Sunday, October 23, 2011

Collapse of Dexia points to global risks

As a NY Times article by Gretchen Morgenson and Louise Story points out, Europe is on the verge of replaying the failed policies of 2008-2009.  Specifically, public money is being used to bailout Dexia's creditors.

Once again governments are taking action based on the fear of contagion and the idea that "losses" will bring down the banking and financial system.

There is only one cure for contagion:  disclosure of each bank's current detailed assets and liabilities.

The fact that three years have passed since AIG and a global data warehouse has not been set up to cure contagion is simply disgraceful.  There is no excuse for not having done so!

This is a classic example of how the global financial regulators create financial instability at huge cost to taxpayers.
Among Dexia’s biggest trading partners are several large United States institutions, including Morgan Stanley and Goldman Sachs, according to two people with direct knowledge of the matter. 
To limit damage from Dexia’s collapse, the bailout fashioned by the French and Belgian governments may make these banks and other creditors whole — that is, paid in full for potentially tens of billions of euros they are owed. This would enable Dexia’s creditors and trading partners to avoid losses they might otherwise suffer without the taxpayer rescue. 
Whether this sets a precedent if Europe needs to bail out other banks will be closely watched. 
The debate centers on how much of a burden taxpayers should bear to support banks that made ill-advised loans or trades. 
Many on Wall Street and in government argue that rescues are essential, to avoid the risk of destabilizing the financial system — with one bank’s failure to pay its obligations leading to problems at other banks. 
But others counter that the rescue of Dexia is reminiscent of the United States’ decision to fully protect big banks that were the trading partners of the American International Group when it collapsed, a decision that was sharply questioned and examined by Congress. 
Critics warn of a replay of the financial crisis in autumn 2008, when governments used taxpayer money to shore up troubled companies, then allowed them to transfer those funds to their trading partners to protect those institutions from losses. I 
n using public money to rescue private institutions, these critics say, policy makers effectively rewarded banks that traded with companies that were in trouble, rather than penalizing them, and that encouraged risky behavior. 
“The question is did the A.I.G. experience and the bailouts generally contribute to the current situation?” asked Jonathan Koppell, director of the School of Public Affairs at Arizona State University. Would the banks, he continued, “have had a different view in dealing with Greece — or with Dexia for that matter — if those who had dealt with A.I.G. hadn’t been made whole?” 
Given the global and interconnected nature of the financial system, institutions around the world have other types of indirect risk to European debt problems. But the scope of these ties is not fully known, because the exposure is hidden by complex transactions that do not have to be reported in detail.

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