Take a look at some recent events:
- US investment banks ceased to exists, either were taken over (JP Morgan bought Bear Stearns) or failed (Lehman). This collapse of Lehman is now considered a big mistake, as it sent shockwaves throughout the world (banks lost money as Lehman did not pay back, even some private banking clients in Poland lost money as they were offered “safe” and nice yielding Lehman bonds. Two most resilient investment (Goldman and Morgan Stanley) got banking licenses over weekend and became commercial banks.
- US stepped into two US mortgage giants (quasi-nationalization) and bought near 80% stake in AIG (nationalization)
- Banks’ shares nosedived across the world, US, UK, Europe, with Hungary as a recent victim, on the rumor that biggest bank has problems
- Governments nationalized banking sectors (Iceland, UK, continental Europe, USA)
- Iceland’s government took over banking sector but it was too big and the whole country went bankrupt. Now UK is considering to sue Iceland, as British public sector lost half a billion pounds it deposited in Iceland banks
- US first rejected and then passed the Paulson plan, effectively a 700bn dollars bailout, while everybody knew it was way too small to have any impact
- UK came up with a 500bn pounds plan to inject capital into the British banking sector, provide liquidity and guaranties
- Russia, Indonesia and Brazil suspended trading amid huge one-day falls, Tokyo stock exchange fell by 11% in a single day
- Short-selling was banned in a number of countries
- Money markets are not functioning, banks have injected close to USD2trillion liquidity to the system and it made no difference, institutions are hoarding cash
- There was an unprecedented coordinated rate cut (including Peoples Bank of China) to boost confidence, the next day markets sunk
- Fed is accepting junk as collateral in repo transactions with banks, and is considering to move into unsecured lending, first time in history
- Fed has established a special purpose vehicle to buy corporate commercial paper, because banks refuse to roll-over maturing papers
- On Friday markets were to settle $400bn worth of CDS where Lehman was a counter party, big liquidity squeeze was anticipated, banks were holding cash and government bonds, and a record 2.3 trillion dollars bond repo transactions failed to settle . No wonder markets tanked.
Fat cats of this world meet in Washington at the annual IMF/World Bank meetings. They will surely send a message to the world that a series of actions will be taken to restore confidence and prevent world recession. Here are some ideas that are floating around:
(1) nationalizing banking sectors or key banks (already in progress); (2) providing government guarantee to all transactions between banks to remove counterparty risk (hopefully not Icelandic government one); (3) creating global clearing house, that will clear interbank transactions and remove counterparty risk; (4) increase fiscal deficits and cut interest rates further to boost global demand and avoid recession; (5) organize a massive asset swap, with Gulf/Chinese/Japanese investor swapping their UST holdings for preferred stock in US/western European banks and insurance corporations; (6) extend unlimited deposit guarantee to all deposits in all major countries; (7) on political level a creation of new G-XY (11, 12 ???) that will be in charge of global governance; (8) Maybe a new global stability fund will be created to deal with such issues, and shareholding of the fund will reflect 21st century power structure. (9) Some people ponder suspending mart-to-market accounting?
Whatever comes out of the IMF/WB meeting it should be bold enough. Another “Paulson plan” would do more harm than good. And when drafting solution fat cats should think not only about tomorrow, but also about the day after tomorrow. I hold firmly to my view that any solution that does not involve China and the Gulf will be second-best. We need Alexandrian Solution, that reflects 21st century financial and political power structure. If governments keep nationalizing banks they risk becoming “new Icelands” once recession hits and public finances deteriorate. And imagine large Western European country declaring bankruptcy. Or imagine people loosing faith in AAA USA rating. We do not need to take this risk, we need new global governance model, we need new G8/9 (US, EU – one seat, China, India, Japan, Russia, Brasil, Indionesia and GCC when created). This is the Alexandian Solution we need to cut the present financial crisis Gordian knot. Trash all “Paulson plans”, think bold. Think Alexandrian Solution.