Scheisskerl financing

Visited the Book Salon today after I had read Bill Black’s review of the book on MYFDL and this comment stood out to me: “Matthew Richardson August 14th, 2011 at 3:25 pm 62
In response to masaccio @ 53 (show text)

“Fannie Mae and Freddie Mac were part of the problem, but they weren’t the only problem. One can see the emergence of large, complex financial institutions in 2003 onwards that also got favorable borrowing rates (some would argue from too-big-to-fail) and leverage up.

My view, and the one expressed in the NYU stern books, is that the major culprit was the poorly designed government regulation that allowed certain firms (like Fannie and Freddie) to exploit loopholes in regulatory capital requirements to take a one-way highly levered bet on credit, especially residential and commercial real estate.

here’s one example. if you owned AAA-rated securities and bought insurance on these securities from a AA- or AAA-rated insurance firm (AIG for example), you didn’t have to hold capital under international capital rules. not surprisingly, this is what happened.

And that reminded me of this article by Michael Lewis at Vanity Fair.

Why? Because of the reference to international capital rules and how Germany got suckered by the U.S. as a result of them.

“Until now the European Central Bank, in Frankfurt, has been the main source of this cash. The E.C.B. was designed to behave with the same discipline as the German Bundesbank, but it has morphed into something very different. Since the start of the financial crisis it has bought, outright, something like $80 billion of Greek and Irish and Portuguese government bonds, and lent another $450 billion or so to various European governments and European banks, accepting virtually any collateral, including Greek government bonds. But the E.C.B. has a rule—and the Germans think the rule very important—that they cannot accept as collateral bonds classified by the U.S. ratings agencies as in default. Given that they once had a rule against buying bonds outright in the open market, and another rule against government bailouts, it’s a little odd that they have gotten so hung up on this technicality. But they have. If Greece defaults on its debt, the E.C.B. will not only lose a pile on its holdings of Greek bonds but must return the bonds to the European banks, and the European banks must fork over $450 billion in cash. The E.C.B. itself might face insolvency, which would mean turning for funds to its solvent member governments, led by Germany. (The senior official at the Bundesbank told me they already have thought about how to deal with the request. “We have 3,400 tons of gold,” he said. “We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.”) The bigger problem with a Greek default is that it might well force other European countries and their banks into default. At the very least it would create panic and confusion in the market for both sovereign and bank debt, at a time when a lot of banks and at least two big European debt-ridden countries, Italy and Spain, cannot afford panic and confusion.”

“Jörg Asmussen offers the first hint of an answer—in his personal behavior. He is a type familiar in Germany but absolutely freakish in Greece—or for that matter the United States: a keenly intelligent, highly ambitious civil servant who has no other desire but to serve his country. His sparkling curriculum vitae is missing a line that would be found on the résumés of men in his position most anywhere else in the world—the line where he leaves government service for Goldman Sachs to cash out. When I asked another prominent German civil servant why he hadn’t taken time out of public service to make his fortune working for some bank, the way every American civil servant who is anywhere near finance seems to want to do, his expression changed to alarm. “But I could never do this,” he said. “It would be illoyal!”

Asmussen agrees and then addresses the German question more directly. The curious thing about the eruption of cheap and indiscriminate lending of money during the past decade was the different effects it had from country to country. Every developed country was subjected to more or less the same temptation, but no two countries responded in precisely the same way. The rest of Europe, in effect, used Germany’s credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn’t afford. Given the chance to take something for nothing, the German people alone simply ignored the offer. “There was no credit boom in Germany,” says Asmussen. “Real-estate prices were completely flat. There was no borrowing for consumption. Because this behavior is rather alien to Germans. Germans save whenever possible. This is deeply in German genes. Perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s.” The German government was equally prudent because, he went on, “there is a consensus among the different parties about this: if you’re not adhering to fiscal responsibility, you have no chance in elections, because the people are that way.”

“He then offers me the same survey of German banking that I will hear from half a dozen others. German banks are not, like American banks, mainly private enterprises. Most are either explicitly state-backed “lands banks” or small savings co-ops. Commerzbank, Dresdner Bank, and Deutsche Bank, all founded in the 1870s, were the only three big private German banks. In 2008, Commerzbank bought Dresdner; as both turned out to be loaded with toxic assets, the merged bank needed to be rescued by the German government. “We are not a prop-trading nation,” he says, getting to the nub of where German banks went so wildly wrong. “Why should you pay $20 million to a 32-year-old trader? He uses the office space, the I.T., the business card with a first-class name on it. If I take the business card away from that guy he would probably sell hot dogs.” He is the German equivalent of the head of Bank of America, or Citigroup, and he is actively hostile to the idea that bankers should make huge sums of money.”

There is a LOT more in the article and I encourage others to read it because this “scheisse” will be affecting the U.S.

Besides ,there’s info about Hitler you probably didn’t know and little jewels of sentences such as “Naked women fought in a metaphorical ring of filth while the spectators wore plastic caps, a sort of head condom, to avoid being splattered.” and ““I was in the belief that the best supervised of all banking systems was in New York. To me the Fed and the S.E.C. were second to none. I did not believe that there would be e-mail traffic between investment bankers saying that they were selling … ” He pauses and decides he shouldn’t say “shit.”” and “Patriotism,” she says, “is still taboo. It’s politically incorrect to say, ‘I’m proud to be German.’ “.