Following on from their generous bail out of Northern Rock, the UK Government, otherwise know as the taxpayer, has opened its arms to any old piece of paper banks have sitting around on their balance sheet.

Or to be more accurate, the Bank of England will accept mortgage backed securities in return for government bonds. Nice trade if you cant get it. The amounts mentioned are 50 to 200bln pounds (where the hell is my pound key?) but basically it’s a free for all.

Now we can expect to see banks reaching for the refinancing button in order to take advantage of this. RBS has already put its hand up for 10 to 12bln of fresh capital plus a 6bln write down.

Ok so its just more mess. The markets may rally on this hoping it can help clear the looming crisis in the mortgage market but the numbers are really starting to mount up and this is just very bad news indeed.

The key issue here is the capital adequacy of the banking system. It’s proven to be the achilles heel which is why the authorities have had no option but to underwrite the system.

Given this exposure of the fragility of the banking system it is time to ask questions about capital adequacy and the way banks are regulated and allowed to operate.

The G7 communique from the current meeting makes for interesting reading. Their focus has been wide ranging and, for a change, not just on currencies though the headline statement does make a clear reference to recent moves.

What I took note of was their concerns around bank capital. This is really where the crunch point is located. They call for the Basel Committee to review liquidity risk management guidelines and a quick disclosure of write downs ands revaluations (or in reality devaluations).

The accounting for off balance sheet items was also raised, particularly the valuation of assets in a time of financial stress. That should cause palpitations amongst traders of credit default swaps. Quite frankly some of this stuff can only be valued when its traded. The idea that there is some kind of two way market is really a myth. That in itself should make regulators, as well as bank shareholders, sit up and think about some of the toxic trades sitting around on the books.

They also call for a speedy implementation of Basel II. I think they should tear up Basel II and move straight onto Basel III but more on that another time.

They realise the game is up and the time has come for a thorough overhaul of the system itself. It will be interesting to see how this plays out as more and more unwinding takes place. As far as currencies go, China was gently reminded to hurry up and revalue the Yuan and the market was reminded that G7 wasn’t happy about some of the moves we had in March.  Whether that helps the $ is anyone’s guess but they better have an intervention plan up their sleeves before the $ takes another big dump.

The markets had a nice rally but reality is never too far away in markets and the last couple of weeks may have just been a pause for thought.

Following on from my piece on the AMRA, I’m posting a message from Stephen for all Washington D.C. locals who can attend his meeting below. Spread the word if you cannot.

Dear Friends of the American Monetary Institute

Please take a moment to concentrate on this message, and consider the very particular action it asks of you, to help our nation achieve meaningful change to assure that no “Wild West” banking system ever again despoils our people.

Place: Busboys and Poets Restaurant (Langston Room)
2021   14th St.   NW,    Washington DC  20009

 Date:  Thursday, April 10, 2008                  Time: 6:00 PM to 8:00 PM

Late arrivals OK                 Dress: Informal; all are welcome

 

Reservations not necessary but really appreciated 

Call 224-805-2200  or email  ami@taconic.net

RETURN TO AMI HOME PAGE

This is in response to Dave’s post on a new wave of financial regulation. It’s a great 5 minute potted history of money to a stunning tune from Prince Charles and the City Beat Band. They rock!

Watch it here

With the financial system gutted and exposed like big swordfish from the Grand Banks, it’s time to have a look at a proposal for monetary reform. Stephen Zarlenga from the American Monetary Institute has put together a proposal that rests on the US constitution no less.

As many people are starting to learn, the 1913 Federal Reserve Act “effectively ceded the sovereign power to create money delegated to Congress by the Constitution to the private financial industry”. It was led by none other than JP Morgan himself. There is some interesting history of how the Act was actually passed during the small hours of the morning whilst no one was looking.

As Jim Rogers suggested yesterday, the Fed could be abolished or as Stephen proposes, be purely a bank of issue, supplying money as required by the government.

Now there are many ways to approach the issue of interest free money into an economy but for now I would just like people to read through the proposal and see what they think. Pass it to friends, schools and universities. People should be discussing this openly.

The AMI hold talks around the US all year round so get in touch and find out when they are coming your way.

Its your Congress and its your money.

Fed just cut the fed funds and discount rate by 75bps voting 8-2. The 2 against were for less aggressive cuts.

Overall the market wanted a bit more but still rallied initially. Better than expected numbers from Goldman Sachs and Lehmans helped with overall confidence

So what now? Well it’s hard to say. I don’t think much has changed and its hard to justify a big market rally from here. So the best to hope for is some stability from here.

I think the focus will now shift back to the banking sector and who is next up for refunding.

As for the market I expect that to come under further pressure.