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The Proof Is in: Third-World Debt Is Erasable •
Solutions to the Crisis: Let's Start in France •
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Banks in Question
By Jean-Pierre Balligand
Le Monde
Thursday 20 March 2008
Virtually each week we see central banks - with the American Federal Reserve
in the lead - injecting hundreds of millions of dollars to increase the liquidity
of financial markets threatened by the crisis. Despite some people's reassuring
projections, that they should be brought in this way to play fireman - on a
grand scale and with great urgency - shows that this crisis and the risks it
brings to bear on the global economy are far from extinguished.
The central banks' interventions amount to helping out the actors - that is,
the banks - that to differing degrees are the cause of the present crisis. From
that perspective, and although the means they use are very different, one may
compare the US initiative to the British Treasury's temporary nationalization
of the Northern Rock bank. Both sets of decisions were based on the old "too
big to fail" principle, which maintains that when the consequences that
certain banks' failure could provoke are too significant, it's necessary to
socialize their losses.
This necessity to alleviate banks' problems with the public's money may understandably
surprise when we compare it to the customary litany of profits the major banks
realize. To take French examples only: BNP, the Crédit mutuel, Société
générale, Dexia and the Banque populaire, Caisse d'épargne
and Crédit agricole groups posted cumulative net profits from 2004 to
2006 of close to $75 billion.
Privatization of the profits when all goes well and socialization of the losses
when all goes badly raises four questions. First of all, are banks businesses
like any other? Some are rediscovering that banks are not businesses like any
other: unlike businesses, they are the object of special regulation and must
respect specific rules with respect to their capitalization.
We no longer count the number of internal as well as external (public agencies)
bank controllers. This special status derives from their place in the economy.
Through their lending activity, the banks are at the heart of what makes our
market economies work: confidence. Without confidence, the system is blocked
and no one can plan for the future any more.
Secondly, have the banks forgotten their calling? In any case, supervision
does not prevent them from chronically underestimating risks and succumbing
to frequently catastrophic vogues. Take, for example, securitization. The fundamental
calling of a bank is to evaluate the risks of the loans it grants and to follow
the approved loans throughout their duration. Securitization has led to an overall
rejection of responsibility and accountability by banks in favor of techniques
designed to transfer risks "repackaged" by rating agencies to investors.
A sad record in the end: close to $400 billion of losses, enormous difficulties
in identifying and locating the risks, American borrowers forced to sell their
discounted homes at a loss. The crisis is so severe that it has become an issue
in the American primaries, with some candidates demanding a return to the regulation
of lending.
Third, may investment banks replace commercial banks? It is customary to present
bank income as having two components: on the one hand, the so-called recurrent,
i.e. stable, activities, for example, retail banking; on the other hand, the
so-called sporadic, more volatile activities, those investment banking activities
that depend on the development of interest rates or security prices. And we've
discovered that the share of non-recurrent activities could represent as much
as nearly half of the profits at one of the principal French banks.
The fact that no one is unsettled by such a proportion allows us to discover
all the market actors' overestimation of the stability of income actually vulnerable
to market hijacking.
It is undoubtedly time to question the balance between different sources of
income. It is also undoubtedly time to restore their patents of nobility to
the banker's mission: distributing loans and following them during their lifetime
without delegating that responsibility to others.
Finally, can we avoid similar dysfunctions recurring in the future? It is urgent
that we reflect for good on the future of our banks and their role in financing
the French economy. It is difficult to decree a complete scission between commercial
and investment banking.
But shouldn't banks' ratios promote their financing of the real economy more,
to the detriment of activities such as trading? In this regard, we must urgently
question the connections between banking and industry in France, while we continue
to deplore the absence of financial accompaniment for small and medium-sized
companies.
We would consequently be wrong to cut short debate on the real health of the
banks, their strategies, their shareholders and the role of all stakeholders,
including bank employees, who, in some cases are their companies' primary shareholders.
--------
Jean-Pierre Balligand is a Socialist Party MP from Aisne.
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The Proof Is in: Third-World Debt Is Erasable
By Damien Millet and Eric Toussaint
Le Monde
Thursday 20 March 2008
Since August 2007, North American and European banks have been experiencing
a very severe crisis, now poised to spread to the entire neo-liberal free-market
system as a whole. The actual sum of asset write-offs the banks have had to
make now exceeds $200 billion (127.4 billion Euros). According to the most qualified
experts, the bill will ultimately exceed a trillion dollars.
In the United States, 84 mortgage loan companies went bankrupt or ceased all
activity between January 1 and August 17, 2007, versus only 17 for the whole
year in 2006. In Germany, the IKB bank and the public SachsenLB were barely
saved. England had to nationalize the bankrupt Northern Rock bank. Carlyle Capital
Corporation fund, close to the Bush family, has just collapsed: its debts represented
32 times its capital. As for the prestigious American bank Bear Stearns, it
has just called on assistance from the United States Federal Reserve Bank to
obtain emergency financing; it will be purchased by JP Morgan Chase for a mere
mouthful of bread.
So several segments of the debt market are in the process of collapsing and
are dragging the powerful banks and hedge funds that created them along in their
wake. The rescue of these private financial institutions is being realized thanks
to massive intervention by government entities.
A question arises in consequence: why have the banks, which do not hesitate
today to erase doubtful debts in the tens of billions of dollars, always refused
to annul developing countries' debt? They are demonstrating that it's possible
and altogether necessary. Let us remember that criminal dictatorships, corrupt
regimes, and leaders faithful to the great powers obtained the debts the banks
presently claim. The big banks lent sums without count to regimes as disreputable
as those of Mobutu in Zaire, Suharto in Indonesia, the Latin American dictatorships
of the 1970s-1980s, without forgetting the Apartheid regime in South Africa.
How can they continue to inflict the yoke of this debt on the peoples who suffered
these dictatorial regimes the banks themselves financed? Legally speaking, numerous
odious debts figure on their books and have not been repaid. But the banks continue
to exact reimbursement. Let us also recall that the third-world debt crisis
was provoked in 1982 by the Fed's brutal and unilateral decision to increase
interest rates.
Previously, private banks had loaned money at variable interest rates as if
there were no tomorrow to already-over-indebted countries, ultimately unable
to cope. History is repeating itself, but in the North this time and in a particular
way: the over-indebted households of the United States have become unable to
repay their variable-rate mortgages because the real estate bubble has burst.
The debt write-offs that banks are effecting today vindicate those who demand
cancellation of developing countries' debt: that third-world public debt to
international banks came to $181.9 billion in 2006, or a lesser sum than that
which has been written off in a few months....
The big private banks have triply sinned: they've constructed the disastrous
montages of private debt that led to the present catastrophe. They've lent money
to dictatorships and forced the democratic governments that succeeded them to
reimburse every last cent of that odious debt; they've refused to annul third-world
debt, although its repayment involves deterioration in the living standards
of the populations involved.
Consequently, we must demand that they account for themselves. The governments
of the countries in the South must effect audits of their debt, as Ecuador is
doing today, and repudiate all odious and illegitimate debts. The bankers are
showing them that it's possible. It would be a first step in returning finance
to its appropriate role, that of a tool in the service of the human being. Of
all human beings.
--------
Damien Millet is the spokesperson for the Comité pour l'annulation
de la dette du tiers-monde (CADTM France)[Committee for the Abolition of Third-World
Debt].
Eric Toussaint is the president of CADTM Belgium.
Go to Original
Solutions to the Crisis: Let's Start in France
By Philippe Auberger, Raymond Douyère, Monique Millot-Pernin and Michèle
Saint-Marc
Le Monde
Thursday 20 March 2008
In a world where capital circulates freely and continuously from one country
to another, is it possible to organize a global financial reform quickly? First
of all, to be effective, this new regulation would have to be accepted at an
international level; otherwise, the freedom of financial flows will continue
to produce competitive distortions in favor of tax havens.
Moreover, as it brings sovereign governments and independent central banks
into play, international decision-making is slow. The system of international
supervision is like the napoleon pastry: on top of national central banks, there
are Euro-zone institutions (the European Central Bank, the Eurogroup), then
European Union institutions (the Commission, the European Parliament and Ecofin),
then the G10 (the Forum for Financial Stability, the Bank for International
Settlements, the Basel Committee) and finally global institutions, like the
IMF.
Ideological differences - the most difficult kind to reconcile - add to that
slowness. When several continents are involved, Anglo-Saxon peculiarities surface
and favor "good practices" between gentlemen and the market to the
detriment of regulation.
Given all that, how can we begin the process of restoring confidence? Would
it be simplest to begin with measures that are within the jurisdiction of a
single nation? In the framework of supervision, for example: during his hearing
before the Assembly's Finance Commission, the governor of the Bank of France
proposed that controllers have a right to alert the public supervisory authorities;
an increase in fines for establishments that do not respect the demands of banking
audits, and an obligation to institutionalize audit committees within the governing
organisms of credit institutions that would be responsible for following audits
and their consequences. Will our neighbors tune in to these measures?
For its part, the Bank of Spain has instituted an original mechanism: anti-cyclical
provisions. Spanish banks will have to constitute provisions during their fat
years when unpaid outstandings are rare for the thin years when those outstandings
will multiply. Furthermore, the Bank of Spain discourages the creation of subsidiaries
where banks can "park" their risky assets not covered by their capital
off-balance-sheet. Why shouldn't these measures be taken up in France?
Also, why not imitate Lloyds TSB (the No. 5 British bank) that only grants
loans to the extent, approximately, of clients' deposits? Isn't it being rewarded
by its present good results? It has only had to write off 280 million euros
versus 2.6 billion euros of losses for Société générale.
Let's also accomplish what still comes within the purview of our national competencies:
control of rating agencies, limitations on loans in proportion to the deposits
that back them, separation between commercial banking and finance and investment
banking, raising the moral standard for financial markets and financial advertising,
repression of abuses of moral authority by bankrupt agents. Only governments
can make ethics a goal of international competition.
The process is certainly sensitive, however, at the Bank of France, the Monetary
Committee in its role as examiner of monetary development and consequently of
financial stability, and the General Council which approves the budget - notably
that of the Banking Commission - consider that our central bank may effect the
necessary actions, on a national level, then at a European level. Let's learn
from the American example, in which an important plan for financial recovery
was rapidly launched by joining the efforts of the executive and the central
bank.
France takes over the EU presidency July 1. It should refer to its own experience
and that of its neighbors to coordinate the studies that are scattered today
among a patchwork of multiple national and supranational controllers. Without
precipitating an adoption of excessive regulation that runs no chance of succeeding
in the absence of international consensus, let us nonetheless draw up proposals
for regulation at a national level that it will be the task of the political
power - sole democratic authority - to elaborate and then to "transmit"
at an international level.
--------
Philippe Auberger, Raymond Douyère, Monique Millot-Pernin and
Michèle Saint-Marc are members of the Bank of France's Monetary Committee.
Translation: Truthout French language editor Leslie Thatcher.
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