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Mervyn King’s statement in March ’08 -wikileaked-

March ’08 Cable – Systemic Insolvency Is Now The Problem, Global Bank Bailout Needed – Bank of England’s call for a sovereign consortium to manage the collapse

I have some questions with regard to King’s suggestion about how the crisis should be tackled. Clearly, it seems the banking system collapsed, as many here have written:

1. Does this mean foreclosures dump losses on public vs. banks, enabling the latter to manage size of write-downs?
2. Of the problem mortgages outstanding, what percent are insured against lost, with the banks being the beneficiary?
3. Given that the banking system is so dangerously overleveraged, does shifting the problem onto the backs of the debt-holder minimize or displace the threat to the banking system itself? In other words, are foreclosures good for the banks?

Wikileak cable intercepts show Bank of England Governor, Mervyn King, warning that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. The call was for Western governments to hatch a plan. King suggested that the U.S., UK, Switzerland, and perhaps Japan form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks.

King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs.

“This proves it was widely known in government circles by the time Bear Stearns went bust that the global banking system was effectively insolvent – and that banks’ unloading garbage assets at inflated prices was seen as critical in preventing the whole global economy from collapsing. The key in the chain of events in America came with the changing of accounting rules to hide insolvency. Without this accounting gimmick, we would have seen GD2 already.

Credit Writedowns = Depression; No credit writedowns = fake recovery. The systemic crisis has been halted so far because the credit writedowns are no longer being taken. If the credit writedowns re-appear, so too will the systemic crisis.”

Read more: http://www.creditwritedowns.com/2010/12/mervyn-king-systemic-insolvency-is-now-
the-problem.html#ixzz18feMZKHh

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