Don't Shock the Countries, Shock the Banks/ters - Part III: Make the banks/ters pay !

As huge sums are needed for the reduction of the sovereign debt accumulated from bank bail-outs and stimulus packages to prevent economic collapse after the 2008 Global Financial Crisis, a healthy consensus across party-lines seems to be emerging in Germany and beyond: make the banks/ters pay for the mess they created. 

In early August, the conservative newspaper Süddeutsche Zeitung wrote: “Instead of spanning ever-larger rescue umbrellas and force the ECB to refinance sovereign debt, it is time for a concession: The attempt to reduce sovereign debt by way of .... austerity and higher taxes has been ineffective. Remains only one alternative....Instead of rolling over the write-downs on toxic assets and sovereign debt to European taxpayers, international creditors ... should carry a share of the losses.” (Süddeutsche Zeitung, “Die Banken müssen zahlen”, August 2, 2012). Outside of Germany, critics are putting the blame on German banks: “Germany’s Banks Helped Create This Mess. Why Not Hand Them the Broom?” (Bloomberg Businessweek, May 28-June 3, 2012). 1/

In German talkshows, it is these days not unusual to find conservatives and liberal-leaning entrepreneurs agreeing with politicians from the left on the principle that those who spent large sums of money on risky deals (and pocketed fabulous earnings when markets were booming) should carry the losses from these deals instead of passing them on to taxpayers. The CEOs of top German corporations, including Bosch, SAP, Heraeus, Munich Re and others put it bluntly: “banks that play casino need to be able to go bust”….if necessary, we need to make everything so small that nothing is too big to fail. They complain about a financial system that seems out of bounds, with financial derivates having reached a global nominal value of $601 trillion, ten times the size of global GDP. (Handelsblatt, Aug. 24, 2012: "Die Realwirtschaft schlägt zurück")

Finally, the German public seems to begin to comprehend that the sovereign debt mountains in the European periphery are in large part due to the 2008 Global Financial Crisis (see chart) and government-financed bail-outs of financial institutions - which are now speculating against the sovereign bonds of the very countries that bailed them out. And the public demands to make the banks and speculators pay ! 

In sum, the atmosphere seems ripe to promote a set of austerity measures for European banks/ters, such as the following 14-point reform and adjustment program:

1. STOP all unconditional welfare payments to banks and other financial institutions, whether they be in the form of capital infusions or bail-outs, interest rate subsidies, zero-interest credit lines, or cheap loans backed by potentially worthless assets. (Bloomberg News, August 27, 2012)
2. Provide taxpayer-financed assistance for financial institutions ONLY against strict conditionality and the regular supervision of performance targets (modeled upon IMF structural adjustment programs for countries). 
3. In the case of private financial institutions, in addition to rule (2), government assistance will be provided ONLY against an equity participation with preferred voting rights and seats on the Board of Directors according to the size of the capital infusion. 
4. Along the lines of rules (1), (2) and (3), restructure and consolidate all European financial institutions that receive taxpayer-financed bail-outs or are ‘too big to fail’. 
5. Close down those financial institutions that cannot survive based on a realistic accounting of all their assets, including ‘toxic’ assets and sovereign bonds valued at current market prices. 
6. Guarantee only deposits up to €100.000, the bank payments system and credits business needed for the financing of real investments. 
7. No guarantee for bank-to-bank debt. 
8. No guarantee for CDS and CDS-derived products and investments. 
9. Disallow all derivative commodity, foreign exchange, and credit risk speculation, i.e. deals that are not linked to the real economy.
10. Reduce or eliminate all financial activities not related or linked to the real economy. 
11. Recall all boni & retirement packages for managers responsible for losses that had to be covered by taxpayer-financed bail-out packages. 
12. Reform the remuneration system for managers of financial institutions along the lines of the IMF wage reform policies recommended for Greece (see IMF Memorandum for Greece, pp.6-7 and pp.20-23).
13. Employees who loose their jobs as a result of the restructuring and consolidation of the European financial sector should be given the option to re-train for jobs in the public service sector, i.e. public schools, elderly care, child care facilities, etc. 
14. Implement the Financial Transactions Tax NOW and raise up to €540 billion per year from a 0.1% tax on foreign exchange transactions alone (based on a current €2 trillion nominal volume per day). 

Arianna Huffington of the Huffington Post Media Group has another interesting idea: institute a shock therapy for banks/ters: ….. “maybe there could be some sort of “Clockwork Orange”-like aversion therapy for those inside the banks ….any time a dazzling new financial transaction is mentioned, an electric shock follows.” (Sun Sentinel, May 29, 2012).

Now that’ll teach them ! 

-------------------------------------------------------------------------------------------------------------------        1/ Bloomberg argues that “German banks lent more than they could afford”, building up $704 billion in credit exposures to Europe’s periphery before the crisis. Since the crisis began, German banks pulled out $353 billion, passing a large shunk of these exposures to the ECB, thus shifting the risk to European taxpayers. [As per end of May 2012, the total credit exposure of European lenders in Spanish, Portugues, Italian, and Irish debt is estimated at $1.2 trillion.]