Saturday, October 22, 2011

Its hard to fix the European financial system when bank lobbyists are invited to the summit

According to a Bloomberg article, as the European finance ministers debate how to solve the sovereign debt and bank solvency crisis the banking industry lobby is present at the summit.

How ridiculous is that?

Do any of these finance ministers expect the industry lobbyists or the European equivalent of Wall Street investment bankers to actually recommend a solution that does not benefit the industry?

Do any of these finance ministers actually understand that Wall Street is set up to make money if the ministers adopt their self-serving suggestions or to make money by saying the sky is falling if the ministers do not adopt these suggestions?

When I first proposed the FDR Framework's blueprint for saving the financial system, I realized it was an uphill fight to get it implemented even though the mainstream media had finally discovered the link between disclosure and trust/confidence.

Even though the banks have their lobbyists present and Wall Street is also well represented, I still expect the EU finance ministers to realize that all they are seeing is variations of failed ideas.  The EU finance ministers know these ideas failed before because they previously implemented them and turned a bank solvency crisis into a sovereign debt crisis.

I expect the EU finance ministers to listen to the UK's George Osborne's call to end "sticky plaster" short-term solutions.

When that occurs, the EU finance ministers will recognize that US Treasury Secretary Tim Geithner is right.  They do have the ability to solve the problem themselves.

They can simply apply what Walter Bagehot recognized in 1883.  "A well-run bank needs no capital.  No amount of capital will rescue a badly run bank."

The solution that common sense dictates is not to bailout banks, but rather to force the banks to become well run banks.

This requires the banks to take the losses on all the debt that the banks should not have underwritten in the first place.  This is not some option to be negotiated with the banks.  This is the country which hosts each of these banks exorcising its authority and telling the banks what they will do.

At the same time, the EFSF will guarantee all deposits at the European banks to reduce the possibility of a bank run.  Finally, the finance ministers will require that all Eurozone banks disclose their current asset and liability level data on an ongoing basis so that market participants, including regulators, can monitor these banks to be sure that they are well-run from now on.

Of course the lobbyists and investment bankers will dislike this solution, which is another reason to believe that it is the right solution.
A 10-hour meeting in Brussels failed to yield a blueprint for banks’ role in a revamped Greek rescue as European finance ministers haggled over what they called a “credible firewall” against fallout from deeper writedowns. 
The ministers’ meeting broke up at about 7 p.m. after reaching agreement that European banks may need about 100 billion euros ($139 billion) in capital after marking their sovereign-debt holdings to market values, according to a person familiar with the discussions. This amount is needed to reach a core tier 1 capital level of 9 percent based on a European Banking Authority test, said the person, who declined to be identified because discussions are private. 
The struggle to get an accord on bank capital was just one piece of solving the two-year-old financial crisis. Governments also are pushing for deeper writedowns on banks’ holdings of Greek debt, a step the investors are resisting. 
“Discussions are making progress, albeit limited,” Charles Dallara, managing director of the Institute of International Finance, the umbrella group for 450 of the world’s biggest financial companies, said in a statement late today. 
The negotiations were part of a six-day stretch of talks aimed at stopping contagion spreading to Spain and Italy as the turmoil pushes Greece closer to default, roils global markets and dents confidence in the survival of the 17-nation currency. Finance ministers now yield the conference tables after two days of talks to leaders, who meet tomorrow and on Oct. 26.

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