Archive for the ‘Financial crisis’ Category

As the global economy inches closer to Global Financial Crisis 2.0 or GFC2, the Leadership of the Group of 20 Nations is attempting to head it off at the pass by assembling a Frankenstein coalition of nations willing to underwrite a huge new bailout of ailing banks. Although estimates vary as to the total amount that might be needed, figures from $2.5 to $6.7 trillion dollars have been floated (hat tip to @paulstpancras):

These forecasts — excepting the Times article — are all old: the NPR article is a month old and the other two are from the Spring. So, conceivably, the total could be higher today. And, considering how the leadership of the world usually waffles over exactly how to handle these situations until a bad situation gets worse, the total price tag will continue to increase while some kind of solution is found.
I don’t know about you but I can’t even wrap my head around these numbers. As if the first round of bailouts during the first global financial crisis wasn’t bad enough — these numbers are higher, and even more offensive. Really, we know better. But so little has been done to change the regulatory, economic, political and financial environment that this outcome is virtually inevitable.
Worst yet, another bailout won’t change anything. Well, it might change something: banks and the financial elite who run them will be further emboldened by the wholesale enabling of the politicians and taken even more risks with someone else’s money. And the people who are already struggling to make ends meet will find themselves facing benefit cuts, higher unemployment in recession-oriented economies. That’s because politicians will justify even more austerity in the name of deficit reduction following this next round of bailouts.
But even if the G-20 can conjure up this mind-blogging sum, it still might not be enough. That’s because the system is so volatile, so full of risk, that something unexpected could come out of left field and bust the system wide open before this new bailout is put together.
Obviously, the banks are the biggest risk out there right now. Markets are pricing bank stocks in an eerily similar fashion to pre-bailout 2008; 186 US financial institutions are trading at 60 percent of book value, including Bank of America, Citigroup and Morgan Stanley, according to Bloomberg.
Then, the problem was toxic mortgage assets. Now, the problem is toxic sovereign debt AND an overhang of toxic mortgage debt. Not only have banks not cleared all the bad mortgages from the housing boom, but they are being sued right, left and center over bad securitization and underwriting practices from that era. Not surprising.
Credit rating agencies are one wildcard; we’ve seen the turmoil that one rating agency downgrade of the US can foster. In this unstable economic environment, an ill-timed sovereign debt downgrade could start a cascade of bank downgrades or write-downs, sending the global economy into a Lehman Brothers style crisis.
Actually, the rumors surrounding French Bank Societe Generale are already raising fears that a French sovereign debt downgrade would negatively impact the bank’s capital, according to the New York Times. Conversely, a bailout of this or any other French bank would also potentially imperil the country’s AAA credit rating.
And if France losses it’s top-notch credit rating, say goodbye to the AAA credit rating of the European Central Bank (ECB), one of the main entities behind the attempt to save the Euro.
And what about the banks here in the USA? Rumors have been swirling for weeks that Bank of America is in a perilous financial situation, and may need some kind of bailout. BOA or any other large bank failure could start a destabilizing chain reaction impacting other banks and freezing up the bank system internationally.
And that’s not even including the whole issue of credit default swaps, a type of insurance that banks and companies can take out to hedge against default. No one even knows the CDS exposure on sovereign debt or what might happen if a big sovereign, such as Italy or Spain, needed a massive bailout or a systemically important bank did.
Ugh. I’m getting a headache. The longer the situation goes on, the more potential there is for destabilizing events that could blow up the entire system. Sounds like the choices are:
  1. A horrifically expensive bailout that will kick the can down the road a few more years
  2. A financial crisis that will cripple the global economy and all but destroy the TBTF banks
  3. The unknown
None of these alternatives is particularly appetizing. But I’m betting it won’t be too long before one of them is a reality.

Is it 1961 or 2011? I’m wondering because the International Monetary Fund (IMF) is acting more like the former than the latter. If it was 1961 (the year of my birth, BTW), there would no question that the next leader of the IMF should be a European. But it’s 2011, folks, and the outdated, cosy, cold-war agreement that the leader of the IMF should come from Europe while the leader of the World Bank should come from the U.S. is not only outdated, it’s dangerous.

As Bob Dylan would say, “the times, they are a changin” but as far as the Western Global Political and Economic elite goes, change isn’t desirable or good. It’s clear to anyone with a brain in their heads that the economic and political momentum on the planet has shifted from the west to the east. But instead of trying to make this transition work as seamlessly and painlessly as possible, the soon-to-be-have-nots are kicking and screaming and hanging to every ounce of political and economic power they have for every possible second.

If the stakes weren’t so high, it would almost be funny. But they couldn’t be higher: with the global financial system in danger yet again — this time from the Euro zone yet again — Western political leaders are intent on reinforcing the status quo by selecting another French politician as the leader of the IMF. Outside of her gender, is Christine Lagarde that much different from Dominique Strauss-Kahn? Does France, and Europe itself, a country and a continent with declining economic and political influence, really deserve this job, especially in a time of financial crisis?

Frankly, no, they don’t. And shame on anyone who is pretending that this selection process will be merit based and include everyone. Come on! People, it’s a done deal. The US and Europe have the votes to sew this up and nothing else but raw votes and raw political power matter. Yes, Australia and South Africa are in favor of a change to the status quo, but Brazil is willing to go along with a European candidate, God knows why. A back-room deal, maybe?

Really, it is shameful, short-sighted and flat-out stupid that preserving the status quo and the delicate feelings of the Europeans matters more than saving the global financial system. Because that’s what’s at stake. The weaker members of the EU are literally burning with riots in Spain and Greece, economic depression in Ireland and any kind of sensible solution off the table, but so what. We’ve got important status-quo preservation work to do.

Not that actually opening up the IMF managing director selection process and choosing someone from outside of the current EU-US power axis would necessarily make a difference, but a different outlook and some emerging market cred might help. But we’ll never know, will we because we’re getting more of the same.

As Martin Luther King once said, “Freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.” If it was up to the current powers that be, IMF vote re-alignment would happen eventually, say in about 100 years. If emerging markets want more say commensurate with their growth prospects and potential to contribute funds to all these bailouts, they better start demanding more. Because otherwise, it ain’t gonna happen.

Next time, I’ll share more of my thoughts on the so-called solutions being put forth by the powers that be in regard to Greece, what’s likely with Spain and a few other thoughts. For now, I’ll leave you with some links:

  • Markets aren’t going to give the Euro any breathing room: The markets are going to continue to pound the Euro, Greek, Spanish and Portuguese¬†debt until the Euro Zone, IMF, US and anyone else with influence on the situation realizes that more needs to be done beside rearranging the deck chairs on the Titanic currently known as the Euro (from Business Insider).
  • Political protests go viral across Europe: Many Europeans are fed up with austerity; it’s being seen in elections, which many not produce the desired results, but will at least send a message (Roar Mag).
  • IMF Candidates by the numbers: Are you kidding me? This should be in The Onion, not the New York Times. Right, a candidate from Azerbaijan has a chance because that country has the highest growth rate in the world. And sure, Singapore is right in there because it’s unemployment rate is 2.5 percent. Or, OMG, maybe Paraguay, because it has low debt. Yeah. (Reuters via New York Times).