Against the tide: From villains to saviours: the big bank scam

The plan of the big US money centre banks
to set up a fund to buy mortgage-backed
securities from hedge funds and bank conduits
aims to relieve the log jam in credit markets.
But it is also a scam to get the banks out of a
mess of their own creation.
 
It might work and free up credit markets.
But it won’t reverse the contraction of global
liquidity and the rising cost of capital in the
longer term. We are set for slower liquidity
growth, providing little room for further asset
price inflation (whether in equities, emerging
markets or commodities).

“Put more than one capitalist in a room and
what you get is not competition, but conspiracy
to defraud the public” – to paraphrase Adam
Smith. The latest attempt by the world’s mega
banks is a neat example of such a situation.
The very villains who created the mess have
now turned saints who want to save the
world from a folly that is of their own making.
They are putting together a $75 billion fund,
the Orwellian-sounding master (!) liquidity
enhancement conduit, or Mlec.

Mlec might relieve the log jam of lousy bank
assets in special purpose vehicles and the overleveraged
state of the asset-backed commercial
paper market. But the real purpose is to save
the skins of the very idiots who, together with
irresponsible central bankers, danced the
wild fandango and now hope to live to dance
another day.

In reality, their heads should roll – and so
they already have at Merrill Lynch and Citi.
So should the heads of central bankers who
wittered on about not being able to control
leverage-financial asset bubbles. That is, until
after they retire and write hypocritical I-toldyou-
so books. Of course, like the cigar-smoking
fat men in the smoke-filled rooms of Marxist
caricature, many of these global captains
of finance will probably give themselves
absolution and survive to sin again.

The Mlec structure they propose is smart
in two ways and this might ensure its
success. First, it creates a mechanism for the
transmission of liquidity being provided by
central banks to the smaller SPVs and other
leveraged players that it could not reach until
now.

These small players didn’t have any access
to the discount window or to free money being
thrown at markets by central banks. They relied
in normal times on banks and debt markets for
finance. Once the markets dried up, so did their
source of funding.