Finance ministers are gathering in Sussex today to prepare the ground for the G20 meeting in 3 weeks time. The meeting will be a defining moment of the financial crisis, the moment for agreement on global coordination to do 'whatever it takes' to speed up recovery and avoid 'Recessio' leading to 'Depression'. In the US and UK, as D&G both appreciate, there is a successfully-developing, closely-mirrored, three-pronged approach, asset-swap funding, capitalisation, and insurance guarantees. All three are mostly self-funding and therefore off-budget (of government tax and spend budgets). 
It may, in hindsight, appear to be turning out, and will turn out, more an example of 'soft-choices' than 'hard-choices'! "Who knew it would be so easy?"- I hear commentators sneer. Such sarcasm would be mistaken. The UK and US financial-crisis counter-measures have broken the mould of past responses. These solutions were not inevitable choices, even if they turn out to have probably been the best choices or only ones capable of working. Martin Wolf, of the FT, whose opinions are picked over round the globe, has written that G20 will fail because not enough will be done. Success requires that more than enough is done! 
This feigned shock-surprise can extend to apoplexy on the question of fair value accounting. Jamie Dimon, JPMC CEO, who is close to Bernanke and Geithner, says yes we all support fair value mark-to-market accounting (fiercely insisted upon by the IASB) but not to be applied where it has never applied and is inappropriate e.g. loans-accounting and inventory, by which he means in the 'banking book'. That seem intuitively ok, except that there are useful techniques of credit risk and market risk assessment by also pricing assets according to credit default spreads and collateralised debt prices. Yes, I know these are not entirely reflective of the underlying assets and have their own pricing dynamics internal to these derivative instruments. Fine, but thes references prices and spreads do provide a conservative reference price that can be triangulated against other valuations such as hold-to-maturity, over-the-cycle, cash-flow NPV and so on. Part of the compensation for foreign investors in illiquid US bonds has been the rise in the $ exchange rate. If the US fiscal stimulus kicks in early the US trade deficit will widen again and the $ will fall and oil very likely rise slightly. To avoid this the US is therefore pressing other countries to fiscally expand their economies at the same time. 
The US has reassured China that its $1.5tn of foreign reserves vested in US bonds is safe. Does that mean guaranteed and insured against dollar writedown losses or in Chinese Renimbi.Either way pressure will be on to change the accounting rules. The last thing the American public will stand for is a US large comnpensation payment to China. The analysts laptops hit the floor on this, in reaction to Fed Chairman Ben Bernanke's comments at the Council on Foreign Relations on Tuesday this week. During that speech, Bernanke weighed in on diluting "mark to market" accounting, by saying: "The ongoing move by those who set accounting standards toward requirements for improved disclosure and greater transparency is a positive development that deserves full support. However, determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle. As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro-cyclical effects without compromising the goals of disclosure and transparency. Indeed, work is underway on these issues through the Financial Stability Forum, and the results of that work may prove useful for U.S. policymakers." By this he also means the G20 Agenda for the London Conference. 
The first point, one that no-one else may say, though you can read it in many of my blogs here - governments (treasuries and central banks now as direct and indirect owners of $trillions of banking assets, as insurers and guarantors against credit risk losses, and as holders of banking assets, held as collateral against massive issuance of treasury bills and central bank cheques and as liabilities, deposits, to support capitalisation of banks' equity capital) have an extremely keen interest in avoiding having their financial balancing embarrassed by asset write-downs based only on defaults (unrealised losses) or credit default spreads and their impact on market prices. 
Ben Bernanke suggests "modifying" accounting rules might help the banking system. This we have heard before, but every time resisted by the IASB's Mr Tweedie, and indeed also resisted by many frontline financial market professionals (who may or may not also be short-sellers). Bernanke does not say it would help the Federal Reserve, US Treasury, FDIC, Bank of England, HM Treasury, ECB and many others. But, the strict legal fact is that majority or wholly-owned government assets and banks are technically outside regulatory supervision and strict financial accounting standards such as IAS and IFRS, though they have their own government accounting standards and are sensitive to any fear of cooking the books because what we do not want is loss of confidence in government finances - the credibility of which are already stretched toi breaking point among taxpayers. Therefore, have no fear, the government accounting will be accurate and clear, just not quarterly! 
What Bernanke did is shift towards the banking industry's apologists, as promoted by teams of highly-paid lobbyists, assorted policymaker advisers, and insider-pundits (including Steve Forbes, who wrote an Op-Ed in the WSJ) arguing that once you cut to the chase — the problem with the banks isn't all the junk-bond and illiquid securities and subprime loans and naive hubris. It's not that banks maxed-out to balloon their books for short-term bonus rewards, or by taking on excessive risk beyond what capital reserves could support, lending against banking assets and property collateral whose value was plunging or about to fall off the cliff, no. It is not that they failed to do economic analysis, chased fees as arrangers and underwriters without real-world risk assessments, or over-leveraged on 2% downpayments or on derivatives paper profits, or mis-sold junk to pension funds and foreignors, or were blind-sided by the ratings agencies, no. It's not that they funded cosy relationships with hedge funds, property developers, M&A and private equity deals, foolish commercial offices and shopping centres, pricing on unrealistic future cash-flows, unsecured consumer credit, and unaffordable mortgages for poor people, or chased market-share quantity instead of quality, also no. 
It was all those things and more. But, the defence is that wht was happening was ok when prices were real, normal, going places, not today's shockingly artificial, panic-driven, bank-run, sold-short, below-book-value prices. Today is not real. It is temporary and recovery will prove this and that is why recovery needs to come sooner than later. And they ask themselves without getting any cogent answers "how can asset prices diverge so far from cash-flow values?" What of course they will not accept is that reality is a long run trend, as most chartists know. But, of course we never travel directly along that trend only either side of it, zig-zagging. We zigged up for years further than anyone had a right to think was sustainable and we are now zagging badly.Some financiers/investment bankers don't care. Why should they if they've retired with plenty of loot, including even maybe MADOFF's earliest Ponzi clients? Legal suits may catch up with many including a few hundred inside-traders and senior ex-managements. But, their defence includes saying that regulators and economists didn't tell them what was up ahead and over the hill? Pull-eaze, sure we did, but you didn't want to listen and didn't want to know and didn't understand anyway, banking and economics qualifications not being a professional requirement for the right to trade and investment $ billions. But knowing the regulations was a requirement that in law could not be dodged by delegating to others, so they were delegated, and to middle-managers and junior analysts with no real power or status, not being bonus-earners. Canada has a story to tell here. Canadian banks have survived the credit crunch well largely by shifting their loans from households to industry ahead of time.
Bankers complain they have to mark their book of securities made up of bundled loans to current market prices, but these are 'bad' prices. Fair value by definition is the price obtained between illing buyer and willing seller, not that obtained by 'forced sales' in on-way markets. But, by the same token, they should not have been profitably priced by issuers based on one-way sellrs' markets either. Bankers say, but yes, ok, at least there was a market, but now it's not just that prices are today "artificially" low — but, when it comes to interbank credit and private buyers of securitised banking assets there is NO market, only the government as 'buyer of last resort' and for many smaller banks, any not of systemic importance, not even that, and for NBFIs (Non-Bank Financial Institutions, the 'shadow-banks' no lender of last resort). So, what's the solution?
Well, only we could avoid marking those assets to market, or use new super-NPV cash -low MODELS — which, show "real" value of those securities is higher — then the banking system would be fine and we can all go back to life as 'normal'. let's re-book it all into the banking book, or into 'bad-bank' work-out off the balance sheet, or, which might be quite good, go back to through-the-cycle values at least for everything that is not sub-investment grade or sub-prime and just treat asset values as separate to cash-flow p/l and risk assess this over the expected credit and economic cycles. Sounds good, except bamnkers don't have models and systems and historical data to do that, and not even central banks and ratings agencies have that in place either? 
We need to cook the books differently and make sure the result is edible. Like crisp and golden eggcup buns in standard shapes and sizes. The ingredients all exist but they need gathering together and someone has to write a new recipe and publish the cookbook. Sad fact for now is that banks and the authorities do not have the systems and forecast-accounting needed, the kitchen facilities, utensils and the cooks, to implement alternative yet real-world solutions. So they are stuck with trying to cross-correlate various partial systems, adopt wide margins of error, and hope the results can be tracked into the right ballpark to sell in the stands and resume the game, but even that take brainpower and computing power on the field that is in very short supply. [Please excuse the cake-mixing with sporting metaphors.]
Houston, there's a problem ... pretending something's worth more than the market will pay doesn't change capitalist reality! hence, governments step in to buy time and get well rewarded for doing so too! The problem isn't that there's NO market for these securities, after all they mostly contain all our loans and we're not all busted or jobless. The problem isn't that the prices are "artificially" low either. The problem isn't how we account for these assets. The problem is that the industry doesn't want to acknowledge that today's prices are the REAL prices or acknowledge that capitalism means losses not just profits, falls not just rises. Of course, profit and loss is a value that depends on the time over which it is measured, daily, weekly, monthly, quarterly, annually or 3, 5, 10, 20 years. There is no question that the world of finance shifted from slow-home-cooking to fast-food-eating-out.
The markets contain speculators and investors who have risk exposures and repayment obligations that is as diverse as all the timespans over which gains and losses may be accounted for. Shifting fair value to the long end, 'into the long grass' does not save those at the short end. They know that and have been exerting their own solutions, short-selling. But, short-sellers have had a magnificent bull-run inverse of everyone else's bear-run, and are satiated. So maybe now is the time to shift the goal-posts.There are bidders out there for discounted bonds... at the RIGHT strike-price. Vulture funds, hedge funds, private equity investors: They've all raised many $ billions to scoop up cheap real estate, inexpensive bundles of mortgage backed securities, and distressed buyout loans. But, they perhaps have waited, bluffing too long, and now government has stepped in, called 'all-in' bigger than any private sector players imagined could be possible, and scooped the pot.
But, the loser, the sellers, don't want to admit that reality. They balked at the buyer's bids. They're hanging on, hoping against hope that they won't have to go to where the market is. And the governments are figuring out ways to keep the other players in the game and so is happy to receive their IOUs. Policymakers are afraid of mass insolvencies. So Bernanke is returning to something akin to the early 1980s use of Regulatory Accounting Principles (RAP), which papered over insolvencies in the Savings & Loan industry. Papering over problems didn't mean they went away, only that they were amortised over longer periods of time. The unofficial nickname for RAP used to be Creative Regulatory Accounting Principles. Banks are not so lamed as S&Ls or are they? When all Japanese banks went insolvent in the early 1990s and all other SE Asian and Chinese banks in the late 1990s, they were allowed to work-out and government paid down loan loss provisions and now they are all back in rude good health. The S&Ls that were granted forbearance to grow their way out of insolvency. They increasingly gambled on new ventures, especially commercial real estate, to do so. Result: they eventually blew up anyway. That is not affordable by the economy in the case of big and medium-sized (if systemically important) banks.The strategy of slow-cooking, time-delay, to stall on hope has another more recent analog: what we saw in the early days of the housing market downturn. Sales volume dried up, while the supply of homes for sale surged.
The Anglo-Saxon approach of unlimited, 'whatever it takes', lender-of-last-resort response. The summit of the G20 leading advanced and emerging countries in London on April 2 2009 will fail. Its members are refusing to meet what Lawrence Summers, senior economic adviser to the US president Barack Obama, calls “the universal demand agenda”. In the US, the get mad spirit of Andrew Mellon, Treasury secretary to Herbert Hoover, remains alive for many, the opposite of JM Keynes revived again for both US and UK governments. His advice – lamented Hoover – was: “liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate”. Yet this foolish view is not animating US policy. The danger is not of doing nothing, but rather of doing too little. If such timidity fails, opponents will argue: these policies have failed. This will exacerbate confusion, making attempts at decisive action later on more difficult and ineffective. A major part of stimulus packages has to be alternative energy programmes. Energy, oil depletion, global warming, credit crunch, recession-depression, unemployment, various unstable regions where cross-border wars and civil wars are possible, nuclear arms race, many things appear recipes for disasters looking ahead. There are many voices saying this could be the 1930s again heading for the 1940s and it is time for the peace-securing EU to prove those credentials, and so on. Oil is half of world-trade by value even at the lower end of its price range. What happens if there there are absolute shortages. 
The right thing to do is to do more than enough. It will always be possible to withdraw stimulus a year or two hence. It will be far more difficult to make action effective if depression, both economic and social, takes hold. European countries appear to be resisting Treasury Secretary Tim Geithner's fresh calls to unleash more stimulus money and free up a half-trillion dollars to lend to struggling countries. This will lead to some tense discussion as Darling and Geithner (the Dolce & Grabbana of world recovery) and their finance officials lobby the ministers and officials from the other Group of 20 nations tonight and tomorrow. As the U.S. calls for more spending, more Eastern European countries also are coming to the table hat in hand, looking for financial help from the IMF, but does the rest of the world have the political spirit and global outlook to give? 
The FT reported, "We're just getting into the worst of the crisis in a global sense," said Ralph Bryant, a senior fellow at the Brookings Institution who specializes in international economic issues. "Many developing countries ... are just beginning to feel the really bad effects." But EU leaders recently rejected a request from Hungary for $241 billion in bailout money for the region, but the EBRD gave €24bn which supplied much of the current year's funding gap needs of the banks. 80% of Eastern Central Europe's banking is part of western banks and therefore their cross-border funding needs are mostly internal to banks that should be able to finance the obligations. "I think they're on a different page," Bryant said of U.S. and European financial officials. He said the calls by the U.S. for more stimulus money and international aid likely will stir controversy at the upcoming meetings. Geithner on Wednesday called for a tenfold increase in the size of an emergency fund the IMF uses to help countries in trouble -- to as much as $500 billion. He also endorsed the IMF's call for countries to enact stimulus packages worth, on average, 2 percent of their GDP. But in a report last week, the IMF said the U.S. was the only one of the world's seven rich industrial nations -G7- on track to meet that goal. "I think that the United States has actually taken a significant lead on a number of these steps that are required," President Obama said Wednesday, calling for "concerted action around the global to jumpstart the economy" at the G-20 meeting. Some European nations are reticent to take on the kind of treasury finaning the US has been generating and those in the Euro Area are unable to, the money market opeations being entirely the ECB's responsibility. European critics have charged that the US demand for increased stimulus spending is an effort to divert a European call for a major overhaul of financial regulations governing cross-border big banks especially. At a meeting this week finance ministers of the 27-nation European Union, officials said they were doing enough already to support the world economy. 
"Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking," Luxembourg Finance Minister Jean-Claude Juncker was quoted as saying after the meeting, with other thoughts on his mind as he next day declared that his state's banking secrecy would be ended, alongside Austria and Switzerland. German Finance Minister Peer Steinbrueck recently said finance ministers from the EU's 27 nations were not pleased at U.S. suggestions that Europe has not done enough to stimulate the global economy. Germany has been criticized for its reluctance to spend and stimulate its economy, Europe's largest, which is a long term accusation. Germany has for 20 years focused on export-led growth, which has not succeeded well except for 2005-2007. But whether to do domestic internal stimulus or not has been a sharp-edged internal political debate. Their stimulus package was about 1.5% of its GDP this fiscal year is taking fiscal prudence far to theologically. France's was about half that, but will now expand.
(Meanwhile, countries like China and Saudi Arabia h\ve or exceeded the United States' level of stimulus spending.) European nations apparently are preparing to sign on to at least a partial version of the calls by the US and UK for more IMF funding. The Times reported that the EU is considering lending between $75bn and $100bn towards the IMF doubling of its lending ability from $250bn to $500bn, but that is likely to need doubling again in the second half of 2009. Calls to boost the fund have mounted as developing countries hit hard by the global downturn, particularly in Eastern Europe, have so far tapped about $50bn from the IMF since November. 
It's unclear whether European nations will go as far as Geithner is suggesting in helping the IMF, however. Bryant said a number of European countries favour raising some of the money from China, but that's just a diversionery long-shot. Japan is committed to lending an additional $100bn. President Obama said, "Everybody understands that we're in this together. I think the G-20 countries are going to be seeking a lot of cooperation." Geithner said he would seek to build a "new consensus" on how to establish a "substantial and sustained program of support for recovery and growth."
