Citigroup’s Pandit Says Basel Accords Could Make Credit Crunches Worse

Citigroup Inc. Chief Executive Officer Vikram Pandit said many of the goals set by the Basel Committee on Banking Supervision are likely to be ineffective or make existing capital inequalities worse.

While Pandit supports higher capital levels, Basel’s rules have a cyclical quality that lowers targets in good times and raises them in bad times, the CEO said today in the prepared text of a speech at the Buttonwood Gathering in New York. The result could be “piling risk into the system” when the economy is strong as capital requirements fall, while “raising the cost of credit precisely when credit is needed most” during weak economies, he said.

“By creating an illusion of safety, Basel actually dulls the sense of urgency further,” said Pandit, 53, whose company is based in New York and ranked third by assets in the U.S.

Citigroup, 12 percent-owned by U.S. taxpayers, is grappling with stricter financial regulation in the wake of the 2008 financial crisis, during which the bank received a $45 billion bailout. The so-called “Basel III” accords are designed to keep the banking system from “falling into crisis again,” Pandit said.

New regulatory goals announced in September by the panel, made up of regulators from 27 nations, has triggered a “bidding war” for setting the highest capital targets in different countries that will hurt economies, Pandit said.

The Crisis of Credit Visualized

All you needed to know about the credit crisis of 2007-08

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What good are economists, anyway?

Peter Coy, BusinessWeek | April 21, 2009

Economists mostly failed to predict the worst economic crisis since the 1930s. Now they can’t agree how to solve it. People are starting to wonder: What good are economists anyway? A commenter on a housing blog wrote recently that economists did a worse job of forecasting the housing market than either his father, who has no formal education, or his mother, who got up to second grade.

“If you are an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables,” he wrote on patrick.net.

Take that, you pointy-headed failures! Go jump off a supply curve!

To be fair, economists can’t be expected to predict the future with any kind of exactitude. The world is simply too complicated for that. But collectively, they should be able to warn of dangers ahead. And when disaster strikes, they ought to know what to do.

Financial Crisis: How to Stop the Panic

It is possible to calm the waters, but it’ll mean unlearning our post-Depression lessons

by Peter Coy and Stanley Reed

The world’s governments are shocked and dismayed by their inability to stop the increasingly grave financial crisis. Nothing they have attempted has gotten lending flowing normally. Profitable companies are cut off from borrowing. Confidence is shot. Through Oct. 7 the U.S. stock market had its worst five-day performance since 1932 on fears of a severe economic downturn. Says Stephen Jen, currency economist at Morgan Stanley (MS) in London: “The choices for the real economy are between a recession and a depression.”

Can anything be done to halt this panic? As a matter of fact, yes. It won’t be quick or easy. But the prerequisite for a new approach is unlearning doctrines that were developed in the aftermath of the Great Depression, the last time financial conditions were worse than this. The world has changed in the intervening seven decades, and what worked to quell the financial crisis then may not work now—as anyone trying to borrow money can see.

Global write-downs and credit losses

Anatomy of a global credit crisis

Publication: Economic Times Mumbai; Date:2008 Sep 17
Author: sugata.ghosh@timesgroup.com

How can a bank like Lehman go down so fast?
FINANCIALmarkets can be punishing and reversal of fortunes can be dramatic. More so, if an institution is overleveraged — when loan and investment books are much, much bigger than its capital. What compounds problems are strange accounting practice and high-risk nature of the loans and investments. There are also disclosure issues: Lehman, in its last conference call with investors, gave no clue that it was actually on the brink.

How did the crisis build up?
An investment bank uses its proprietary book (own money) to lend others and invest. It started with the subprime crisis. Banks like Lehman, buy mortgage loans from other banks, and then package them to sell bonds against the loan pool. Often they add cash to make the loan pool more attractive, so that the bonds can be sold at a higher price. Suppose mortgage was earning 6%, these bonds are sold at 4%. The difference is the spread which the investment bank earns. By selling these structured bonds, it raises money and frees capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets.
But don’t investment banks play advisory role?