Ben Bernanke and Mervyn King see British Bankers' Association as responsible for dealing with Libor 'fraud'

Since the beginning of the financial crisis, we have had a number of 'you could not make this stuff up moments'.  Today's testimony by Fed Chairman Ben Bernanke to Congress and by Bank of England's Governor Mervyn King to Parliament provided one of those moments.

Both men indicated that it was the responsibility of the British Bankers' Association to deal with the fact that Libor could be manipulated by the banks for their benefit.

The British Bankers' Association that just happens to be run for the benefit of the banks that were engaged in manipulating Libor for their benefit.  As David Zervos at Jeffries & Co said,

It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. 

The OTC derivatives markets was designed by the big banks, for the big banks, to ensure that as they set up their own private securities exchanges - away from regulatory scrutiny - they could control the interest rate settings. 

Money center commercial banks did not want the "truth" of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses.

It was not just anyone who was saying it was and is the British Banker's Association's responsibility.

• Mr. Bernanke is the chairman of the US central bank that just happens to have full responsibility for the supervision and regulation of the large US banks involved in the Libor scandal.

• Mr. King is the governor of the UK central bank that just happens to be in the process of having full responsibility for the supervision and regulation of the large UK banks involved in the Libor scandal transferred to it.

At a minimum, this recommendation to outsource supervision to the banks who are committing fraud suggests that PhD economists are unfit for heading up or having any involvement with an organization responsible for bank supervision.

From a Guardian article on their testimony,

The heads of the US and UK central banks have described as "fraud" the manipulation by Barclays of the international lending rate, Libor. 

The US Federal Reserve chairman, Ben Bernanke, said the process for setting the rate was "structurally flawed" and that he could not guarantee its reliability.

The solution of course is to base Libor off of actual trades that are disclosed as part of the requirement that banks provide ultra transparency and disclose on an ongoing basis all of their current global asset, liability and off balance sheet exposure details.

Mervyn King, the Bank of England governor, said that deliberately rigging the Libor rate for private gain was "my definition of fraud"....

Bernanke told a Senate banking committee hearing that there was little the US central bank could do to reform the system, which has rattled investor confidence in financial markets, because it has no control over how it is set.

Actually, there was plenty the US central bank could do, but so far has elected not to do.

For example, it could have required US banks that are on the Libor panel to disclose their trades.

For example, it could have mentioned the fact that Barclays had confessed to manipulating Libor prior to the debate over the Dodd-Frank Act.  The Financial Times' Martin Wolf showed that this would have resulted in transparency being included in the Dodd-Frank Act as he linked the need for transparency to the Vickers Commission reforms.

The reliability of the London Interbank Offered Rate, the interest rate that underpins transactions worth trillions of dollars, is under question with the revelations that bankers sought to move rates to profit on trades and to hide its borrowing costs during the 2007-09 financial crisis. 

"I would like to see additional reforms to the Libor process, assuming that Libor will continue to be a benchmark for financial contracts," Bernanke said at a Senate banking hearing held to discuss the state of the economy. 

Libor is set by a panel of banks, which submit estimates of how much they believe they have to pay to borrow from each other. Barclays is the only bank so far to settle with US and UK regulators over allegations that it manipulated the key interest rate. Dozens of other big banks – including at least two American institutions – are currently under investigation. 

Bernanke said the Fed had little power to change the way the benchmark rate is set. "We are and need to continue advocating for reforms to the Libor process. It is constructed by private organization in the UK, and so our direct ability to influence that is limited," he told lawmakers. 

In short, it is up to the British Bankers' Association.

Bernanke said he could not say "with full confidence" that Libor is reliable, because the "British Bankers' Association did not adopt most of the recommentations made by the New York Fed".

The recommendations by the New York Fed that came from the very banks manipulating Libor.  Had all the recommendations been adopted, it would not have prevented the ongoing manipulation of the Libor interest rates.

From a Telegraph article on Mr. King's testimony,

The BBA had to be nudged to get into the right direction, but once they had been nudged...they did work very hard to make a successful consultation.

So successful that the banks could continue to manipulate Libor through at least 2010.

IMF says Spanish bank recapitalization plan flawed

A Wall Street Journal article describes how the IMF is saying that the Spanish bank recapitalization is flawed because funds go through the government and not directly to the banks.

Channeling the money through the Spanish government is the least of the flaws in the recapitalization plan.

The more important flaws are

• In a modern banking system with deposit guarantees and access to central bank funding, banks do not need to have governments bail them out by injecting capital.  Banks are capable of absorbing all the losses on the excesses in the financial system today and rebuilding their book capital levels through retention of 100% of pre-banker bonus earnings.  The IIF suggested that this would take 4 years for the Spanish banks to do.

• Bailing out the banks is never accompanies with the requirement that the banks recognize all their losses.  As a result, the banks continue to support zombie borrowers to the detriment of creditworthy borrowers and the real economy.

• Governments have scarce resources and these resources should be used to support economic growth.  Bailing out banks is of no value if the economy goes into a depression.

• In the absence of ultra transparency and the requirement that banks disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, market participants will never believe the banks are adequately capitalized.  The absence of ultra transparency is a guarantee that the banks have something to hide.

From the article,

Spain said its crisis-hit banks will need as much as €62 billion ($78.75 billion) in new capital to absorb losses from a real-estate meltdown, as the International Monetary Fund warned that the euro-zone plan to aid the country may not work. 

Spanish lenders have been pummeled by a dive in property prices that hasn't yet bottomed out, as loans to households are going bad amid record-high unemployment. 

The cost of bailing out the banks will drive up Spain's debt load and threatens to freeze the country out of international markets, which could send shock waves across the euro zone. 

The currency bloc has promised Spain as much as €100 billion in aid, but because it will ultimately add to the government's debt load, investors have been dumping the country's bonds, driving up its funding costs. 

The IMF, which is a contributor to the European rescue programs and is providing technical assistance for the Spanish bank support, on Thursday came out sharply against the euro zone's insistence that any aid be channeled through the government. 

The euro zone needs to quickly set up a mechanism that allows it to directly recapitalize weak banks, "in order to break the negative feedback loop that we have between banks and sovereigns," IMF Managing Director Christine Lagarde said after a meeting with the bloc's finance ministers in Luxembourg....

A negative feedback loop that only exists because bankers need bailouts if they are to continue receiving their bonuses.

Earlier in the day, Spanish officials presented the results of stress tests by Oliver Wyman, a U.S.-based consulting group, which estimates that under an adverse economic scenario, Spanish banks would need between €51 billion and €62 billion through 2014, and by German consultancy Roland Berger, which estimates they would need €51.8 billion..... 

In an effort to shore up international confidence in its battered banks and to pave the way for euro-zone financial aid, the Spanish government hired the two consultancies to conduct stress tests on the sector's overall loan book to determine potential losses in base and adverse economic scenarios through 2014. The tests analyzed the sector's ability to absorb those losses and provided estimates of possible capital shortfalls in both scenarios. 

"The analyses are accurate, they're credible and they are manageable," said Spanish Prime Minister Mariano Rajoy at a meeting with local business leaders in São Paulo, Brazil.....

Just like the analyses there were done in Ireland, Greece,....

The latest plan to clean up the banking sector is Spain's fifth in three years. Some analysts questioned whether the new effort will be sufficient to shore up investor confidence. 

Phoenix Kalen, a macro credit strategist at Royal Bank of Scotland Group, said the €62 billion figure was lower than generally expected for worst-case scenarios. "Investors may have concerns that the stress tests weren't adverse enough," she said. "If investors could see the macro situation deteriorating more than is assumed in the worst-case scenario, they will question the [tests'] credibility."

Regular readers know that the only way to restore credibility is to provide ultra transparency.  With this information, market participants can independently assess the banks.  Confidence flows because market participants trust their own assessment.

Former Fed Governor Kevin Warsh adds his support to requiring ultra transparency

In a Wall Street Journal column, Former Fed Governor Kevin Warsh discusses how global policy makers are preventing informed judgments.

His solution is providing market participants with transparency.

Financial markets are in a precarious place, with European banks and sovereign balance sheets in the cross-hairs. Bank regulators are becoming increasingly aggressive, and euro-zone borrowing costs are rising as the debts of years past are coming due. 

In this environment, policy makers are finding their authority, credibility and firepower being tested. In turn, they are finding it tempting to pursue "financial repression"—suppressing market prices that they don't like. But this is bad policy, not least because it signals diminished faith in the market economy itself. 

Markets are not always efficient, but the market-clearing prices for stocks, bonds, currencies and other assets (like housing) are critical to informing judgments, in good times and bad. 

Market-determined asset prices often reveal inconvenient truths. But the sooner the truth is revealed, the sooner judgments can be rendered and action taken. 

By contrast, government-induced prices send false signals to users and providers of capital. This upsets economic activity and harms market functioning. 

Markets that rely on governmental participation will turn out to be less enduring indicators of value. 

In environments of financial repression, businesses are keener to retrench than recommit their time, energy and capital to new projects. Trillions of dollars of private capital remains on the sidelines. And the private-sector engine that drives prosperity sputters. 

Consider a few recent examples of this policy in practice: 

In Europe, share prices are falling among the largest banks, but these prices are little more than a symptom. European banks suffer from a lack of capital to offset future losses, and a lack of transparency that makes it futile to try to judge their financial wherewithal. 

This also applies to banks globally.

Until banks are required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, market participants will not be able to judge their solvency.

The bank problem is not some unfounded attack by greedy speculators, so a leading proffered solution—extending the ban on short-selling shares in big banks—obfuscates rather than informs. It also delays the necessary private-sector recapitalization....

Financial repression is sometimes the effect of policy even if it is not the intent. It manifests itself, for example, when policy makers react more forcefully to declines in asset prices than to increases. Price increases tend to be treated with benign indifference. But declines often lead policy makers to respond with force, deploying fiscal stimulus and monetary accommodation.... 

Efforts to manage and manipulate asset prices are not new. But history provides little comfort that these practices work. Interfering with market prices occasionally buys time, but rarely do policy makers seize the window of opportunity to enact structural reform. 

Financial repression embeds the wrong incentives—obfuscation begets delay, and a robust recovery becomes unattainable. 

The path to prosperity requires taking the long road. It requires policy reforms that make the economy less reliant on the preferences of government and more responsive to the market. 

That means prioritizing long-term growth over fleeting market stability, and giving precedence to structural reforms over temporary stimulus and market manipulation.

Nothing would be a bigger structural reform than requiring ultra transparency.

A modest proposal to save Spain from repeating the Irish mistakes in handling its banking crisis

A Bloomberg article reveals that Spain's newly elected government is seeking proposals for how to clean up its banking system.  This includes asking two academics for advice on setting up a bad bank to acquire the troubled real estate assets from its banking system.

Allow me to offer a modest proposal:  Before taking any action, require every Spanish bank to disclose on an on-going basis its current asset, liability and off-balance sheet details.

Since handling the banking crisis successfully requires that market participants think the crisis was handled, start the process of resolving the banking crisis by including the market participants.

Requiring that each bank provides ultra transparency does this.

With this data, market participants can independently assess each bank and value its assets.  This is the critical step if market participants are going to believe that the solution to the banking crisis actually solved the problem.

There is no way around doing this.  Like the Irish government, the Spanish government has already represented that the scope of the problem is less severe that the problem actually is.

To get around this, Ireland engaged a third party, BlackRock Solutions, to value the assets in its banking system.  Market participants confirmed the need for ultra transparency by effectively not believing the results and continuing their run on the Irish banks.

There are other benefits to ultra transparency including, but not limited to:

First, since each asset is being continually valued by the market, there is no reason for the banks not to work diligently to get the bad asset off their balance sheet.  Market participants are already anticipating the losses on the bad assets so there is no benefit to not addressing them.

Second, it eliminates the need for the Spanish government to recapitalize its banks.  So long as the Spanish government and European Financial Stability Fund guarantee the deposits and the guarantee is trusted, depositors will keep their money in the Spanish banks even if they are technically insolvent (market value of their assets exceeds the book value of their liabilities).

Three, it allows the banks to resume lending.  One of the biggest barriers to lending is nobody knows what the value of real estate pledged as collateral is.  By disclosing all the details on bank exposures, the market can determine a clearing price for real estate (that is what markets do after all).  With a 'market price', lenders can be comfortable taking real estate as collateral again.

Spanish Prime Minister-elect Mariano Rajoy has asked for at least two papers from academics on how to create a so-called bad bank, according to two people with knowledge of the matter. 

Both proposals outline mechanisms for a state-backed agency to buy soured assets such as real estate from banks at a discount, said the people, who declined be named because the process isn’t public. 

According to one of the proposals, Spain needs external financing of about 100 billion euros ($133 billion) to absorb the cost of transferring assets to the bad bank and should seek it from the European Financial Stability Fund or the International Monetary Fund, one of the people said. Both options call for valuations of real estate to be made by independent appraisers, the people said. 

The People’s Party, which won the Nov. 20 general elections in Spain by a landslide, has pledged a “cleanup and restructuring” of the country’s banking system to help restore the supply of credit in an economy where lending is shrinking at its fastest pace on record. 

Spanish banks, burdened with 176 billion euros of what the Bank of Spain terms “troubled” assets linked to real estate, are fighting to preserve profit as lending slumps and their cost of financing surges. 

Rajoy hasn’t been specific about how he’ll make banks deal with real estate on their books. 

His electoral program said his government would make it easier to “actively manage” the industry’s impaired assets so that they can be sold off....

Still, Faes, a Madrid-based research institute that is linked to the PP and chaired by former Prime Minister Jose Maria Aznar, favors creating a bad bank, Jaime Garcia-Legaz, secretary general of the organization, said in an interview on Oct. 24. 

Luis de Guindos, a former deputy finance minister under Aznar, said in an interview he wants to “eliminate all doubts” about valuation of real estate on the balance sheets of banks.

As Ireland has shown, the only way to do this is by providing ultra transparency to the market.  Not letting market participants have access to the data to assess the valuation fo real estate for themselves tell the market participants that there is something to hide.

The 52 percent of the more than 300 billion euros of assets linked to developers that the Bank of Spain deems to be “troubled” dwarfs other risky assets held by the industry such as the combined 13 billion euros banks own of Greek, Italian, Portuguese and Irish sovereign debt. 

Banks may face more than 60 billion euros of losses they haven’t covered with reserves as the economy risks tipping back into a recession, Banco Bilbao Vizcaya Argentaria SA (BBVA)’s research department said in a Nov. 8 report.

Surprise! Europe's banks to raise little new capital from investors as a result of 9% Tier 1 mandate

According to a Bloomberg article, the analysts have crunched the numbers on the European regulators requiring Eurozone banks to hit a 9% Tier 1 capital ratio and discovered the Eurozone banks will require little in the way of new capital from investors.

The analysts reached two conclusions.

First, the 9% Tier 1 capital ratio will not restore investor confidence as the issue is what are the banks' current exposures and the lack of credibility of their risk models.  In addition, it is the peripheral banks and not the core "systemic" banks that need to raise capital.

This conclusion is not a surprise to regular readers as they know that it will take disclosure by each bank of its current asset, liability and off-balance sheet detail data to restore investor confidence.

Second, the 9% Tier 1 capital ratio mandate is just another exercise in "extend and pretend" by the Eurozone policymakers and financial regulators designed to buy time.

Europe’s largest banks may raise just a tenth of the total capital shortfall estimated by regulators, fueling concern policy makers’ plans to bolster the region’s lenders could fail.... 

Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends...

“The issue is how much fresh capital will be brought in,” Philippe Bodereau, head of credit research at Pacific Investment Management Co. in London, said in a telephone interview. “It would be positive if we saw banks launching rights issues, but they won’t. This is hardly shock and awe.” 

Lenders may sell as little as 6 billion euros of new stock to investors to plug the shortfall, according to Alastair Ryan, an analyst at UBS AGin London. That’s seven times less than the amount banks will raise from retaining earnings and adjusting risk-weightings, he said. 

Before last week’s summit, analysts at JPMorgan Chase & Co. and Credit Suisse Group AG had estimated banks might need as much as 250 billion euros more capital. 

Now, only Banco Bilbao Vizcaya Argentaria SA of Spain, Germany’s Commerzbank AG, France’s BPCE SA, Austria’s Raiffeisen Bank International AG and four Italian banks -- UniCredit SpA, Banco Popolare SC, Banca Monte dei Paschi di Siena SpA and Unione di Banche Italiane ScpA -- need to raise money, according to [Morgan Stanley analyst] Van Steenis. 

“Surely, no one thinks that by allowing banks to avoid raising capital in all these various ways it’s going to give investors more confidence,” said Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director at New York-based Citigroup Inc. “Part of the issue for a long time has been the lack of credibility of bank balance sheets and their risk models. This isn’t going to help.” ...

Greece’s six banks will need to raise about 30 billion euros, more than any other EU member state, the EBA said. That shortfall is covered by existing backstop arrangements with the EU and International Monetary Fund, so Greek lenders wouldn’t have to tap investors, according to the EBA. 

Spanish banks have the next-biggest deficit, according to the regulator. Yet Banco Santander SA and BBVA SA, the country’s two biggest lenders, have said they won’t raise capital. 

They will instead rely on profit and changes to the way they calculate risk-weighted assets to meet the target.

Under the Basel rules, firms use internal models to decide how much capital to assign to assets based on their own assessment of a default. The models aren’t disclosed and banks can reach different risk-weightings for the same assets, regulators and analysts say....

Italian banks have a 15 billion-euro shortfall, according to the EBA. UniCredit, which has a 7.4 billion-euro deficit, said it may be able to reduce that to 4.4 billion euros by counting 3.3 billion euros of hybrid securities as core capital. The Milan-based lender, the country’s biggest, said it’s working to identify “capital management actions to be put in place,” without adding further details.... 

France’s BNP Paribas SA and Societe Generale SA, which in September began programs to trim a combined 300 billion euros in assets, said last week they can meet the new capital targets without tapping shareholders or the government. 

President Nicolas Sarkozy said on Oct. 27 he has asked the banks to shift “almost all” of their dividend payments into strengthening their balance sheets and make their bonus practices “normal.” 

Deutsche Bank AG and Commerzbank AG, Germany’s biggest lenders, also are cutting assets and selling businesses to meet the threshold. 

The method used to determine how much capital banks need to raise “puts the onus on peripheral banks and limits the impact on core banks,” said Pimco’s Bodereau. “The big weakness is that banks that are truly systemic are headquartered in London, Paris and Frankfurt and not in Athens.” 

Southern European banks that can’t raise capital may still need to shrink their balance sheets by as much as 40 percent to meet the new requirements and run the risk of having to rely on state injections, Mediobanca analysts including Alain Tchibozo wrote in a note to clients on Oct. 28. 

“They’ve cobbled together a sticking-plaster solution,” said Jonathan Newman, an analyst at London-based Brewin Dolphin Holdings Plc, which manages about 25 billion pounds ($40 billion). “While it’s desirable for them to have been tougher, the reality was they couldn’t afford to be tougher. Banks wouldn’t have been able to raise the money privately, so they would have had to go to governments, which then puts the sovereign at risk.”

Run on the Irish banks continues

According to an article in the Independent, Ireland's banks are now paying depositors more for their money than they are charging for a mortgage loan.

Regular readers know that the reason the banks are offering to pay so much for deposits is that individuals and firms do not trust that they are solvent.  By forcing the depositors to keep their money with the bank for at least one year, the banks are hoping to slow down the run on deposits they are experiencing.

SAVERS have seldom had it so good.  So desperate are our banks for us to lend to them that they will actually give you a higher interest rate on your deposit than they are charging on some mortgages. 

Money that is deposited for a year or more is the most sought after with interest rates in excess of 4pc not unusual. 

Some banks are advertising deposit rates that are almost the same as their mortgage rates. 

Take AIB. It is currently offering 4.1pc on deposits for a 12-month term. 

The same institution is offering mortgages for new buyers as low as 3.34pc. 

Simon Moynihan of the price comparison website Bonkers.ie says this means those with savings are in a very lucky position. 

"Instead of lending us money, the banks are now desperately trying to get us to lend money to them. 

"But they don't want to be troubled with pesky withdrawals, so they're offering the highest interest rates on accounts where money is locked down for a year or more."

George Osborne wants comprehensive, not "sticky plaster", solution in Europe

According to a Telegraph article, UK Chancellor George Osborne is going to push the European Union for a comprehensive solution to its sovereign debt and bank solvency problems.

He wants to rule out short term measures that are only "sticky plaster" solutions.  Included in this list of short term measures would be bank recapitalizations (also known as bailouts).

We know that bank recapitalizations are not a long term solution as they were tried in Europe in 2009 and managed to expand a bank solvency problem into a sovereign debt problem.  Examples of this include Ireland, Greece, Portugal, Spain and, over the last few weeks, France.

Regular readers know that there is only one proven comprehensive solution to Europe's sovereign debt and bank solvency problem.  This solution was outlined on this blog as the blueprint for saving the financial system.  This blueprint is based on disclosure of each bank's detailed asset and liabilities.

Under the FDR Framework, market participants will use this data to determine who is solvent and the path back to solvency for those banks that are currently insolvent.  It is this activity by the market participants that a) restores confidence in the financial system and b) comprehensively solves the sovereign debt and bank solvency problem.

"The crisis of the eurozone is a real danger to all of Europe's economies, including Britain," said the Chancellor, arriving for a meeting of all 27 EU finance ministers in Brussels this morning. 

"What we're going to be arguing for at this meeting is a comprehensive solution to this crisis. We've had enough of short-term measures, sticking plaster that just gets us through the next few weeks."

NY Times' Editors join in call for banks to provide current detailed disclosure

In their October 13, 2011 editorial, The Banks Falter, the NY Times' editors call for banks to provide current detailed disclosure on their loans and investments (this is the granular asset and liability-level disclosure this blog has been talking about).

Specifically, they said,

Investors, meanwhile, are pricing banks’ stocks below the banks’ book value — a sign that they don’t believe the banks are worth what the banks say they are. 

The questions generally involve whether banks are properly valuing their loans and investments and the extent of their exposure to shaky European debt. 

Banks could fix this with increased and detailed disclosure. 

Government officials and regulators could compel that disclosure. The general failure on this front feeds the air of skepticism. 

One of the lessons from the financial crash is that there is no substitute for transparency. In the new earnings season, investors are still in the dark.

Larry Fink: Regulators Broke Europe; TYI: Regulators can fix Europe

A Wall Street Journal blog summarized BlackRock Chairman and CEO Larry Fink's speech on the European financial crisis succinctly as regulators broke Europe.

The finger of blame is pointing all over the globe when it comes to the European sovereign-debt crisis. BlackRock CEO Larry Fink knows exactly who is at fault. 

“You could argue this was created by regulators,” Fink said of the Eurozone crisis at today’s “Delivering Alpha” conference. “This was not an accident. This was a very visible action by banks and regulators are aware of it. And now we’re sitting with some deep exposures to sovereign credits….

Mr. Fink has gone further than say that regulators are a source of financial instability.  He has specifically said that regulators are a cause of financial instability.

How exactly did the regulators cause Europe's current sovereign debt and banking crisis?  He attributes it to the regulators being aware of what the banks were doing and not taking action.

Why is this the regulators' fault and not a failure of market discipline given that buying sovereign credits "was a very visible action by banks"?  Because the regulators had a monopoly on all the useful, relevant information about bank sovereign debt exposures.

It was only with the latest stress tests that banks were required to disclose this information.

Since then, lead by BNP Paribas, the French banks have been moving towards 'utter transparency' and disclosure of the 'hard facts'.

To me it’s going to require similar actions to what we did in ’08 and ’09 to stabilize.” 

Memories are short, Fink said, and investors are uncertain of what the policy response could look like. “Until we have greater comfort that government is going to do the right thing, it’s pretty binary.”

These actions presumably include the European version of TARP and PPIP.

Regular readers know that taking "similar actions to what we did in '08 and '09" is the absolutely wrong strategy and would waste a considerable quantity of taxpayer money.  Rather than address the problem, these actions address the symptoms.

The issue the market is dealing with is trying to answer the question of which banks are solvent and which are not (including the impact of restructuring government debt).  The only way this issue can be addressed directly is with disclosure that provides 'utter transparency'.

It is only with this information that the market can determine which banks are solvent and which are not.  It is only with this information that the market can determine which of the insolvent banks is capable of earning its way back to solvency and which need to be recapitalized or closed.

It is only by going through the steps of disclosure, analysis and then action that the problem of solvency can be addressed.

When I proposed this solution to the US Treasury in 2008, they agreed with me that addressing the issue of solvency required going in order through these steps, but they felt they needed to "buy" time as disclosure and analysis was not going to happen over night.

The rest is history.  The Great Reprieve from the financial crisis that began in 2007 was bought at large cost to the taxpayers.  Unfortunately, the time of the Great Reprieve was not used to bring disclosure and address the global solvency issue.

Today, the global solvency issues have returned and Europe no longer has access to a charge card for buying time.  The German public has sent the clear message that taxpayer money has to be spent on addressing the underlying solvency problem and not on an unending stream of bailouts.

Fortunately, Europe has an alternative for buying time that will allow it to take the steps of disclosure, analysis and then action.

The alternative is a statement by the regulators.  This statement has two parts.

• The first part includes a reminder that the regulators have access to all the useful, relevant information that other market participants do not have.  The statement then goes on to honestly lay out what the situation really is for the European banks on a bank by bank basis. 
• This is not a statement of how each bank performed on the stress tests.  The results of the stress test are a combination of a bank's current position and assumptions made by regulators about the future.  
• This is a statement of each bank's current condition.  It is the starting point off of which all other market participants should and will base their analysis of a bank's solvency.

• The second part is to implement 'utter transparency' under which banks will disclose their current asset and liability-level data. 
• The US Treasury is right that this will not happen over night.  A much more realistic time period is 36 - 48 months for implementing disclosure through a data warehouse. [by way of background, I have designed and patented information technology for collecting, standardizing, and disseminating loan-level information through a data warehouse.]

This statement sends a very powerful message.  It asks the market to trust the regulators.  Perhaps more importantly, it tells the market that it is going to receive the information necessary to verify that what the regulators said is the situation is in fact what is happening.

Trust but Verify.

This is a very powerful combination that will provide Europe with the time it needs to implement disclosure.

British banks ordered to disclose foreign government debt exposure

An Independent article reports that the Financial Services Authority is requiring that British banks disclose their foreign government debt exposure in a bid to head off contagion fears.  Not only does the FSA want this disclosure, but it wants it updated on a daily basis.

Without explicitly endorsing the FDR Framework, the FSA has championed it.

The FSA is saying in no uncertain terms that providing the financial market participants with disclosure produces financial stability.

The Financial Services Authority (FSA) has stepped up scrutiny of UK banks' exposures to foreign government debt as fears of European sovereign debt contagion sent markets into a renewed frenzy yesterday. 

The City watchdog is in talks with Britain's banks and their auditors to ensure consistent disclosure of their sovereign holdings according to the standards of the recent European stress tests in their year-end results. 

As fears over which banks could be hit by downgrades of sovereign bonds continue to rattle markets, the FSA has also upped its day-to-day monitoring of UK lenders' exposures. 

An FSA spokeswoman said: "We have been holding discussions with the banks and their auditors in relation to their sovereign exposures. What we are looking for is greater consistency and disclosures across firms to give the market clear information." 

Yesterday marked another round of turmoil for Europe's banks as fears about exposures to debt-stretched economies made investors question their ability to fund in the market. 

Shares in Société Générale gyrated as the French lender sought to stamp out doubts about its financial strength. The bank was the focal point of Wednesday's rout of bank shares. 

SocGen's chief executive, Frederic Oudea, staged a fightback overnight, dismissing negative speculation as "absolute rubbish". He called for the French market regulator to investigate the source of market rumours. 

"People are scared so the tiniest information touches off irrational fears," he said. "[Our clients] should not listen to this stuff, which is totally baseless." 

Did Dick Fuld at Lehman say something similar?  The reason disclosure is needed is so that market participants can Trust, but Verify!

His comments rallied the shares but they then fell more than 9 per cent in a day of frenzied trading before closing up 3.7 per cent. Speculation about a European ban on short selling helped boost shares. BNP Paribas, France's biggest bank, closed up slightly after falling up to 7.5 per cent earlier. 

However, average short interest across the Euro Stoxx banks sector was 2.85 per cent, only marginally above the average for European companies in general, according to Data Explorers figures. Short interest in SocGen was 1.23 per cent and was 1.95 per cent for BNP Paribas. 

The figures suggest short selling was not a major factor in the banks' declines, though rumours planted by a few short sellers can wreak havoc. 

The cost of insuring SocGen's senior bonds hit a fresh record, according to data provider CMA. Speculation about a downgrade of France's sovereign debt, a bigger bailout for Greece and the bank's ability to raise funds put SocGen shares under pressure. 

Banks' overnight borrowing from the European Central Bank hit a three-month high as prices for inter-bank lending showed Europe's banks increasingly unwilling to lend for longer than overnight. 

Analysts at Royal Bank of Scotland said SocGen was among European banks that rely most heavily on short-term wholesale funding. 

"The mix of euro doubts and rating fears in recent days and weeks may have dented the confidence of funding counterparties, which has then fed back into equity markets," they said. 

Market Confidence

Under the FDR Framework, the only source of market confidence is disclosure.  With disclosure, investors can be confident in their investment decisions because they know they had access to all the useful, relevant information in an appropriate, timely manner prior to making the buy, hold or sell decision.

Recently, market confidence has been linked to the push for austerity.  This linkage has been phrased as "if we cut the deficit, it will restore market confidence."

Cutting the deficit has nothing to do with market confidence.

Cutting the deficit simply cuts one source of demand in the economy.  Unless government spending was crowding out the private sector, investors see the drop in demand as reducing the growth rate of the economy and the ability of both the private and public sector to service its debt.