Banks and the state / Les banques et l'état

Willem Buiter wrote a short paper on corporate governance of the state in banking:
http://blogs.ft.com/maverecon/2008/10/corporate-governance-in-the-financial-sector-state-share-ownership/#comment-6000
 I offered a short comment:
What is important is to propose proved efficient solutions. It is not easy because the first signs of the crisis are old but the Paulson plan was only conceived in the last days. Sorry your proposals seem to me a little idealistic!
For instance look at the Fortis case and you will see that the tax payer money have been used very badly:
Friday market value of belgian Fortis group: <14 M Euro;
11.2 M Euro the price paid by the belgian government for half of the banking activities of the belgian Fortis group, it is a 60% more than the market price to get the more dangerous branch of the group.
40 M euro of toxic assets are in the books of the group and it is very probable that they are located in the banking activities. It means that this branch has a negative accountable value today!
I am afraid that the pricing process of assets in the TARP will also be at the taxpayer expenditure.
This is the result of lack of time and lack of market mechanism.
And you want now that high grade "fonctionnaires" represent the state and the tax payers in semi nationalised banks! OK! What we saw in the past is that they represent the state and more precisely the political party which governs the country and also their own interest in case of privatisation or available jobs in the top executives of the bank. Finally they will have a good opportunity to review the regulation process with their cronies at the state agency! The name for that is PCI (permanent conflict of interest).
I agree that the states have to repair what they create with laws (Glass Seagall, subprimes, state warranty through GSE, fiscal stimulus of housing ) and cheap money (FED policies of Greenspan and Bernanke): a spring of fluid with numerous and explosive bubbles inside, which flew in the planet economy through the banking system. But giving to states around the developped world the keys of banks at the tax payers expenditure is dangerous and probably inefficient. It's a waste of money and the true economy will suffer a severe depression because of that. There is a risk that states will save the banks at the odd of businesses.
One very important solution I propose is better transparency in time and nature for all the financial products. Classic regulation focused on fraud is obsolete. A more specialised regulation focused of risk evaluation with continuous auditing by referees is needed because of globalisation and electronic transmission of money. This regulation will allow the agencies either federal or private , public and shareholders to know not only the main data on the past year in a bank sheet but the leveraging ratio including undirectly exposed assets extensively. On the other hand instead of putting the banks at risks by the market to market assessment of assets, it is the magnitude of leveraging which should be adressed by increasing drastically the equity capital of banks. It should allow economic actors to select investment in less exposed banks and force banks to decrease their leveraging in order to attract investors. For sure several banks will close or fail. I think that central banks which regulate interest rates and creation of money should also receive a mandate to monitor the trust positions in the banking system which could lead to a classic too big to fail or too interconnected to fail.
As for corporate governance and state share ownership it is far preferable to give the defense of the state interests to a private investment bank with a well defined contract instead of believing that "fonctionnaires" will do the job efficiently. This is not a matter for public money and government agents should be better employed to the new regulation process. But I would like to stress that the magnitude of the next crisis will be less important if the states in US and elsewhere avoid heavy interventionism in an economic sector like they did in housing.


It seems to me that these proposals about banks are still on the table especially the mandatory increasing of equity capital and the deleveraging. Unfortunately sovereign debts are presently crowding the potential of bank lending in the private economy.