How quickly do the banks come crying for help from the central banks, eh?
The same banks that "restructured" steel and mining and textiles and autos and construction and told the managers in those industries to wake up and smell the coffee of a tougher, globalized world. The same banks that waved an admonishing finger at subsidies and government rescue plans when "restructuring and modernization" put yet another steel or construction company to the brink of extinction.
"Let the free market sort it!" they insisted then. No distortions of the competitive environment through rescue packages. It's survival of the fittest! Mismanagement must not be rewarded!
Well, it's easy when it's others who have to do the surviving and the mismanagement, hmm?
A bit like "Animal Farm," really: All animals are equal, but some animals are more equal than others. In this case it's the banks. Years of record profits and a you-can't-do-anything-wrong, price-cum-interest-rate environment in U.S. real estate, and when the market cycle does what market cycles do -- cycle in the other direction -- it's: HELP!!!!!!!
Why? Or rather: What miracles do the banks expect their central banks to perform?
The ECB, which was arguably the only one of the major central banks that was right on top of the situation, poured a limp 249 billion euros into the money market via emergency repo funding (more than even the weeks following 9/11!) that week in September when everybody decided the crisis broke. And what happened? Overnight rates came down to almost normal level, but beyond-a-month's funding remained painfully tight, and has done ever since.
The BoE took the philosophically purist stance of deciding that this was a problem of the banks and not of the central bank. So let the banks deal with it or be damned. Very "stiff upper lip" and quite rightfully so. I mean, you can't argue with it at all -- except when the British banking system in the disconcerting shape of Northern Rock presented them with the first "run" on a bank in postwar history. With scenes of worried customers queuing up in the high street, even the stiffest upper lip started quivering and all of a sudden, emergency funding and government rescue plans were poured on potential voters.
At this point I might direct the discerning blog reader to a chokingly brilliant stab at "explaining" the liquidity crisis, pilfered from the video archives. It's one of the by-now (in)famous fake interviews of British satirists Bird & Fortune. Watch and see for yourselves whether you feel more like laughing or crying.
OK, it's only satire. But, hand on heart, didn't YOU nod a few times in grudging (or not so grudging) consent?
For years on end, the banks sold mortgages as if there was no tomorrow -- as if there wouldn't be a time when rates would go up and house prices go down -- then sliced up, repackaged, put some nice wrapping around it, gave it some funky name like "Structured Investment Vehicle" or "High Quality Enhanced Investment Fund" and sold it down the line from Dublin to Kuala Lumpur. But when you strip it down to the basics, it's still a plain old mortgage that has turned sour, because with rates up and prices down, the mortgage-takers' financing is up the creek.
Very basic, really. No rocket science. No complicated cross-rates-profitability formula needed. Simple, oh-too-simple banking. The Knights Templar would not have had problems with spotting the problems here! And your average money lender on the Appenine in Ancient Rome would have shaken his head and tutted with a worried frown.
Alas, 2000 years later, in the world of modern, sophisticated high-tech global banking, the modern, sophisticated, high-tech global bankers just passed the buck. The rating agencies were to blame for not warning them that prices could go down and rates could go up -- that such an "unexpected market scenario" (yeah, right) might blow many of the underlying mortgages and their refinancing to smithereens. And when all that passing-the-buck was finished and the liquidity crunch was still crunching rather painfully, then came the cry for help: High rates are the problem! Cut rates!
The Fed -- more's the shame -- promptly obliged. Again and again and again. Did it help? Nope.
More rate cuts, scream some. Cut the discount rate below the Fed funds rate, others say. Pump more money into the system, yet more cry.
Nothing Has Helped.
So far, none of it has helped really. Not even the long-overdue concerted liquidity relief effort by Fed, ECB, BoE, SNB and Bank of Canada. OK, OK, arguably they should have done THAT in August or September. Now it seems they can do nothing but run after the markets and market expectations.But here's the punchline. Liquidity is not, and was not, the problem. The banks are the problem.
When the first bank that was in trouble dared raise its head out of the trenches (and pretty much got it shot off) in September -- Germany's IKB -- I did the usual. A quick ring-around to ask the other banks in Germany about their potential exposure to U.S. subprime. "Absolutely NO exposure!" declared the board member of one bank (with conviction, and I dare say he meant it). Two days later it became painfully apparent that HIS bank as well had subprime exposure -- not directly, but through their dealings with afore-mentioned IKB.
And from there, this nasty little snowball rolled on. Left and right, bankers were turning around, panic-stricken, wondering what exactly they had in their books and not knowing it! Not knowing it still in many cases.
When one of Germany's regional savings-and-loans, Sachsen LB, went belly-up and had to be rescued, German Finance Minister Peer Steinbrück -- never the man to mince words -- declared with gritted teeth he was gutted and that bank managers were evidently "arrogant, incompetent, careless and dilettante." Ouch! OK, he didn't point out that the politicians who were sitting in the supervisory boards of those banks were so lost in la-la-land that AFTER the crisis broke they were queuing up for crash courses to lean what exactly this "subprime" was or why a SIV had nothing to do with four-wheel driving and off-road vehicles.
Lessons to be learned? Klaus Peter Müller, the CEO of Commerzbank and at the time still President of the Association of German banks put it this way: "It's back to the basics. To the basics of good, solid banking. Know what you have in your books, evaluate it yourself and then decide whether it belongs there."
Sound advice, I'm sure. Possible? Maybe. Likely? Naaa!
Sadly, this won't be the last post about this topic. But I suppose you might have guessed that.
Ciao for now.
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