He takes requiring ultra transparency one step further than I do and suggests that the banks be broken up and restricted in the activities they can engage in. A concept he calls Limited Purpose Banking. The parallel to a limited purpose bank in the financial world is a mutual fund.
Joe Nocera’s outstanding column about the Libor scandal and Barclays tells us four key things.
First, we cannot rely on “trustworthy” bankers to protect and run the financial system.Please re-read the highlighted text as this is a critical point that your humble blogger has been talking about since the beginning of the financial crisis.
Our modern financial system is not designed so that we should ever be in a position where we have to rely on 'trustworthy' bankers to protect and run the financial system.
Rather, our modern financial system under the FDR Framework is designed based on disclosure so that market participants can Trust, but Verify.
Second, the regulators weren’t in a position to independently assess whether Libor was being rigged.This is an example of our regulators failing. Their failure was not for failing to be in a position to assess whether Libor was being rigged or not.
Their failure occurred when Libor was first established and they did not ensure transparency in the setting of Libor by requiring that it be based off of actual, disclosed transactions.
The regulatory failure for the last 30+ years has been the failure to perform their primary responsibility which is to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.
Third, “$350 trillion worth of derivatives and $10 trillion worth of loans are based on Libor.” This means that the banks involved in rigging Libor could be subject to enormously expensive civil litigation.Another way of looking at this is that the present value of the banks' losses is likely to exceed their current book capital levels.
This makes a mockery of any regulator who suggests that the largest banks in the world are adequately capitalized and should bring an end to pursuing the Japanese model and the protection of bank book capital levels.
Fourth, the banks are going to try to deflect the blame for their malfeasance onto regulators....Given the regulators' failure to ensure transparency, the regulators put themselves in a position to be blamed for allowing the banks to manipulate Libor.
It’s time to face financial facts. Opacity and leverage are the core problems with our banking system ...
The problem with opacity is that even the slightest sign of fraud or financial distress places everything the opaque bank is doing under suspicion. And since creditors can take their money and run, that’s exactly what they do.
No one can tell today how deep the rot in Barclays runs or how many other “risk managers” at JP Morgan are actually “risk manufacturers.”
No one can tell the true condition of the BIGPIS (Belgium, Ireland, Greece, Portugal, Italy, and Spain) banks and no one trusts their books.Please re-read the highlighted text as Professor Kotlikoff has nicely summarized several of the problems that your humble blogger has been talking about since the beginning of the financial crisis.
Yet there is not a single official in the U.S. or Europe brave enough to take on the bankers and say what needs to be said, namely:
“Boys and girls, the party’s is over. You have one job and one job only — financial intermediation.
If you want to gamble, be our guest. But do so on your own time, in your own home, and on your own dime. As a group, you are not to be trusted. So we’re going to let you exercise your significant skills and generally good judgment, but in a way that doesn’t threaten our savings, jobs, and families.....
There is a way forward that doesn’t require David Cameron wasting his breath calling for better banking culture.
We can fix the banks, but to do so, we need to crush a lot of their eggs, starting with their claim to proprietary information.
It’s time to end faith-based banking and make the master secret-keepers do what other honest businesses do — disclose what the hell it is they are selling.Disclosure is an elegant, proven solution.