Well, that was a surprise yesterday.
A pleasant one, but a surprise.
The surprise was the number of positive comments about my rant about
America. I thought I was straying far too far into political
territories, but I was angry so thanks for the endorsements.
Therefore, I'll carry on with this rant and the fact that I did say
yesterday that I have a solution to the credit crisis. I’ve labelled
this my solution because:
(a) it might be rubbish,
(b) I made it up,
(c) it may be completely unworkable, and
(d) it could be very unpopular.
Therefore, I want it to be known as mine.
I also want it to be known as mine because:
(a) it might be spectacular,
(b) I made it up,
(c) it could be made to work, and
(d) it might be very popular.
If it’s the latter, I don’t want someone else saying they made it up.
To the point, we have two problems to face immediately:
1) what do we do to get out of this mess; and
2) how to ensure we never repeat this mistake again.
Let’s answer the first question: what do we do to get out of this mess?
Well, here’s my unpopular view, and this will be very unpopular amongst the readers of SWIFTcommunity.net I suspect.
The fact is that we need to raise funds fast. We also need to avoid
those funds solely being generated by taxpayers. We also recognise that
governments cannot just generate a $700 billion amount from selling US
Government-bonds to the Chinese. After all, why should the world’s
largest communist state bail out the world’s largest capitalist state?
By the way, as I write that line, I am trying to work out which one
these days is the capitalist and which one the communist?
We need another plan which avoids taxpayer’s anger and equally avoids currency degradation.
Answer: take it off the thieves who stole it.
This is the bit that I think would be most unpopular but I like it.
Governments should state that all bonus payments and monies paid to
investment bankers that have any association with the subprime crisis
have all their assets frozen and seized by the government.
This will not solve the issue, but it will appease the taxpayer.
And yes, I know that most of the funds will have already been spent or
been moved overseas, but investment bankers should be accountable for
these losses. Therefore, the fiscal policymakers will make it clear
that any citizen who made money from toxic derivatives that led to this
mess either (a) pays it back or (b) goes to jail for a period
equivalent to one year for every million dollars missing. For Stan
O’Neal that could be a very long time.
So yes, that’s radical, but note that I avoided any mention of capital
punishment, which George W and his cohorts must be considering. Bear in
mind, that George W’s home state is the one that has the most death
penalties per annum!
This action would generate $5 to $10 billion in returned bonuses. That's peanuts but boy, does it feel good.
Secondly, and also unpopular here, the US Government should agree the
bailout plan but with the caveat that the banking industry will need to
fund the fund from a tax on profits until it is made good.
This will do nothing for bank stocks, but hey, they’ve tanked through
the floor anyway, so what do we care? At least if it brings some
stability back into the system, folks will be happier.
And both actions make us culpable and accountable for our irrational
exuberance. Therefore, the industry might work harder to self-regulate
itself to avoid this catastrophe ever happening again.
You may say, why punish all for the actions of the few?
I suspect the government would answer: because we can and you should have gotten rid of your rotten apples before we did.
Finally, I would place an action on the treasury and regulatory players
to also make them culpable and accountable. After all, they played a
part in this mess. My message to them: if you ever allow any activities
to remain unchecked of this nature again, then you will be held to
account. Equally, if you can demonstrate risks avoided and other
miscreant ventures identified, you will be rewarded.
If the regulatory authorities missed the issues, then the key players
walk … no separation agreement, no remuneration, they just walk. Oh
yes, and they are named and shamed in the process of course. I’m even
tempted to say they should be personally liable for the losses they
failed to avoid, but that would put anyone off applying for regulatory
office, and someone’s got to do it.
This may all sound far too stick and not enough carrot, far too
punitive and not enough incentive, but hey, the carrots have all been
eaten. The carrots are all those annual bonuses that should not have
been paid. The carrots are all those regulators who made inspection
checks and missed the action. The carrots are all those shareholders
who took the dividends without asking where they came from.
So that’s my answer to the first question: get out of this mess by
bailing out the industry, but humiliating all those culpable in the
Now, to the second and more important question: how do we avoid repeating the mistake?
The mistake is to let complex derivatives run unchecked.
SIVs, CDSs, CDOs are the same leveraged products bringing down our
industry today as the toxic meltdowns of LTCM, Enron, Worldcom and
Michael Milken, as mentioned yesterday. It’s all to do with structured
finance and leveraged products being sold without any understanding of
the risk or repercussions.
We basically need to create a method to avoid over-leveraged risk
exposures hitting the firms who trade in the markets in the future. We
also need to ensure there is an effective liquidity management engine
to identify and manage total liquidity movements in the markets.
So here’s how I would tackle this one.
In earlier blogging,
I related the story of Lloyd’s of London who had risks entering and
leaving the markets without any tracking. Risks would leave one door
and come back through another, without anyone knowing.
This only came to light when global catastrophes all occurred in the
same year and Lloyd’s discovered the total exposure for all those risks
lay within their walls. Several Lloyd’s firms went bankrupt, as did
their shareholders, and everyone called for blood, change and
A data warehouse tracking system whereby everyone in the Lloyd’s
markets logged every risk they took on board and the counterparties
involved. Each risk had a unique identifier so that every time it left
and re-entered the markets, Lloyd’s could see their total exposure.
Soon, any over leveraged risks could be tracked and declined, before
the markets were overly weighted against the coverage, liquidity and
We need to do this in banking.
For Lloyd’s, it was easier as they are all in one building. For
banking, it would require a concerted effort by regulators,
governments, banks and insurance firms to build a Global Risk Exchange
which everyone is forced to use.
The Global Risk Exchange would log every single financial instrument
traded in the world, the counterparties involved, the amounts involved,
the capital against those amounts to cover the risk and other base
Governments would underwrite the Global Risk Exchange by stating
clearly that any products traded and securitised through the Exchange
would be underwritten by government backing should there be any future
failures in the markets. They would do this because they would be able
to see a real-time global tracking system of all risks being traded
worldwide through the financial markets, the capital available to cover
those risks, and where risks were leaving and re-entering to create
This is critical for our future as, right now, no-one knows how much
the total losses will be from this crisis. Six months ago, it was $400
billion. Last month, it was $700 billion. Today, it’s $1 trillion.
No-one knows what it really is.
This is because the risks have been laid off globally between banks,
insurance firms, corporates and other counterparties, with no total
picture of the liquidity and risk exposure involved.
So my proposal is a system to track global liquidity and risk.
A Global Risk Exchange.
A government endorsed entity funded by the banks.
Who would operate the system?
Effectively, it’s a SWIFT for Risk Management so SWIFT or an equivalent new body could do this.
The new firm builds a global data warehousing shared service centre,
funded by the banks, that allows the exchange of risk and liquidity
information using standardised messages that are globally agreed,
ISO-moderated and government endorsed.
Governments effectively state that as long as the risks for securitised
products that you are trading are registered on the exchange and
accepted, then the product can be traded. If not, the product is
The acceptance of the trade is based upon the total risk and liquidity
exposures, and the fact that your entry has not triggered a red light
The systems of course, will do this at light-speed through low latency engines, so don’t worry about the administration folks.
This answers the question as to how we avoid this again, by building a
global risk version of SWIFT for tracking total liquidity and risk
exposures between all the organisations trading globally.
So that’s my plan.
Be tough with the instigators and publicly flagellate them.
That will get the public back on side.
Then create a SWIFT for Risk through a Global Risk Exchange that all Governments endorse and co-operate to ensure it works.
This is not simple and I have not even touched on the other things that
are in my head, such as how we get customers back on board trusting
that banks are worth doing business with. So I’ll give that one a go
Meantime, I’d be interested to know whether you love or hate my plan,
whether it’s workable or unworkable, popular or unpopular … and if the
majority of comments fall into the former category, can you send an
email to George.W.Bush@WhiteHouse.org with the title: “a silver cloud”.