OECD Breakfast series Fixing Finance Tuesday, October 13, 2009 8:30 a.m. - 10:00 a.m. New America Foundation 1899 L St NW, Suite 400 Washington, DC 20036.

OECD Breakfast series“Fixing Finance”Tuesday, October 13, 2009

8:30 a.m. - 10:00 a.m.

New America Foundation1899 L St NW, Suite 400Washington, DC 20036

Adrian Blundell-WignallDeputy Director, Financial & Enterprise Affairs

Causes of the Crisis

Macro •Global Imbalances•Reserve Currency•Asian & Other Exchange Rate

Arrangements•Liquidity: The Dam

OverflowingOct-2009

2

Fig. 1: US Monthly Trade Balance, Bilateral Comparisons

Source: Datastream, OECDOct-2009

-80000

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0Ja

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$m

TB with OPECTB with EECTB with JapTB with AsiaTB with NAFTAUS TB

3

Fig. 2: Chinese Exchange Rate Pressure


-6.5

-4.5

-2.5

-0.5

1.5

3.5

5.5

7.5

9.5 yuan/$; %

dE/E-[σ(E)/σ(R)](dR/R)+[σ(E)/σ(i)](di)

Yuan/$Exch Rate Pressure 3m %chgImplied yuan/$

4

Fig. 3: US--China External Adjustment

Source: OECDOct-2009

C2 US external imbalance adjustment:RMB moves up, US Trade Bal. improvesChina to move growth towards higher domestic demand absorption (reduce saving-higher imports)US to move growth to lower domestic demand absorption (more saving: wealth effect and fiscal cuts)NB Real rates rise!!!!Highly unlikely to happen on current policy settings

C very dangerous for the long run.

B D ADEFICIT = AB

Global Adjustment

(1+r) (1+r*)C1

This gap permitted by RMBdistortion: ie expected long-run apprec.

5

Causes of the Crisis

Structural•Equity Culture in Banking•CDS/Derivatives/

Securitisation•Capital Arb./Tax Structuring•SEC rule change/LeverageOct-2009

6

Fig. 4: Structural/Regulatory Causes of the CrisisCREDIT CULTURE

BANKS POOL DEPOSITS, CREATE PRIVATE INFORMATION ON LENDERS TOOSMALL TO ACCESS THE CAPITAL MARKET, HOLD A BUFFER OF CAPITAL & LENDTO HOUSEHOLDS & SMALL & MEDIUM SIZE BUSINESSES

EQUITY CULTUREPUT OPTION FROM DEPOSITORS/UNLIMITED UPSIDE FOR EQUITY BOUNDEDAT ZERO ON THE DOWNSIDE=INCENTIVE TO TAKE ON MORE RISK: I.E.

STOCKHOLDERS AIM TO REDUCE THE RISK ADJ CLAIM OF CREDITORSON THE BANK & REALLOCATE WEALTH FROM CREDITORS TO STOCKHOLDERS

NEW INNOVATIONS & REGULATORY CHANGE ACCELERATE EQUITY CULTURE RISK TAKING

DERIVATIVES BIG ARBITRAGE OPPORTUNITIES SEC RULE CHANGE ON IB LEVERAGE GLASS-STEAGALL REMOVAL ●CREDIT DEF SWAP ●BASEL RULES ●CONSOLIDATED ENTITIES BASIS, IB's ●CAN MIX SECURITIES &

●TAX SYSTEM MOVE TO HIGHER EU LEVERAGE BANKING

STRUCTURED PRODUCTS NEW BUSINESS MODELS EXCESS COMPETITION EMERGES ●SECURITISATION: ORIGINATE TO DISTRIBUTE ●IN THE MARKET FOR CORPORATE CONTROL ●CONDUITS CDO's CSO's ●IN TAKING MARKET SHARE IN NEW GROWTH ●ON-B-SHEET STUCT. NOTES FUNDING BUSNNESSES ●CDS HEDGED ASSETS TO REDUCE CAPITAL

RISK CATEGORIES BEGIN TO RISE

CREDIT RISK RISING LEVERAGE ●EXCESS LEVERAGE ●COUNTERPARTY RISK OF FAILUREMARKET RISK GLOBAL ●EXPOSURE TO PRICING OF COMPLEX PRODUCTS FINANCIAL ●LIQUIDITY ISSUES CRISISCONTAGION RISK ●SECUITIES BUSINESSES CONTAMINATE SAFE COMMERCIAL BANKING ●CALL ON GROUP CAPITAL PUTS WHOLE INSTITUTION AT RISKOPERATIONAL RISKCORPORATE GOVERNANCE FAILURES

Oct-2009 7

Fig. 5: The Explosion of CDS Contracts

632 919 1,563 2,192 2,6883,779

5,442

8,422

12,430

17,096

26,006

34,423

45,465

62,173

54,612

38,564

0

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1,000

1,500

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2,500

3,000

3,500

0

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1H01 2H01 1H02 2H02 1H03 2H03 1H04 2H04 1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08

Bil

lio

ns

of

US

do

llar

s

Notional amounts outstanding (LHS)

Gross market values (RHS)

Oct-2009 Source: BIS 8

Fig 6: Capital Regulations• Banks are desperately short of capital—Basel II

asks them to hold less.• Basel Pillar 1 does not penalise concentration

risk!!!! And relies on supervisors to do something in pillar 2!!

• Basel lets the regulated entities determine their own capital weights!!! & is pro-cyclical.

• Basel II does not allow for idiosyncratic or local risk (based on a single global risk factor).

• Weightings create regulatory arbitrage possibilities to raise leverage by off-balance sheet activity or CDS insurance to “de-risk” the balance sheets.

• A SIMPLE LEVERAGE RATIO IS SUPERIOR—BUT NOT ENOUGH (EXCESS RISK TAKING!).

Oct-2009 9

Fig 7: Citigroup & Capital Arbitrage• Securitized off-balance-sheet mortgages 0% capital

charge under Basel I, & 50% if on B/Sheet.• Arbitrage: what % of on and off-B/Sheet mortgages

allow the increased return now (from 2004) without causing a shortage of capital later on when Basel II became fully operational?

• 0.4*(50% On-B/Sheet Cap/wt.)+6%*(0% Off-B/Sheet)

=20% Basel II Equivalent Capital Requirement for Mortgages

• CITIGROUP end of 2007 10K filings show $313.5bn on balance sheet, $510.5bn off (VIE’s and retained interests in QSPE’s): i.e. about 38% on b/sheet and 62% off b/sheet.

• Citigroup had a further $733.7bn in QSPE’s, where the interests had been transferred away from Citigroup.

Oct-2009 10

Fig 8: Northern Rock CEO & UK Treasury Committee Evidence

• Mr Fallon: “Mr Applegarth, why was it decided a month after the first profit warning, as late as the end of July, to increase the dividend at the expense of the balance sheet?”

• Mr Applegarth: “Because we had just completed our Basel II two and a half year process and under that, and in consultation with the FSA, it meant that we had surplus capital and therefore that could be repatriated to shareholders through increasing the dividend.”

Oct-2009 11

Fig 9: The Hypo Bank Quote

• By purchasing CDS protection on its assets, which remain on its balance sheet, Hypo transfers the credit risk to someone else, and this is recognised in its Basel risk-weighted assets. (As long contracts can be renewed—no global financial crisis).

• “Since October 2007, DEPFA has been a member of the Hypo Real Estate Group, and this transaction achieves a number of objectives for DEPFA, and the Group as a whole: DEPFA has reduced the amount of regulatory capital required to support the assets (which under current BIS rules are 100% risk weighted, though under Basel II this will reduce substantially), and at the same time has improved the return on equity and credit risk”

Oct-2009 12

Fig 10: The Tax Issue• The tax system encourages

securitisation.• Tax haven opaqueness allows capital

gains and income to be shifted in CDO creation

• Inequality of tax treatment of income and capital gains/losses causes CDS boom in synthetic CDO’s.

• Debt versus equity bias pushes up leverage—double dipping deductions.

Oct-2009 13

Fig. 11: The Tax Arbitrage in CDS

Source: , Samuel Eddins, OECD

Buy & Hold CDS premium +tax wedge Credit protectionInvestor (e.g. seller--broker in IB

Pension Fund)(Buys a synthetic (mark-to-market

CDO, Credit business trader)Protected) Pay credit loswses if defaults

Credit protection CDS premium=expected Credit Protectionbuyer losses only Seller

(mark to market (Synthetic bondbusiness trader) Pay loss if default occurs CDO issuer)

CDO in Caymans Broker can take Synthetic bondLow quality, with adv. of losses at creation with the broker.losses, that investor corp tax rate 35%. Mirrors cash flow ofcant take advantage Synthetic CDO. underlying bond.of (CGT 15% loss No capital outlay Insurance Co's& $3000 limit over gains). outlay, & gets a like AIG playingBut he pays CDS prem. return on the loss their role.plus tax wedge from the tax man.(to sleep easy) This is like an

infinite rate of return

Oct-2009 14

Fig. 12: Leverage Ratios Prior to the Crisis

0 5 10 15 20 25 30 35 40

US commercial banks

US investment banks

European banks

Hedge funds

Leverage ratio, year-end

2006

2007

Oct-2009 Source: Company reports

15

Fig. 13: The Explosion of Private Label Securitised Mortgages

Oct-2009 Source: BIS

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00 %GDP Agency

Business Loans

Comm Mtgs

Con Credit

Home Mtgs

Home Equity & Oth

16

Causes of the CrisisCompetition

•Concentration issue.•New Businesses in

structured products.•Glass-Steagall removal &

corporate control.•Contagion risk.Oct-2009

17

Fig. 14: Concentration & Ratings

Source: Datastrean, OECDOct-2009

Top 50 rankCountry Top 4 Banks (by Assets) Assets Asset Mkt Share Credit RatingAustralia A$bn %National Australia Bank 657 24.6% AACommonwealth Bank of Australia 488 18.2% AAAustralia and New Zealand Banking 471 17.6% AAWestpac Banking Corporation 440 16.4% AATotal Top 4 2055 76.8%USA (bank only) $bnJP Morgan Chase 1,664 15% A+Bank of America 1,451 13% noCiti 1,165 11% noWells Fargo (incl. Wachovia) 1,100 10% AATotal Top 4 5,380 49%UK GBP bn.Royal Bank of Scotland Plc (The) 2402 18% noBarclays Bank Plc 2053 15% noHSBC Bank plc 1734 13% AA-Goldman Sachs International 896 7% noTotal Top 4 7084 52%Germany Euro bn.Deutsche Bank AG 2202 28% A+Commerzbank AG 625 8% noBayerische Hypo-und Vereinsbank AG 459 6% noLandesbank Baden-Wuerttemberg 448 6% AA+Total Top 4 47%France Euro bn.BNP Paribas 2076 29% AACrédit Agricole Group-Crédit Agricole 1784 25% AA-BPCE 1144 16% noSociété Générale 1130 12% AA-Total Top 4 6133 81% 18

Fig. 15: Notional & Delta Adj. Index Tranche Obligations, Structured Credit Notes


0

500

1000

1500

2000

2500

3000

Mar-07 Mar-08 Mar-09

$bnIndex Tranche Vols, Delta adj.($14.2trl. Cum.)

Notional

19

Fig. 16: Notional & Delta Adj. Index Tranche Obligations, Structured Credit Notes: Main Issuers


0

500

1000

1500

2000

2500

3000

3500

4000

4500 $bnCum. Issuance Index Tranches by Bank

20

Fig. 17: Notional & RW Issuance: Collateralised Synthetic Obligations


0

100

200

300

400

500

600

700

800

900

Mar-07 Mar-08 Mar-09

$bnTot Issuance CSO's, Risk-wtd($3.4trillion cum.)

Notional

21

Fig. 18: Collateralised Synthetic Obligations: Main Issuers


0

100

200

300

400

500

600

700

800

900 $bn Cum. Issuance RW CSO by Bank

22

Fig. 19: USA Takeovers As Glass-Steagall Abolition Approaches

Source: Thomson, OECDOct-2009

0.00

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GD

P

Banks' acquisitions of financial companies: United States

Portfolio mgm. & other

Insurance

Investment banking

Commercial banking

NationsBank Corp,Charlotte,NC acquires BankAmerica Corp on 30-Sep-98, deal value = U$ 61,633 mill, .7 pct of United States GDP

Chase Manhattan Corp,NY acquires JP Morgan & Co Inc on 31-Dec-00, deal value = U$ 33,555 mill, .34 pct of United States GDP

Norwest Corp,Minneapolis,MN acquires Wells Fargo,San Francisco,CA on 02-Nov-98, deal value = U$ 34,353 mill, .39 pct of United States GDP

JPMorgan Chase & Co acquires Bank One Corp,Chicago,IL on 01-Jul-04, deal value = U$ 58,663 mill, .49 pct of United States GDP

Bank of America Corp acquires FleetBoston Financial Corp,MA on 01-Apr-04, deal value = U$ 49,261 mill, .42 pct of United States GDP

23

Fig. 20: Europe Takeovers

Source: Thomson OECDOct-2009

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Banks' acquisitions of financial companies: Euro area


Insurance

Investment banking

Commercial banking

Banca Intesa SpA acquires SanPaolo IMI SpA on 01-Jan-07, deal value = U$ 37,624 mill, .31 pct of Euro area GDP

Deutsche Bank AG acquires Bankers Trust New York Corp on 04-Jun-99, deal value = U$ 9,082 mill, .14 pct of Euro area GDP

Credit Agricole acquires Credit Lyonnais SA on 27-May-03, deal value = U$ 16,243 mill, .19 pct of Euro area GDP

Unicredito Italiano SpA acquires Capitalia SpA on 01-Oct-07, deal value = U$ 29,528 mill, .24 pct of Euro area GDP

Unicredito Italiano SpA acquires Bayerische Hypo- und Vereins on 23-Nov-05, deal value = U$ 18,256 mill, .19 pct of Euro area GDP

24

Fig. 21: Australia Takeovers

Source: Thomson OECDOct-2009

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Banks' acquisitions of financial companies: Australia


Insurance

Investment banking

Commercial banking

Westpac Banking Corp acquires St George Bank Ltd on 17-Nov-08, deal value = U$ 17,933 mill, 1.58 pct of Australia GDP

National Australia Bank Ltd acquires MLC Ltd(Lend Lease Corp Ltd) on 30-Jun-00, deal value = U$ 2,726 mill, .68 pct of Australia GDP

St George Bank Ltd acquires Advance Bank Australia Ltd on 24-Jan-97, deal value = U$ 2,224 mill, .53 pct of Australia GDP

Commonwealth Bank of Australia acquires Colonial Ltd on 13-Jun-00, deal value = U$ 5,906 mill, 1.47 pct of Australia GDP

National Australia Bank Ltd acquires Michigan National Corp on 02-Nov-95, deal value = U$ 1,713 mill, .48 pct of Australia GDP

25

Exit Strategy Issues

Forbearance & Time

•Losses & Writedowns.•Recapitalisation.•Coordination May Not Mean

Simultaneity.Oct-2009

26

Fig 22: The 5 Policy Steps• Emergency measures in monetary policy,

central bank loans and public guarantees.• The need to deal with impaired assets both

on and off bank balance sheets.• The need to recapitalise banks to get credit

and other forms of financial intermediation moving again to avert a credit crunch.

• The eventual necessity to exit from emergency measures, and government loans and guarantees.

• Decisions about the longer-run shape of the future global financial system.

Oct-2009 27

Fig. 23: Losses, Capital Rebuilding 2009 Mid Year

Oct-2009 Source: Bloomberg

1099.1 1025.2

264.4157.6

237.9

118.2

0

200400

600800

10001200

1400

1600

Writedown & loss

Capital raised

USD

bill

ion

GlobalGovernment sponsored entities (U.S.)

Insurers

Banks & brokers

607.5 495.8

204.8121.1

237.9

118.2

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600

800

1000

1200

1400

1600

Writedown & loss

Capital raised

USD

bill

ion

USAGovernment sponsored entities (U.S.)

Insurers

Banks & brokers

432.2 419.9

54.8 33.7

0

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800

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Writedown & loss Capital raised

USD

bill

ion

EuropeInsurers

Banks & brokers

33.5 90.61.5 0

0

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Writedown & loss Capital raised

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bill

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Asia

Insurers

Banks & brokers

28

Fig. 24: USA (19 SCAP Banks) Losses, Capital Raised

Oct-2009 Source: OECD, Company reports

Q2 2009 Q4 2010(billions US dollars) est.

Capital Q2 2009 853.8

Assets Q2 2009 11547.4

Leverage Ratio 13.5 Balance Sheet Writedow ns 573.3 Further Losses F/cast (3.5% Assets) 404.2 Capital Raised 476.3 0

Shortfall B/sheet 97 501.2

Off B/Sheet Exposures VIE's now consolidated onto B/Sheet (end 2008) 120.6 VIE Outstanding (Q2 2009 unconsolidated) 796.3 Unconsolidated VIE max Loss exposure 317.3 QSPE Outstanding end 2008 3326.5 QSPE Loss exposure 80.7

Potential New Losses On & Off B/Sheet 802.2 Plus B/sheet shortfall to date 97 899.2 Less Pot. earnings ($173bn) est. 1.5% p.a. assets 1 1/2 yrs259.8 Potential capital needs end 2010 639.3

Memo: 3.5 yrs of earning @ 1.5% Assets to restore pre-crisis leverage after 201029

Fig. 25: Europe (Loss Banks) Losses, Capital Raisings, & Scenarios

Oct-2009 Source: OECD, Company reports and Bloomberg

Q2 2009 Q4 2010(billions US dollars) (Est)Capital end 2008 1155.1Assets end 2008 33736.1Leverage ratio 29.2 Balance Sheet Write Downs 391 Capital Raised 400 Loss Forecast IMF: EU UK 2009Q2-2010Q4 1027.2 Shortfall B/sheet -8.9 1018.3

Capital to get to the lower US leverage ratioCapital Required for leverage ratio of 13.5 (USA) 2499.0Extral Capital to match US by 2010 1343.9Capital Needs for new losses & to catch USA 2362.2Off Balance Sheet ExposuresTot. Eur. issuance of CSO's to 2007Q1-09Q2 3433.6Off Bal sheet exposure to conduits/losses UNKNOWN UNKNOWNLess pot earnings est 1% assets ($337bn) for 1 1/2 years 506.0Potential capital needs ignoring conduits after 2010 1856.1Memo: Or 6 years of underlying earnings per annum @ 1% pa on assets after 2010

30

Fig. 26: Fannie and Fredddie vs Private Label Mortgage Securitisation

Oct-2009 Source: BIS

0

10

20

30

40

50

60

% of Mtgs

30% Cap. rise

B-sheet ConstraintsFed Mtg Pools % Tot Mtgs

RMBS ABS Issuers

31

Fig. 27: US Bank Intermediation (Bank Loans + ABS), GDP & Real Consumption


-10

-5

0

5

10

15

20

25 %paNominal GDPBank Loans+ABSReal Consumption

32

Fig. 28: US Bank Intermediation versus GDP % Change & US House Prices % Change


-10

-5

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15

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-81

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Bank Loans+ABS% less GDP%

House Price Index %

33


Policy Withdrawal•Fiscal & monetary.•Guarantees and loans.•Coordination May Not Mean

Simultaneity.

Oct-2009 34

Fig. 29: Two Routes to Deleveraging


EQUITY %

A11%

B

6% GDP %

The Saving RouteTo Deleveraging The Inflation Route

To Deleveraging

35

Fig. 30: Fiscal Deficit Projections


2007 2008 2009 2010(per cent of nominal GDP)

United StatesFinancial balance -2.9 -5.8 -10.2 -11.9Gross financial liabilities 62.9 71.9 88.1 100.0

JapanFinancial balance -2.5 -2.6 -6.8 -8.4Gross financial liabilities 167.1 172.1 186.2 197.3

Euro areaFinancial balance -0.7 -1.8 -5.4 -7.0Gross financial liabilities 71.2 71.0 77.7 84.4

OECDFinancial balance -1.4 -3.0 -7.2 -8.7Gross financial liabilities 74.5 78.8 90.6 99.9

36

Fig. 31: Support Packages For Financial Sector

Source: OECD, IMFOct-2009

Purch. of assets Cen. Bank Supp. Liq. Provisionand lending by prov. With Trsy & other supp. by TOTAL Up-front

Capital inject. Treasury backing central bank (a) Guarantees(b) A+B+C+D+E Govt. Fin. (c) (A) (B) (C) (D) (E)

OECD membersAustralia 0 0.7 0 0 n.a. 0.7 0.7Germany 3.8 0.4 0 0 18 22.2 3.7Ireland 5.3 0 0 0 257 263 5.3Japan 2.4 11.3 0 1.2 7.3 22.1 0.8(f)Netherlands 3.4 2.8 0 0 33.7 39.8 6.2South Korea 2.7 5.4 0 0.3 13.8 22.2 0.8(g)Spain 0 4.6 0 0 18.3 22.8 4.6Switzerland 1.1 0 0 10.9 0 12.1 1.1United Kingdom 3.9 13.8 12.9 0 51.2 81.8 20.2(i)United States 3.9 1.3 1.1 42.1 31.3 79.6 6.3(j)

37


New Fault-lines Already Emerging

•Asia versus the crisis countries.

•The broken dam refilling anew with liquidity before it is fixed.

•Asset prices bouncing strongly.Oct-2009 38

Fig. 32: China: Money vs Domestic Credit, Opposite of OECD Countries


0.00

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15.00

20.00

25.00

30.00

Jan/99Jan/00Jan/01Jan/02Jan/03Jan/04Jan/05Jan/06Jan/07Jan/08Jan/09Jan/10Jan/11

M2

Dom Credit(Contrib)

Forex Reserves(Contrib)

%yoy

39

Fig. 33: China: IP, FAI, Real M2 Exports


-40

-20

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Exports(RHS)Indust Prod.(3ma)Real M2Fixed Asset Inv.(RHS)

% yoy % yoy

40

Fig. 34: Global Forex Reserves & China Stock Market


-5.00

0.00

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15.00

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-75.00

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%% China Stock Market

Global Reserves $'s

41

Fig. 35: Stock Markets: Better EM Fundamentals?


0.8

1.8

2.8

3.8

4.8

5.8

Mar/03 Jun/04 Sep/05 Jan/07 Apr/08 Jul/09 Oct/10

Japan

EU

USA

China

Korea

Aust

INDEX

42

Fig. 36: Dividend Yield vs Cash


-9

-7

-5

-3

-1

1

3

% Points

USAAust.JapEUUKChina

43


Defining What the Future Global

Financial System Should Look Like.

Oct-2009 44

Fig 37: What IS & IS Not Being Addressed• Is addressed: ●capital rules—the FSB & G20 are on the right track. ●compensation—but it is a symptom only . ●accounting, clearing, back office.• Is NOT addressed: ●“Too big to fail” & the implicit ‘puts’ & the ‘equity

culture’. ●Contagion risk & corporate structure—what banks should

do. ●Corporate governance reform to align shareholder &

management interest more generally than compensation. ●The structure of competition in banking conducive to a

credit culture. ●The structure & governance of regulatory agencies to

avoid overlap & conflicts. ●Tax reform to remove incentives to structuring.

Oct-2009 45

Fig 38: Equity Culture, & Competition vs Prudence

• Equity culture—the creditor-versus-equity-owner put in banking—asymmetric upside; & the CEO shareholder asymmetry of interests.

• “Too big to fail” is a huge problem—the government implicit put that ensures that risk is mispriced.

• “Too big to fail” problems come out of M&A & growth via structured products helped by commercial banks owing investment banking/securities businesses with massive leverage on of off the balance sheet.

• Australian banks are in the top 20. Why? A clue here. They had Basel, the same Credit Rating Agencies, & access to securitisation & derivatives. Their success must have been due to something else—Less equity culture.Oct-2009

46

Fig 39: Why Is Australia Better Placed??• Twin Peaks regulatory structure: APRA, ASIC. The RBA

focus on monetary policy & stability of the payments system.

• Hence macro policy without conflict of interest: Budget surplus, and high interest rates. Plenty of room to ease.

• 4 Pillars: Stable, medium-sized oligopolies that did not compete excessively in securities. 80% of the market does not fear competition in the market for corporate control, which is conducive to a “credit culture”.

• Australian banks take deposits and lend as the main focus of their business—they look for profitable lending opportunities, rather than structuring notes and CSO/CDOs.

• Macquarie: our one big IB introduced a Non-Operating Holding Company Structure (NOHC) in 2007. Reduces contagion risk amongst affiliates.Oct-2009

47

Fig. 40: Comparative Bank Structures


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0 % B of AmCitiBarclaysUBSDeutscheWestpac

48

Fig. 41: $70.6bn Payments to AIG Counterparties ($45.7bn to EU!): Sept. 16 to 31 December 2008

(billions of US dollars) Collateral postings Payments to securities As a share of

Institution for credit default swaps* lending counterpaties** Total capital*** at end-2008

Goldman Sachs 8.1 4.8 12.9 29.1%Societe Generale 11.0 0.9 11.9 28.9%Deutsche Bank 5.4 6.4 11.9 37.4%Barclays 1.5 7.0 8.5 20.0%Merrill Lynch 4.9 1.9 6.8 77.4%Bank of America 0.7 4.5 5.2 9.1%UBS 3.3 1.7 5.0 25.2%BNP Paribas … 4.9 4.9 8.3%HSBC 0.2 3.3 3.5 5.3%[memo: Bank of America after its merger with Merrill Lynch] 12.0 [18.1%]

*Direct payments from AIG through end-2008 plus payments by Maiden Lane III, a financing entity

established by AIG and the New York Federal Reserve Bank to purchase underlying securities.

**September 18-December 12, 2008.

***Common equity net of goodwill; net of all intangible assets for Merrill Lynch and HSBC.

Oct-2009 Source: Fed, US Treasury

49

Fig. 42: Non-operating Holding Company NOHC

Source: OECD

NOHC, Non-

operating parent.

External funding, eg equity

capital.

Commercial

Bank, external funding,

trading etc

Broker/Dlr. equity

sales,IPO's, etc

Wealth mananage

ment, private

clients, etc

Insurance, general,

life, reinsurane

Invest. Banking, position taking,

securities business

Oct-2009 50

Fig 43: Competition Policies• Open market buying of toxic assets is least distortive.• Stable oligopolies that don’t compete excessively in the

securities and derivatives businesses.• Foreign acquisition of domestic weak banks fosters better

competition without disturbing the local structure.• Selling asset of failed firm in pieces enhances competition.• Temporary nationalisation is better than a megamerger.• Promote entry with competitive mergers of smaller healthy

banks—e.g. regionals—in overbanked jurisdictions. They are ready to lend and competition will force recapitalised banks to lend.

• Foster removal of regulatory barriers to entry in the loan market: fine grained credit rating information on consumers and small businesses.

• NOHC structures to foster transparency, competition, and regulatory ease.Oct-2009

51

Fig 44: Corporate Governance

• Independent directors: strengthen fit and proper person test to cover competence, technical expertise. Risk management skills; formal separation of CEO and Chair; term limit on board membership.

• Risk officer role with access to the board (with special employment terms--CEO doesn’t fire or set salary).

• Fiduciary responsibility of directors: clarified tying duties to single affiliate in the case of complex firms.

• Remuneration: board reform helps, and tax incentives provide teeth.

Oct-2009 52

OECD Breakfast series Fixing Finance Tuesday, October 13, 2009 8:30 a.m. - 10:00 a.m. New America Foundation 1899 L St NW, Suite 400 Washington, DC 20036.

Documents

cds source

thomson oecd

credit risk

regulatory capital

concentration risk

main issuers source

europe takeovers source

australia takeovers