In banking and most highly leveraged finance, size is a social bad.  Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.

  • Legally and institutionally, unbundle narrow banking and investment banking (Glass Steagall-on-steroids).
  • Legally and institutionally prevent all banks (narrow banks and investment banks) from engaging in activities that present manifest potential conflicts of interest. This means no more universal banks and similar financial supermarkets.
  • Limit the size of all banks by making regulatory capital ratios an increasing function of bank size.
  • Enforce competition policy aggressively in the banking sector, by breaking up banks if necessary.
  • Require any remaining systemically important banks to produce a detailed annual bankruptcy contingency plan.
  • Only permit limited liability for narrow banks/public utility banks.
  • Create a highly efficient special resolution regime for all systemically important financial institutions. This SRR will permit an omnipotent Conservator/Administrator to financially restructure the failing institutions (by writing down the claims of the unsecured creditors or mandatorily converting them into equity), without interfering materially with new lending, investment and funding operations.

The Geithner plan for restructuring US regulation is silent on the too big to fail problem.  That alone is sufficient to ensure that it will fail to result in a more stable and safer US banking and financial system.

In the UK, the otherwise enlightened head of the FSA, Adair Turner, does not see a problem with banks of huge size and with a staggering range of unrelated or conflicted activities.  Of all the parties that matter, only the Governor of the Bank of England, Mervyn King, is clear that ‘too big to fail’ is at the heart of the financial crisis we are trying to exit and will be at the heart of the next financial crisis that we are preparing so assiduously.

The Chancellor of the Exchequer, Alistair Darling takes the cake in the bigger is better stakes.  He appointed “Win” Bischoff, the former chairman of Citigroup (appointed interim CEO for Citigroup in December 2007 after Chuck Prince bit the dust), to co-chair the writing of a report on UK international financial services – the future, published on May 7, 2009.  That’s rather like asking the Ayatollah Ali Khamenei to write a report on who won the Iranian presidential election.  It really is the most ridiculous appointment since Caligula appointed his favourite horse a consul.  You will not be surprised to hear that the report does not consider the size of UK banks to be excessive.

International cooperation is necessary if we are to solve the too big to fail problem.  I am not holding my breath.”

To read the full article, click here.

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The US economy appears to be plunging into what many experts believe will be its worst recession since 1982.

Senior officials at the Treasury and Federal Reserve are confident that the rescue plan for US banks will succeed in preventing a financial system meltdown and ensure there will not be a repeat of the Great Depression. But they know that a sharp economic downturn is already baked in the cake. They do not,however, know how deep or protracted it will be.

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Many members of the Web 2.0 generation of internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.

The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in internet start-up circles.

Read more here.

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