Risk Rap

Rapping About a World at Risk

"Denial is Not a Strategy"

Our optimism from yesterdays post about the rebound in the real estate market was tempered by the sage advice offered to bankers by the Comptroller of the Currency, John Dugan. Said Dugan, “denial is not a strategy.” He encouraged banks to be honest with regulators about the extent of their troubled loan portfolios to blunt the effect of the economic downturn.

As if that weren’t enough we hear on yesterday mornings BBC World Service of the The Bank of England’s plan to inject £50 billion PS ($100 billion) in additional liquidity into the market through an asset swap and repo program that will give troubled banks the ability to strengthen their balance sheets and improve stressed capitalization ratios.

With the ink not yet dry on the contract to bail out Northern Rock the free marketeers rale against the nationalization of banks and are beating warning drums. Some believe that the central banking strategy to prop up troubled banks encourages herd behavior, penalizes financially healthy banks that refrained from engaging in high risk lending and remain financially sound and lastly does nothing to solve the current crisis while planting the seeds to abet similar risky behavior in the future.

The rationalization of the banking industy will be swift and not without pain. The stakes of losing pose great danger and real monetary risks for the central banks. We wish to remind the central bankers of the gargantuan losses the Bank of England suffered at the hands of George Soros when they tried to artificially prop the pound to maintain the pre-euro Exchange Rate Mechanism. Soros made a huge bundle of dosh on that trade and we fear that the speculative sharpies running hedge funds are itching to fleece the less nimble and politically confined central bank trading book again.

This could kill the possibility of Hank selling his house for the next few years. It could also wipe out his entire equity stake that took Hank and Judy 40 years to build.

Risk: Central Banks, Home Equity, Capital Markets,


April 22, 2008 - Posted by | banking, Basel II, credit crisis, regulatory | , , , , ,

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