Boo to Basel Too
Posted: October 12, 2010
As a general rule, we don’t like to criticize, argue with or dispute
economists. They are rarely comprehensible, rarely right and even more
rarely working on the same planet as the rest of humankind.
We will make an exception here if only because the economist in question is
one we frequently agree with and have found to be routinely (perhaps
accidently) sensible. Professor Alan Blinder (Princeton University) judges
the Basel III accords as deserving “one hand clapping”. We suspect this time
the good professor is more true to his name than his reputation suggests.
Indeed, blind is what Basel III is. Blind to reality, blind to necessity and
blind to any useful contribution toward resolving our economic malaise,
today. This malaise starts and ends with banks refusing to lend, refusing to
cleanse their balance sheets and refusing to accept their role in the
broader economy to protect their own pocketbooks.
The globally brilliant minds behind Basel III have decreed from on high that
banks will operate with tighter (better) definitions of Tier 1 capital, will
have to employ a meaningful leverage ratio, establish limits to
counter-party risk (kudos to Lehman and AIG for bringing this issue to light
of day) and have a counter-cyclical capital buffer.
We don’t clap, we boo because none of this good stuff takes effect for
years, a decade or ever.
The world does not need banks to dither around until 2015 or 2020 to do what
they need to do today and do what they always did historically. The world
needs these stewards of our deposits to act now. Today. This week. This
month. Now.
Banks are not lending; commercial and business loans contracted again last
month for the 13th consecutive month while home mortgages are becoming near
impossible to get in many markets unless borrowers have upwards to 100%
collateral.
Excuse us – if we have 100% collateral, we don’t need banks. Business
expansion, forerunner of job creation, is stalled at almost every level in
this country. Small business is particularly stymied with reports from the
sublime to truly ridiculous about “standards” the banks are imposing.
Please. If banks had “standards” we never would be in this mess and as long
as they have “standards”, it appears we aren’t going to get out of it any
time soon.
Despite Professor Blinders distant optimism and allowing for our persistent
advocacy for reinstating Glass-Steagall, action is required today from the
banks (or their regulators, as impotent as they are) to fix the problem they
caused today. First and foremost, banks must write down, write off, and
unload over one trillion dollars in garbage residential and commercial
mortgages stinking up their balance sheets. As long as this trash sits, the
smellier it gets and the less capable banks are to perform their duty within
the economy.
Their refusal to act is understandable for any institutions run by those as
self-serving and self-interested as bank executives. Write offs and write
downs hit financial reports hard, reducing any legitimacy banks have to
award obscene salaries to officers.
Further (and possibly more important), these actions require bank officials
to admit publicly that they were/are dunderheads, morons and imbeciles all
through the run up in property prices. They would have to admit that no-doc
loans, zero collateral loans, and weirdly impossible ARMs demonstrated bad
judgment which they, as professionals, should never have countenanced. The
would have to admit that Structured Investment (Implosion) Vehicles,
off-balance sheet accounting shenanigans and near-criminal relations with
rating agencies and mortgage originators were flat out wrong behavior.
These admissions they won’t make.
Nor will Basel III require them to do so. Not today, when we need it most
and not for upwards to a decade when no one will care and it won’t matter
anyway.
Sorry, Dr. Blinder – this is not the time to be blind.
©Unicorn Equity Analysts, 2010. All Rights Reserved.
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