What happened to the global economy and what we can do about it
with 11 comments
By Simon Johnson
Vikram Pandit heads Citigroup, one of the world's largest and most powerful banks. Writing in the Financial Times Thursday morning, with regard to the higher capital standards proposed by the Basel III process, he claims
"There is a point beyond which more is not necessarily better. Hiking capital and liquidity requirements further could have significant negative impact on the banking system, on consumers and on the economy."
Mr. Pandit is completely wrong. To understand this, look at the letter published in the Financial Times earlier this week by finance experts from top universities "“ the kind of people who trained Mr. Pandit and his generation of bank executives.
The professors write,
"Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15%, of banks' total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any."
The point is that "bank capital" just reflects the choice between debt and equity "“ to "have more capital" simply means to rely more on equity relative to finance. From the professors again, and remembering that these people also have a great deal of practical experience,
"High leverage encourages excessive risk taking and any guarantees exacerbate this problem. If banks use significantly more equity funding, there will be less risk taking at the expense of creditors or governments."
"Bankers warn that increased equity requirements would restrict lending and impede growth. These warnings are misplaced. First, it is easier for better-capitalized banks, with fewer prior debt commitments hanging over them, to raise funds for new loans. Second, removing biases created by the current risk-weighting system that favor marketable securities would increase banks' incentives to fund traditional loans. Third, the recent subprime-mortgage experience shows that some lending can be bad for welfare and growth. Lending decisions would be improved by higher and more appropriate equity requirements."
Mr. Pandit is a smart individual and he knows all this "“ he has a Ph.D. in finance from Columbia University. Why then does he advance such obviously specious arguments in the pages of the Financial Times?
The answer is straightforward.
a) He can get away with it. Modern financial CEOs float in a cloud above the public discourse; they can spout nonsense without fear of being contradicted directly in the pages of a leading newspaper.
b) Officials listen to bank CEOs and an op ed gets their attention. Perhaps they think Mr. Pandit knows what he is talking about "“ or perhaps they know that these arguments are completely specious. In any case, they are deferential.
c) Mr. Pandit is communicating with other CEOs and, in this fashion, encouraging them to take recalcitrant positions. There is an important element of collusion in their attempts to capture the minds of regulators, politicians, and readers of the financial press.
Mr. Pandit is engaged in lobbying, pure and simple. Ask the people who invented modern finance theory and figured out how it should be applied (second to last paragraph),
"Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks' shareholders and managers, with taxpayers picking up losses and economies suffering the fallout."
Written by Simon Johnson
November 12, 2010 at 4:50 am
Posted in Commentary
Tagged with citigroup, Vikram Pandit
Yes, he’s completely wrong. And I agree with using the words of his own corrupt trainers against him, as long as we remember that corporate academia is a criminal organization as well.
But what’s most wrong of all is to think there can be any “compromise” with these criminals. Implicit in all this nitpicking over the details of bankster propaganda and wrangling over Basel is the long disproven notion that these rackets can be “reformed”.
But they cannot be. They are purely predatory, purely parasitic, and absolutely worthless and destructive. They have to be eradicated completely.
In a sense, the mode of argument is a kind of “trickle-down” in itself. One doesn’t start from first principles; formulate demand one: Smash the Rackets; and proceed aggressively from there.
Rather, one lets the banksters themselves and the status quo itself set the parameters for “debate” (including the implicit assumption that the banks should exist and deserve to exist at all), and then sets out to rationally prove them wrong on the details they allow to be part of the discussion at all.
Of course, one can and does “win the debate” on points, every time, but meanwhile the criminal walks free every time and continues to rob and destroy. Doesn’t that prove by now that winning the bankster-defined debate among an audience of wonks doesn’t accomplish anything?
Russ
November 12, 2010 at 6:55 am
Russ,
Start a fire with tinder; tend to it carefully and get a good hot foundation; then throw on the big stuff.
Joe
November 12, 2010 at 7:32 am
I think the better analogy for Vikram’s FT argument would have something to do with privatized bank profits, socialized bank losses and a pervert with nothing but a long overcoat, and a reporter with a small notepad standing nearby asking him if there’s anything he wants to communicate to the city.
Ted K
November 12, 2010 at 7:34 am
You should have titled this post “Revenge of the clerks,” Simon.
Politico has a similar post:
HIGHER CAPITAL RULES HURTING ECONOMY? "“ That's what Goldman Sachs analysts led by Richard Ramsden suggest in a report that could catch some regulatory and political eyes: "US banks are holding more capital in response to the tighter capital and balance sheet rules regulators have already put in place, and perhaps in anticipation of even greater capital requirements yet to come. Higher capital levels have raised the cost of making loans, which has "¦ raised the costs faced by many bank customers and slowed loan growth." Full report: http://politi.co/dcGjl8
The banks have assembled their greek chorus to guide us thru the implications of the dire consequences of Basel III, and to intone gloom and misery if they are forced to change their MO.
It is undoubtedly true the cost of lending is increasing as the banks’ leverage ratios are declining. There is no way these firms can legitimately earn 20+ roe or even 15% roe if their leverage is reduced. At their core, these banks and the people who run them perform a clerk’s function: funds come in to them for safekeeping on which the provider of the funds receives a small return; the bankers lend the funds out to people who actually make stuff, or provide real services, and, in return, the bankers charge the borrower a cost reflective of the risk of the loan (i.e., interest rate). The bankers are required to maintain detailed records on both sides of the transaction, and report on their own safety and soundness to their regulators, so they do incur a cost, which typically is covered by taking a sliver of the money wedge between the bid for and offer on investors’ funds.
Pandit and his co-evals are part of the greek chorus that is the modern-day banking sector. The GS “research” is the script from which they read. They intone increased regulation, greater oversight and reduced leverage will bring doom and destruction to the world. Behind them, the smoldering wreckage of the destruction they’ve already visited upon the world, from which their their mournful intoning is meant to divert attention. (If you’re having trouble imagining this particular chorus, imagine instead the funny masks and cloaks being replaced by a row of perfectly turned out clones at, say, the Buttonwood Gathering ( http://buttonwood.economist.com/ ), all wearing an appropriately grey Savile Row suit, a beautiful Neapolitan french-cuff dress shirt set off perfectly be a purple, yellor or royal blue Hermes tie, and a pair of Ferragamo alligator lace-ups and you’ve got the picture perfectly.)
What Pandit and GS, et al, are really saying is we’ve spent the last 30 years figuring out more and more subtle ways of increasing the clerks’ share of banking transactions with less and less of our own money at risk, and we’ve guaranteed all the people who buy our equity that we’ll be able to delivered 20+ percent roe from now till the end of time. If we are not allowed to continue to do this, we will stop performing the clerk’s function. So there.
This is all about protecting the gargantuan income the bankers dole out to themselves and their top clerks, and the great wealth they’ve managed to accumulate in the form of equity in their firms. If, one day, everyone wakes up to the fact that the clerks have lost their ability to dictate terms — which the GS analysis alludes to vis-a-vis increased issuance in the bond markets — the great wealth Pandit et al have amassed will shrink dramatically. If the actual return to the clerks becomes more in line with their actual utility to society they are all screwed.
They have been extraordinarly successful in keeping their own cost of funds at something slightly above zero, and yet still manage to find reasons why they cannot perform the clerk’s function on 300+ bp of risk-free profit borrowing from the Fed and lending back to the U.S. government at 3 percent. They don’t even have to look for stuff to do. If they get really creative, they can use this firehose of money to buy tankers, refineries, power plants, more MBS and just roll the dice to see what happens. It really doesn’t matter, since Uncle Sam’s bankrolling all of it with no risk of failure to any of these guys. And still they can bring out the greek chorus. Amazing.
As we come to the close of this year, and prepare for the $144 BILLION in bonuses that’ll be handed out this year to the clerks and their subalterns — a resplendent example of just how successful the clerks have been — one wonders why they continue to intone the end is near. Perhaps they see in Basel III and the recalcitrant regulators around the world that the future does indeed look grim. Maybe not Christmas-Carol grim, but grim nonetheless. Grim in the sense observed by Billy Ray Valentine in Trading Places:
… the clerk ” ‘ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain’t gonna f… my wife ain’t gonna make love to me if I got no money!’ So they’re panicking right now, they’re screaming ‘SELL! SELL!’ to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.”
markets.aurelius
November 12, 2010 at 9:39 am
Read Full Article »