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From Crisis to Crisis?
By Roger de Weck
Les Échos
Wednesday 07 May 2008
Every banking apprentice knows these three rules. First of all, never put all
your eggs in one basket; diversify risks. Second, verify the solvency of those
to whom you lend money. Third, assure yourself of the reliability, solvency
and legitimacy of the investments you recommend to your clientele.
In the banking world of recent years, even the best houses have continuously
broken these three rules. Some establishments have gone so far as to ignore
"banking's golden rule," which advocates: never make long-term loans
(for example, real estate loans, and so, all the more so, "sub-prime"
real estate loans) with short-term deposits, or you will find yourself at an
impasse.
Banks have had to write off and must now write off assets and risk positions
involving hundreds of billions of Euros that are worthless today. In the United
States, the heads of Citigroup and Merrill Lynch have been summarily dismissed.
In Switzerland, the president of the Swiss giant UBS, Marcel Ospel, has just
thrown in the towel. It's true that bad management is not alone involved. As
soon as a series of big banks derogate from the profession's elementary rules,
it's obvious that there has been a systemic failure. It is essentially due to
outsized profitability objectives.
Banks were targeting a 25 to 30 percent return on equity. Now they could only
achieve that objective if they were willing to incur enormous risks. Investment
managers and specialists knew they were playing with fire - but that they'd
lose their jobs if they demonstrated too much caution. So, they were reckless
in order to maximize their own bonuses in the short term. Their outrageous salaries
were an expression of the system's fragility, even as they exacerbated it. Those
salaries damage the financial world and the whole economy. Yet those who have
long criticized these excesses were accused of "jealousy."
Banks' risk management and that of rating agencies "under the influence"
has suggested, notably by means of mathematical models, that it was possible
to reasonably manage unreasonable and unconsidered investments. Banks fooled
themselves and incurred repeated failures. At UBS, Ospel had announced at the
end of a serious crisis in 1998: "This must not happen again; it's out
of the question to perform any further operations with a too-elevated risk profile."
Yet that has happened again.
At present, a number of bankers still hesitate to draw all the logical conclusions
from the crisis because the solution displeases them: they'll have to take less
risk; consequently they'll have less profit; that is, lower bonuses. If all
the surveillance authorities - central banks and governments - do not concertedly
change the situation, the new "golden rule of banking" will be summarized
by the phrase: the next crisis is tomorrow.
Pull back to jump forward? "We are pulling back in order to launch ourselves
further in the future," the UBS boss explained at his departure. But his
lyricism does not fool us. UBS and the other big banks in disarray will recover
- at least, so it is to be hoped. But in the years to come, the middle class
will prove to be the main victim of the crisis. It's the middle class that suffers
the most from the inflation the European Central Bank cannot fight with vigor
ever since it's had to flood the financial markets with liquidity to avoid the
collapse of the system. Now inflation is gnawing away at purchasing power, wears
away salaries and pensions and contributes to the erosion of household savings.
Should this inflation have to mutate into stagflation with a reduction in employment
in a number of European countries, the financial crisis will produce a political
crisis.
Translation: Truthout French language editor Leslie Thatcher.
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