Despite massive successive capital injections, Big Banks on government life support continue to suffer, confirming that insolvent banks cannot be cured with an injection of public funds any more than a body can be resuscitated with massive blood transfusions. It is Alice in Bankerland to believe that the international financial crisis could have been fixed in a matter of months when fictitious wealth had been created over years through fraudulent bond issuances, corrupt debt ratings agencies, overpaid regulators[1] asleep at the wheel[2] and dodgy accounting practices that led to the sale of commission generating machines as financial products. Instead of mercilessly pursuing the rogue bankers they had Knighted, glass house politicians only managed to prolong the agony with insolvent banks being ‘outed’ in a sequence directly proportional to their skills at duping the Markets.
Given that there are indications that some of the dust may be settling for some of the banks, it is perhaps a propitious time to reflect on these events from an SME’s perspective.
The first important observation is that though the UK banking sector appears to have reached calmer waters, the same cannot be said of the US. As Robert Kuttner[3] noted on 7th June 2009, “..the government has bent the accounting rules to allow banks to carry nearly worthless securities on their books at their nominal full value. …the banking lobby and legislators pressured the Financial Accounting Standards Board to suspend its rules requiring assets to be carried on banks' books at their current market value… Cooking the books to inflate the value of depressed securities also explains how zombie banks like Citigroup could pass the government's "stress tests" with flying colors. Citigroup, which has depended on $45 billion in straight government cash and hundreds of billions more in guarantees, was found by the stress-testers from the Fed and the Treasury to need only $5 billion more to be adequately capitalized. This is, of course, preposterous if you value the junk[4] on its books accurately”
This places the $68 Bn of loans repaid in June by ten banks squarely into context and underscores the many hundreds of billions more in government guarantees continuing to sustain their very life blood. ‘Early’ repayment was thus probably linked to the lifting of Obama executive bonus restrictions[5] because these banks would have been unable to repay any government loans (never mind executive bonuses) had their toxic debts been correctly valued. The focus now shifts on to how (and whether) the US Government has planned to prevent any return trips by Zombie Banks to the “too-big-to-fail” money trough at the Taxpayers’ Fest.
The second observation is that while we should avoid the mushrooms the UK Chancellor was munching when he based his Budget on a magic V shaped economic rebound starting January 2010, we should equally be aware that the Zombie implosion has opened commercial opportunities of a life time for small and medium sized independent financial institutions in Gibraltar. Recent software advances on the Net have further levelled the competitive playing field for SMEs dreaming of locking horns with Big Banks in a specific area and especially if they are specialist financial institutions not linked with government or government-owned zombies.
There are important reasons for this.
Firstly a tectonic shift in sentiment of major proportions occurred when clients woke up one fine morning to find that,” the bank where I have my (Offshore) Account is now owned by my government..”. A national survey by Raddon Financial Group in the US confirms this, with 37% of existing clients saying they were less likely to continue banking with Zombies and 88% saying they were “not very likely” or “not at all likely” to ever become a Zombie customer. Extrapolate this to Europe, and you get the picture. Millions of potential clients.
Secondly, the leveraged mish-mash of conflicts (bank, asset manager, stock broker, prime broker, market maker, govt adviser, part time Master of the Universe) as represented by the Lehman business model is dead. Quite apart from being an imbroglio of conflicts too far, hidden off balance sheet losses, frauds, scandals, bankruptcies, lawsuits and abject regulatory failings have all served to highlight the value of conflict-free services offered by independent financial institutions with no conflicts and no toxics.
Thirdly, an era of financial specialisation appears to have started within the post-Zombie paradigm where the mantra “too big to fail” has been replaced with “too big to exist”. Jurisdictions that followed this flawed policy of least risk based on bigger = less risk = less work have had the likes of Lehman, Madoff/ Medici, Stanford et al cut a swathe through their ranks to destroy[6] extremely brittle regulatory careers.
The flip side of the coin for independent financial SME specialists is that they now get to pay Zombie sized bills, including those related to that Cathedral of Bureaucratic Overreach called MiFID which was espoused by turbo leveraged Zombies right as they were bringing the world’s economy to its very knees. This will make economic recovery more painful and longer lasting. The problem is that no lessons seemed to have been learned. EU Regulocrats continue to expend time, money and precious human endeavour building new catch-all regulatory cages when what they should be doing is to make all participants in the process accountable. After all, the last cage they built signally failed to get within a Square Mile of catching the Zombie Banks at their skulduggery. A coffin would have been more apt.
[1]The Guardian, 15th March 2009 “FSA's ex-golden boy ends up with a tarnished reputation”. JohnTiner, CEO of the FSA, earned around £650,000 per annum at the FSA, drove a Porsche to work with the number plate T1 NER, was never made accountable for events under his watch which directly led to today’s crisis.
[2] The Independent 18th December 2008 “was Wall Street's regulator asleep at the wheel?”
[3] “Fantasies of Green Shoots” on www.huffingtonpost.com
[4] According to Bloomberg, off-balance sheet assets (where the junk is parked) for the four biggest U.S. banks only were about $5.2 trillion at the end of 2008. The U.S. GDP was around $14 Trillion in 2008.
[5] $400.000 per annum, imposed by the Obama Administration
[6] SEC Press Release 19th June 2009: SEC charges CEO of Financial Services Commission Antigua for Roles in Stanford Ponzi Scheme. SEC Press Release 19th June 2009
