Most troubling aspect of Standard Chartered's Iran scandal is Peter Sands advised UK government to bailout banks

The Telegraph reported on the possibility of Standard Chartered having its $190 billion dollar clearing operation in New York closed as a result of what the New York State Department of Financial Services  said was its intentional violation of US money laundering laws.

Naturally, Standard Chartered is saying it didn't do what it is accused of doing and if it did the number of transactions involved was a fraction of what the NY authorities claimed.  Which is not much of an excuse given that zero transactions could have been easily achieved.

To me, the most troubling aspect of this scandal is not that it occurred.

Since the beginning of the financial crisis, we have discovered that every large global financial institution has had a culture that permitted, some might say, encouraged bad behavior.  This is just another unsavory example.

As former Barclays CEO Bob Diamond said, culture is how you behave when no one is watching.  The fact that banks are wrapped in opacity means no one is watching and bankers had and have the opportunity to behave badly.

To me, the most troubling aspect of this scandal is that the UK government turned to the head of Standard Chartered, Peter Sands, for advice and as a result implemented a bailout of the banks.

Regular readers know that in a modern banking system, banks do not have to be bailed out.  Deposit guarantees and access to central bank funding allow banks to operate with negative book capital levels. As a result of the deposit guarantees, taxpayers are banks' silent equity partner when the bank has negative book capital levels.

Banks are designed to absorb the losses on the excesses in the financial system and protect the real economy.

With Standard Chartered's Iran scandal have we finally run out of bankers the UK government will take advice from that recommend bailouts over requiring the banks to recognize their losses and provide ultra transparency to confirm the fact?

Standard Chartered could be expelled from Wall Street amid explosive allegations that for 10 years the bank “schemed” to bypass American anti-money laundering sanctions and process $250bn (£160bn) of transactions on behalf of Iranian clients. 

New York’s top financial regulator has claimed that “flagrantly deceptive actions” by the British bank left the US “vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”. 

In a devastating 27-page order Benjamin Lawsky, superintendent of the New York State Department of Financial Services, claims that Standard Chartered Bank (SCB) “operated as a rogue institution” – and that the bank’s group directors in London were complicit. 

In October 2006, the head of the bank’s American operations “sent a panicked message to the group executive director in London” saying that the bank’s handling of Iranian clients could cause “catastrophic reputational damage”. The unnamed director allegedly replied: “You f****** Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.” 

The order ... claims: “Motivated by greed, SCB acted for at least 10 years without any regard for the legal, reputational, and national security consequences of its flagrantly deceptive actions. 

Lord Davies, the former Labour minister, was chief executive of Standard Chartered between 2001 and 2006. The current chief executive, Peter Sands, was promoted to the top job from finance director in November 2006. Mr Sands, one of Britain’s most respected bankers, was credited with masterminding the “Balti bail-out” that shored up the financial system at the apex of the crisis in 2008.

Update
The Wall Street Journal focused on the hit to both Standard Chartered's and Peter Sands' reputation and the simple fact that shutting down the dollar clearing operation would have very negative consequences for the bank.

In the U.K., Mr. Sands has long been heralded as a voice of reason in the country's turbulent banking sector. The former consultant, who was named Standard Chartered CEO in 2006, regularly espoused the importance of sound governance and sensible investment. 

While several of its British peers were being bailed out by taxpayers, Mr. Sands was guiding the Asia-focused bank to record profits boosted by growing trade between emerging nations. The executive stressed the fact that Standard Chartered doesn't have an investment bank and didn't need European Central Bank cheap loans to keep its business ticking over. 

As a result, Mr. Sands is one of the few top British bankers to see his stock rise in the past decade.... 

At this stage, few analysts expect the allegations to have any bearing on Mr. Sands's job. 

However, some wonder why Standard Chartered was taken so flat-footed by the report. "It's not going to be helpful that the management team was basking in the glory saying that they weren't hit by compliance scandals," said Gary Greenwood at Shore Capital. "It doesn't look good as they probably ought to have known this was going on." 

When asked by reporters about the U.S. investigation last week, Mr. Sands played down its importance. 

The New York State Department of Financial Services on Monday threatened to revoke the license of Standard Chartered Bank, a U.S. unit of the U.K. bank located in midtown Manhattan. 

Standard Chartered's U.S. dollar clearing business is the seventh largest in the world, according to Deutsche Bank. Standard Chartered has positioned itself as a facilitator of trade between Western and emerging nations, so being able to offer this service is critical, analysts say. 

However, the bank can easily afford the fine, said Mr. Greenwood.  The real cost, he said, is to the management's reputation.

Without data, US housing policy "absolutely insane"

Salon (hat tip Matt Stoller) ran an interesting article on the need for a single mortgage database so that housing policy could be based on facts.

Regular readers know that your humble blogger has called for building this database since before the beginning of the financial crisis as it is also necessary to support the residential mortgage-backed securities industry (everything from covered bonds to securitizations).  The Federal Housing Finance Agency has also called for building this database as it sees its future in having oversight over the database.

Six years after the foreclosure crisis began in earnest, as former Congressional Oversight Panel vice chair and current AFL-CIO general counsel Damon Silvers put it, “it’s impossible to get reliable, comprehensive information on foreclosures.” ... 

Or on performing mortgages.

There are four separate widely followed private foreclosure tracking services — Corelogic, LPS, RealtyTrac, and the Mortgage Banker’s Association National Delinquency Survey. Each has problems, and none is comprehensive. 

There are also government sources for foreclosures. The Office of the Comptroller of the Currency, which regulates national banks, has a widely cited Mortgage Metric Report. The data for that report comes from the big mortgage services, and it is “rigorously reviewed”, according to Bryan Hubbard, spokesman for the OCC. It’s considered good data, but it covers only 50 to 60 percent of the market, the part controlled by services regulated by the OCC. 

The FHFA tracks some limited data around Fannie and Freddie loans, and the VA and FHA track some data around loans guaranteed by those agencies. But like the private data services, none of these foreclosure sources are comprehensive.

Please recall that Phillip Swagel and the Paulson Treasury team called for the creation of this database at the start of the mortgage crisis.

This causes significant problems for policymakers (and thus homeowners). 

As Silvers put it, “If you do x, whatever x, refis, principal write-downs, interest subsidy programs, how much is it going to cost?” 

The lack of data is impacting the key policy question over debt relief for homeowners. 

Currently, there are proposals outstanding for Fannie and Freddie to write down mortgage principals for homeowners that are underwater, or owe more on their mortgage than their home is worth. Liberal groups are seeking to have the official in charge of these two entities, acting FHFA chief Ed Demarco, fired for his intransigence in this policy area. 

There are also proposals for municipalities to seize performing underwater mortgages through eminent domain and restructure and resell them. 

A key question in these disputes is how these proposals would impact foreclosures. And because of the lack of data, we can only guess. 

“If you write up some sort of protocol for doing something with mortgages, the question can’t really be answered vigorously under the current data regime. And the consequence is actually that it produces a reluctance to act. The lack of good data has seriously contributed to the inability to make good policy in this area,” says Silvers.

Please re-read the highlighted text as Mr. Silvers nicely summarizes what your humble blogger has been saying not just about mortgages, but also about the banks.

A lack of good data makes it virtually impossible to address the problems.

The problem of foreclosure data has been understood for years. 

In April, 2009, Elizabeth Warren’s Congressional Oversight Panel released a report detailing problems in this space and citing a “failure of regulatory intelligence gathering and analysis.” 

Dodd-Frank even included a provision for the Consumer Financial Protection Bureau and the Department of Housing and Urban Development to create a national database of foreclosures. The bill, however, did not provide the necessary funding mechanism for HUD to do so, nor did it include a deadline. 

The next Congress, not surprisingly, has also failed to appropriate the funds. According to Brian Sullivan at HUD, the agency also lacks “statutory authority to compel the reporting to HUD of information necessary to compile localized loan performance data.”

The Consumer Financial Protection Bureau, which has a strong research component, has partially stepped into the breach. HUD is working with the Consumer Financial Protection Bureau to begin “exploring and evaluating options for creating the database,” according to Pete Carroll, CFPB’s assistant director of mortgage markets. “In order to best understand what is going on in the mortgage marketplace, regulators need solid loan performance data.”

Please re-read the highlighted text as Mr. Carroll confirms what I have been saying about the need for loan performance data.

But there is no deadline or dedicated congressional funding for the joint HUD-CFPB project, and other priorities that are funded take precedence. There are no congressional hearings scheduled over this crucial element of Dodd-Frank, nor is there congressional pressure to look into whether the regulators can even peer into the housing market with precision. And should Mitt Romney win and alter the direction of the CFPB, or should the CFPB lose a funding battle in Congress, the creation of a database will stop at the exploration stage.

A victory for Wall Street's Opacity Protection Team.

The lack of data speaks to the “absolutely insane way we do housing policy,” according to Georgetown law professor Adam Levitin. The problems in this area are exacerbated by a mix of failed leadership and bureaucratic design.

 What I refer to as the financial-academic-regulatory complex (FARC).

“What is our housing policy? We don’t have one, because no one’s responsible for it. Treasury and the Fed are not housing experts, but they seem to be as involved as anyone. We don’t have a housing czar. The system worked fine before 2008, because housing policy was very simple. It was, increase homeownership. Now that we’re more sophisticated about housing policy, we have a problem because no one’s in charge of it.”... 

As Levitin puts it, “the lack of accountability for housing policy is especially galling in 2012 because for years we’ve had people saying ‘housing is at the center of our economic troubles,’ and yet the administration has done nothing to produce a housing policy apparatus. You can see this in where they put HAMP, they put this in Treasury. Prior to 2008, Treasury had zero experience in housing. You see it with the fact that Demarco is the head of FHFA. If I were the President and I knew that housing was our number one economic policy problem, I’d want my guy running that agency.” 

In the housing and foreclosure space, Levitin notes, there is no leadership: “No one wants the football.” That’s why the government doesn’t have adequate data on the characteristics of the foreclosure epidemic. You can’t manage what you can’t measure. So if you want to avoid managing a problem, just don’t measure it.

If the database existed, the problem would be addressed.

Addressing the problem would reduce the power of FARC.  As a result, FARC has an incentive to act as a barrier to the creation of the database and solving the problem.

Spain's troubled bank clean-up suffers credibility shortfall

As discussions continue over how Spain should divide the 100 billion euros it is receiving between a bad bank to hold all the troubled assets and recapitalizing the good banks, Spain is discovering that in the absence of ultra transparency this activity will not credibly clean-up its banking system.

Regular readers know that the first step in credibly cleaning up the banking system is to require the banks to disclose their current global asset, liability and off-balance sheet exposure details.

With this information, market participants can identify and value the bad assets.

As a result, the bad bank or an independent third party buys the bad assets at a price that the market thinks is credible and the banks fully absorb the losses.

Of course, it gets a lot more complicated when the goal is to protect bank book capital levels and therefore minimize the losses the banks absorb.

Just like the US government tried to do with toxic structured finance securities and the Irish government did with bad loans in its banking system, Spain is hiring third parties to value the bad assets and show that miraculously 100 billion euros is enough to a) write the bad assets down to market value and b) recapitalize the good banks.

Of course, nobody believes this is remotely possible to achieve on 100 billion euros given that Spain is facing at least 400 billion euros of bad debt.

Still, the Spanish government insists on pursuing the good bank/bad bank concept.  This raises a series of questions:

Why pay money to third parties for something the market will do for free if the banks were required to provide ultra transparency?

Why pay money for something that the market will view with distrust (after all, if there was nothing to hide, then there would be ultra transparency and no need for the third parties)?

Cost-Benefit analysis by SEC major factor in financial crisis

Dennis Kelleher, Stephen Hall and Katelynn Bradley of Better Markets wrote a very interesting white paper on cost-benefit analysis and financial reform at the SEC.

In the paper, they make the critically important point that the SEC is specifically excluded from having to factor in a cost-benefit analysis when they introduce a rule.  What the SEC must consider is does the rule protect investors and the public interest.

While the authors do not say it directly, the common sense reason that the SEC is exempted from worrying about a cost-benefit analysis is that the cost of a financial crisis is far greater than the cost of any single rule or combination of rules that might be applied on the financial industry.

Regular readers know that your humble blogger has been very active in trying to bring transparency to structured finance securities.  Specifically, I have both talked with individuals at the SEC about the revision of Reg AB (the regulation that lays out the disclosure requirement for structured finance securities) and provided input through a response to their public consultation.

My recommendation has been that all structured finance securities, including covered bonds, be required to report on an observable event basis any activity that occurs with the underlying collateral before the beginning of the next business day [as opposed to the sell-side's preferred once per month reporting after the end of the month].

In addition, the disclosure should include all data fields tracked by the originators, billers and collectors while protecting borrower privacy consistent with HIPAA standards [as oppose to the sell-side's preferred data templates that exclude valuable data fields].

With that background, now to the role that cost-benefit analysis played in the financial crisis.

During one of my conversations with a senior SEC staff member, the subject turned to the cost-benefit analysis that was done when Reg AB was originally mandated in the mid-2000s.  According to the staff member, while the SEC knew that disclosure should include all data fields and be made on an observable event basis, it could not justify this requirement based on their internal cost-benefit analysis.

Let me repeat that:  based on the results of its cost-benefit analysis, the SEC knowingly backed off of requiring transparency and instead issued a rule saying that then existing disclosure practices that were inadequate for valuing individual structured finance securities (see the Brown Paper Bag Challenge) were adequate.

Shortly after the financial crisis began, the Bank of England's Andy Haldane estimated that the losses on structured finance securities from investors not being able to value these opaque securities exceeded $1 trillion.

My bet is that the SEC's cost-benefit analysis did not place the benefit of being able to value the structured finance securities at over $1 trillion.  Hence, the reason that the SEC did not require transparency when it promulgated Reg AB.

However, now that we know the benefit is over $1 trillion, an annual cost of $10 billion to provide investors with disclosure of all borrower privacy protected data fields on an observable event based reporting basis under a revised-Reg AB can easily be seen as money well spent.

The fact that the SEC's internal cost-benefit analysis did not include the benefit of avoiding over $1 trillion in losses reaffirms the common sense reason for not subjecting any single rule or combination of rules from the SEC to a cost-benefit analysis.

Common sense says that if the SEC does not perform a cost-benefit analysis, there is no chance that doing a cost-benefit analysis incorrectly will result in a rule that doesn't protect investors and the public interest.

Banks are using computer systems that are "unfit for purpose"

In a Telegraph article, Intellect, the trade body for the UK's technology sector, exposes the dirty secret of banking:  their information technology is 'unfit for purpose'; specifically, to providing managers and regulators with the information they need to assess the risk of each bank.

Regular readers know that your humble blogger has been advocating the creation of the 'Mother of All Financial Databases' to collect, standardize and disseminate all of the current global asset, liability and off-balance sheet exposures of each bank.

It is the data in this database that would provide the information all market participants, including the banks themselves and the regulators, need to assess the risk of each bank.

Creating the data warehouse to support the Mother of All Financial Databases would be less expensive than having each bank upgrade its information systems.  Plus, it has the added benefit that the data warehouse bring transparency to the banking sector.

Banks are using computer systems that are “unfit for purpose” and as a result have little idea what is going on inside their own businesses, a report has warned. 

Banks are using computer systems that are “unfit for purpose” and as a result have little idea what is going on inside their own businesses, according to a new in-depth report on the technological problems facing the industry. 

Decades of under-investment in up-to-date technology mean the basic “plumbing” that underpins banking operations is not up to the task of providing managers and regulators with the information they need to understand the risks banks face, according to the report by Intellect, the trade body for the UK’s technology sector. 

Intellect warns that four years on from the financial crisis when banks’ systems were shown to be unable to provide timely and accurate information on risk exposures, little has been done to improve the situation.

This is the direct result of the financial regulators and policymakers failure to require banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

This information can easily be made available on a borrower privacy protected basis.

Your humble blogger knows, because he has developed information systems for doing precisely this!

“Within individual banks, poor infrastructure does not afford a timely and accurate view of 'the whole’ of their operations and exposures. 

Please re-read the highlighted text because it nicely summarizes what your humble blogger has been saying about both banks and structured finance securities.

Please note the emphasis on timely.  Regular readers know that "timely reporting" for banks and structured finance securities is observable event based reporting.  Whenever there is an activity that effects the underlying exposures at banks or structured finance securities, it should be reported to all market participants before the beginning of the next business day.

This reporting would be easy to do as it is consistent with how bank information systems currently track the underlying exposures.

“In effect, they do not know their own businesses well enough. Therefore it is impossible for the regulatory authorities to build a macro view of 'the whole’ of the financial system that allows them to identify and mitigate risks across it,” said Intellect.

The bottom line:  providing ultra transparency will be as helpful to the banks in understanding the risks they are taking as it is to market participants.

Five years ago, the credit crunch began; how long will it last?

In its Guardian editorial, the Observer noted

Five years ago this week the world woke up to the fact that a credit crunch was definitely happening. On 9 August 2007, central bankers became so alarmed by banks' reluctance to lend to each other that they took emergency action. The European Central Bank and the US Federal Reserve injected a combined $90bn into financial markets.... 

The central bank called it a piece of "fine tuning", but investors knew it was far more serious. The FTSE lost 121 points that day, and in the US the Dow Jones average fell by 387. 

A squall that had appeared at two French investment funds exposed to US sub-prime loans was about to develop into a hurricane. Adam Applegarth, boss of Northern Rock, where queues would form the next month, later called 9 August "the day the world changed". 

Even so, at the time few would have predicted that half a decade later the world, or at least the western part, would still be struggling with the consequences....

Actually, your humble blogger predicted at that time that the global economy would continue to struggle as it was in a downward spiral that could only be arrested by bringing transparency to all the opaque corners of the global financial system.

Please note, that when it comes to our current financial crisis, I have a very good track record making predictions.  This includes being among the few who predicted the crisis and subsequently predicting on this blog which of the policy responses were not going to work and why.

How much longer can it go on? 

"After five years, we are in a worse place than when we started," wrote Jamil Baz, chief investment strategist at hedge fund GLG, in an eye-catching analysis last month. He observed that total debt – meaning government, household, financial and corporate debt – is higher than in 2007 in 11 economies under the microscope. They are Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the UK and the US.

Mr. Baz's analysis confirms my prediction about the downward spiral.

Baz made five predictions. 

First, "all the perceived unpleasantness of the past few years is merely a warm-up act for the greater crisis to come", because the need to get debt levels down remains. 

True.

Second, history says debt cannot be reduced by more than 10 percentage points a year without causing social unrest, which suggests a minimum of 15 to 20 years to achieve healthy conditions for growth. 

It depends on how debt is reduced.

Regular readers know that debt can and should be reduced by banks recognizing the losses on the excess debt in the financial system.  Were this to occur, the only social unrest would be bankers complaining about not receiving large cash bonuses.

Third, the economic impact of cutting debt will be massive because a multiplier effect occurs when spending is reduced. 

Not true.  By having the banks absorb the losses, spending is not reduced.

Fourth, share prices may still be too high because corporate profits will be hit. 

To the extent that the real economy is made to carry the burden of the excess debt and the pension fund/real economy death spiral is triggered, then corporate profits will definitely be hit.

As for share prices, they may or may not be too high.

Fifth, there is no magic bullet. Interest rates are already on the floor and even back-door inflation would not help because bond yields would soar and, in any case, many government liabilities are inflation-linked.

Not true.  There is a magic bullet.  The magic bullet is to use our financial system as it is designed to be used when there is excess debt.  Require the banks to absorb the losses on this excess debt.

With their deposit insurance and access to central bank funding, banks are designed to operate and support the real economy even when they have negative book capital levels.  Taxpayers act as their silent equity partners while they are rebuilding their book capital levels.

In return for being silent equity partners, taxpayers get the benefit of requiring banks to absorb all of the losses on the excess debt today.

Five years ago banks stop lending to each other... they still don't

In his Guardian column, Larry Elliott reviewed the unraveling of the financial system and the interbank lending market at the beginning of our current financial crisis.

This review is timely as the still frozen interbank lending market confirms that all of the policy responses adopted since the beginning of the financial crisis have not fixed the underlying problem.

The summer of 2007 was a run-of-the-mill affair.... 

Then, on 9 August, came reports that central banks had been active in the markets. The Guardian said the action involved pumping billions of pounds into the financial system to calm nerves amid fears of a credit crunch. 

The trigger for the panic was the decision by BNP Paribas to block withdrawals from three hedge funds because of what it called a complete evaporation of liquidity. ... 

Actually, BNP Paribas said it could not value the subprime mortgaged-backed securities in the three funds and that there was inadequate liquidity to get a reliable price from the market.

Five years on, the global economy has yet to recover from the deep trauma caused by the hubris of the bankers. 

Back then, though, there were few who imagined that 9 August 2007 would prove to be such a milestone in financial history....

A milestone that is so carefully hidden that two Yale professors were left pondering what happened in August 2007 that caused the financial markets to freeze [it is a testament to the non-existence of even minimal academic standards at the leading economic and finance journals that their paper pondering the August mystery was published given that Mr. Elliott wrote about it at the time].

Stripped of the jargon, it is now quite easy to see what happened. Banks were taking large gambles with precious little capital in reserve if the bets went wrong. ... 

In August 2007, the air started to escape from this gigantic bubble. It happened in three stages. The financial sector was the first to feel the impact, because while it was evident that almost every bank had been up to its eyeballs in investments linked to the American housing market, nobody knew for sure just how much money each institution stood to lose. The financial system grinds to a halt if banks refuse to lend to each other, as they did in August 2007....

Please re-read the highlighted text as Mr. Elliott nicely summarizes why banks stopped lending to each other:  they couldn't tell who was solvent and who was not.

The inability to assess how much each bank stood to lose is the direct result of opacity.  In this case, it is opacity into each bank's current global asset, liability and off-balance sheet exposure details.  With these details, banks could independently assess each bank's losses.

Governments arrested the slide into a 1930s-style slump by concerted and co-ordinated action, but wrecked their own finances in the process. Bailing out the banks was expensive, particularly since much lower levels of output reduced tax revenues....

Bailing out the banks was expensive and unnecessary.

In a modern financial system, banks are designed to be able to continue to operate and support the real economy even if they have negative book capital levels.  The reason for this is the existence of deposit insurance and access to central bank funding.

With deposit insurance, taxpayers are the banks' silent equity partner when banks have negative book capital levels.

Since banks don't need to be bailed out with direct investments by the governments, the governments are freed up to use the funds to promote economic growth.

Central banks tried to help out by making credit cheap and plentiful. They cut interest rates and used unconventional methods – such as buying bonds in exchange for cash – to boost the money supply. The hope was this would stimulate a private sector recovery and so provide a breathing space in which governments could repair their finances.

The attempt to solve a crisis caused by credit with even more credit has, predictably enough, proved a failure....

As your humble blogger has documented, not only was the failure of central bank policies predictable, but the wanton destruction caused by these policies was also predictable.

For example, these policies triggered the pension fund/real economy death spiral.  With interest rates artificially depressed, pension funds are not able to generate a return on their investments.  As a result, companies have to make up the pension fund earnings shortfall by using money that would have been invested to grow the economy.  With a slowdown in the real economy, pension fund earnings shortfall get worse and this requires even more money being diverted from growing the real economy.

Are central banks' monetary policies a source of systemic risk?

Earlier this week, the Bank of England's Andrew Haldane said that economists share in the blame for the financial crisis and the ongoing recession.

Mr. Haldane is the executive director of financial stability at the BoE and a member of the BoE's Financial Policy Committee.  The FPC is suppose to focus on sources of financial instability and systemic risk.

As a result, my question is:  based on Mr. Haldane's comments are central banks' monetary policies a source of financial instability and systemic risk?

Regular readers know that your humble blogger's answer is yes.

As this blog has documented on numerous occasions, the economic headwinds created by zero interest rate policies and quantitative easing appear to far outweigh the benefits.  Not only that, but the policies have never be shown to promote economic growth (Japan is in its third lost decade when it comes to economic growth).

So why do central bankers pursue these policies that crush the real economy with what appears to be messianic zeal?

Mr. Haldane provided the answer in his observation that economists have come to believe in the assumptions underlying economics as if they were a "theological doctrine".  As a result, economists are on a crusade to prove they are right.

As this blog has documented, many of the assumptions that economists make are wrong.

For example, they assume that zero interest rates will force investors to reach for yield.  This is not true.  Investors see that pricing in the financial markets is distorted by the central bank policies.  As a result investors are now focused on return of their capital over return on their capital.  This deprives the real economy of capital it needs for growth.

This raises another interesting question:  given economists' religious belief in the assumptions underlying their models of the economy, are they fit to be central bankers?

The Telegraph's Jeremy Warner offered

Wanted: applicants for the post of Britain’s most powerful technocrat. 

Required qualifications include unmatched knowledge of macro and micro economics, in-depth experience of banking and the complexities of modern finance, natural authority, exceptional communication and media skills, outstanding administrative abilities, proven leadership qualities and a deity-like ability to transcend the political divide. 

It is small wonder that George Osborne is struggling to find a suitable candidate for the post of governor of the Bank of England, which falls vacant when Sir Mervyn King retires next June. 

By consolidating responsibility for banking supervision and financial stability under the same roof as the Bank of England’s existing monetary functions, the Chancellor has created a huge job and an almost impossible ask....

Imagine how much easier it would be to find qualified individuals if the requirement for 'unmatched knowledge of macro and micro economics' is dropped.

Whoever the Chancellor chooses will have to answer some profound questions about the future of central banking and the economy. 

Money is only a means of trade and exchange, yet over the last decade or two, it has been catastrophically mismanaged at almost every level. As custodians of the monetary system, central bankers have been a large part of this mischief. 

Nor, having messed up so spectacularly in the years before the crisis, is it clear they’ve got their response to it entirely correct either.

Which is exactly what Mr. Haldane observed.  More importantly, his observation in their belief in their assumptions suggests that economists are singularly incapable of correcting the response of monetary authority.  Doing so would require that they stop believing.  Hence the question:  are economists fit for central banking?

RBS chief Stephen Hester says banking has hit 'new low'

As reported by the Guardian, banking has hit 'new low' as a result of Libor scandal according to RBS chief Stephen Hester.

"The Libor situation is on our agenda and is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact. This is the subject of ongoing regulatory investigation but our customers and shareholders should be in no doubt that we are taking it seriously," Hester said. 

Admitting that the reputation of the industry was at "new lows", Hester added: "This is dangerous because customer trust is a pre-requisite for a successful banking sector and an effective banking sector is so important to economic stability and growth....

"We are in a chastening period for the banking industry.

What the Libor scandal has revealed is that bankers knowingly abused the trust of their customers to profit at both the individual and firm level.

Customers trusted that the banks acted with integrity and submitted interest rates for inclusion in Libor that reflected their actual cost of raising funds on an unsecured basis in the interbank lending market.

This trust was violated by every bank on the Libor panel.

Your humble blogger says this because everyone knew that the interbank lending market froze in 2008.

No bank could borrow because no lending bank could determine if the borrowing bank was solvent or not.  This fact was confirmed by the Financial Crisis Inquiry Commission.

If the market is frozen, then how could any firm have borrowed money?  The interest rate basically went to infinity.  However, that is not what Libor showed.  Hence, all the banks on the panel lied.

Regular readers know that preventing banks from lying in the future about their financial condition is one of the reasons that your humble blogger has been calling for banks to be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

It just so happens that this same data is also necessary if banks with deposits to lend are to be able to independently assess the risk of the borrowing banks.  It is the ability to independently assess risk that unfreezes the interbank lending market and keeps it open in the future.

With a functioning interbank lending market, Libor can be based on actual, easily confirmable trades.

JP Morgan trader urged to boost value of positions in losing trade

The Wall Street Journal reported that the JP Morgan "Whale" was prodded to increase the value of the positions that were underlying the money losing credit default swap trade.

This is another example of behavior that would be eliminated if banks were required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Quite simply, with this disclosure, market participants would have noticed that the positions were aggressively priced.

Sunshine really is the best disinfectant.

A J.P. Morgan Chase & Co. executive encouraged the trader known as the "London whale" to boost valuations on some trades, said a person who reviewed communications emerging from the bank's internal probe of recent trading losses. 

After reviewing emails and voice-mail messages, the bank has concluded that Bruno Iksil, the J.P. Morgan trader nicknamed for the large positions he took in the credit markets, was urged by his boss to put higher values on some positions than they might have fetched in the open market at the time, people familiar with the probe said....

Determining accurate prices for infrequently traded investments such as the bets made by Mr. Iksil can be difficult, and J.P. Morgan routinely reviewed the valuations made by traders. 

The oversight process by the bank's so-called valuation control group includes input from outside pricing companies and brokers, which the group uses to set what it considers an appropriate range for various investment positions. The arrangement is a common risk-management practice among large banks. 

In Mr. Iksil's case, though, the high valuations didn't sound any alarm bells, according to people familiar with the internal investigation. The reason: The values claimed by the trader were within the broad range set by the oversight group, so it approved the valuations. 

People close to the probe said the control group's acceptance of the numbers was the weakness referred to by J.P. Morgan last month. As part of the company's cleanup efforts, the group will establish a narrower band of values for such positions and check traders' valuations more frequently than its previous practice of once a month, these people said. The group operates separately from the CIO.