Thomas Hoenig , the Vice President of the FDIC, announced at the Global Economic Meeting in France that, “The market no longer determines what is adequate capital for the banking industry. Following generations of taxpayer support and ever-expanding government involvement, politicians, regulators, and lobbyists have supplanted the role of the market in determining what counts as capital, how it is calculated, and how much is enough. An artificial capital framework has thus developed, which has resulted in steadily lower levels of capital and declining quality-even blurring the distinction between debt and equity. Unfortunately, recent experience has shown that when the marketplace does finally realize it cannot trust such a framework, the consequences for the banking industry and the global economy can be dire.”
They have manipulated the system to keep the game going to steal every last cent you have managed to hold onto. Mr. Hoenig fails to name the culprits possibly for fear of losing his position. His statement should have been, “Central Banks now control our government and have instituted VERY limited capital requirements which REQUIRES them again to be bailed out by the public WHEN the economy fails.”
He went on to state that the true market isn’t even a part of the game any longer as regulators and industry lobbyist’s (for the banks) dictate capital for a bank to hold. In addition, I would note that, the conflict is not really about risk-based versus leverage ratios, nor about complex versus simple calculations. Fundamentally, the conflict is about whether more or less equity capital best assures that banks are sound and that economies enjoy strong, sustained growth. Seen in this light, it is apparent why the demand for bank capital ebbs and flows as crises come and go, and why this conflict intensifies as economies stabilize.
Moody’s Investor Services, which grades bonds, just downgraded the Deutsche credit rating and unlike Lehman Brothers that started to implosion in 2008, Deusche bank CANNOT be bailed out or in because there isn’t enough money in the world to bail them out. When this bank fails the system will implode and the stock market will drop 60-90%. Did you know that most stock P.E. ratios are at their highest level in decades, and with ratios of 27:1, it would take 27 years to pay for themselves and they simply cannot do it? The housing market will evaporate as well as homeowners I suspect will again lose 40-50% of their valuation. Most will simply walk away again from underwater properties as the system repeats itself. Did you know that today the home ownership rate is the same as it was in 1965, fifty years ago, yet we have had a surge in home valuations over the past 4 years. Once again their feeble lies attempts to assure us that all is well and the economy is in recovery, meant to quell our fears, so we will begin to spend and borrow to invest in the system that is nothing but vacuous air.
Today the world’s banks no longer hold more assets than they do debt. Actually they hold very little in assets and humongous amounts of debt. It is but a casino game whereby they use your savings to play their game and assume NO personal risk. Wouldn’t you enjoy to gamble someone else money where you receive the gain and shoulder no personal responsibility? Today bank creditors expect governments to protect them from loss and no longer rely on a bank’s equity positions for confidence even though there is compelling data that suggests that more equity capital and not less is best in order to attain sound banks and constant economic growth. The banking industry and the economy would be performing much stronger and the banks would be much safer with higher equity capital levels than when banks hold less equity capital (ownership funded) and the reason the economy has been less than lackluster.
Since the financial crisis of 2008 the banking industry has begun to lobby for special treatment or exemptions from capital requirements and the influence lobbyists have over Congressmen whom often sway towards personal gain when given the opportunity and no longer accept reality. When such proposals happen once again these lower capital standards will continue to jeopardize the most important industry. One proposal from the BASEL committee would exempt capital requirements against derivatives which was the major cause of the last crisis. Do you see the circle they attempt to escape from or just maybe, their plan is to keep their game in motion?
The facts are that today banks are NO better able to weather another economic storm than they were 8 years ago and in are in fact much worse as nothing has been acknowledged or changed. Balance sheet strength and equity matters and high leverage DOES NOT accelerate economic growth.
Have you ever seen a business become strong and succeed that reduces the size of their balance sheet, while leveraging themselves to an extreme and reporting higher capital levels than what actually exist? No you don’t yet bank regulators led by the Federal Reserve governor Daniel Tarullo whom heads the Fed’s Committee on Bank Supervision and is called affectionately by private financiers as “the Wizard of Oz” sanctions everything from behind-the-scenes support of corporate strategies to how many billions of dollars banks must be maintained in capital through mediocre “stress tests” he championed. Mr. Tarullo’s influence illustrates the outsized role that government regulations now play for banks. The pendulum has swung too far, creating even larger banks that they believe are ultra safe while actually forbidding healthy risk taking. They prefer to gamble with your depositor funds and free government money. This governor is the judge, the jury and everything else and he has a job until 2022 when his term ends and another president selects a successor! And you thought Janet Yellen was in control!
Banks MUST BE required to return to capitalization based upon the marketplace’s assessment of risk and independent of any taxpayer support or government involvement. As long as regulators are assigning the weight requirements for measuring a bank’s risk and its internal allocation of risk capital, as is risk-based capital, they continue the hazard whereby investors must rely on the regulators’ approval of bank capital levels and structure. They incorrectly assume that the regulators’ intimate knowledge of a bank’s risk profile must surpass their own and any real reform threatens those at the top of the wealth and power pyramid. Today we have nothing but lies of economic data and fake reforms. I am sorry to say it but, the “Too Big to Fail” problem is still the elephant in the room, YOU will be expected to “Bail In” your bank when the oncoming crisis happens. What are you doing to protect your family?