Plus ca change… Finance Capitalists (still) rool ok?

by Duncan Lindo

A month or so ago the world seemed about to change: bankers were bad, Sir Fred was in hiding, AIG was being punished and a rethink of financialised capitalism seemed possible. Today the bad banker headlines are fading, banks’ results are improving and there’s talk of repaying TARP funds. In fact finance capitalists seem to be winning the struggle by some margin. Three news stories of recent weeks show that so far there has been no fundamental questioning whatsoever of financialised capitalism; indeed is anything the crisis is being used to usher in ever more market-friendly measures.

A review of fair value accounting led to a relaxation of the rules, resulting in less mark-to-market, but no fundamental questioning of the idea that market prices in financial markets are efficient and result in correct allocation of resources – despite the crisis. In a previous blog we explored how expansion of mark to market expands the “everything-for-sale” attitude with it’s short-termist outcomes and ever more power to the financial elites.

The so-called CDS big bang cedes some power from banks to other investment firms such as PIMCO. But let’s be clear here, PIMCO or any other investment firm are just as much interested in trading revenues as the banks. This is not a big bang it’s only a small shift. Are these really the hedgers / investors that the literature makes so central to the ability of derivatives to spread risks? I don’t think so. The contract changes all work in the direction of further standardisation in preparation for central clearing. This flies in the face of returning CDS to be a hedging tool. Credit transfer products such as CDS have become steadily more standardised over the last 20 years inviting ever increasing trading volumes for those who spend the day buying and selling. But a true hedger requires the opposite - a bespoke contract which they will hold until maturity. As explored previously “counterparty risk” is a red herring being used to usher in ever more trading / market friendly conditions.

These two stories trends are manifesting themselves in a slight upturn in the latest banks’ results. Banks have taken advantage of the relaxation of fair value accounting to report better numbers and are also reporting better trading revenues on wider bid-ask spreads. Strange world where large spreads are due to the low level of liquidity that is caused by the financial crunch which was caused by…..banks!

When the vast majority of economists are trained to believe markets work we shouldn’t be surprised that when markets fail (again) the response is to look past the facts and attempt to implement markets yet harder and faster. How long will it take for the realisation to sink in that something more fundamental needs to change? Well don’t hold your breath! It takes a long time to turn a tanker even as it hits a storm, what’s more there are powerful forces trying to ensure the route through the storm is to keep in the same direction but go even faster!

PS: Should we be surprised that the finance capitalists are winning the day when two of their number are holding the most relevant posts in the White House? As Stiglitz puts it: “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Financial Literacy - important points to think about

by Christina Laskaridis


Provision of services to enable consumers to handle money, debt and their overall finances better has expanded considerably in recent years. In the UK the FSA are leading initiatives in financial capability and literacy e.g. spending £90m on it’s National Financial Capability Strategy, in conjunction with government, the financial sector and a multitude of non-profit organisations. This follows the discovery that the UK’s population has a low level of financial literacy, manifested as money and debt mismanagement, little planning, limited shopping around for alternative financial products and low product awareness. In 2006 an estimated 10.5 million people around the UK were experiencing difficulties in at least one of these areas, a figure which has probably risen since. The campaigns aim to improve personal financial administration through better budgeting and debt prioritisation and improved maths’ skills.

Despite the belated effort to address a serious problem by introducing such support, the strategy raises a few points of contention. Firstly, it focuses on debt prioritisation but leaves unaddressed the choice this will leave for the most vulnerable between rent and food. The National Strategy does not encompass food support for those in such a position, as has been proposed for example in Canada’s financial capability raising programmes.

Secondly, if the National Financial Capability Strategy is taking the form of a larger scale social welfare programme should the responsibility of leading it lie with the FSA – the financial services ‘regulator’, a body that is not subject to the public’s scrutiny, or should it lie with the government – through the Departments with the capability in providing social and education services? Given the experience and access to provision channels would it make more sense for this to be publicly provided?

Thirdly such a strategy implicitly accepts without argument that households have and should accept these responsibilities. Arguments focusing on the recklessness of consumers and home-buyers evade the discussion about the structures that cause oppression through finance. Households are now burdened with a much greater individual responsibility of financial risk management as finance has expanded into ever more areas of everyday life, e.g. the decline in public welfare policies and wide-spread privatisations, which means a precarious balance of risks are transferred and borne by the household.

The debate on raising financial literacy and capability – the crux of this financial education approach - does not ask what the institutional factors that have led people to find themselves in the situation they do and, as corollary why others do not. Without addressing the inequality within the financial system, the whole debate on financial capability resigns those deemed financially incapable to being seen as irresponsible and out of date – quite ironic as concurrently masses of analysts highly specialised in finance are also defamed for irresponsibility. Should we all be learning the theories which have guided us into the current crisis?! The focus of the National Financial Capability Strategy is in educating the innumerate, financially incapable segments of the population, rather than identifying let alone re-arranging the provision of financial services as a cause of the problem to start with. It orientates itself around educating the public about becoming better consumers, evading altogether the content of economic and financial relations that people are in.

Lastly, an entirely different model of education about finance and economics could be put in place, in which adult education is not used as a disciplinary mechanism to assist conforming and adapting to society. Community-wide education in economics and finance can be work by looking at one's own position and linking it to others; by connecting knowledge and action, education can lead to a critical assessment of one’s situation. Education fostering critical thought in the sphere of economics and finance can lead to comprehending a historical specific situation which is susceptible to change. Financial capability need not be only about better budgeting support but a wider and deeper awareness raising programme to assist people in demanding more equal treatment in the sphere of finance.

The SDR by IMF: could it become a new World Money?

by Juan Pablo Painceira


The size and spread of present financial crisis has shown to analysts and public alike how important the dynamic of world money is to the global economy. Surely this crisis would not have the same magnitude if the heart of crisis was not the US economy, the issuer of world money. The importance of international money in the unfolding of financial crisis was addresses by this author in an earlier RMF discussion paper (http://www.soas.ac.uk/rmf/papers/).

It is well know that the Federal Reserve has taken conventional and extraordinary measures to tackle the 2007-08 financial crisis in order to rescue/recover the financial system’s ability to perform their normal functions, and in particular banks,. Among the FED’s measures, the swap currency lines, initially offered to the major central banks and extended to the key developing countries after September 2008, are directly related to the role of dollar as world money. Basically, the Federal Reserve has offered credit lines in dollars around the global economy.

The spread of those swap lines and the monetisation of US public debt have raised questions about the functionality and stability of international money, ie the US dollar. Recently, the China’s central bank chief and the Russian government have proposed a bigger role for the IMF’s SDR in global financial operations in order to achieve a supra-national reserve currency to replace the dollar as world money. The Special Drawing Rights (SDR) created by IMF in the 1970s is a basket of major currencies traded in the international financial and commercial operations. The value of SDRs daily is determined by summing, in US dollars, the values of a weighted basket of currencies and used as monetary reference to the IMF’s operations. So, the SDR are reserve assets.

The emergence of new world money and the reform of international financial system has been widely discussed in the last weeks e.g. G. Soros addressed the need for the IMF to take care of some developing countries external financing immediately in order to avoid a Great Depression; the increase of issuance of SDR would be the instrument to use. Some analysts are arguing that a new global reserve currency would lead also to changes in the process of reserve accumulation and exchange rate regimes among the major countries. A UN commission lead by J. Stiglitz advocates that to deal properly with the consequences of global imbalances it is necessary to have a new global reserve system based on the expansion of the SDR.
It seems that this new world money would lead a more stable and equitable global financial system.

However, some questions are still remained…Would China be really interested in walking away from dollar denomination, considering that its foreign exchange portfolio is highly concentrated in dollar? The same question could be asked for Japan. If the IMF becomes the global lender of last resort, who would be the Treasury of last resort? Who will control the political decisions to lend or not lend? I recognise that those questions are hard but we know from the economic history that a change in the global monetary standard can be painful and that effects can last many years as did the change from the gold standard to the dollar-gold standard. Lastly, a currency has a political force behind it, even when it is a supra-national currency, are the conditions ripe for the IMF / World Bank to take on such a role?

NGO reaction to the financial crisis

by Jeff Powell


Clearly NGOs around the world are too diverse to allow meaningful generalizations of their reactions to the evolving crisis. Some have seized the opportunity, embracing new ideas and reaching out to different actors and constituencies. Others are grafting new issues on to an old agenda: add crisis and stir. Still others are finding their agenda drowned out, at the same time as direct debits get cancelled and stock-market dependent foundations pull up the funding drawbridges.

Here in the UK, development and environment NGOs have come together with the Trades Union Congress in an unprecedented coalition (which, in the name of transparency it should be stated that the author is a part of), initiated by the Bretton Woods Project. The Put People First coalition (PPF) has come together around a short manifesto highlighting jobs, social justice and the environment. The focus for the time being is on the G20 meetings in London in April and then in St. Andrews in November. It's too early to say whether the coalition will be longer-lasting, and if it will be able to get beyond the 'lowest common denominator' politics which held back the Make Poverty History campaign in 2005.

On finance, PPF has joined the general chorus for increased transparency and accountability, without yet articulating a clear vision of what this means. More developed are its ideas on eliminating tax havens, drawing on the groundwork done by the Tax Justice Network. The investigation that TJN inspired in The Guardian has shamed the Labour government into its first tentative (and long-overdue) steps on tax havens, particularly those in the City of London or UK protectorates. Gordon Brown has announced plans to discuss multilateral exchange of information on offshore accounts at the G20 meeting. The PPF coalition is trying to use the crisis as an opportunity to broaden the reform agenda to include a re-invigoration of public services and a shift of economic priorities towards environmental sustainability. Managing the need to focus on shorter-term policy developments with these longer-term objectives will not be easy.

Similar networks and coalitions have formed across Europe. Brussels-based groups Eurodad (the European network of NGOs working on debt, development and poverty reduction) and CONCORD (the European Confederation of Relief and Development NGOs) have started to work with some European trade unions at National and Supra-national level. Like the UK's PPF, Eurodad has a developed campaign on capital flight issues. Groups in these networks with a history of advocacy on financial issues include Germany's World Ecology Economy and Development (WEED), the Dutch group SOMO and of course the ATTAC network which, with others, has been working for over a decade on issues of regulating and democratising finance.

At the international level, the key cue for NGO policy positions comes from agreed positions at the World Social Forum in Brazil, earlier this year. The WSF attempts to bridge the (sometimes elusive) divide between NGOs, trade unions and social movements. While it is short on details, and the process of getting from A to B is absent, the principles of the WSF statement ('Put finance in its place') are radical and clear. They include a call to “implement a global mechanism of state and citizen control of banks and financial institutions” and the creation of “regional reserve currencies”. Taking up the issues of financial sector reform is Re-thinking finance, a new coalition which brings together the Bretton Woods Project, Eurodad, Amsterdam-based Transnational Institute, the Asian network Focus on the Global South, and Latin American network Choike.

In the coming months the ability of all of these NGOs to sharpen and deepen their analysis of financial sector issues, and their capacity to communicate these ideas to a wider audience and build broad-based movements for fundamental change is critical if the crisis is to be transformed into opportunity.

In the Hot Seat: Private Equity and the Financial Crisis

by Sherif H. Elkholy

Private Equity History
For a long time spanning from the 1980s private equity has been one of the main drivers of market-based finance, catalyzing the transformation of the processes and institutions of direct finance. Back then private equity was a specialized form of finance characterized by its long-term investment strategy, its hands-on approach, and its capacity to add tangible value by investing in companies. This changed significantly over the 2003-2007 boom cycle: private equity was no longer confined to savvy investors, it no longer needed to have a long-term horizon, and it no longer needed to add real value in order to make money. This was made possible by three factors: a seemingly endless supply of cheap debt (annual LBO debt issuance rose from $71 billion in 2003 to $669 in 2007), growing reported profits across all sectors (16% annual growth in the S&P 500 earnings from 2003 to 2007), escalating asset prices (41% growth in US valuation multiples and 43% in European valuation multiples between 2003 and 2007), and more portfolio allocations to private equity by institutional investors (around triple the historical amounts). Then came the perfect storm.

Where it Currently Stands
The financial crisis has hit all the pressure points of private equity at once. Corporate earnings are down thus negatively effecting the financial position and the fundamental value of companies owned by private equity funds. Asset prices are also down, thus deferring any divestiture of companies by private equity owners. More critically, debt markets are extremely tight, virtually freezing the previously flourishing leveraged buy-out market. Finally, portfolio allocation to private equity by institutional investors is down due to limited liquidity and heavy losses across all asset classes. The immediate problem which private equity has to wrestle with is keeping it’s investments afloat. It is unavoidable that many private equity owned companies will default on their debt obligations- simply because the debt levels piled up during the boom years are not in line with current earnings. However, every cloud has a silver lining. Amidst the financial crisis many babies are being thrown out with the bath water- the smartest private equity companies will pick up under-valued high quality businesses for a fraction of the fair value... if they have the liquidity to do so.

The Future of Private Equity
Private equity is facing the ultimate truth test. A close look at the private equity model of the 1980s reveals that private equity had a lot of shared similarities with bank-based finance: investment decisions premised on relationships and knowledge of companies, hands-on control, monitoring through board representation, active management, and long-term “buy and hold” approach. Private equity needs to re-invent itself back to this initial form and it needs to do so fast to guarantee a place in the new financial system which will rise from the ashes of the global crisis. Whatever form private equity will take in the coming years, it will most certainly involve less fees, more work, real operational value-add, and less debt. For the real economy, perhaps this shake out is not so bad after all.

Mark to market madness

by Duncan Lindo

The news last week that only 2% of GE’s assets are market-to-market will have shocked some investors. What murky mischievous mark-to-model is being used to mask the mess that is the remaining 98% of assets (98% by what measure we might ask…). The stock has plummeted and now they’ve lost their 50year old AAA rating.

But wait..! GE doesn’t intend to sell these assets (not at these prices anyway the cynic might add) – so of what relevance is their mark-to-market (MTM). Whilst we’re right to worry about how they are valued why on earth should mark-to-market be better?

Firstly what happens when there is no market? As noted in a House Committee on Thursday: “Illiquid markets have resulted in great difficulty in valuing sizable assets”. The assumption of ever increasing markets for assets implicit in the spread of MTM across balance sheets is looking a little bogus. Most famously the secondary markets for mortgage assets have disappeared… albeit from a low base.

Blessed are the financial intermediaries
Perhaps given a bit more time it was hoped that MTM would become self fulfilling. As more of balance sheet value becomes subject to market valuation more opportunities have arisen for the derivative traders to sell hedging instruments to mute the volatility of market valuation. Thus markets for the assets appear. This is less chicken-and-egg than golden goose eggs for financial intermediaries inserted into yet another area of the economy. The alternative is the constant surveillance of the balance sheet for restructuring possibilities – selling businesses with high hedging costs. There are always investment bankers ready to advise you on that too. Everything market to market means everything for sale.

Procycliality
Market to market accounting is also pro-cyclical – even Hank Paulson admits it. The classic mechanism of bubbles through collateralised lending against rising market value of assets fuelled by leveraged buying and the deleveraging spiral that follows the burst. As soon as you admit herd behaviour, euphoria, bubbles then accounts based on market price look non-sensical. For the time being though it doesn’t look like the law-makers are ready to make the U-turn on the law. It’s pro-cyclical but… err… we don’t want to change it.

Symmetry and the Farce of Own Credit
“Fair Value” was also partly born of a desire for symmetry between buyers and sellers of instruments – an idea at odds with neoclassical theory which requires differing utilities in order for trade to occur! One consequence was billions of dollars of profit for banks during the crisis in the form of “Own Credit”. Holders of bank debt have marked down their assets as bank default probabilities rise (as measured by CDS spreads) taking losses; conversely arguments of symmetry under “fair value” accounting regulations have required banks to reduce the value of the equal and opposite liability resulting in a “profit” for the bank! The more the market writes down their debt the bigger the profits banks can book! The more debt they have the bigger this profit is! The incentives created are clearly crazy. Furthermore the balance sheet as a description of reality further distorted – e.g the distance between “retained earnings” and bank’s ability to pay dividend clearly increases. At least here it might be argued that MTM is anti-cyclical!

Yeah and –what you gonna do about it?
You’ll notice that I’ve spent 500+ words knocking MTM accounting with not one constructive suggestion.. well… as Hank P agrees.. it’s tricky. Any ideas out there???

Part 2: Protagonists of an old game: Political Processes behind Greece’s troubles

By George Lambrinidis

Picking up the story behind the recent riots described in the last post, it is helpful to delve deeper into the relations between the working class and capitalists in Greece by way of a few key observations.

First, we have to observe that Greek financial capital is bank-based, rather than market-based. Banking was until recently under state control, privatization was forced by industrial capitalists which partly explains the strong links between industrial and financial capital.

Second, Greece is a small place. Over 99% of firms employ less than 50 employees and the Greek bourgeoisie is made up of only ~300 families – not that this limits their prosperity; Greek capital is found amongst the first positions of OECD countries in terms of profitability. The Greek commercial fleet is the largest in the world with around 19.5% of world capacity. Moreover, a (very) small group of capitalists control most forms of media. The political influence of the bourgeoisie is indisputable e.g. the minister of mercantile marine (a crucial post given Greece’s concentration) is assigned directly, or must be approved by the ship owners.

Finally, Greek-oriented capital has a strong regional presence, especially in the Balkans and SE Europe, with what might be labeled minor imperialistic tendencies. Of major significance are the contracts signed for the building of a couple of oil pipes that will provide Europe through Turkey, Greece and Italy with Russian oil and gas.

Leaving financialisation aside until the third post in the series we can see how this economic, political and ideological power was built by focusing on the Greek working class. There were two major evolutions in the condition of the working class. The first, common to many nations is the pressure on real wages, volatile working practices, extension of retirement age etc., which is in somehow related to the subversion of the USSR. The second more specifically Greek process is a weakening of the unity of the working class during the rule of the Social Democrats from the early 1980s’ until 2004. An ideological split emerged between a model where worker’s leaders moved into government and one of unified struggle. It can be argued that many were led or even forced to see the Unions as a road to personal advancement by political cooperation with the ruling party e.g. it became natural that the president of the workers confederation became Minister of Labour. Increasing disillusionment with this approach led to falling union numbers. Meanwhile the Communist party enjoyed deep roots in Greek society and it managed to slow this process and stabilize the situation in the unions from the early 2000s. From mid 1990s onwards protests were often marked by two separate demonstrations (a class frontier of unions of all levels and individual workers backed primarily by the CP, and one by the compromised leadership of the unions and their political allies), with different content, demands and direction, reflecting the two conflicting views of consent and conflict.


In our next post, we will see how these political processes link with financialisation in Greece, review December’s events in this light and finally attempt to look into the future.