from Commentaries:
Why banks should welcome “living wills”
A year after Lehman Brothers collapsed, policymakers are still getting to grips with the key question raised by the Wall Street firm's fall: how to ensure that the failure of a large bank does not jeopardise the entire financial system.
After much debate, politicians and central bankers are warming to the idea that banks should make preparations for their own failure. This plan -- memorably dubbed a "living will" by Mervyn King, governor of the Bank of England -- would allow regulators to wind down even large, cross-border institutions without putting public money at risk.
Alistair Darling, Britain's chancellor, wants to introduce legislation this autumn to force banks to draw up living wills. Such plans have drawn predictable squeals from bank executives, who claim the idea is hard to implement for large cross-border groups. They have a point. Nevertheless, bankers should embrace the idea, for the simple reason that it is better than any of the alternatives.
The status quo is no longer acceptable, so policymakers have three choices for dealing with large, systemically important financial institutions. The first is to make them smaller so that the collapse of any one bank would no longer threaten the system. The second option is to take a "zero failure" approach to regulation, along the lines of safety rules in the airline industry.
Both of these approaches have flaws. Small banks still pose a risk if they all collapse together. And preventing failures entirely would require a level of regulation that would stifle innovation and further reduce competition in financial services.
By contrast, a system of living wills would be far less intrusive. This is not to suggest the switch would be straightforward. Differences in national insolvency laws mean it is currently impossible to establish a consistent approach to winding up complex cross-border institutions. Politicians' desire to protect local depositors and taxpayers -- often at the expense of foreigners -- also complicates matters. Simplifying corporate structures that have evolved over decades will also not be easy.
And even assuming that all these problems can be overcome, governments would still struggle to convince investors that they were really willing to use their powers.
from James Pethokoukis:
The myth of Lehman, part two
John Taylor has maintained that it was the government's reaction to Lehman that freaked out financial markets. Now Luigi Zingales and John Cochrane make a similar pitch in the WSJ:
On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman's collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor—the London Interbank Offer Rate—is the rate at which banks can borrow unsecured for three months.)
Why? In effect, these speeches amounted to "The financial system is about to collapse. We can't tell you why. We need $700 billion. We can't tell you what we're going to do with it." That's a pretty good way to start a financial crisis.
Dear friend,
Let allow me boasting of myself in regard to articles.
Major of your articles on pure economics are very interesting,grasping and reaches to high school of thoughts.
Here,you have narrated Lehman part two,
Everywhere, after shock of Lehman brothers, financial organisations closure and its impact.
Instead of forgetting these worst financial disaster,you-means journalists and famous world news channels,websites and newspapers had almost conducting ritual ceremony to this closure.
To conclude here,we need 700 million dollars for recovery and for running financial system.
This financial journey is very hard,roads are in bad conditions and lot of confusions, daily more statements on this subject by world leaders,economists, blogs are common on now a days.
I am typing one semi real solace sentences for more interests and for correct solution finding exercises from famous schools of economic theories.
Economic roads are very rough ,but we will overcome from known hurdles with future years.
from Rolfe Winkler:
A year after Lehman, the good news
Regular readers know how pessimistic I am about the economy. The "recovery" is little more than a government-financed credit bubble and it's back to risky business as usual for much of the banking sector.
But that doesn't mean there isn't good news to report.
For instance, less credit coursing through the economy means deflation, and deflation means stuff is cheaper.
Start with the cost of necessities, like shelter. House prices are down 31 percent, according to the latest Case-Shiller data.
That may wreak havoc with bank balance sheets, but it's great for buyers. Rents are down, too. I was thrilled to get two months free when I signed my new lease. Such terms were unimaginable just two years ago.
Energy isn't cheap, but thanks to reduced demand it's cheaper. Oil is down to around $70 per barrel after reaching $147 14 months ago.
Deflation can improve an economy's competitive position, too. In the short run, it means higher unemployment, but in the long run it means improved productivity.
Good one Rolfe !
The Universe has no ‘central part’ mam, that’s the good part of it, the rest is pretty violent.
from The Great Debate UK:
Tiptoeing toward economic recovery after Lehman
- David Andrews is director of David Andrews Media, a financial public relations consultancy with high profile fund management and financial services clients based in the UK, Ireland, Cayman Islands, Cape Verde, Beijing, Europe and the U.S. The opinions expressed are his own. -
David is a former financial journalist best known for his weekly Daily Express and Conde Nast ‘Money Matters’ columns. Few will be lifting a glass to toast the first anniversary of the collapse of investment bank Lehman Brothers a year ago this week. With billions of dollars under management and thought to be invincible, the private bank was generally regarded as a potential gateway to the riches of Croessus for the ordained Masters of the Universe who prowled its Jackson Pollock-lined corridors.
But when the bank started to drown in the treacherous quagmire of its collateralized debt obligations (CDOs) - a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets – America’s Federal Reserve elected not to send in the cavalry.
The virtual overnight collapse of Lehman Brothers in September 2008 was the catalyst which brought the world economy to its knees with breathtaking rapidity. The bank was so huge, a massive juggernaut reversing and elbowing its way in so many different markets that when the U.S. government allowed it to go to the wall, it caused a convulsion among its many counter-parties, which in turn caused global credit markets to seize up. "Normal" banking activity virtually ground to a halt.
We were all in dreadful trouble.
Some commentators, notably Warren Buffett and the International Monetary Fund’s former chief economist Raghuram Rajan, sounded many alarms bells about the runaway train that was the growing appetite for CDOs and other highly complex, derivatives-based tools which delivered fabulous wealth to a few but subliminally spread a cancerous, critical risk throughout the global credit system and effectively precipitated the crunch that led to a near collapse in the UK and U.S. banking systems and onto worldwide recession.
Germany risks zombie banks
– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Germany’s politicians seem to have rescued their bad bank. Pushing back the valuation date for toxic assets to before the Lehman collapse has made it more likely that banks will consign their dud investments to the voluntary scheme.
It had looked as if the banks might simply boycott it. However, while the government has scored a political goal, it is no closer to its aim of boosting lending to a credit-starved German economy. The essence of the scheme is that banks will be able to transfer some 250 billion euros of toxic assets into “eine Bad Bank”. In exchange they receive government-backed paper that they can count towards regulatory capital.
In principle this will raise their lending capacity. However, because the Germans do not want to reward reckless banks, the banks will pay an annual fee to participate, and will be liable for any shortfall at the end of the scheme. In other words, there is no fundamental risk transfer from the banks and the uncertainty about their eventual liability remains.
The breakthrough this week is that the government has pushed the valuation back to before the collapse of Lehman last autumn — when valuations were much higher.
One of the perverse effects of the revision is that some banks may enjoy a gain on the value of their impaired bonds because they have already been written down. This explains why shares in Commerzbank jumped by almost 20 percent when the news emerged on July 1.
However, like the original plan, the amendment is simply a sleight of hand. The government is still putting no cash into the scheme. The German public is dead against bailing out reckless banks, and the government, mindful of September’s general election, is in no mood to trifle with voters.
Bankers tend to go forward … require them to provision the future is a good thing for them and for the economy.