Thursday, July 26, 2012

Sandy Weill calls for Swedish model and 'repudiates Geithner and Bernanke's entire financial strategy'

In his blog post, George Washington explains how Sandy Weill's call for transparency and breaking up the big banks repudiates the entire strategy for handling the bank solvency led financial crisis that Tim Geithner and Ben Bernanke have been pursuing.

Regular readers know that they have been pursuing the Japanese model for handling a bank solvency led financial crisis.  Regular readers know this model has never worked and only makes the ultimate cost of fixing the problem orders of magnitude bigger.

Regular readers know that your humble blogger has championed the Swedish model for handling a bank solvency led financial crisis since the beginning of the financial crisis.  Under the Swedish model, banks recognize all of their losses today and subsequently rebuild their book equity through retention of 100% of pre-banker bonus earnings.

Under the Swedish model, banks have to mark all their assets to market.  In addition, they need to provide ultra transparency and disclose on an on-going basis their current global asset, liability and off-balance sheet exposure details.

These details are important as they let market participants confirm that the bank has recognized all of its losses.

In addition, these details allow market participants to exert discipline so that banks do not take excessive risk while rebuilding their book capital levels (ultra transparency prevents the 'gambling on redemption' behavior shown during the US Savings & Loan Crisis).

In his statement, Sandy Weill effectively calls for adoption of the Swedish model.

It is - justifiably - big news that former Citi CEO Sandy Weill said that we should break up the big banks, and separate traditional depository banking from speculative investing. 
Indeed, even congress members are confronting top government officials on why they haven't done this. 
But Weill said 3 other equally important things today. 
First, Weill told CNBC that the financial crisis was largely caused by too much leverage, and that we should reduce leverage to between 12-15 times. (Background.) 
Secondly, Weill said that we have to restore transparency, so that nothing is hidden off balance sheet. (Leading economist Anna Schwartz told the Wall Street journal in 2008: “The Fed … has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”) 
Regular readers know that the only way to restore the credibility of financial firms' balance sheets is for them to provide ultra transparency..
Third, Weill said that assets must be marked to market every day. 
If banks have to mark their assets to market, they will end up recognizing all the losses currently hidden on their balance sheets.  The very heart of the Swedish model.

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