Banks in Question

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t r u t h o u t | 03.25



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Banks in Question
By Jean-Pierre Balligand
Le Monde

Thursday 20 March 2008

Virtually each week we see central banks - with the American Federal Reserve in the lead - injecting hundreds of millions of dollars to increase the liquidity of financial markets threatened by the crisis. Despite some people's reassuring projections, that they should be brought in this way to play fireman - on a grand scale and with great urgency - shows that this crisis and the risks it brings to bear on the global economy are far from extinguished.

The central banks' interventions amount to helping out the actors - that is, the banks - that to differing degrees are the cause of the present crisis. From that perspective, and although the means they use are very different, one may compare the US initiative to the British Treasury's temporary nationalization of the Northern Rock bank. Both sets of decisions were based on the old "too big to fail" principle, which maintains that when the consequences that certain banks' failure could provoke are too significant, it's necessary to socialize their losses.

This necessity to alleviate banks' problems with the public's money may understandably surprise when we compare it to the customary litany of profits the major banks realize. To take French examples only: BNP, the Crédit mutuel, Société générale, Dexia and the Banque populaire, Caisse d'épargne and Crédit agricole groups posted cumulative net profits from 2004 to 2006 of close to $75 billion.

Privatization of the profits when all goes well and socialization of the losses when all goes badly raises four questions. First of all, are banks businesses like any other? Some are rediscovering that banks are not businesses like any other: unlike businesses, they are the object of special regulation and must respect specific rules with respect to their capitalization.

We no longer count the number of internal as well as external (public agencies) bank controllers. This special status derives from their place in the economy. Through their lending activity, the banks are at the heart of what makes our market economies work: confidence. Without confidence, the system is blocked and no one can plan for the future any more.

Secondly, have the banks forgotten their calling? In any case, supervision does not prevent them from chronically underestimating risks and succumbing to frequently catastrophic vogues. Take, for example, securitization. The fundamental calling of a bank is to evaluate the risks of the loans it grants and to follow the approved loans throughout their duration. Securitization has led to an overall rejection of responsibility and accountability by banks in favor of techniques designed to transfer risks "repackaged" by rating agencies to investors.

A sad record in the end: close to $400 billion of losses, enormous difficulties in identifying and locating the risks, American borrowers forced to sell their discounted homes at a loss. The crisis is so severe that it has become an issue in the American primaries, with some candidates demanding a return to the regulation of lending.

Third, may investment banks replace commercial banks? It is customary to present bank income as having two components: on the one hand, the so-called recurrent, i.e. stable, activities, for example, retail banking; on the other hand, the so-called sporadic, more volatile activities, those investment banking activities that depend on the development of interest rates or security prices. And we've discovered that the share of non-recurrent activities could represent as much as nearly half of the profits at one of the principal French banks.

The fact that no one is unsettled by such a proportion allows us to discover all the market actors' overestimation of the stability of income actually vulnerable to market hijacking.

It is undoubtedly time to question the balance between different sources of income. It is also undoubtedly time to restore their patents of nobility to the banker's mission: distributing loans and following them during their lifetime without delegating that responsibility to others.

Finally, can we avoid similar dysfunctions recurring in the future? It is urgent that we reflect for good on the future of our banks and their role in financing the French economy. It is difficult to decree a complete scission between commercial and investment banking.

But shouldn't banks' ratios promote their financing of the real economy more, to the detriment of activities such as trading? In this regard, we must urgently question the connections between banking and industry in France , while we continue to deplore the absence of financial accompaniment for small and medium-sized companies.

We would consequently be wrong to cut short debate on the real health of the banks, their strategies, their shareholders and the role of all stakeholders, including bank employees, who, in some cases are their companies' primary shareholders.

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Jean-Pierre Balligand is a Socialist Party MP from Aisne .

The Proof Is in: Third-World Debt Is Erasable
By Damien Millet and Eric Toussaint
Le Monde

Thursday 20 March 2008

Since August 2007, North American and European banks have been experiencing a very severe crisis, now poised to spread to the entire neo-liberal free-market system as a whole. The actual sum of asset write-offs the banks have had to make now exceeds $200 billion (127.4 billion Euros). According to the most qualified experts, the bill will ultimately exceed a trillion dollars.

In the United States , 84 mortgage loan companies went bankrupt or ceased all activity between January 1 and August 17, 2007, versus only 17 for the whole year in 2006. In Germany , the IKB bank and the public SachsenLB were barely saved. England had to nationalize the bankrupt Northern Rock bank. Carlyle Capital Corporation fund, close to the Bush family, has just collapsed: its debts represented 32 times its capital. As for the prestigious American bank Bear Stearns, it has just called on assistance from the United States Federal Reserve Bank to obtain emergency financing; it will be purchased by JP Morgan Chase for a mere mouthful of bread.

So several segments of the debt market are in the process of collapsing and are dragging the powerful banks and hedge funds that created them along in their wake. The rescue of these private financial institutions is being realized thanks to massive intervention by government entities.

A question arises in consequence: why have the banks, which do not hesitate today to erase doubtful debts in the tens of billions of dollars, always refused to annul developing countries' debt? They are demonstrating that it's possible and altogether necessary. Let us remember that criminal dictatorships, corrupt regimes, and leaders faithful to the great powers obtained the debts the banks presently claim. The big banks lent sums without count to regimes as disreputable as those of Mobutu in Zaire , Suharto in Indonesia , the Latin American dictatorships of the 1970s-1980s, without forgetting the Apartheid regime in South Africa .

How can they continue to inflict the yoke of this debt on the peoples who suffered these dictatorial regimes the banks themselves financed? Legally speaking, numerous odious debts figure on their books and have not been repaid. But the banks continue to exact reimbursement. Let us also recall that the third-world debt crisis was provoked in 1982 by the Fed's brutal and unilateral decision to increase interest rates.

Previously, private banks had loaned money at variable interest rates as if there were no tomorrow to already-over-indebted countries, ultimately unable to cope. History is repeating itself, but in the North this time and in a particular way: the over-indebted households of the United States have become unable to repay their variable-rate mortgages because the real estate bubble has burst. The debt write-offs that banks are effecting today vindicate those who demand cancellation of developing countries' debt: that third-world public debt to international banks came to $181.9 billion in 2006, or a lesser sum than that which has been written off in a few months....

The big private banks have triply sinned: they've constructed the disastrous montages of private debt that led to the present catastrophe. They've lent money to dictatorships and forced the democratic governments that succeeded them to reimburse every last cent of that odious debt; they've refused to annul third-world debt, although its repayment involves deterioration in the living standards of the populations involved.

Consequently, we must demand that they account for themselves. The governments of the countries in the South must effect audits of their debt, as Ecuador is doing today, and repudiate all odious and illegitimate debts. The bankers are showing them that it's possible. It would be a first step in returning finance to its appropriate role, that of a tool in the service of the human being. Of all human beings.

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Damien Millet is the spokesperson for the Comité pour l'annulation de la dette du tiers-monde (CADTM France )[Committee for the Abolition of Third-World Debt].

Eric Toussaint is the president of CADTM Belgium .

Solutions to the Crisis: Let's Start in France
By Philippe Auberger, Raymond Douyère, Monique Millot-Pernin and Michèle Saint-Marc
Le Monde

Thursday 20 March 2008

In a world where capital circulates freely and continuously from one country to another, is it possible to organize a global financial reform quickly? First of all, to be effective, this new regulation would have to be accepted at an international level; otherwise, the freedom of financial flows will continue to produce competitive distortions in favor of tax havens.

Moreover, as it brings sovereign governments and independent central banks into play, international decision-making is slow. The system of international supervision is like the napoleon pastry: on top of national central banks, there are Euro-zone institutions (the European Central Bank, the Eurogroup), then European Union institutions (the Commission, the European Parliament and Ecofin), then the G10 (the Forum for Financial Stability, the Bank for International Settlements, the Basel Committee) and finally global institutions, like the IMF.

Ideological differences - the most difficult kind to reconcile - add to that slowness. When several continents are involved, Anglo-Saxon peculiarities surface and favor "good practices" between gentlemen and the market to the detriment of regulation.

Given all that, how can we begin the process of restoring confidence? Would it be simplest to begin with measures that are within the jurisdiction of a single nation? In the framework of supervision, for example: during his hearing before the Assembly's Finance Commission, the governor of the Bank of France proposed that controllers have a right to alert the public supervisory authorities; an increase in fines for establishments that do not respect the demands of banking audits, and an obligation to institutionalize audit committees within the governing organisms of credit institutions that would be responsible for following audits and their consequences. Will our neighbors tune in to these measures?

For its part, the Bank of Spain has instituted an original mechanism: anti-cyclical provisions. Spanish banks will have to constitute provisions during their fat years when unpaid outstandings are rare for the thin years when those outstandings will multiply. Furthermore, the Bank of Spain discourages the creation of subsidiaries where banks can "park" their risky assets not covered by their capital off-balance-sheet. Why shouldn't these measures be taken up in France ?

Also, why not imitate Lloyds TSB (the No. 5 British bank) that only grants loans to the extent, approximately, of clients' deposits? Isn't it being rewarded by its present good results? It has only had to write off 280 million euros versus 2.6 billion euros of losses for Société générale.

Let's also accomplish what still comes within the purview of our national competencies: control of rating agencies, limitations on loans in proportion to the deposits that back them, separation between commercial banking and finance and investment banking, raising the moral standard for financial markets and financial advertising, repression of abuses of moral authority by bankrupt agents. Only governments can make ethics a goal of international competition.

The process is certainly sensitive, however, at the Bank of France, the Monetary Committee in its role as examiner of monetary development and consequently of financial stability, and the General Council which approves the budget - notably that of the Banking Commission - consider that our central bank may effect the necessary actions, on a national level, then at a European level. Let's learn from the American example, in which an important plan for financial recovery was rapidly launched by joining the efforts of the executive and the central bank.

France takes over the EU presidency July 1. It should refer to its own experience and that of its neighbors to coordinate the studies that are scattered today among a patchwork of multiple national and supranational controllers. Without precipitating an adoption of excessive regulation that runs no chance of succeeding in the absence of international consensus, let us nonetheless draw up proposals for regulation at a national level that it will be the task of the political power - sole democratic authority - to elaborate and then to "transmit" at an international level.

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Philippe Auberger, Raymond Douyère, Monique Millot-Pernin and Michèle Saint-Marc are members of the Bank of France 's Monetary Committee.

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