It’s a strange statistic that only 25% of world finance is provided by the banks. In other words 75% of finance is provided by non-banking institutions such as States (Countries), companies, private individuals and Sovereign Funds.
When households, business, financial and government sectors are included, total US debt is in excess of $53 trillion, and is soaring.
This is dramatic in many ways especially given that most of the media attention is on the liquidity and health of the big three banks – Citigroup, the Bank of America and JP Morgan Chase (JPMC). We should be watching JPMC very carefully. The bank has $9.2 trillion US in credit default swaps (almost twice as much as Citigroup and the Bank of America combined).
Given that banks provide only 25% of the world’s finance, are we looking at this from the right angle? Even if those loans which are currently recognized as “toxic” are isolated and bought by the US Government or other institutions or States, there are still so many variables which could cause chaos – the banking system has so much to still be exposed.
Firstly, US Banks have written off approximately $1 trillion in bad loans with estimates for further world-wide write offs varying from $1.2 to $2 trillion to cover their subprime losses. There are rumblings that $2 trillion will not be enough to keep the banks alive – they are already insolvent and the bankers need to come clean and finally tell the truth. As time passes it is becoming obvious $2 trillion will not be anywhere near enough to cover subprime losses.
Secondly, Sovereign Funds and other non-bank institutions have in many ways been “burned” by companies, including banks and they will be looking carefully as to where they choose to invest. Executives have been completely irresponsible and trust is a valuable commodity – especially when it is lost.
Boston Consulting has estimated that $5.5 trillion US has been lost off the value of world banks on the markets. Total worldwide losses are difficult to calculate – European Banks who have massive exposure to collapsing Eastern European countries are yet to fully disclose their exposure. With many currencies in Eastern Europe all but worthless, many will have no capacity to service interest requirements, let alone repay the debt in full.
Therefore pumping endless money into Banks and buying “toxic” loans in the hope of freeing up liquidity in the system is nothing more than a band aid solution – the band aid will fall off! How much money is tied up in toxic loans? How did executives make such damaging decisions? Should they remain in their positions and how do we ensure those decisions are not repeated?
How do we ensure that multi-national corporations whose decisions can impact so many nations, so many economies and people are regulated in the same prudent way in every country? The answers are not simple ones. The ideal world solution is to simply have one governing body – maybe the International Monetary Fund (IMF) and vastly increase the scope of its powers. How would we get all nations to agree on this?
Negative equity in the United States residential home loan market is estimated to be approximately $500 billion. Most borrowers are choosing to walk away from their homes as they have limited or no capacity to inject capital to correct the mess. Prices in the US are low and in areas where over development has been allowed to occur (in other words more properties have been built than the population needed) prices are under even more pressure to head south.
This is a regulatory failure as much as it is an entrepreneurial failure. Government oversight broke down and lenders failed to recognize the pending risks or chose to ignore warnings. Each situation was completely preventable if basic measures would have been in place to protect institutions. Entrepreneurial failure involves poor decision making at a number of levels – financing poor decisions to over-build is and was completely preventable.
Finally, these corporations have been allowed to become so large that they are larger than the economies of most nations. It is a regulatory and security failure to allow companies to grow to such a size, when their failure has the ability to cripple economies. With total assets of close to $4 trillion US between Citigroup and Bank of America, the result of poor management or failure could be catastrophic.