finanzkrise, nachhaltig, nachhaltigkeit, finanz, geldpolitik, fiskalpolitik, abzocker initiative, notenbank, währung, geld, krise, wachstum

Reforming Banks

Reforming Banks PDF

If you are interested in more background here are two relevant chapters of  Eye Of The Storm, (16) Asset Management, (17) The UBS Story

First, let me apologize for my long silence on my blog. It wasn’t a leisurely summer as some of you will have enjoyed: rising markets, lots of “Green Shots” and a couple of weeks at the beach, what more can you wish for. Not for me though.
Some of you know that I am not primarily an author and commentator. My entrepreneurial spirit has the tendency to take over and keep me busier than I bargain for. I am involved in a very exciting multimedia project produced by my wife Sandra (Yndico), that also uses the prototype of a, I dare say revolutionary, E-commerce  engine Yndico Store,  produced by a venture in which we have also become involved (facilitating the dawn of the much anticipated social commerce, you can get a little glimpse here:  Magnet).

Certainly, I have been following news and events, the return of the bulls, the inventory cycle, by many mistaken as the end of the economic crisis, and the sad tales and tragedies that gloomed up the summer while the political debate in the US grew beyond silly. Before I start; I have a pdf version of this post attached for all of you who like to read in two columns (I found that I am a much more efficient reader this way as my field of vision does just not cover the full width of a page).
After such a long time, there is much to talk about. Unfortunately, as you might have guessed, I cannot join in the cheerleading of the bulls amid the more than 50% rebound in stock-markets across the planet and all the economic “green shots”. Personally, I expect the next leg down to start any time now as hope gives way to facts and the reality of what we are up against. In the coming weeks I will try to address the important issues we face in our global economy. I will address the misguided fear and expectations of inflation that is taking hold in finance and media and explain why continuing deflation is so much more likely.
I will address the state of the economy and the inventory cycle that is being mistaken as a new dawn announced by the equity-markets’ rebound.
I will talk about China and emerging markets and why most of them are in for an even worse 2010 than the US economy.
I will address the rotten political process (we still call democracy), in which vested interests prevail over logic and facts, in which people who obviously failed are not only being left in charge of their businesses or posts but allowed to define the rules of the future: definitely not the change many voted for and an outright corporate governance night-mare.
And, I will write to you about the dire prospects of current policy direction that further impoverishes Main Street at the expense of Wallstreet that is driven by a misguided fear to take on the rotten structures in banking.
Although this all sounds very gloomy, I am in fact very upbeat about our long-term future. Technological change is clearly accelerating and is opening up huge opportunities. I believe in the ingenuity of people; we have always emerged stronger from any crisis. Today, the $50 trillion question is: who will pay for the mistakes of the past? Current policy direction would have Mainstreet footing the bill. This is glaringly unfair and given the scale of things, the resulting inequalities have the potential to become highly explosive.   There is much to cover indeed.
But, rather than concentrating on the negative, let us start with solutions. Last week, Mervyn King, the governor of the Bank of England took up ex-Fed Chairman Paul Volcker’s demand (voiced back in June) to split up our financial superstores along institutional lines (finally, I dare say). Promptly, Gordon Brown and Alistair Darling rebuked Mr. King, with the argument that the problems in the banking sector are more complex than Mr. King suggests, which is amusing coming from those two. Not surprisingly these two are pinning their hopes on more regulation. More regulation? Well, yes, rather smarter regulation is indeed necessary. Yet, it is precisely the complexity of the system that calls for a good dose of more market orientated measures.
Yes, agreed our regulators and financial “experts” were asleep at the wheel and that has to be changed. But we should not mistake the past 30 years in finance as a period of free-wheeling markets. In fact, quite the opposite is true. With regulators looking the other way, the “big and beautiful” took control and made finance their own, controlling the entire span of financial services in a happy hugely profitable oligopoly, rigging the market to their advantage and in the process distorting some of the most important price signals such risk or interest rates.
The financial industry is characterized by a variety of business structures with different risk profiles and functional dynamics that demand specific organizational and institutional structures, human resources and incentive systems. Described in detail in “Eye of the Storm” (
A commercial bank doesn’t have the institutional structures nor the functional abilities to advise anyone on investments (even less to manage assets themselves). HSBC, undoubtedly one of the most prudent and the most successful commercial bank on or planet, thrives on its strategic imperative that its core business doesn’t have the resources or structures to be successful in investment banking.
Yet today, virtually all globally leading commercial banks offer the entire span of services and products our financial industry has to offer and generate the bulk of their earnings in asset management and investment banking.
This was primarily made possible by the abundant tool box of Modern Finance that became wholly accepted, then mis-applied by bankers and cheered on by regulators and central bankers during the past 30 years. With the fall of Glass Steagall in 1999 in the USA, the last bastion of restrictions was lifted, with devastating consequences.
In the three years up to the summer of 2007 alone the top 20 global commercial banks increased their balance sheets by $20 trillion, 150% of US GDP.
Take the case of UBS, a swiss bank. At the end of 2006, UBS was the world’s 7th largest bank with $2’000 billion in assets on its balance sheet (Royal Bank of Scotland was the largest bank with a balance sheet of $3’700 billion). Of these assets straight loans amounted to $260 billion. UBS’ non-core business therefore was (and continues to be) a multiple of its core business. UBS also advised a total of $2500 billion of client assets for a fee.  Thus, in total, this commercial bank exerted influence on $4’500 billion in assets, roughly 10 times its host country’s GDP, 17 times its own core business and 110 times its equity capital. UBS became a hedge fund much larger than the total estimated size of the global hedge fund industry (approximately $3’000 billion).
During the past two decades, UBS and its peers crowded out smaller and better suited firms to handle the risks they ended up taking with misguided inadequate management tools. Smaller, entrepreneurial firms had no chance in the face of the balance sheets and market power of our commercial banks.
In order to even justify being able to manage these astronomical sums, UBS and its peers rely on the mathematical risk models spawned by Modern Finance. These models allowed them to boil down complex and diverse fields of businesses, investments and risks into simple and “precise” formulas. The inadequacies and dangers of the wholesale application of these models had been proven long before 2007. The irresponsibility with which they were applied and condoned by auditors, boards, regulators and central bankers is not open to subjective interpretation. The dangers were clear to everyone yet the money train was simply too big and too strong for anyone to stop.
When it was finally brought to a halt by ever more ridiculous practices, we had amassed the largest pile of credit in human history. In relative terms the USA’s outstanding credit today is 3 times the size it was at the beginning of the Great Depression. Worse, this credit was accumulated to a very large extent by institutions that were as ill-qualified as they come, using tools as unsuitable as anyone could imagine.
Yet, it would be wrong to blame securitization or derivatives for this crisis. Modern Finance and its tools have brought much efficiency and progress to finance, yet in the wrong hands they are wreaking havoc.
Now, as the chickens have come home to roost, these same bankers who mismanaged and rigged the market on a grand scale ask the taxpayer for a bailout. They then turn around and pay themselves large bonuses (based on such ridiculous arguments as to retain top talent), instead of accumulating capital reserves. In addition, not only are they being left in charge of their businesses but also of their own industry’s restructuring. Even Mr. King says he would allow bankers to “write their own will”.  Don’t we all hate men without spine?
It is a corporate governance night-mare that no private business would ever get away with. Our representatives, our politicians need to finally wake up to the monumental risk that commercial bankers pose, a risk that has become even larger in the 2 years since the crisis broke. It is dishonest and shamefully irresponsible to point the finger at hedge funds and non-bank financial institutions, while the truly responsible are declared too big to fail, too delicate to touch and too powerful to replace.
Central bankers, auditors, boardrooms and politicians alike need to finally drop their irresponsible attitude towards the theories of Modern Finance and how they are applied within our banking system.
Restricting commercial banks to commercial banking doesn’t mean the end of Modern Finance or securitization. It means that we are able to nurture a more nimble, fragmented, specialized institutional landscape that functions within a framework of proper incentives, checks and balances and businesses able to properly take and manage risks. Our financial system is indeed too complex for any one institution to handle the entire array of products on offer, in particular commercial banks. Properly framed and managed no institution in our financial industry will be too big to fail.
In closing let me say it again: this crisis was not an unforeseeable “Black Swan” event. We were headed towards the abyss for years with warnings ignored at the levers of power the world over. It is shameful to now stand in front of cameras and say “no one saw this coming” and feed the media and the people half truths and confusing, ill-informed garbage on the workings of the financial system. If you don’t understand it, admit it and step aside! There are enough independent professionals who understand exactly what is going on. This crisis was glaringly obvious to a great many people who have been ignored by greed and arrogance at the expense of every decent hard-working taxpayer.
Whatever self-serving politicians proclaim Mervyn King and Paul Volcker ought to be taken serious. It is our duty to act decisively. It is certain that most bankers wont like it. But everyone else will.
Mervy King Speech
Reaction by Brown and Darling

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