Sep 13 2013

Five years post-Lehman, five big bank problems remain

Posted by: Nick Shaxson in: Thoughts

Updated with BIS comments

A summary of a good article by Gillian Tett in the Financial Times. After the 2008 collapse of Lehman brothers, popularly taken to be the big moment of the financial crisis, what has changed? Well, she’s selected six, of which I’ll highlight five since the sixth is rather US-focused:

  • The big banks are bigger than ever, particularly in the U.S. Now they’re Too Big to Jail too.
  • Shadow banking is bigger, not smaller. From $59 trillion in 2008 to $67tn today – with more growth to come.
  • Central bank backstops are even more important than before, at least via Quantitative Easing (QE). Too Big to Fail also means the taxpayer guarantee’s alive and well.
  • The rich have become richer. Thanks in large part to QE, lifting asset prices.
  • Financiers have not been jailed for crisis-related sins.

Scarier, though, are these subsequent comments from the Bank for International Settlements, in a story picked up by Ambrose Evans-Pritchard in the UK’s Telegraph newspaper:

“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.

“All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle,” said Mr White, now chairman of the OECD’s Economic Development and Review Committee.
. . .
The BIS said interbank credit to emerging markets has reached the “highest level on record” while the value of bonds issued in off-shore centres by private companies from China, Brazil and other developing nations exceeds total issuance by firms from rich economies for the first time, underscoring the sheer size of the debt build-up in Asia, Latin Africa, and the Mid-East.”

What will shift this tentacular behemoth, this global, globalised, non-utility, offshore-steeped, casino-like financial services industry? Politics is captured, so that leaves public opinion.

Thankfully, public opinion in many countries has clearly changed dramatically, and for the long run – but it doesn’t seem to have dented the banking outcomes yet. The intellectual arguments for reform are still being put in place, but the all-important one on bank capital is basically won. There’s also room for a whole new arena of argumentation, here.

2 comments so far

Links Sep 16 9th September, 2013 5.10 pm

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Ooh 2B 10th October, 2013 10.17 pm

The wriggly fish is already slipping through the central banks’ hands. Their indulgence of their chums in the cartel of too-big-to-fail banks is in its end game.

The swaps market, or over-the-counter derivatives, dominate the shadow banking system. And it scares the pants off the outgoing deputy governor at the Bank of England, Paul Tucker.

Now look already: wriggle, wriggle…

The OTC derivatives market is vulnerably exposed to the vicissitudes of the dollar index and T-bond yield, and the central banks’ QE rod, which until now has had the markets hook, line and sinker, can only be cast once. When it fails there’s no keep-net for the wriggly fish. We, the taxpayer, are maxed out after the last little hiccup in the road.

All they can do is more of the same. They’ll print more and more and still more currency until USD, GBP, CHF and all the others on the QE reel have gone the way of the Reichsmark and the Zim dollar.

Twenty years ago the OTC derivatives were described as “financial hydrogen bombs”.

What’s changed since then? They’ve got much, much bigger. No wonder Tucker’s scared.


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