Monday, November 21, 2011


As anticipated, the Spanish elections threw out the left-of-center government that has been running the country for 7 years and brought back the conservatives but with a greater margin of victory than was expected.  What effect this will have on the finances of Euroland is anyone's guess but in the day after markets were down substantially all around the continent and on Wall Street as well.  There is simply no good news out there and Europe dominates all markets will the nagging concern that with the short Thankgiving week on this side of the pond we might but caught out from Wednesday's close to next week.  And speaking of "over here," the bankruptcy trustee for MF Global suggested that the amount of missing funds may be far greater than initially expected with the figure now considerably above $1.3 billion which surly means that this was no mere accounting mistake but a serious and deliberate fraud whose ramifications could well be immense.  Hell of a way to start a week.

Aside from the obvious blame game, I wonder if anything useful can be learned from the disgraceful episode other than a call for more totally useless regulation to prevent a re-do of the already preventable and a public relations nighmare for the administration already in the process of running away from Corzine who, given many reports, was the odds-on favorite to replace The Suit at Treasury and a serious money man for The Leader.  That part of it will be fun at least.  What should come out of this IMHO is an understanding of  what I've been saying all along:  banks die on the liability side of their balance sheet.  I'm will to bet some serious money--at least 10 bucks--that when the full story is finally know, it will be revealed that the intermingling of client funds was not a long term event but in response to the loss of funding close to the date of the failure of the firm.

You know, banking has been going on for quite a few years now and for the most part it hasn't changed very much.  Oh sure, there are new products all the time but all are really variations on a theme and at the end of the day banks are intermediaries in bringing excess funds (deposits) to areas of needed liquidity through the medium of a loan.  Whether that liquidity comes in the form of a loan, bond, swap or what have you, or by whom it is delivered is really unimportant.  And yet this is the facet of banking that is the subject of practically all the interest--and regulation--be it on a wholesale of retail basis.  Not to belabor the point (that's a lie), but we have lost sight of the truly important aspect of this business which is what is the nature and the source of that liquidity with which the bankers act in their disintermediary capacity?

In the good old days, banks would accept demand and time deposits from their liability clients and lend them to their asset clients.  That deposit base as it was called was jealously guarded as it represented the life blood of the institution. Handled properly, that base was remarkably stable, often aided in the past by regulation, ostensibly designed to protect the depositor but having another role as well in that through the limiting of competition (interest caps) and protection mechanisms (FDIC insurance) had the effect of insuring the continuity of the deposit relationship.  The system worked quite well and the bankers limited their extention of credit to cash flow lending which rarely had a final maturity of more than seven years and that term was a fairly recent development.  Then things changed.

My late friend, Stanley, was fond of saying, "Banking is what bankers do."  And so banking changed--as for the better is a topic that can be argued forever.  Certainly the asset side of the business has changed dramatically especially as to the length and terms of exposures as well as the nature of the instruments in which bankers deal.  But more importantly has been the change in the liability side of a bank's balance sheet, not in the nomiclature of what we find and surely there is that,  but in the nature of the funding whereas the overall duration of the same has become incredibly short--so short that overnight purchased deposits regularly fund asset exposures of 10 years or more.  Our entire system is a time bomb and when one is faced with the lack of confidence and credability such as occured in 2008 and such is occuring today, the bomb explodes either on a systemic or on an individual institutional basis.  This is, I believe, is what happened with MF Global.  What's the next step?

1 comment:

  1. Belgian government collapses. German growth revised down to 0.5 pct. Moody's warns on France and reaffirms negative on Ireland.

    Turning and turning in the widening gyre
    The falcon cannot here the falconer;
    Things fall apart; the centre cannot hold
    Mere anarchy is loosed upon the world,
    The blood-dimmed tide is loosed, and everywhere
    The ceremony of innocence is drowned;
    The best lack all conviction, while the worst
    Are full of passionate intensity.

    The illegitimate governments of Greece and Italy fall. Unicredit and Monte de Peschi are probably already gone. Austria joins Hungary in calling on the IMF. Money funds, French banks, Japan. The Supercommittee.