Tuesday, July 10, 2012

548 Banks recycle Trade Deficit into Asset Boom, which leads to Great Financial Crisis

Banks recycle Trade Deficit into Asset Boom, which leads to Great
Financial Crisis

(1) If they could vote, Chinese would elect Bo Xilai, and go to war -
Singapore Think Tank
(2) China boom is over, but Japan is expanding into Southeast Asia
(3) Greek PM warns of society's collapse, as anti-austerity rage mounts
(4) TRADE DEFICIT is the issue: Romney & Obama ignore Outsourcing threat
to Jobs
(5) Australia banks say they can't pass on Rate Cuts because they rely
on Wholesale Funding
(6) Wholesale Funding probably means "foreign deposits" from Surplus
(7) Wholesale funding "one of the major determinants of bank
vulnerability during the 2007-2010 financial crisis"
(8) The Dark Side of Bank Wholesale Funding - IMF & BIS

(1) If they could vote, Chinese would elect Bo Xilai, and go to war -
Singapore Think Tank

From: John Craig <john.cpds@gmail.com> Date: Fri, 28 Sep 2012 15:00:46 +1000
Subject: Friction between China and Japan: The End of the Asian 'Century'?
To: "Greg Sheridan (sheridang@theaustralian.com.au)" <john.cpds@gmail.com>

Greg Sheridan


Beijing worrying many neighbours


The Australian September 27, 2012 12:00AM

SOMETHING very strange is happening at the moment in the East China Sea
and in the South China Sea, and Australia should be taking serious
notice of these developments. In both areas Beijing is pushing disputed
Chinese territorial claims with an aggressiveness that is remarkable and
hasn't been seen for many a year.

In the East China Sea, Beijing claims sovereignty over the Senkaku
Islands, which the Chinese call the Diaoyu, which for many decades have
been administered by Japan. In the South China Sea, Beijing claims
sovereignty over virtually the whole of the sea, right down to the
coastal waters of many of the nations with which it has territorial
disputes, such as The Philippines, Vietnam and Malaysia.

What is strange is the aggression with which Beijing is now pushing
these claims. It is using commercial and sometimes coastguard-style
fleets to violate the territorial waters of the nations with which it
has disputes. In the case of Japan, Beijing recently licensed a series
of violent anti-Japanese protests in which protesters hurled abuse and
projectiles at Japanese diplomatic establishments in China and smashed
Japanese businesses and motor vehicles.

The South China Sea dispute is bad enough. But the dispute with Japan is
exceptionally dangerous. In this, China is confronting a nation whose
present military strength is comparable with China's, which has a giant
economy, and which is an ally in good standing of the US. Indeed,
although the US has been working over time to defuse these tensions, and
although it has no formal position on the merits of the various
territorial disputes themselves, Washington is quite clear that if push
comes to shove it is backing its ally, Japan.

Washington is in an interesting phase of its China policy, the third
distinct phase since Barack Obama became President. The first phase, in
2009, was to try to charm Beijing and offer it every possible concession
- the President not meeting the Dalai Lama, the Secretary of State not
raising human rights, and so on. This secured absolutely nothing in
return from Beijing. Instead, throughout 2010, Beijing engaged in a
great deal of bullying of virtually all its neighbours, getting into
disputes with Japan, India, Vietnam, Australia and a number of other
nations. The regional nations involved all cleaved much closer to the US.

Washington worked hard to reassure its friends and allies of its staying
power and to tell Beijing that it should pull back on the regional bully
stuff. It became much more hard-headed in its dealings with Beijing.
This culminated in the second phase of policy, the Obama "pivot" towards
Asia. This pivot was welcomed by everyone in Asia except China and North
Korea (and, apparently, Malcolm Fraser, though he doesn't really count).

Now, in the third stage, the Obama administration is at pains to
reassure China that its balancing of Chinese power is matched by
positive engagement with China, that it welcomes China's greater role in
the world, and that, in Hillary Clinton's words, the Asia-Pacific is big
enough for everyone.

What is truly perplexing is not Washington's behaviour, which is clear
enough and perfectly modest and responsible, but Beijing's motives.

I have spent the past week in Singapore, which is an excellent place to
inquire about China because it has some of the finest think tanks and
scholars on China and the region and it is, in a sense, disinterested.
It backs neither Western nor Chinese triumphalism. Apart from being an
astonishing success story in itself, Singapore has for many decades been
a source of serious geo-strategic insight.

At the Institute of Southeast Asian Studies, Rodolfo Severino told me
that it would be a mistake to push China towards legal adjudication or
even clarification of its claims in the South China Sea. This would
serve only to harden China's claims.

At the East Asian Institute, Zheng Yongnian provided me with a guide to
Chinese nationalism and all the different players who now figure in that
phenomenon. The professor also concluded that Beijing's recent moves had
to be seen against the leadership transition now under way in China.

He described how the Chinese government had done a lot to fan Chinese
nationalism, but that this nationalism now was an independent force
within Chinese society that its leaders had to reckon with.

One of his most depressing conclusions was that greater democracy in
China today would probably lead to greater chaos and violence, and
potentially even international conflict.

China's economic development so far, remarkable as it is, is not unique.
It follows roughly the pattern of other East Asian economic
modernisation. What is different, however, is the lack of social
development in China to accompany that economic development. Other East
Asian societies also engaged in government-led, at times quite ruthless,
capitalist development. But, according to Zheng, they also engaged in
great social reform, providing a degree of welfare and social
infrastructure such as health and education, as well as a growing
substance in citizenship, which China has not emulated.

Thus Chinese feel inherently insecure. There is no welfare net. The vast
majority of Chinese are impoverished workers or impoverished rural folk.
They don't respect Chinese government institutions, and here corruption
is a key.

In Zheng's view, if China were a democracy, the ousted Chongqing
Communist Party boss Bo Xilai would be elected president. This is
because he had a populist style and engaged in direct income redistribution.

Much of what Bo did was illegal, but there is not a big tradition of
respect for the law under communist rule in China.

In this sober analysis, both leftism and nationalism have deep social
roots in China, but liberalism is a thing for intellectuals and elites.

The biggest task, in Zheng's view, is that China develop its middle
class. "The government is strong, the people are weak," the good
professor says. "The government is rich, the people are poor.

"The Chinese middle class does not have institutional protection. It has
to pay for everything, education, healthcare."

Although he says he is overall an optimist, Zheng feels "there is a real
risk that China could experience a period of social chaos. There is a
race between reform and social uprising.

"The most important thing is to grow the middle class. Democracy today
would mean more violence, more nationalism. How to manage
democratisation is the key task. Nationalism could kill democracy."

And most of the dynamics that govern these matters are internal to
China. American policy is not the worry here. Chinese politics is the worry.


Thanks to John Craig for sending this article. John's comments are at

John Craig to Greg Sheridan:

Re: Beijing worrying many neighbours, The Australian, 27/9/12

[...] In this environment China (and also Japan) are facing serious
risks. These risks include, but go beyond, the issues mentioned by the
Singaporean experts that your article outlined. A key point is that the
rapid economic advancement that has been achieved in East Asia
(including Singapore) has involved neo-Confucian systems of
socio-political-economy which are anything but ‘capitalistic’ (ie they
are not driven by a search for profit by independent enterprises – but
rather by a state-driven goal of boosting the economic power of ethnic
communities). The financial institutions in affected economies would
suffer crises (like the Asian financial crisis of 1997) unless domestic
demand is suppressed to the point that current account surpluses make it
unnecessary to borrow in capitalistic / profit-focused financial
markets. The resulting demand deficits (‘savings gluts’) are
macroeconomically unsustainable, and compensating for this has been one
significant factor in the heavy debts that their trading partners have
incurred and also in causing the GFC (see Impacting the Global Economy).

Speculations about China’s predicament now that this strategy is
becoming unsustainable are outlined in Heading for a Crash or a
Meltdown? The latter suggests that China’s problem is not just financial
and economic, but that for various reasons the neo-Confucian system of
socio-political-economy that has been the core of its rapidly developing
economy since the late 1970s is an obstacle to developing solutions.
Japan, it can be noted, is also approaching a financial crisis – because
it is on the point of incurring current account deficits and thus having
to borrow externally with a non-capitalistic financial system. ...

Comment (Peter M.): Japan is still a major Capital Exporter. See the
following article "Business leaders in call to ride wave of Japan's
Southeast Asia expansion". Study the graph, which shows that Japanese
investment in Australia dwarfs that of China.

(2) China boom is over, but Japan is expanding into Southeast Asia


Business leaders in call to ride wave of Japan's Southeast Asia expansion

BY: RICK WALLACE From: The Australian October 08, 2012 12:00AM

Source: The Australian

THE key to Australia's growth after the China boom lies in joining
Japan's wave of expansion in fast-growing emerging markets, according to
key Japanese and Australian business leaders.

However, Australian companies and employees needed to abandon their
reluctance to embrace Asia if they hoped to boost their profits and
careers, executives from ANZ, Japanese food and beverage giant Kirin and
PricewaterhouseCooprs told The Australian.

The call for a fresh focus on Japan-related opportunities comes as
business leaders in both countries prepared to mark the 50th anniversary
of the industry body linking the two countries.

Julia Gillard and former Treasury secretary Ken Henry will address the
Australia Japan Business Co-operation Committee conference in Sydney
today, to be chaired by AJBCC chairman Rod Eddington and his Japanese
counterpart, Nippon Steel president Akio Mimura.

A report published by PwC, to be introduced at the conference by
Tokyo-based PwC partner Jason Hayes, shows the sheer scale of Japan's
expansion into Southeast Asia, right on Australia's doorstep, and
highlights the potential gains of tie-ups with Japanese firms.

The Revitalising Corporate Japan report shows that Japan's merger and
acquisitions activity rose by 42 per cent in Asia from 2010 to 2011 and
is now growing at an increasingly rapid pace.

Mr Hayes, who head PwC's Japan practice, said Japan was offering
Australia its best chance to be a serious player in Asia instead of
simply being a supplier of raw commodities.

"Australia needs to move quickly to take advantage and not remain
fixated on China as the only game in town because I think ignoring Japan
may be to our detriment," Mr Hayes said.

Leading Japanese firms such as Kirin, Uniqlo, convenience store operator
Lawson and other corporate giants are spearheading a new push into
China, Thailand, Vietnam, India, Indonesia and now Burma as growth
opportunities in Japan dry up.

ANZ Japan chief Peter Davis said tapping into this expansion would help
Australian companies boost their engagement in the region and would be
vitally important for Australia's growth.

This expansion would provide Australian companies and suppliers with
low-risk opportunities to join forces with Japanese industry and boost
their sales in the epicentre of global growth, Mr Davis said.

"Japanese investment into Asia has doubled for each of the last three
years," Mr Davis said.

"That's a huge influence on all of the Asian region.

"The penetration of Japan into Thailand, Vietnam and China is far, far
deeper than Australia's has been. They might have had some difficulties,
but they have had far more longevity in those markets and have a lot
more experience than Australian companies do," Mr Davis added.

"The whole focus in Australia is on investment from China, when indeed
the more significant investment over the last 10 years has been from
Japan, and the Japan rate of investment has been increasing rapidly in
the last three years."

Food and beverage giant Kirin, which owns Lion (formerly Lion Nathan and
National Foods) in Australia and now sees 30 per cent of its profits
come from Australasia, is the most successful example of this dual
Japanese-Australian approach.

Senior executives from the company said it was deploying Australian
staff, systems and products as it expanded in emerging markets in Asia
and Latin America.

Kirin global head of strategy Ryosuke Mizouchi said that it was
sometimes easier for Kirin to find talent in its Australian business
than in Japan. Australian companies and employees were natural partners
for Japanese firms bent on expansion, he said.

"From the cultural point of view, and also a governance and common-sense
point of view, I think Australia and Japan can work together pretty
well," Mr Mizouchi said.

"Instead of getting there all by ourselves, going together with
Australian companies could give us an advantage. By combining that
diversity of strengths I think we should become better at dealing with
the new challenges in emerging markets."

Mr Mizouchi said people in Japan underestimated the importance of the
relationship between Japan and Australia, although soon more companies
would grasp Australia's potential as a market and as a springboard to
other parts of the world.

The head of Kirin in Singapore, Hiroshi Fujikawa, said Lion's Australian
management had great human relations and strategic planning skills,
while Japanese staff remained world class in terms of product
development, production techniques and research and development.

"If we could combine those strengths together, I think there are a lot
of opportunities for us to jointly develop the emerging markets," Mr
Fujikawa said.

But ANZ's Mr Davis said many Australian companies remained too nervous
about expanding into Asia after a series of high-profile failures in
recent decades.

"For many companies, it's still just a toe in the water," Mr Davis said.
"There's a lack of significant strategic commitment. If they are to see
the growth levels available, they are going to need to see a portion of
their revenues coming from this part of the world."

Mr Davis said ANZ's Japan operation were vital to the bank achieving its
goal of sourcing 25-30 per cent of revenue from outside Australia and
New Zealand within five years.

(3) Greek PM warns of society's collapse, as anti-austerity rage mounts


Greek PM warns of society's collapse

by Helena Smith in Athens

Sydney Morning Herald

October 07 2012

GREEK society is at risk of disintegrating unless the country's
near-empty public coffers receive urgent financial aid, its Prime
Minister has warned.

Almost three years after the eruption of Europe's debt drama in Athens,
the economic crisis engulfing the nation had become so severe that
democracy itself was now imperilled, Antonis Samaras said.

''Greek democracy stands before what is perhaps its greatest
challenge,'' Mr Samaras told German business daily Handelsblatt in an
interview published hours before the announcement in Berlin that
Chancellor Angela Merkel will fly to Athens this week.

Resorting to highly unusual language for a man who chooses words
carefully, Mr Samaras evoked the rise of the neo-Nazi Golden Dawn party
to highlight the threat that Greece faces, explaining society ''is
threatened by growing unemployment, as happened to Germany at the end of
the Weimar Republic''.

''Citizens know that this government is Greece's last chance,'' said Mr
Samaras, who has repeatedly appealed for international lenders at the
European Union and International Monetary Fund to relax the onerous
conditions of the bailout accords propping up the Greek economy.

Mounting anti-austerity rage before a new round of sweeping
EU-IMF-mandated austerity measures appears to have caught the government
off-guard, with officials voicing fears over the ability of Mr Samaras'
coalition to survive.

The unprecedented storming of Greece's Defence Ministry by hundreds of
protesting dock workers on Thursday has especially unnerved officials.
On Friday, Mr Samaras lashed out at ''those who don't understand the
meaning of law and order''.

''The government is waging a battle on all fronts for the nation's
credibility and its future so that the sacrifices made by Greeks aren't
lost,'' he said, referring to spending cuts and tax increases that have
sparked record levels of poverty and unemployment.

Many officials fear the conservative-led alliance is being pushed too
far in negotiations over the latest ?13.5 billion ($A17.1 billion)
package of austerity measures that is the price of further aid. Growing
speculation Greece will be kept waiting until after the US elections in
November before it receives its next disbursement of aid has added to
the pressure.

On Friday, EU officials made clear it was unlikely a decision would be
made on the payment - vital to kick-starting the cash-starved economy -
at an EU summit on October 18.

Mr Samaras emphasised that Greek cash reserves would run dry by the end
of November.

''The key is liquidity,'' he said. ''That is why the next credit tranche
is so important for us.'' GUARDIAN

(4) TRADE DEFICIT is the issue: Romney & Obama ignore Outsourcing threat
to Jobs


The Day After the Election, What Happens To Sensata-Style Workers?

Sunday, 30 September 2012 10:18 By Dave Johnson, Campaign for America's
Future | News Analysis

Sensata Workers - More Jobs Going To China

Two weeks ago I wrote about the workers at the Sensata factory, You
Should Know About Sensata - It's What The Election Is About,

Workers facing outsourcing by Bain Capital are camping outside the
Sensata factory in Freeport, Ill. They are asking Mitt Romney to show up
and help save their jobs. They say they will stay camped there until
Romney shows up and stands with them – or with Bain.

Mitt Romney can use this to show us if he wants to be president of
the whole United States, or just president of, by and for the
outsourcing 1 percenters.

All Mitt has to do is show up and help these workers. He says he is not
part of Bain, and wants to be President of all of the country. Mitt
Romney can can use this to show us if he wants to be president of the
whole United States, or just president of, by and for the outsourcing 1
percenters. He could - and should - do that.

The Bain Workers Bus Tour

Workers from Sensata have left Missouri and are stopping in are stopping
in Iowa, Wisconsin, Michigan, Ohio, Pennsylvania, Virginia, Florida, the
presidential debate in Hempstead, NY -- and are (eventually) heading
toward Boston where both Bain Capital and the Romney headquarters are
located. They want Romney and Bain to ask them not to send their jobs to
China. You can read about their progress at BainWorkerBus.com.

The thing is, these workers might be at this plant, run by this company,
but there are millions of workers - millions - in the same boat. Or
whose jobs have left or are leaving on the same boat, anyway.

The Chart That Says It All

It is more than just these Sensata workers -- they are a symbol of the
damage that our terrible "trade" policies have done and are doing to our
country. A company can just close a factory here, open it there, bring
the same stuff back to sell in the same stores here and call that
"trade?" And they can get tax breaks for doing that? They can use the
threat of doing that to bust unions and cut our wages? Polls show that
We, the People overwhelmingly want this changed, yet it doesn't change.

Look at the chart in this post at Think Progress: After Nearly A Decade
Of Declines, Manufacturing Jobs Begin Rebound. It shows what happened to
our manufacturing base literally immediately after George 'W' Bush took
office. Seriously. Look at this chart and see if you can just guess why
we have such a terrible economy today.

During the Bush administration we lost more than 50,000 factories and at
least 6 million manufacturing jobs directly to China. (Never mind the
effect on the supply chains, the grocery and clothing stores where those
people shopped, etc... The foreclosures, the bankruptcies, the
misery...) We have a huge trade deficit with China -- money that we send
to China and then complain that there is not enough money to do things here.

Imagine how our economy would be doing if we had actual trade with
China, where we buy things from them and they buy just as many things
from us?

After The Election

After the election the country is going to be diverted into a battle
over how much more damage we can do to ourselves. Instead of addressing
the trade deficit -- the cause of our budget and jobs deficit -- our
plutocrat-funded elites are going to play a Shock Doctrine game of
whipping up hysteria about the budget deficit. They are going to terrify
the public about "the fiscal cliff" that occurs when the Bush tax cuts
expire, and when the deal that put off the hostage-taking over the debt
ceiling cuts the military budget, and then the safety net.

Instead of addressing jobs and inequality and wage stagnation and trade
and climate and crumbling infrastructure and manufacturing policy and,
and, and, they are going to all try to outdo each other offering ways to
cut the things that We, the People do for each other -- all to keep
taxes low for the super-wealthy. Some call this the "Grand Bargain"
where they offer up austerity -- working so well in Europe -- instead of
jobs. ...

(5) Australia banks say they can't pass on Rate Cuts because they rely
on Wholesale Funding


It's hard for big banks to pass cuts on: ANZ

BY: MITCHELL BINGEMANN From: The Australian October 08, 2012 12:00AM

A "RELENTLESS" increase in the cost of funding has crimped the ability
of the nation's big banks to pass on cuts to consumers, ANZ's Australian
chief, Phil Chronican, says.

Mr Chronican said that banks were still being subjected to rising
funding costs even as they continued to shift their reliance to
deposits, from wholesale funding.

"The increased cost of wholesale funding has just been relentless --
it's gone up and up, although it has stabilised this year -- but even
so, we're refinancing this year borrowings that were made three, four
and five years ago at materially lower costs and the cost of retail
deposits has gone up materially," Mr Chronican told the ABC's Inside
Business program.

"So, the overall position is that our interest margins on our domestic
Australian business have hardly moved over that period."

Last week, the Reserve Bank of Australia reduced the official cash rate
by 25 basis points to a three-year low of 3.25 per cent.

So far the Commonwealth Bank and NAB have passed on 20 basis points of
the cut to borrowers, and Westpac 18 basis points.

ANZ is yet to respond but is expected to announce its review of interest
rates on Friday.

In a sign that the bank might not pass on the entirety of the RBA cut to
borrowers, Mr Chronican said yesterday that interest rate reductions
were not the only way to encourage growth in the economy. ...

(6) Wholesale Funding probably means "foreign deposits" from Surplus

Peter Myers, October 8, 2012

Bank lending is a triangular process: it involves the sale of an asset
from a Seller to a Buyer, funded by a Bank loan. The Bank creates money,
in the form of a new credit balance in a new account of the Buyer
(no-one else has any less: this is NEW money). This money is then
transferred to the Seller, who deposits it in the Bank.

Loans create Deposits; the new deposit (a liability of the Bank) matches
the loan (an asset of the Bank). Even though the Bank created the new
money ex nihilo, its deposits must still match its loans.

The problem is that in the current asset boom, the Buyer only deposits
PART of the money in the Bank. With the rest, he buys an imported 4WD
and caravan (trailer) or goes on an overseas holiday. Our Current
Account Deficit is made up of a myriad such purchases.

To compensate for the shortfall in deposits, the Bank borrows from
"Wholesale" markets. But since Germany and the Asia Model countries are
following economic policies which generate Trade Surpluses, and the
Anglo-American countries are mired in Post-Industrial economics,
generating Trade Deficits, it follows that the Surplus countries must be
investing their profits in the Trade Deficit countries.

The interest and dividend surplus that results is called the Income
Surplus. The Trade Surplus plus the Income Surplus comprise the Current
Account Surplus. Running such surpluses is a way of accumulating Capital
- which is supposedly what Capitalism is all about, Monopoly on a
world-wide scale.

Wholesale Funding probably means "foreign deposits" from Trade (Current
Account) Surplus countries.

That is, rather than taking their Surplus home, which would push up
their currencies and threaten exports, the Surplus countries keep the
dollars here, investing them and loaning them to us. All that changes is
the name on each dollar bill - ie its ownership.

Creditor countries are recycling their Surplus by loaning it to our
banks. After all, the banks are government-guaranteed. Or, at least, the
government would fall if the banks go under. So what better place to put
your money?

The IMF & BIS published a paper called The Dark Side of Bank Wholesale
Funding, which pointed out the role of Wholesale Funding in causing the
Great Financial Crisis (see

If the Banks were denied access to Wholesale Funding, they would not
have been able to lend so much money. This means that asset prices would
have stayed lower: there would have been much less Boom and Bust. Houses
would have been more affordable, and evictions and repossessions much
less common.

But such denial would have to apply to ALL the Banks and non-Bank
lending institutions in a country; otherwise, those with access to
Wholesale Funding would have done the deals and overtaken the others.
Nor could any loopholes be allowed, eg other kinds of foreign loans.
There's no substitute for the Referee's hand.

(7) Wholesale funding "one of the major determinants of bank
vulnerability during the 2007-2010 financial crisis"


Wholesale funding is a method that banks use in addition to core demand
deposits to finance operations and manage risk. Wholesale funding
sources include, but are not limited to, Federal funds, public funds
(such as state and local municipalities), U.S. Federal Home Loan Bank
advances, the U.S. Federal Reserve's primary credit program, foreign
deposits, brokered deposits, and deposits obtained through the Internet
or CD listing services.[1]


Although core deposits continue to be a key liability funding source,
many insured depository institutions have experienced difficulty
attracting core deposits and are increasingly looking to wholesale
funding sources to satisfy funding and liability management needs.
[edit]Liquidity risk

Wholesale funding providers are generally sensitive to changes in the
credit risk profile of the institutions to which they provide these
funds and to the interest rate environment. For instance, such providers
closely track the institution's financial condition and may be likely to
curtail such funding if other investment opportunities offer more
attractive interest rates. As a result, an institution may experience
liquidity problems due to lack of wholesale funding availability when
needed. Academic research suggests that the use of wholesale funding was
one of the major determinants of bank vulnerability during the 2007-2010
financial crisis.[2]

[edit]See also

Interbank lending market

1 Federal Deposit Insurance Corporation. "Management Manual of
Examination Policies (Sec 6.1: Liquity and Funds Management)".
2 "The dark side of bank wholesale funding". Research Papers in
Economics. Retrieved 2012-05-02.

... This page was last modified on 11 May 2012 at 00:04.

(8) The Dark Side of Bank Wholesale Funding - IMF & BIS


The Dark Side of Bank Wholesale Funding

Rocco Huang
Philadelphia Fed

Lev Ratnovski
Bank of England

May 08

{p. 2} Introduction

{p. 3} Bank Funding

• Retail deposits
–Insured, passive -> Effectively long-term
–Limited supply -> Unused investment opportunities

• Short-term wholesale funds

–Rolled over frequently
–Other fin institutions, non-fin corps, state/local authorities,
foreign entities, money market mutual funds...
–Repo’s, Interbank deposits, Fed Funds,
large denomination CDs, commercial papers...

{p.4} Short Short-Term Wholesale Funds

• “Bright side”

–Fully exploit investment opportunities
–Market discipline (Calomiris, 1999)
–Reduced liquidity risks (Goodfriend & King, 1998)

• “Dark side ”–Aggressive lending + compromised credit quality
–Limited market discipline
–Sudden stops + inefficient liquidations

• Reconcile?

{p. 5} Wholesale funds in past bank failures

-> Act on publicly-available information
-> Run and escape unscathed

• Continental Illinois

• Northern Rock

• Bear Stearns

{p. 6} Wholesale funds in past bank failures

1. Continental Illinois

–Exposure to energy sector and Penn Square
–Wholesale depositors withdrew
–The Fed kept lending to prop up the bank
–Wholesale depositors did not experience loss or delay
–Retail depositors (and ultimately FDIC) held the bag

2. Northern Rock

3. Bear Stearns

{p. 7} Wholesale funds in past bank failures

1. Continental Illinois

2. Northern Rock

–U.S. subprimemortgage crisis
–Wholesale financiers refuse to renew funding
–After a while, NR had to turn to BoE for assistance
• Did not stop exit by wholesale funds
– Then retail deposit run finally started
–Short-term wholesale investors did not lose a penny

3. Bear Stearns

{p. 8} Wholesale funds in past bank failures

1. Continental Illinois

2. Northern Rock

3. Bear Stearns

–Worries about CDO market and Bear Stearns’solvency
–Secured lenders (~$32 billion) refused to continue funding
–Liquidity pool (~18 billion) sold off to fund their exits
–Long-term securities (~$80 billion) and customer funds (net ~ $60
billion) bailed out by JP Morgan and the Fed
–Note: customer funds are insured by SIPC up to $500,000

{p.9} Wholesale funds in past bank failures

1. Continental Illinois
2. Northern Rock
3. Bear Stearns

> Act on publiclyAct publicly-available information
–Cheap but noisy
–Both “correct”and “incorrect”liquidations

> Run and escape unscathed
–Effective seniority due to first-come first-served
–Central bank support also helps finance exit

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