Friday, March 28, 2008

Banks sweat meltdowns in private; In public they say "Trust Us"

Here's a great look behind the scenes of the panic that the Central Bankers currently fear. And stock prices of the financials, must reflect the perception that the Central Banks want the public to think, not the reality of their balance sheets that exist on the financials.

The weighing mechanism of these opposing forces is the stock market. Which makes it a difficult time to be short the financials, when you have the Central banks throwing money at the problems that currently exist, which they want to pretend don't!

Here's the story:

"Germany and other industrialized nations are desperately trying to brace themselves against the threat of a collapse of the global financial system. The crisis has now taken its toll on the German economy, where the weak dollar is putting jobs in jeopardy and the credit crunch is paralyzing many businesses....

For some time, there has been a tacit agreement among central bankers and the financial ministers of key economies not to allow any bank large enough to jeopardize the system to go under -- no matter what the cost. But, on Sunday, the question arose whether this agreement should be formalized and made public. The central bankers decided against the idea, reasoning that it would practically be an invitation to speculators and large hedge funds to take advantage of this government guarantee.

Everyone involved knows how explosive the agreement is. It essentially means that while the profits of banks are privatized, society bears the cost of their losses. In a world in which the rich are getting richer and the poor poorer, that is political dynamite.

Nevertheless, central bankers are running out of options. They are anxious to avert the nightmare scenario of a financial crisis like the one that rocked Germany in 1931, when the failure of a major Berlin bank prompted a massive run on other banks by a nervous public, which plunged those banks into insolvency. For decades, a repetition of that disaster had seemed unthinkable. But ever since former Fed Chairman Alan Greenspan dubbed the current financial crisis the worst since the end of World War II, old certainties have no longer applied.

So, what does apply? Should the state use taxpayer money to help greedy bankers repair the damage caused by their unscrupulous speculation? Should it invest billions to save ailing financial institutions, thereby engendering new risks and side effects? And should the government, to use the words of a Frankfurt investment banker, "treat a drug addict with cocaine"?

How does one explain to honest taxpayers that they should pony up their hard-earned money for a bank like Bear Stearns, whose long-standing CEO forked out $28 million (€18 million) for a 600-square-meter (6,500 square-foot) duplex apartment on New York's Central Park shortly before the collapse of his company? Or that UBS, the crisis-ridden, major Swiss bank, fired three of its senior executives for poor performance only to turn around and pay them roughly 60 million Swiss francs (€38 million/$59.2 million) in golden parachutes?

The central banks and governments of the major industrialized nations are still dodging the answers to these questions. They see themselves in the role of an emergency room doctor, whose job is to provide acute treatment. Like a dangerous virus, the crisis in the US real estate market has infected large parts of the worldwide financial system. After being burned by scores of bad loans, the banks have become deeply distrustful of each other. They have gambled away their most important asset: trust.

As the weeks progress, the disaster scenarios painted by prophets of doom, such as the American economist Nouriel Roubini, are becoming more and more likely. For months, Roubini, a professor of economics at New York University, has warned of the risks of a "core meltdown" of global financial systems and has summarized his thoughts in an analysis entitled "The Twelve Steps to Financial Disaster." According to an assessment by the International Monetary Fund, the crisis could lead to global losses exceeding $800 billion (€520 billion).",1518,druck-543588,00.html

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