One reader asked me to look at long-term answers to the banking crisis rather than short-term, after my blog the other day.
I will provide a more in-depth answer to this question on January 5th when I make my predictions for 2009.
Right now, it needs the full backdrop to answer that question by reviewing the course of this crisis, with the heart of the storm in September and October:
8 Sep: the US Treasury takes over Fannie Mae and Freddie Mac. Together these two provides loans or guarantees to the tune of $5.2 trillion of the total American $12 trillion mortgage market.
15 Sep: Lehman talks with JPMorgan and Barclays failed, so Lehman is allowed to fail without US government assistance. Government also refuses AIG's request for a $40 billion loan. Merrill Lynch merges with Bank of America.
17 Sep: US Government reverses position on AIG and Fed gives $85 billion loan in return for an 80% stake in AIG.
18 Sep: The Financial system freezes. Hank Paulson and Ben Bernanke tell President Bush that the situation is “extraordinarily serious”. With President Bush’s blessing, Hank Paulson wins Congress leadership approval to push for $700 billion bailout plan. Fed adds US$180 billion liquidity to key central banks. Treasury gives Fed $100 billion of bonds. US SEC and others ban short-selling. Fed provides guarantee for money market funds to discourage withdrawal which sees three-month Treasury yield near zero. In the UK, LloydsTSB takes over HBOS.
22 Sep: Federal Reserve allows Goldman Sachs and Morgan Stanley to become commercial banks.
26 Sep: US House fails to pass $700 billion bailout plan. US stocks fall 5-7%. Washington Mutual (Asset size $300 billion) taken over by JPMorgan.
28 Sep: The UK's 3rd largest mortgage lender, Bradford and Bingley, is nationalised.
29 Sep: In Europe, Fortis bailed out by Benelux governments with a $16 billion capital injection. In Germany, Hypo Real Estate is taken over by the German government. In the USA, Wachovia is taken over by Citigroup but, after renegotiations and a couterbid, Wells Fargo later proves successful.
30 Sep: Dexia given a capital injection of $9.2 billion by shareholders and the governments of France and Belgium. The Irish government guarantees all bank deposits.
3 Oct: President Bush signs a $700 billion bailout bill into law. The UK's regulator, the FSA, raises guarantees on deposits to £50,000 from £35,000.
6 Oct: Germany announces a €50 billion plan to save Hypo Real Estate. Denmark gives 100% guarantee on savings, and Sweden increases its protection levels.
7 Oct: The Icelandic government takes control of Landsbanki, the country's second largest bank, which owns Icesave in the UK.
8 Oct: UK government announces a rescue package for the banking system worth at least £50 billion ($88 billion), along with £200 billion ($350 billion) in short-term lending support.
11 Oct: G7 nations issue a five-point plan to unfreeze credit markets.
13 Oct: UK government invests £37 billion into Royal Bank of Scotland, Lloyds TSB and HBOS.
14 Oct: US government announces a $250 billion plan to purchase stakes in the nation’s largest banks.
19 Oct: South Korea announces a $130 billion rescue package by offering a state guarantee on banks' foreign debts and by investing capital into struggling financial firms. The Dutch government announces a €10 billion investment in ING, plus a €20 billion to protect the financial sector from the credit crisis.
20 Oct: Sweden's government offers up to $205 billion in credit guarantees to banks and mortgage lenders.
Purely from a banking markets perspective, the specific short-term resolutions have therefore included:
Australia: A$10.4 billion fiscal stimulus for pensioners, family and first home buyers. Guarantee of bank deposits for three years.
Austria: Government controlled €85 billion clearing house to provide cash by holding illiquid bank assets as collateral. Also pledge to buy bank shares should domestic institutions seek to sell new stock. Total package: €100 billion
China: a two-year $586 billion economic stimulus package to help boost the economy by investing in infrastructure and social projects and by cutting corporate taxes.
France: Guarantee €320 billion of bank debt and up to €40 billion to recapitalise banks.
Germany: Guarantee up to €400 billion of lending between banks, plus €20 billion to cover potential losses and €80 billion to recapitalise banks.
Iceland: Government has taken control of Iceland’s three largest banks. $2.1 billion IMF loan, the first IMF loan for a Western European nation since 1976.
Ireland: Guarantee bank deposits, covered bonds, senior debt and subordinated debt of six major Irish banks. Total bailout package up to €400 billion. A further €7 billion pledged to the three largest banks in December, effectively nationalised Anglo Irish Bank.
Italy: Guarantee some bank debt and buy preferred stock in banks if necessary up to €40 billion.
Korea: Dh$477.5 billion in guarantees on foreign debt and to recapitalise financial firms.
Netherlands: Guarantee up to €200 billion of interbank loans.
Pakistan: $7.6 billion IMF loan to avoid defaulting on international debt.
Singapore: Guarantee all bank deposits until 2010, following similar measures in Malaysia and elsewhere in Asia.
Spain: Guarantee €100 billion of bank debt and allow the government to buy shares in banks in need of capital.
Switzerland: SFr6 billion in a recapitalisation of UBS as well as SFr54 billion loan.
UK: £200 billion liquidity scheme, up to £50 billion to recapitalise banks and £250 billion guarantee of bank debt issuance. Total package: £500 billion
Ukraine: $16.4 billion IMF loan to bolster the economy, shaken by global financial turmoil.
USA: US $700 billion TARP package, including US$250 billion support for major US banks in October, followed by a further $800 billion into the economy in November to try to stabilise the financial system and encourage lending. Of this new investment fund, $600 billion will be used to buy up mortgage-backed securities while $200 billion is aimed to allow the boost of more consumer credit lending.
Note: This is not the complete list of financial assistance programs underway globally and amounts are subject to change and if you’d like to know more, the BBC has quite a useful overview.
So that’s the history with most of it being cash generated by governments to support the bank’s weakening capital bases, and to promote more lending. Without lending, the consumer and corporate confidence is killed and the economy tanks.
But it’s all short-term, as is a bank shareholder guarantee scheme.
Longer-term, there are clear requirements for transparency of risk. All of the above is created by the lack of transparency of OTC Derivatives, along with a lack of regulatory oversight.
Therefore, the aim to make risk transparent by creating a Central Clearing Counterparty (CCP) for OTC Derivatives and a Prudential Supervisory Framework for the G20.
Will these solve the issues?
Possibly.
But the biggest solution would be a globally shared risk exchange, which all regulators and banks can access and use. A global risk data warehouse.
This is now tenable and possible.
I’ll talk about it more when I come back to blog about the predictions for 2009 but, right now, I think I’ve depressed y’all enough so here’s a more cheerful note, courtesy of The Morning Paper.
Not sure what a risk exchange would accomplish or what data would be there that would be better than exists today. The fundamental issue with the interbank market and all securities is that no-one knows the underlying risk. The rating agencies offerred lip service to this, are no longer trusted.
A second problem is that no-one knows the underlying capacity of banks to absorb risk and loss. Their financial statements are so convoluted as to be unreadable to accountants, let alone lay investors.
It may be large enough of a problem that the only agency capable of taking on the risk, perhaps in some type of insurance, would be government.
Posted by: Colin Henderson | December 25, 2008 at 03:08 AM
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Deborah
http://termlifeinsurance2.com
Posted by: Deborah | January 12, 2009 at 05:38 AM