13 April 2011

The Dead Snake Can Still Bite.

The below is copied from http://www.fundweb.co.uk/1029522.article?cmpid=14001&email=true

Our commentary follows.

“Things are worse” in the financial system than before the crisis of 2008, according to Joseph Stiglitz, the Nobel prize-winning economist.

In a video for the Financial Times, Stiglitz says American regulators in particular have made little progress in curbing too-big-to-fail institutions and risky financial sectors.

“In many ways things were worse than they were before. We allowed banks to merge together. The problems of too-big-to-fail have become worse. [The institutions] all know they will be bailed out,” Stiglitz says.

“I don’t think [authorities] have learned the lesson. When I testified before Congress, a whole spectrum from left to right all agreed this problem is one of the most fundamental ones and hasn’t been fixed.”

At Vision Finance we generally tend to agree with Professor Stiglitz (and Professor Krugman of course too).  We fully acknowledge that majority of current financial institutions are insolvent, with asset values inflated with the use of accrual accounting and offshore SPV parking vehicles.  We fully agree that reserves against the loans grossly underestimate those undervaluations when compared to the mark-to-market valuations.  We agree and even often advise our clients on how to deal with the banking institutions, ensuring that low coupon loans are extended, as the owners of these assets prefer to extend the loan than face the bankruptcy of the borrower, and what goes with it the remarking of the value of the assets (and probably some jobs).  It is hence no surprise why the default ratios continue to be so low - as it is in nobodys interest to see this ratio rise.  Everyone is nicely pretending that nothing is happening, but as professor Stiglitz points out, things are most certainly at worst state than they have been for a while.

The professor however offers little solution to the problem.  I am not sure if back in September 2008 professor was on the trading floor of an investment bank, when there was not a single offer on Libor rates in London, where the Treasurer of the significant bank told me that he is glad that he is retiring this year, when people were finding themselves nice positions overseas in anticipation of the imminent "meltdown".  These were the days when you were approaching the cash machine and you were not sure if the money will come out - not because you did not have it, but because all the banks were at risk of collapse - and frankly, if not for the brave policies of Hunk Paulson, which I am convinced saved our world order as we know it - I would be in some cave right now without electricity, currency, value for cash.  The punch of an invisible hand of the markets can be very painful indeed.

Let’s consider the alternative in more detail.  Yes we could be honest, allow all the banks to collapse, there would be no money coming out of the banks, we would move to barter times at best, almost requiring the government to in an instance inflate the economy by 100%, maybe 200%, leading to possibly the situation seen in Germany after WWI,and more recently Zimbabwe.  How else does Professor Stiglitz think that the equity gap of 300% of current levels could be bridged - never mind the fact that the capital ratio requirements were and still are unreasonably low.

It is however significantly easier to outline the problems, than to propose a solution.  At Vision Finance we were debating recently if we want to enter the market of personal debt collection - a terrible ugly business, where the credit card companies almost already priced in the default of their borrowers at the time when the lend them the money (the only question is if by the time of the default they will manage to repay the principal through the 30% interest rate).  One voice was that, yes, it is an ugly business, but someone has to do it, and if we burry our heads and ignore the problem, well we are no better to often the thugs that are doing this job today with the baseball bat.  We hence sat down and found the solution and we will be releasing it in Philippines shortly, followed by other countries afterwards.

The same must be said of guys who back in September 2008 were entrusted with making some terrible decisions, forcing mergers of bankrupt banks with sound ones, just so that the crisis could be postponed.  In many ways the current accounting policies are also part of this long term recovery process, and as long as we are aware of this, we believe that the current status quo needs to be maintained.

For long time we at Vision Finance maintained, that the only peaceful and stable way out of this crisis is to slowly inflate the economy by 5 -10% per year, allowing the fair value of assets to reach their book values, and only then will the implementation of Glass Steagall Act #2, and other long term policies will become possible.   Indeed Vision Finance is one of the institutions that is able to exist now, and which is looking forward to Glass Steagall Act #2, as being quiet possibly one of the few true Investment Banks out there, specializing in linking borrowers with lenders, and relationships.  We cannot go bust, as we have no balance sheet to go bust with.  This is our major strength.   It also means that we do not have to follow some policies to cover up our mistakes, as simply put - we are outside of the system.  Can any researcher at the Budge Bracket firm afford to write such outright comment?

Hence Professor Stiglitz, have some faith that people do know - some at least - what they are doing, but we need to give it some time.   The dead snake can still bite.



Joseph Stiglitz