Opinion

The Great Debate

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.

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.

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.

from The Great Debate UK:

Tiptoeing toward economic recovery after Lehman

david-andrews

- 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.

Germany risks zombie banks

Margaret Doyle– 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.

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