The mayhem is set to continue, as the bear shakes out every bad bank, every bad debt, every toxic mortgage.
Amidst all the turmoil in the credit markets, the experienced voice of Kenneth Rogoff, the Harvard economics professor and former chief economist at the IMF, stands out prophetically. He said in early September that America was over-banked, that financial services as a sector was far too big and that a vast wave of consolidation and contraction was overdue.
Six weeks later, the most ruthless bear market has achieved some of that: America’s top four commercial banks reduced to two, and the five investment banks also reduced to two; and in Europe, a host of banks have been taken over already, but we are only at the end of the beginning.
So, Mr Rogoff is worth listening to and his latest view is bleak: “The $700 billion TARP will not work. The US Treasury will see it won’t work, and then they will have to do something else. It will take $1 trillion to $2 trillion to solve the problem. Nevertheless, I feel the panic is so dangerous right now that there isn’t a choice”.
The mayhem is set to continue, as the bear shakes out every bad bank, every bad debt, every over-leveraged deal, every toxic mortgage, every falsely-generated derivative and every over-borrowed household, bank, insurance company and government. In the latter category, Iceland will soon be joined by others, that’s for sure, beginning with the Ukraine and East Europe.
The state bail-outs continue relentlessly: the giant AIG needs another $38 billion on top of the first $85 billion; the once-proud UBS needs £31 billion; the mighty Citigroup another $25 billion; Fortis is nationalised for €9 billion; Britain’s HBOS, RBS and Lloyds-TSB need £37 billion. And each time it’s the taxpayer who’s paying, and who will pay for the resulting recession as well. The £2,000,000,000,000 – that’s two trillion pounds – hangover from the great binge banking party is set to rise further as more banks, insurance companies and hedge funds collapse.
The world needs a new set of global rules for the future, that’s for certain. Can we have your ideas please?
For a start, what level of leverage should be the absolute limit for any bank? 10x Capital, 12x or 15x? Lehman was at 25x, Morgan Stanley was at 31x but is now at 17x, which still seems dangerously high.
There must be new accounting rules for off balance sheet vehicles, and for loss recognition on derivatives.
Is the bonus culture a driver of unacceptable risk?