Price transparency brought to opaque swaps markets

Financial regulators, particularly the CFTC, are calling bringing price transparency to the opaque swaps markets a pivotal moment in the regulation of Wall Street.

Regular readers know that that there are two types of transparency:  valuation and price.  It is valuation transparency that is the important form of transparency.

As everyone knows, the investment cycle has three steps:  value the security; solicit a price for the security from Wall Street; and then make an investment management decision to buy, hold or sell the security.

Without valuation transparency, it is impossible to value the security and go through the investment process.

Without valuation transparency, the act of buying or selling the security is simply blindly betting.

So the question is, is there any reason to get excited about bringing price transparency to the opaque swaps market?

No.  In fact, price transparency makes the problems in this market worse.  Price transparency by itself suggests that the casino is somehow not just for gambling.

As discussed by Ben Protess in a NY Times Dealbook article,

After spending two years and millions of dollars to temper a regulatory crackdown, the world's biggest banks are now resigned to a wave of new oversight.

This assumes that the banks did not get exactly what they wanted.  Price transparency has not been the problem in the swaps market as buyers and sellers could always call multiple banks for quotes.

By New Year's Eve, 65 banks had registered their derivatives business with regulators and turned over heaps of real-time trading data to outside warehouses, fulfilling a central rule of the Obama administration's financial regulatory overhaul. 

Late on Wednesday, a warehouse also posted an early batch of data online, shining a rare spotlight on an opaque business that blew up in the 2008 financial crisis. 

The changes, regulators say, signal a pivotal moment in the fight over Wall Street regulation. 

Until now, regulators had little authority and little information to scrutinize the minutiae of derivatives trading, a vast market that totals more than $600 trillion.

Actually, the regulators have always had access to reams of information.  They simply had to ask for it from the banks as the regulators are entitled to know each bank's exposures.

"They are an historic change for the markets that will benefit the public and the economy at large," Gary Gensler, chairman of the Commodity Futures Trading Commission, the architect behind the derivatives overhaul, said in a statement....

Why?  What data will the public get that is useful for valuing these securities?

The new oversight is a major component of the Dodd-Frank Act, the Wall Street regulatory overhaul passed after the financial crisis. The law took particular aim at derivatives, which proved pernicious in the crisis. 

Banks had bought billions of dollars in derivatives as dubious insurance on mortgage-backed investments. 

When the investments soured, the American International Group lacked the capital to honor agreements with the banks, prompting a $180 billion government bailout of the giant insurance company.

So the important data is what each firm's exposure is.  After all, who cares what price the derivatives that blew up AIG were purchased/sold at.  What was relevant was AIG's exposure to losses if the sub-prime mortgage market blew up.

Does the data being disclosed to the market allow market participants to know what is currently on JP Morgan's or Goldman Sach's balance sheet and who their counter-parties are?

Hoping to prevent such calamities, lawmakers spelled out a plan in Dodd-Frank to require derivatives dealers to register with Mr. Gensler's agency. Under the law, the banks and hedge funds must also open up their trading books to regulators and the broader public.

So all market participants are going to be able to see each bank and hedge fund's trading book?

The oversight, carried out through new rules written at Mr. Gensler's agency, developed in fits and starts. At times, a plan that was supposed to kick in during 2011 seemed like it might never take effect. 

The delay was in part a result of an aggressive lobbying campaign on Wall Street, which dispatched lawyers and lobbyists to temper the overhaul. In turn, Mr. Gensler's agency conceded modest changes and postponed the oversight for several months.... 

Wall Street has been aggressively lobbying since before the Dodd-Frank Act was passed.  With the exception of the Volcker Rule and the Consumer Financial Protection Bureau, the act appears to have been written by the industry for the industry.

The banks must also turn over in real-time the data from their trading book.

 And what data from their trading book must be disclosed?

The disclosures, posted on the Web site of the Depository Trust and Clearing Corporation, a data warehouse, include the volume, time and price of each derivatives trade....

Data that is focused on price transparency and not valuation transparency.  Remember, part of valuation transparency is knowing what the exposure to losses is for the counter-party.

The spreadsheet, regulators say, presents the public with its first window into the swaps market. While the public is blocked from viewing the identity of the trader, regulators have access to that information.

This is a classic example of Wall Street protecting the opacity that it profits from.

The data that is being made available relates to price only.  This is of limited benefit as the last price could represent the price that the biggest fool was willing to buy or sell at.

To a buyer or seller who is willing to pick up the phone and call several firms, they can get all the price quotes they want.  Price disclosure simply saves them the hassle of making several calls.

The only market participants who have access to the identity of the trader, which is data needed for valuation, are the regulators.

Wall Street has nicely protected opacity in the swaps market by making it impossible for the market participants who need the valuation data to have access to the data they need by giving the regulators an information monopoly.  A monopoly that the regulators will be very reluctant to give up.

"Real-time reporting brings transparency to the formerly opaque swaps market," Mr. Gensler noted.

As currently being implemented, it only brings price transparency.  The regulators with their information monopoly are helping to keep the swaps market opaque from the perspective of valuation transparency.

Germany calls on US to adopt Basel III

As reported by Reuters, Germany is calling on the US to stand by its commitment to adopt Basel III capital requirements for its banks.

Regular readers know that Basel III is the classic example of regulatory failure.

First, bank asset values are meaningless due to the suspension of mark-to-market accounting, regulatory forbearance that lets banks engage in 'extend and pretend' and create 'zombie loans', and its heavy reliance on bank internal valuation models.

When asset values are meaningless, so too is the accounting construct known as book equity, the largest component of bank capital.

Dividing two meaningless numbers, book capital and risk-weighted assets, by each other does not produce a meaningful number.  A point driven home by the OECD.

Second, by acting like bank book capital levels are meaningful, regulators are effectively encouraging banks not to lend.  Lending takes lots of capital.  Betting using derivatives and government debt takes very little capital.

Third, Basel III is hopelessly complex.  The Bank of England's Andrew Haldane observed that it could not be calculated on the back of a standard business envelope.  Rather, it takes a computer and too many assumptions to make it remotely meaningful.

In short, there is not one redeeming element to Basel III unless your goal is to preserve opacity in the financial system and let the big banks continue to take risk.

German Finance Minister Wolfgang Schaeuble urged the United States to stand by its political decision for tougher bank capital rules and said he was confident Europe would complete the necessary details this year. 

"I am confident that in the course of the year we will complete (the details) in time to be able to start building up the additional capital required in the timeframe set by Basel III," Schaeuble wrote in an essay seen by Reuters on Thursday. 

"I also expect from our American partners that they too stick firmly to the political decision to introduce the new set of rules," he added. 

Major financial centers like the United States and the European Union are delaying the start of the world's main regulatory response to the 2007-09 financial crisis, which requires banks to triple their basic capital buffers in stages.

It is an incredibly sad statement that the world's main regulatory response to the 2007-present financial crisis is Basel III.

Were Basel III in place today, market participants could still not determine which banks are solvent and which are not.  This is important, because without this ability, the interbank lending market never unfreezes and banks can never be weaned off of all the government programs put in place since the beginning of the financial crisis.

Credit Suisse plans new asset-backed bonus scheme to transfer more shareholder funds to bankers

Reuters reports that Credit Suisse is planning a third asset-backed bonus scheme.  The stated idea is to offload risk onto the bankers by having the bankers' bonuses fund the risky assets.

The reality is the scheme is another way for the bankers to profit at the shareholders' expense.

Let's look at the first deal that Credit Suisse did in 2008 involving asset-backed securities.  Under the terms of the deal, Credit Suisse was first in line to absorb $500 million of losses.  Meanwhile, the bankers received interest payments of 5-6%.  Since its inception, the value of the assets involved has increased by 80%.

To an outsider, the structure appears fundamentally flawed.

First, the bonuses should be thought of as "equity" and there to take the first loss on the assets.  As a result, the bankers should not receive any payments until all the assets mature or are sold.

Second, there is a problem when it comes to pricing the assets put into the scheme.  There is a limited market for these securities, so they are difficult to price.  Naturally, the bankers whose bonus is exposed to these securities will want to put as low a value on them as possible (which might imply that Credit Suisse shareholders absorb a loss).  Of course, the shareholders would want to put as high a value on them as possible (say cost).

As a result, Credit Suisse's shareholders should have received the lion's share of any increase in price of the assets in the scheme.  Say an 80/20 split for simplicity.

With these two minor changes in structure, the banker bonuses become truly at risk and the shareholders are protected from conflicts in asset pricing.

Credit Suisse is preparing to offload more risk exposure to staff in its 2012 bonus giveaway but significantly fewer managers will be allowed to join the latest version of a scheme that has yielded stellar rewards in previous years. 

Pioneered in 2008, Credit Suisse's ground-breaking asset-backed bonus schemes pay managers a portion of their bonuses in financial instruments whose value depends on the performance of risky assets that the bank is exposed to. 

The creation of a new Credit Suisse scheme comes as banks bow to the demands of shareholders and regulators to move away from cash bonuses in favor of alternatives that are more aligned with the risks bankers are taking.

Please recall that bankers receive salary and stock options in addition to their bonuses.  

Two earlier schemes have helped the bank to transfer $17 billion of troubled loans and derivatives off its balance sheet, improving its capital position since capital demands are directly related to the size of a bank's balance sheet. 

The schemes have also allowed the bank to save about $1.4 billion on cash or share-based bonus payments. 

Staff, who are not given a choice about how they receive their bonuses, can reap sizable rewards if the underlying assets do well and have already enjoyed massive paper profits on one of the schemes, though they can't get their money until 2016....

True transferring of risk would suggest that the bankers should not be eligible for sizable rewards if the underlying assets do well.

The reward for the bankers should be getting their bonuses at the end of the day.

Further details of the Plus Bond, which will have a "similar" structure and composition to the 2011 scheme, will be announced to staff later in January, according to the spokesman.
For the 2011 scheme, a $12 billion pool of derivatives was taken out of Credit Suisse and put into a specially created vehicle. 

Staff were given bonds that entitled them to regular interest payments of 5 to 6.5 percent, and would get a payout at the end of the scheme in lieu of their original bonus amount. 

The value of their final payout depends on how the underlying assets perform; the first $500 million loss is borne by Credit Suisse and any further losses reduce the lump sum staff ultimately get. 

Reports last summer claimed the value of the original PAF 1 notes had shot up by 80 percent. PAF 1 included troubled assets that were thinly traded in 2008 and hard to value. The surge in its value came as the price of other similar assets recovered from the lows of 2008 when PAF 1 was created....

The asset-backed schemes, which Credit Suisse chief executive Brady Dougan described in an email as "a risk transfer from the firm to employees", are part of a Credit Suisse bonus pool that also includes deferred shares in the bank and cash.

The Atlantic: What's inside America's Banks Part III: Volcker Rule

In their lengthy Atlantic piece, Frank Partnoy and Jesse Eisinger look at the impact of transparency on the Volcker Rule.

Regular readers know that your humble blogger has been saying that there are two parts to each regulation:  what the regulation says and how it is enforced.  I use the Volcker Rule as an example and have said that it could be written in two paragraphs.

Paragraph one says that banks are not allowed to engage in proprietary trading.  Paragraph two says that banks must provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  With this data, market participants can assess whether the banks are complying with paragraph one.

Lo and behold, Mr. Partnoy and Eisinger agree with my solution for implementing the Volcker Rule.

What if legislators and regulators gave up trying to adopt detailed rules after the fact and instead set up broad standards of conduct before the fact? 

For example, consider one of the most heated Dodd-Frank battles, over the “Volcker Rule,” named after former Federal Reserve Chairman Paul Volcker. The rule is an attempt to ban banks from being able to make speculative bets if they also take in federally insured deposits. The idea is straightforward: the government guarantees deposits, so these banks should not gamble with what is effectively taxpayer money. 

Yet, under constant pressure from banking lobbyists, Congress wrote a complicated rule. Then regulators larded it up with even more complications. They tried to cover any and every contingency. Two and a half years after Dodd-Frank was passed, the Volcker Rule still hasn’t been finalized. By the time it is, only a handful of partners at the world’s biggest law firms will understand it. 

Congress and regulators could have written a simple rule: “Banks are not permitted to engage in proprietary trading.” Period. ... 

Legislators could adopt similarly broad disclosure rules, as Congress originally did in the Securities Exchange Act of 1934. The idea would be to require banks to disclose all material facts, without specifying how.... 

 As for the details, banks could voluntarily provide information on their Web sites, so that sophisticated investors had enough granular facts to decide whether the banks’ broader statements were true. 

As the 2008 financial crisis was unfolding, Bill Ackman’s Pershing Square obtained the details of complex mortgages and created a publicly available spreadsheet to illustrate the risks of various products and institutions. Banks that wanted to earn back investors’ trust could publish data so that Ackman and others like him could test their more general statements about risk.

The Atlantic: What's inside America's banks Part II

It has taken four years, but your humble blogger's question, what's inside the banks, and answer, the only way to find out is to require the banks to provide ultra transparency, has finally been picked up by the mainstream media.

As The Atlantic authors Frank Partnoy and Jessie Eisinger say

Some four years after the 2008 financial crisis, public trust in banks is as low as ever. 

Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records uncovers the reason for these fears—and points the way toward urgent reforms.

The financial crisis had many causes—too much borrowing, foolish investments, misguided regulation—but at its core, the panic resulted from a lack of transparency. 

Transparency that still is not available for banks or structured finance securities.

The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode. 

For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. 

This hasn’t worked. 

Not surprisingly because the banks lobbied against being required to provide ultra transparency.  The banking lobby effectively wrote the Dodd-Frank Act and they went so far as to create the Office of Financial Research as a place where transparency would go to die.

Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.

This result reflects the simple fact that bankers continue to operate behind a veil of opacity.  As everyone knows, sunshine is the best disinfectant.  Require the banks to provide ultra transparency and their behavior will immediately change for the better.

The Atlantic: What's inside America's banks

The cover story of The Atlantic asks the question:  What's inside America's banks.

Regular readers know that a recurring them on this blog has been to answer this question by requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

From Barry Ritholtz and the Big Picture:  Big banks are 'black boxes', disclosure is "woeful":

“The banks should give a full, fair, and accurate account of their financial positions and they are failing that test.”
-Kevin Warsh, former Federal Reserve Board member 

“After serving on the [FASB] board, I no longer trust bank accounting.”
-Don Young,  Financial Accounting Standards Board 

“Do I trust Bank Accounting? Absolutely not.”
-Ed Trott, Financial Accounting Standards Board member 

“There is no major financial institution today whose financial statements provide a meaningful clue” about its risks.
-Paul Singer, Elliott Associates

This month’s must read cover story of The Atlantic was written by two of my favorite writers... 

They discuss an issue I have talked about here repeatedly — that banks are essentially opaque black boxes; banks have purposefully concealed what’s on their balance sheets; that they are not merely complex, but actually deceptive; investors have no idea what they are buying when they own one of the behemoth money centers like Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) or JP Morgan (JPM). 

Of course, no bank article would be complete without at least a mention of the bank frauds and illegal actions that are now merely a cost of doing business: Helping Mexican drug dealers launder money (HSBC); funneling cash to Iran (Standard Chartered); LIBOR fraud (Barclays and a cast of dozens); falsifying mortgage records/improperly foreclosing on borrowers (all the giant banks); routinely misleading clients (Merrill, Morgan Stanley, Citi); Selling securities known to be garbage (Goldman Sachs, Merrill); secretly betting against clients to profit from their ignorance (Goldman Sachs). 

Two discussion lines in the article stood out: The first is the number of former bankers now calling for a break up of the giant money center banks: Philip Purcell (ex-CEO of Morgan Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David Komansky (ex-CEO of Merrill Lynch), and John Reed (former co‑CEO of Citigroup). Sandy Weill, another ex-CEO of Citigroup. 

The second is the heart of the article: How opaque, misleading, non-disclosing and — WTF, let’s just say it — fraudulent bank balance sheets are.

Perhaps the most damning quote in the entire column comes from former Federal Reserve Board member Kevin Warsh. He suggested that the financial statements a big bank files with the SEC are worthless: 

“Investors can’t truly understand the nature and quality of the assets and liabilities. They can’t readily assess the reliability of the capital to offset real losses. They can’t assess the underlying sources of the firms’ profits. The disclosure obfuscates more than it informs, and the government is not just permitting it but seems to be encouraging it.” 

That is a damning statement [and should be re-read as it is the reason why ultra transparency is required].

If the first rule of investing is know what you own, than how can anyone credibly own a major money center bank? The answer, at least for me, is that you cannot — owning bank stocks is not investing, it is pure speculation. 

The same can be said about all structured finance securities.

Who wants to make a bet that insiders are going to act in good faith on what is an investor’s best interests?

For this week at least, the focus is now on your humble blogger's topic.

Portugal president warns Europe's leaders to back off austerity demands

Picking up the baton from the leaders of Greece and Cypress, Portugal's president has come out and said that Europe's leaders need to back off their austerity demands as there are limits to what is economically and socially sustainable.

Austerity is a policy promoted by Germany that results from the choice of protecting bank book capital levels and banker bonuses under the Japanese Model for handling a bank solvency led financial crisis.

This choice puts the burden of the excess debt in the financial system on the real economy.  At best, this results in a never ending Japan-style economic slump.  At worst, this results in a depression and a rewriting of the social contract as the real economy is unable to generate enough capital to cover both the debt service burden and existing needs for reinvestment and social programs.

Regular readers know that there is an alternative to the Japanese Model that protects the real economy and does not require austerity or re-writing the social contract.  That choice is the Swedish Model under which the banks do what they are designed to do and recognize upfront the losses on the excess debt in the financial system.

Banks are able to do this because they can operate with low or negative book capital levels.  Their ongoing operations are supported by the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers become the silent equity partners while banks are rebuilding their book capital levels.

As reported by the Telegraph,

President Anibal Cavaco Silva called for urgent action to halt the “recessionary spiral”, warning Europe’s leaders that the current course had become “socially unsustainable”. 

In a speech to the nation, he said Portugal would “honour its international obligations”, but in the same breath called for a tough line with the European Union-International Monetary Fund Troika over the pace of fiscal tightening under Portugal’s €78bn (£63bn) loan package. “We have arguments, and we should use them firmly,” he said. 

“Fiscal austerity is leading to declining output and lower tax revenue. We must stop this vicious circle,” he said, cautioning the Troika that there would be no way out of the crisis until policy was set in the interests of the “Portuguese people” as well as foreign creditors.... 

Please re-read the highlighted text as Mr. Silva summarizes the argument that your humble blogger has been making.

Pursuing the Japanese Model, including fiscal austerity, does not work.

The Swedish Model balances the interests of the Portuguese people and foreign creditors.  Creditors take the losses they should take for extending too much credit.  The result of this write-down is the Portuguese people are left with debt that they can afford to repay.

Portugal’s jobless rate has risen from 13.7pc to 16.3pc over the past year, reaching 39pc for youth, even before the full impact of austerity hits....

Clearly, Portugal is in a severe recession that austerity would only make worse.  This in turn would decrease the ability of the Portuguese people to service any debt and increase the losses for the creditors.

The strategy with the best outcome for both the Portuguese people and the creditors is to forget about implementing austerity and rather write-down the debt.

“There are well-founded doubts over whether the distribution of sacrifice is just,” he said.... 

Popular anger is building over the over the Troika’s fiscal shock therapy, which will push up average income tax rates by 3.4 percentage points and bring in a plethora of surcharges and fees. It aims to cut the budget deficit to 4.5pc this year, largely through tax rises. 

Markets have so far brushed off worries that the country risks a Grecian vortex as austerity bites in earnest. ... 

“Investors are willing to give Portugal the benefit of the doubt right now, but the country still hangs in the balance,” said David Owen from Jefferies Fixed Income. 

“Our concern is that the fundamental economic situation is still getting worse. The European Central Bank’s policy is still too tight. They need to do quantitative easing and cut overnight rates below zero,” he said....

Adding austerity to a situation with deteriorating fundamentals in not a prescription for improvement.

Portugal has taken its medicine with stoicism until now, winning praise from the EU leaders for sticking to its bail-out terms. But Troika officials fear that “social cohesion” is fraying as the slump deepens. The country saw the biggest street protest this autumn since the end of the Salazar dictatorship.

As Ireland has shown, there is no benefit to stoicism as frankly Germany's leadership cares more about the book capital levels of its banks than the people of any debtor country.

Michael Mayo calls on US banks to break up to raise stock prices

CLSA Ltd.'s Michael Mayo, a bank stock analyst, has called on the large US banks to break up as a means for raising their stock prices.

As reported by Bloomberg, the driver behind increasing bank stock prices is ultimately transparency.

One way of increasing transparency is to break-up the bank into small focused business units.

The preferred way of improving transparency is for each bank to disclose on an ongoing basis their global asset, liability and off-balance sheet exposure details.  It is only with this information that market participants can assess the risk of and value each of the bank's operations.

Bank stock prices could double if risk and cost of capital at the firms were reduced, reversing past efforts to boost returns by taking on more risk... 

“The largest banks have underperformed not only on returns but also on efficiency, revenue, risk, transparency, reputation and stock price,” Mayo wrote. 

“When we ask, a large majority of investors indicate that breakups -- divestitures, downsizings and de-mergers -- would be good for stock prices.” 

The goal should be “orderly” scaling back to achieve “safe banks” that have less leverage and lower risk... 

Merkel rival threatens to upend Japanese Model media narrative

Since the beginning of the financial crisis, one of the most interesting developments has been the main stream media's unwillingness to critically assess the Japanese Model for handling a bank solvency led financial crisis.

Under the Japanese Model, bank book capital levels and banker bonuses are protected at all costs.  This implies adoption of a series of policies like austerity, bank bailouts and zero interest rates/quantitative easing that squarely place the burden of the excess debt in the financial system on the real economy.

There are predictable harmful consequences from adopting the Japanese Model.  These include the endless Japan-style economic slump that countries that adopt the Japanese Model experience.  In addition, there is the re-writing of the social contract by changing social programs under austerity.

Regular readers know that your humble blogger has been making the economic, political and social case for abandoning the Japanese Model and adopting the Swedish Model for handling a bank solvency led financial crisis.

Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt in the financial system.  This protects the real economy and the social contract with its related programs as capital is not diverted to servicing the excess debt.

The Swedish Model also happens to be the policy choice that is supported by the design of our modern banking system.  Banks can continue to operate with low or negative book capital levels because of the combination of deposit insurance and access to central bank funding.

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

According to a column in the Guardian, Mrs. Merkel's challenger for the position of German Chancellor is threatening to upend the Japanese Model media narrative by pointing out all the harmful consequences of the policy choices.

This effectively puts Mrs. Merkel in the position of defending the indefensible (the Japanese Model has harmful consequences and has never been shown to be successful while the Swedish Model has no bad consequences, unless you consider a drop in banker bonuses bad, and has been successful where ever it has been implemented).

This also puts the mainstream media in the position of having to critically assess ongoing choice to pursue the Japanese Model when the Swedish Model could be adopted.

2013 is now upon us and when it comes to German politics it is already clear what the climax of this year will be: the federal elections in September. As 2012 drew to a close, the election campaign was already well under way. 

But rather than focusing on the policies needed to overcome the many issues Europe faces, the focus has been on Peer Steinbrück, Angela Merkel's social democratic challenger. And given the general lack of scrutiny of Merkel's politics one cannot help but feel that large parts of the German media landscape have a much too cosy relationship with the incumbent chancellor.... 

Whether you agree with all of Steinbrück's positions or not, he has two important qualities that are in short supply in the current climate: he is competent and honest. 

A former finance minister whose political stewardship during the financial crisis was widely praised even beyond the borders of Germany, he has for instance published a significant paper on reforming the financial sector.... He has recently also urged that eurozone crisis countries should be allowed more time to get their economies back on track and has also made comments against excessive austerity: a bold move in the current German political climate. 

Steinbrück is also right to accuse Merkel the of not having communicated the real nature of the European crisis: she continues to talk about a sovereign debt crisis even though, apart from Greece, the real macro-economic instability originated in the private sector. 

And she looks set to continue down this path. In her new year address she warned German citizens about difficult economic times in 2013, conveniently without mentioning her own role in bringing these economic risks about.... 

With exceptions such as Wolfgang Münchau of the Financial Times and Spiegel Online, the German media have failed to scrutinise these major mistakes in Merkel's politics, even though we are now entering the fourth crisis year and the situation has only calmed down because of bold action by the ECB.... 

Instead of doing the job of educating the public, most German media outlets seemingly prefer to engage in ad hominem attacks against her social democratic challenger. This, to my mind, is also why the majority of Germans still believe that Angela Merkel is doing a good job in European politics. 

Neither the government nor the German media have properly explained the real issues we face. Often, when I explain the alternative crisis view to one of my compatriots I get asked why this is not discussed more prominently in Germany. This is a good question for which I have no answer. 

But this is also a shortcoming that can be rectified this year. Election years are years of debate and political alternatives. Peer Steinbrück is the right man to challenge Merkel's crisis narrative and take this debate in a more constructive direction. 

And if the German media start to join in and scrutinise the real issues at hand, we are in for a very interesting election year.

Cyprus President: Austerity has made Europe financial crisis worse

The president of Cyprus looks at the austerity policies being pursued in Europe to address the bank solvency led financial crisis and concludes these policies have made the situation worse.

Regular readers know that it is the ongoing choice to pursue the Japanese Model for handling a bank solvency led financial crisis and protecting bank book capital levels and banker bonuses at all costs that is the driver behind the decision to impose austerity across the EU and the peripheral countries in particular.

This is a choice that EU policy makers, particularly Germany's, are making every day as there is an alternative for handling a bank solvency led financial crisis.  The alternative is the Swedish Model.

The Swedish Model requires the banks to recognize upfront the losses on the excess debt in the financial system.  This protects the real economy, eliminates the need for austerity policies and preserves the social programs.

The Swedish Model also happens to be the policy choice that western economy banking systems are designed to support.

By design, banks can continue to operate with low or negative book capital levels because of the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers become the silent equity partners of the banks when they have low or negative book capital levels.

As reported by the Telegraph,

The communist head of state, who tried repeatedly to avoid the inevitable punishing terms of an EU bailout by seeking credit from Russia, said that the policies imposed by the bloc's richer members had been counter-productive, AFP reported. 

"It must be admitted that policies implemented on a pan-European level have not succeeded in providing a solution to the economic problems created by the crisis," Christofias said in a televised new year's message. 

"On the contrary, they have recycled and worsened economic and social injustice," he added....

Please re-read the highlighted text as your humble blogger has been making this point about the policies that have been implemented since the beginning of the financial crisis.

Christofias said the picture painted by many European countries in trouble does "not honour" the European Union. 

"The future of a United Europe cannot be poverty, deprivation, unemployment and homelessness."

This is not just the future of countries in the EU, but also any country in trouble so long as banks book capital levels are protected and banks do not absorb the losses on the excess debt that the borrower will never be able to repay.

Christofias said the EU's "one-sided" approach has failed to achieve growth in those recession-hit countries it has tried to help.

 Exactly as your humble blogger has predicted.

"A different approach is needed which will emphasise development, social cohesion and true solidarity within the Union. It is with sadness that we observe the absence of such policies."

This approach is the Swedish Model.  By making the banks absorb the losses, capital is not diverted from the real economy for debt service on the excess debt.  This allows the capital to be reinvested in economic development and social programs.

Nicosia requested a bailout in June when its two largest Greek-exposed banks asked for assistance after failing to meet EU capital buffer criteria.

Regular readers know that bank book capital is meaningless in the absence of ultra transparency.  It is only when banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details that market participants can assess a bank's true level of capital.

Otherwise, with 'extend and pretend' and suspension of mark-to-market accounting, bank book capital levels are meaningless.

It is one of your humble blogger's peeves that banks are asking for bailouts from their sovereigns for failure to meet a regulators' meaningless capital ratio and that this in turn results in the adoption of austerity policies and changes to the social contract.

Why is a sovereign's limited access to capital being used to formally bailout the banks when through deposit insurance the taxpayers are already the silent equity partner?