Tweet

 

Email

Email to a friend:

To:

Separate multiple addresses with commas.

From:

Name: Please send me a copy Message:

Verification code

Enter the code from aboveRequired

Send

Andrew Ross Sorkin on Glass-Steagall: "Reinstating an Old Rule Is Not a Cure for Crisis" - This is an interesting column by Andrew Ross Sorkin for the NYT & IHT. Here is the conclusion:


Why do we have financial crises? Why do banks lose money?

If history is any guide, it hasn't often been the result of speculative bets. It has been the result of banks making loans to individuals and businesses who can't pay them back.

Yes, standards became so lax that buyers didn't have to put money down or prove their income, and financial firms developed dangerous instruments that packaged and sliced up loans, then magnified their bets with more borrowed money.

But it often starts with banks making basic loans. Making loans "is one of the riskiest businesses banks engage in and has been a major contributing factor to most financial crises in the world over the last 50 years," Richard Spillenkothen, former director of the division of banking supervision and regulation at the Federal Reserve, wrote in a letter to Politico's Morning Money on Monday. He said that if Glass-Steagall still existed, it "alone would not have prevented the financial crisis."

Still, Mr. Spillenkothen said: "If banks had been limited to 'plain vanilla' lending, notwithstanding its admitted riskiness, the financial crisis may well have been less severe or more easily managed and contained."

In my conversation with Ms. Warren she told me that one of the reasons she's been pushing reinstating Glass-Steagall - even if it wouldn't have prevented the financial crisis - is that it is an easy issue for the public to understand and "you can build public attention behind."

She added that she considers Glass-Steagall more of a symbol of what needs to happen to regulations than the specifics related to the act itself.

So would Glass-Steagall make things slightly better? Sure.

But the next time someone says that it is the ultimate solution, think again.

My view - Andrew Ross Sorkin is technically correct in this assessment but I feel that he misses the behavioural message sent by repeal of the Glass-Steagall Act during the Clinton Administration. Along with revoking the Up-tick Rule, it signalled to Wall Street that it was all-powerful, could push regulators around and basically do whatever it wanted in pursuit of profit.

In other words, it opened the door to a lamentable deterioration in standards of governance within what has often been an amoral industry. This led to an insane increase in leverage, mainly via derivative contracts, some of which only the maths wonks understood.

Yes, banks will always make some bad loans, often because 'everyone else is doing it'. Leverage combined with a lapse of ethical standards creates a toxic cocktail. The CDOs at the centre of the 2008 financial crisis, with their improbably optimistic stated yields proved so popular with gullible customers that salesmen in Wall Street banks clamoured for ever more of them. The rest you know.

Standards of governance are established in a top-down process and in the financial industry profit too often trumps morality. Fortunately, there is a litmus test to alert you when speculation is getting out of hand. When Wall Street banks talk about "spreading risk" (translation: we have parcelled it out among the suckers) head for the hills.

Note: there are 12 earlier references to Glass-Steagall in the Archive. The most recent of these was on 1st November 2011 and you may also be interested inJoseph Stiglitz's excellent article: Capitalist Fools, posted on 27th March 2009.

Email of the day - On the EUR/CHF peg:

"Given the ongoing weakness of the euro and the potential for further devaluation how do you rate the possibility of the SNB having to eventually abandon the CHF-EUR peg? What would be the signs that this might happen?"

This item continues in the Subscriber's Area.

European Banks Unprepared for Pandora's Box of Greek Exit - Here is the opening for this topical article from Bloomberg:

Europe's banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro.

While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.

"A Greek exit would be a Pandora's box," said Jacques- Pascal Porta, who helps manage $570 million at Ofi Gestion Privee in Paris, including shares in Deutsche Bank AG (DBK) and BNP Paribas SA. (BNP) "It's a disaster that would leave the door open to other disasters. The euro's credibility will be weakened, and it would set a precedent: Why couldn't an exit happen for Spain, for Italy, and even for France?"

The prospect of Greece leaving the 17-nation euro region increased after parties opposed to the terms of the nation's second bailout by the European Union and the International Monetary Fund won most of the votes in May 6 elections. A fresh round of voting will be held June 17 after politicians failed to form a government. For the first time since the crisis began in November 2009, European leaders and central bankers are speaking openly of Greece abandoning the currency union.

My view - No one yet knows whether or not Greece will leave the euro, not even the Greeks and certainly not the Germans. However, we have a much clearer idea of what the markets are doing.

This item continues in the Subscriber's Area.

Additional commentary by Eoin Treacy

Shale Glut Means $1-a-Gallon Savings Burning Frozen Gas This article by Eduard Gismatullin and Jeremy van Loon for Bloomberg may be of interest to subscribers. Here is a section:

We see opportunities for a concept like this one in other areas of the world as well, said Jose-Alberto Lima, Shell's vice president for LNG and gas sales in Americas. He said Shell, based in The Hague in the Netherlands, doesn't expect a rebound in gas prices anytime soon.

In addition to being cheaper, natural gas burned in trucks emits as much as 25 percent less carbon dioxide, as well as almost eliminating particulate matter and sulfur dioxide produced by diesel-powered vehicles, according to the Calgary- based Van Horne Institute. Using natural gas, a fuel where North America is self-sufficient, would also cut demand for imported crude oil.

Shell eventually plans to deploy LNG technology to power trains, ships and mining industry engines. Gas overtook crude oil to account for more than 50 percent of the company's production for the first time this year. It expects to expand the use of LNG as a transport fuel beyond North America to Europe, China, Latin America and Australia.

My view Basic economics dictate that when the price of a commodity drops versus alternatives demand for it increases as consumers find innovative ways to avail of the more favourable pricing environment and particularly when it has environmental credentials supporting it. Therefore we have anticipated for quite some time that the growth of natural gas as a transportation fuel was inevitable. The main question is how long this will take to evolve into a widespread phenomenon.

While I have previously highlighted Fiat Industrial as a manufacturer of LNG powered haulage vehicles there are now a number of others.

This section continues in the Subscriber's Area.

Eoin's personal portfolio: stock market index breakeven stop triggered, commodity profit taken and order to close left on my ETF long This section continues in the Subscriber's Area.

Time To Cotton On! - Thanks to a subscriber for this interesting report from BNP Paribas which may be of interest to subscribers. Here is a section:

Cotton's collapse is particularly important as an unprecedented bubble in global cotton prices between July 2010 and March 2011, which saw prices treble on a mix of supply and speculative pressures, has been instrumental in pushing up clothing inflation across the globe over the last year. We estimate that clothing inflation is running at, or close to, record highs in China, the US and the euro zone. Cotton's collapse, which has seen prices drop around 2/3rds from their March 2011 peak, should therefore ensure that clothing inflation falls back rapidly over the next 6-12 months. And demand factors, proxied by Chinese narrow money growth, suggest little scope for any near-term recovery in cotton prices.

Clothing inflation appears particularly important in China given its estimated weight of around 8% in headline CPI which is roughly double the regional average according to our estimates. Econometric estimates suggest that CPI clothing inflation could fall by 2-3% points over the next 6-9 months, crimping overall CPI inflation by c.¼ other things equal. Downside risks to inflation from cotton, not to mention oil, mean that policy space' in China may therefore be greater than typically assumed. Clothing inflation also looks set to retreat in both the US and the euro-zone, also increasing policy space' for both the Federal Reserve and the European Central Bank.

My view Cotton continues to extend its decline but is becoming increasingly oversold in the short term. While potential for a bounce has increased, a sustained move above 85¢ would be required to question medium-term downward potential.

This section continues in the Subscriber's Area.

Email of the day on an addition to the Chart Library:

I would appreciate it if you would include in your chart bank Raging River Explorations RRX at Toronto S&P TSX, a newly spun off junior pure (98%) light oil development company. Thank you once again.

My comment Thank you for this suggestion which has been added to the Chart Library.

The Chart Seminar 2012 - Following a well-received tour of the USA I am looking forward to our next venue in London which now only three weeks away. Anyone interested in securing a place at any of our events should contact Sarah Barnes at: sbarnes@fullermoney.com.

The remaining dates and venues for The Chart Seminar in 2012 are:

London - May 24th & 25th 2012 at the Radisson Edwardian Hampshire

London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire

The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.