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Tuesday, 7 October 2008

IMF - another solution?

The FT carries an article proposing an IMF role. The IMF's reputation was established in the post WWII decades in recycling currency surpluses and helping to shore up exchange rates under pressure from Governments' fiscal stances. Insofar as the present crisis was caused by extreme trade imbalances and a few credit boom economies' large deficits versus rest of the world's trade surpluses, which were then balanced largely by securitised financial assets, perhaps a renewed role for the IMF is intuitively practical? But acting at the micro-economic level to save banks is very different from the macro-economic righting of global imbalances.
Banks have liquidity and solvency problems. The latter include replenishing their own capital reserves and the former requires more willing and cheaper recycling of money between all banks. But, there is too a third Machiavellian dimension that of banks jockeying to win bigger shares of financial makets as some go under and others are taken over.
There can be little doubt about the Machiavellian aspect - no more than we doubt the role of short sellers (hedge funds, who even now are lobbying officially to resume short-selling!) Banks with substantial emerging markets exposure (such as HSBC, Standard and Santander) and those working closely with central banks (such as JPM, BA, and BNPP) are big gainers from M&A consolidations (and without paying M&A fees!) But, if the quake has more after-shocks, it may need sticks (or crowbars)not carrots to free up interbank liquidity. Could this mean governments and central banks ordering banks to act systemically, and stop acting selfishly, or they risk a public sector Buffet solution a la Fortis - even if this is the prospect driving down banks' shares today. What could the beneficial role of the IMF be (or BIS too)? Banks certainly need to replenish their capital to cover writedowns, actual losses and falling equity capital.
How the IMF might be more effective than cooperation among central banks that are backed by government treasuries is hard to plumb precisely from Raghuram Rajan's essay in the FT. IMF has experience in managing large funds (contributed by many governments) and drawing rights, but not private finance sources or even sovereign funds, which is more the World Bank style. Would the IMF be backed to issue $ trillions of international government bonds? Would there be political conditions such as hobbled TARP, or other restrictions such as central banks accepting only triple-A collateral and the minimum risk grade of AA- for unsecured interbank lending? Yes, liquidity and capital raising are the issues, but as fast as these are be shored up temporarily gains are lost in bank equity falls. Few disagree that banks' shares are over-sold or toxic assets have more value long term than their current prices. The biggest problem, however, is lost confidence in banks generally that money alone may not recover?
The banks have to get together and mutually resolve their shared systemic problems that most observers believe are the banks' own fault. If banks are the architects of their failed models they must agree new ones or revive older proven ones, but at very least show confidence in each other. Until they can be seen to be successfully doing that and reducing dependence on government help why should confidence in the financial system return? Does the IMF or anyone else have the answers to that? It seems to me that the banks are failing through their associations or any other fora to get together and come up with workable answers for what we used to refer to as "good governance in correspondent banking". For now it is a dog eat dog world. Indeed yesterday, we also learned that that one quarter to one third of the world's animal species are at risk of extiction within decades and how even more serious this is than the financial crisis. There may be a few species of bankers that the public would not miss, but if such species extinctions happen the long term outlook will be insects growing their share of animal biomass by weight from 90% to 93%, and already I've noticed growth in the number of companies trying to sell me trading software packages, household debt management, new kitchens and the usual extensions!

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