The G7/20 meeting and the key issue (to me anyway) - banks lack of intermediation of capital

*Lets face it - the majority of the bigger European banks are insolvent.


Why is that? Simple - the assets on their balancesheets are not marked -to - market. In fact, those very assets are marked at fantasy valuations. Some may object that it is simply not possible to mark these assets to value. That is not true. There are market valuations to be had for basically all of those assets. Problem is that banks will not accept these valuations as it would make them insolvent.

The one exception is; Goldman Sachs. GS has marked their assets to market and have not had any issues with bad assets on their balancesheet as they have sold off these bad ones along the way, behaving proactively.

One would think that this would be a noncontroversial issue, but it is not. There is a lot of ignorance out there, as illustrated by the former FDIC chairman Bill Isaac who believes " we should get rid of mark to market accounting once and for all" as "this is what got us into this mess in the first place". Scary.

The lack of mark to market practise has in essence prevented other banks from acting, yes, you´ve got it - proactively. Now they are stuck with a toxic soup they dont know what to do with. Unfortunately there has not been any riskmanagement plan for it from the beginning -per definition. (Since it was never marked - to market).

It is important to note the authorities have deemed the non mark - to market procedure as appropriate and has not had any problems in accepting it. Now we see the consequences of that sloppy approach.
In any case, Mr Lloyd Blankfein - the CEO of GS, was out last week calling for banks to mark their assets to market. I fully agree.



*Getting the banks working again as intermediaries of capital instead of hoarding it to cover for upcoming creditlosses.

One way to get this working again seems to be to let the old ones go bankrupt.
Ie, no state support at all. Demand that the banks mark their assets to market.

Let the banks issue new shares til the share price is zero. Then let them default on their bonds, etc,etc. Meanwhile, make sure there are state guarantees for the depositors of these banks up to a certain, standardised amount.
Then, lift out the "good assets" at market value and leave whatever remains of the bad ones in the "old" bank, for the taxpayers to take care of. Manage the now government owned "bad assets".

Start up a new bank, based around the "good assets", recapitalised by private capital. Once the bad assets are gone, investors will want to invest. The "new" bank will also want to promote new business since it will make money from it.
(Obviously run on business and "sound" risk terms.)

This "new" bank will hence want to work as an intermediary of capital.
This way, there will be a chance of getting the capitalflow going again. Without it there is a clear and present danger money is being pumped into the abyss without any visible results.

#What about state guarantees one might ask?
#What about the "bad bank" solution?
-State guarantees risk pumping money in mindlessly without any real control of where it will go. It will drain state finances, undermine the value of any guarantees and shift the risk towards sovereign defaults instead.
-The "bad bank" solution creates an ethical dilemma in that it will most likely mean taxpayers will have to buy overpriced "bad assets", to the benefit of the current shareholders. If banks are insolvent, they should be allowed to go bust, with the depositors getting protected by the government in the process.

Europe have most likely some very tough times ahead. Much tougher than what the market is currently pricing in. Therefore, governments need to be proactive with some daring alternatives. To only be reactive without coordinating is not an option. Banks! Mark to market assets - now. The outcome of the current crisis may partly depend on it.




As always, good luck







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