Monday the journalists and experts will focus on the EU bank bail-out. At €70 billion it is laughably small. Too little, too late will be the summary from the markets. Its a bit like setting a Chihuahua to guard a room full of Rottweilers. It’s a snack not a deterrent!
For me, this is not a glimmer it’s a shame. The glimmer is elsewhere.
On Friday The San Francisco Chronicle (picked up by Bloomberg) reported that two German property based mutual funds, with properties valued at about €10 billion, had been forced to close their funds to redemptions. Which usually spells death for a fund. For those who might not know what this means, it is akin to a bank closing its door. Too many people suddenly wanted their money out (redeemed) and there was either just not enough cash or they were afraid of a complete collapse. Either way they closed the doors and told their customers, “No. You cannot have your money back.” That’s leverage for you. Smarts like a bitch when it goes into reverse doesn’t it boys!!
Now that may not sound like a glimmer of any kind of hope, but here is why I think it could be.
The reason the two funds, had to stop redemptions, was because the German Finance Minister Wolfgang Schaeuble released a draft of a bill that proposed to introduce a 10% cut in asset values. If enacted it would mean that all the assets being held by all such funds in Germany (the property mutual fund industry in Germany is about 90 billion euros) would be required to be devalued, written down, by 10%. It also proposed a minimum investment period of two years. Which would mean funds locked in for two years before redemption was allowed.
This proposal is my glimmer of hope.
It is the FIRST serious proposal I have heard of a government saying to financial institutions, “We know you are lying through your teeth about the real value of your assets and by doing so you are hiding your actual losses and depth of your indebtedness. This is going to stop because we are going to FORCE you to write down some of your losses for you.”
Now please bear in mind this is a) only a proposal and b) would only mark them down by 10% when the real devaluation we are likely to be talking about is more like 40-50%. And yet this was enough to start a run on the funds. Investors wanted to redeem their investment NOW while the fund was still pretending the value was full face. Redeem now and you might get that full value leaving those still in the fund when it collapses or takes the write down to eat their loss AND YOURS.
If, as IS almost certainly the case, the fund has been lying about the real valuations, then the fund, by having to sell the assets to get the cash NOW, would have that lie revealed. They would not get the value they claim and the real value of not only those assets but all the others it has been lying about, would become clear. OR the find could try to hide the sale and eat the loss itself. Either way the fund would be stuffed.
But people will lose money, you might say. Maybe some of the investors were pension funds of ordinary people. The point is THEY HAVE LOST. The values are 40-50% less. All we are getting rid of are lies. But, but, perhaps we would be better letting the lies alone. Maybe all this stimulus will work and the value will magically come back? Question – how long are you willing to wait for that to maybe happen and maybe fail ( and so far it has failed in epic style). And how much debt are you willing to go into NOW, while you’re waiting, and in the mean time pay interest and suffer spending cuts as a consequence ?
If you believe, like me, that the only long term and sustainable path out of this no-mans-land we are being led into, FOR US THE ORDINARY PEOPLE OF OUR COUNTRIES, is to force the bad debts to be taken by those who made them, clear the system of the over-hang of their debts and put an end to public money being misused to bail out the wealthy – then this is the sort of thing that MUST happen. The longer we delay the larger the eventual death toll.
This is what we should be doing in every country to every financial institution who has lied to us and is stealing from us with the connivance of our leaders.
There is no easy way out of the killing field we have been led into. It must be starting to come clear to people that a killing field, really is a good description of the place we are being led to. Men in fine suits, with fine degrees from wonderful schools, who live golden lives, have led OUR children to a desperate place. And I don’t believe they care at all. What they care about is ‘defending’ their non-dom status.
Whatever we do, the suffering we have stored-up for ourselves already, will not go away and will have to swallowed everything done so far as entirely squandered.
But it is not too late. And this, small though it is, is my glimmer of hope .
Hi again, Mr. Golem, are you sure about these informations? First it appears as an ulikely piece of legislation to propose in any country, and secondly why just these two funds and not all funds that could be affected?
Both for accounting and taxwise, the value of a property is its cost minus depreciation. Certainly real values and tax values may differ, but then it is usually the owners who wants tax authorities to accept bigger write-offs. I cannot see what in the world could prompt legislators to impose bigger write-offs than the owner (and his auditor) deems appropriate. Write-offs usually lessen the tax bill.
10% sounds arbitrary, and, if annually, way too much.
I see little hope in this. It's a hallucination.
We want to see more forclosures and repricing of assets. For that to happen, somehow the liquidity that so generously have been throwed at the banks must be withdrawn. We want our money back now, Mr. Banker.
Morning Mr Eirik,
Here is the Bloomberg article. See what you make of it. If you think I have completely miss-read this then please let me know and I will withdraw the post immediately.
Your question about why these two funds and not others are my questions also.
Yes, write-downs lessen the tax bill. But if you feel the risk from disorderly insolvencies is a greater risk to you government's finances then it makes sense to force write downs.
I agree on the foreclosures, and also on the need for re-pricing of assets. But if the funds and banks just WON'T re-price their assets what choice is there but to do it for them? Brutal, but what choice?
I agree – we do want and must have our money back now. Except that much of it has gone – gone to the bond buyers in return for the cash to bail out the banks. That money we cannot easily get back, nor get out of those contracts save by debt repudiation.
Dire, dangerous but in the end may be our last resort.
As I say, if I have miss-understood this, please let me know.
Oops. Sorry . Forgot the link. If I had a penny for every time I've done that – I could bail out the banks.
Here it is.
http://sfgate.bloomberg.com/SFChronicle/Story?docId=1376-L222IS07SXKY-6
Hello again, yes the article seems to say exactly that which you say it does.
But, it is very strange, and the jouralist should have asked more questions.
For instance; nobody gets any poorer or richer from a write-down alone.
It's only a proposal, and there is no sense in the premature reaction.
I guess the proposal has the function of a scape-goat, a pretext for hiding real difficulties.
Your 'glimmer of hope' looks faded now: The proposal says in the same article to be withdrawn with apologies for distress caused to investors.
I missed that it had been withdrawn already.
Faded indeed.
Twas only the smallest of glimmers and extinguished now.