Ilargi [Co-editor of The Automatic Earth]: Basel III was pushed through this weekend. Isn’t that great? All those ugly big bad banks will now have to adhere to much stricter international regulations. That’ll teach ’em. And we’ll all be soooo much better off. Never again a financial crisis, and honey flowing from the trees into eternity.
Yeah. Only, who makes them regulations? Why, naturally, that would be the strongest political forces around internationally. And they happen to be, no, wait for this, the banks. They’re once again, as they have been in Washington for decades, regulating themselves, setting the terms for their regulation, in Basel. And yeah, you can or could make a few bucks in the stock markets by betting on that. You know, profit from your own demise. So yes, the stock markets are up. Buy Citi, buy Deutsche, buy Goldman, buy BofA. They can ply their trade for a bit longer. And you can be richer because of it. Well, not all of you. Someone’s got to pay the bill at the end of the day.
Under the agreement, banks will have six years starting Jan. 1, 2013, to progressively increase their capital reserves. Under current rules banks have to hold back at least 4 per cent of their balance sheet to cover their risks. Starting in 2013, this reserve – known as tier 1 capital – will have to rise to 4.5 per cent, reaching 6 per cent in 2019. [..] In addition, banks will be required to keep an emergency reserve known as a “conservation buffer” of 2.5 per cent. In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 per cent of its balance sheet.
Still, while cheering Basel III, you’re cheering the further, continued and deepening screwing of American people, and European, and Japanese, not to mention dirt-poor-to-begin with Africans and Asians, who will for instance increasingly be bid out of what fertile land they once had to feed their children.
Basically, the banks can continue to do anything they want till 2013, and “just about” anything they want until 2019. Not that they’ll be lending to “consumers”, mind you, unless their governments force them to and/or make it very attractive (50+% credit card charges), and if anyone has anything adverse to say about that, their answer will be that they will need the money to comply with Basel III in 2019. Oh, the lovely irony.
And everyone should get it through to their heads that in an economic situation as dire as the one we’re in today, and it is deeply dire no matter what either you think or stocks actually do, there isn’t a banker on the planet who looks ahead 3 and certainly not 9 years, and is then still taken seriously by his peers. Profits and bonuses are all about tomorrow, not about 1 or 3 or 9 years from now. The guys in the know at the major banks are well aware of what the amount and degree of toxicity is of the mountains of “securities” and derivatives in the banks’ vaults. There’s a clock ticking loudly, and it won’t keep on ticking forever. Better get your share while you can.
For the past decade, the mood and strategy on Wall Street, in the City, in Frankfurt and Tokyo has been, and is increasingly so, to rake in as much in profits as you can get away with, since this baby’s bound to bomb and you can never be sure what tomorrow morning brings.
What we should really want to see in these Basel sort of things is new international rules on marking toxic assets, but there isn’t much in that regard. Well, there’s this:
With yesterday’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul. The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios.
Translation: we had to feed them something, and we hope they didn’t notice that even the 10-years-from-now requirements don’t have a denominator yet. In other words, boys, steady as she goes, jolly good, and let’s break open the champagne. Job well done, lads.
Meanwhile, US poverty rates are skyrocketing, and homeless shelters are so overcrowded they probably don’t even care about the upcoming rounds of cuts anymore. Can’t get lower than the gutter, can you?
And it’s not as if there’s no-one stateside who gets what’s to be gotten. Tech Ticker has finance professional Scott Bleier say this:
“There is no ‘double-dip,’ there are no ‘green shoots,’ there was no recovery,” he says. “There are simply segmented pieces of the economy muddling along and getting better or staying the same.”
[..] Bleier wants to see a legislative act — “The Real Estate Debt Restructure Act of 2011.” It would require banks to go line-by-line to examine each asset of every mortgage-backed security (and their derivatives). Banks would have to renegotiate bad loans and then would be allowed to write them off to wipe their balance sheets clean.
“The other option is to let the banks foreclose and own all the underwater properties, and then force them to mark-to-market again. Most would then be insolvent,” says Bleier. That’s not the only problem. “There will be mass homelessness if banks keep foreclosing underwater properties, and that socially is unacceptable [..]
And then Tech Ticker also has Greg Ip, US economics editor for The Economist:
[..] Ip has a fairly controversial policy recommendation he says has been used successfully in other countries following banking crises: America should “make a concerted effort to buy up all the bad loans clogging the banking system; take ’em out of the private sector and in some sense socialize it,” he says. “We really haven’t done that – we’ve given the banks extra capital but all they’re basically doing is stringing along the borrowers hoping to hide the problems for as long as possible. The longer they do that, the more they starve the growing part of the economy of credit.”
Neither of these distinguished gentlemen seems to be aware of the depth of losses within the American and European banking systems. “ Banks would have to renegotiate bad loans and then would be allowed to write them off [..]” sounds nice and all, but what would be the implications? If you’re talking about, and we are here, trillions of dollars in loans, securities, derivatives, it might take decades to re-negotiate a line-by-line re-examination. And even if that were possible, they would never get more than 50 cents on the dollar, and that simple acknowledgment alone would condemn them to death by at the gallows.
And who would take the losses then in order for the banks to survive? You and me, I suppose. But why would we not just let them die, guarantee our deposits with them through the state, and be done with it all?
“America should “make a concerted effort to buy up all the bad loans clogging the banking system; take ’em out of the private sector and in some sense socialize it [..] “.
Yeah, buy up all the bad loans from the private banking sector, that their staff have made billions on issuing, with taxpayer money, so that the banking sector may survive and do it again.
Perhaps we could solve at least part of all this by letting the banks go down who prove to be insolvent once we force them to bring their toxic assets into the light. It’ll be bad for the Chinese, who hold stocks and bonds in them, and it will be awful for our own market funds and pension funds, but it would be a first step regardless.
People who talk about renegotiating bad loans, or about countries buying up those loans, as a way out of the crisis, do not, in my view, appreciate the gravity of the situation.
And why should they, really? They can keep on talking their book for now, because the Basel III accord allows for the banks to keep on pretending, until at least 2019, that all is well.
The point here is, though, that that can’t possibly work. There will be a bank, or an entire country, someday soon, that will either go down directly or try desperately to save its skin, and the valuation of assets will be centre. Some bank in Latvia or Belgium, or some unexpected place like Sacramento, will be forced to mark its holdings to market, and they will be the same as those held by a party in France or Italy or California. Who will then have to follow suit. And then their peers.
Basel III allows for some more facade time, the cardboard ghost town gets to stand up and fool people a bit longer. But that’s all this Basel accord is good for. Some of you will make some dough on that, and the rest of you will pay for it. But the banks are still doomed, on account of the paper they still hold at face value, but that is really worth mere pennies on the dollar. We could, as a nation, buy all that paper (and my, did we try already), and the banks then might survive, but unfortunately we would surely not, as a society.
There is no way out of this that keeps both our banks AND our societies alive. Basel III says, and very clearly so, that it’s the banks that are winning.
There’s something wrong here:
We didn’t even fight them, and they still won.