Saturday, September 17, 2011

Europe rejects Geithner's failed bailout strategies

As was broadly reported (for example, this Telegraph article), the European finance ministers firmly rejected the bailout strategies proposed by US Treasury Secretary Geithner.

There could be a number of explanations for this rejection.
  • They could have rejected the idea because they knew that the countries that would be required to fund the bailout would not do so.  This is a tad simplistic because what countries like Germany have ruled out is an endless stream of bailouts that do not solve the underlying problem.
  • They could have rejected the proposal because they could see that it transfers vast quantities of wealth to individual bankers and elite traders while saddling the sovereign with a tremendous debt load and failing to restore confidence in the banking system.
  • They could have rejected the idea because they resented being advised to adopt a solution where the speaker would not put his country's money where his mouth is.  After all, when pushed on the question of would the US help to fund the bailouts, Mr. Geithner said absolutely not.
My preferred explanation is that because they have a monopoly on all the useful, relevant information about the European banks, the European policy makers rejected the suggestion because the facts did not show it was required. [I like this much better than they have the facts and are in denial.]

Remember, the regulators just conducted stress tests on these banks.  Presumably, these stress tests were based on all the facts, particularly since the previous stress tests which avoided any inconvenient facts failed so miserably.

Facts that BNP Paribas and Societe Generale confirmed with their recent disclosures.

What Mr. Geithner came to discuss was an analysis that was short on facts and long on fear driven assumptions.

In fairness to Mr. Geithner, since he was part of the US stress tests, he knows that the results of stress tests can easily misrepresent the true condition of the banks.  This blog has pointed to the possibility of Bank of America needing upwards of $200 billion in additional capital despite being required to raise a fraction of this under the first stress test as an example of the potential for intentional or inadvertent misrepresentation.

Your humble blogger has said that the path forward for Europe is for the policy makers and regulators to disclose the facts.  First, through a statement.  Second, through the promise and implementation of 'utter transparency' in terms of setting up a data warehouse to provide on-going disclosure of each bank's current asset and liability-level data.

By disclosing the facts, policy makers and regulators can reframe the discussion of bank and sovereign solvency so that everyone is using the same information.  

By promising and implementing disclosure, policy makers and regulators can address the existing fear driven assumptions.  After all, policy makers and regulators would not disclose the information if it were going to show that the situation was worse than they described in their statement.

Fear driven assumptions must be addressed because in any leveraged financial system there is not enough equity to support the system in the face of these assumptions.

It is only by returning the conversation to the facts, that assumptions are constrained by the facts and not emotions like fear.

No comments: