BIS Warns That Dreck Still on Bank Balance Sheet Means More Bailouts

The Bank of International Settlements, mindful of the importance of its role, would never say anything as crass as the translation I offered in the headline. But that is nevertheless a message in its newly-released annual report. From the Guardian (hat tip reader DoctoRx):

Taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks, the world’s leading central bankers warn today.

Despite months of co-ordinated action around the globe to stabilise the banking system, hidden perils still lurk in the world’s financial institutions according to the Basle-based Bank of International Settlements.

“Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks,” the BIS says in its annual report. “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses.”…

As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS’s assessment will carry weight with governments. It says: “The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.”

It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. “Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage,” it says.

This is not over till the fat lady sings.

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8 comments

  1. bb

    "Taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks, the world's leading central bankers warn today."

    what does this mean? if governments have acted quicker, the cost to taxpayers would have been next to nothing?
    wait! didn't banks burn the hands of a few SWFs and a certain saudi billionaire? who else could have been goosed so the taxpayer is spared? the martians or other extraterrestrials maybe?

    the assumption that plentiful money can prevent any bubble burst is just ludicrous.

  2. Anonymous Jones

    I had the same thought as bb. I expect stupidity. I expect lies. I expect bias. But to say "failed to act quickly enough to remove toxic assets," seriously, as bb said, what does that mean? Remove them at what price? Remove them to what entity?

    I'm not some crazy practitioner of undue penance, but this kind of statement is the epitome of denying that our actions have consequences.

  3. RTD

    I don't understand why this would be a surprise to anyone. It was just three and a half months ago that the market was in a state of absolute panic over these "toxic assets". The PPIP was announced a couple of weeks later, but it never got off the ground. Meanwhile, home prices continue to fall and both foreclosures and unemployment continue to rise. What did people THINK happened to all of those "toxic assets"? Just because the stock market rose 30-40 percent over the past 3 months (largely due to the realization that the gov't wouldn't let Citi and BAC fail under any circumstances) doesn't mean the problem magically went away.

  4. Mara

    The problem is that no toxic assets were removed (being the illegal and useless pieces of dreck that they are), but were paid for with money which was created out of thin air–which now will dilute the rest of our funds via the inevitable inflation. From my perspective, the solution would be to declare these derivatives null and void, i.e. CDS where you have no underlying interest. Of course, the BIS (or some of its dear partners) may be a party to some of these winning positions, so wouldn't think to try and kill such a potential Golden Goose. Better to preach the sanctity of contracts and starve the plebs.

    My question to the BIS is: did you think that creating another $6 quadrillion overnight to settle all these bullsh!t derivatives would really solve this problem? Maybe if their intent was to enslave and/or kill off the population.

  5. peteryoung

    Please repeat:
    The debt-money system is broke.
    It is broken.
    It is insolvent.
    First, imagine if you will that the savior from global economic conflagration portends the IMF-WB-BIS triangle.
    Here's the BIS trope on how to deal with systemic financial instability.

    Its conclusion is the need for a cooperative effort towards macro-related actions that are capable of establishing counter-cyclical structures to the system.
    Or, something like that.

    In case you haven't noticed, fractional-reserve banking and debt-money are the essence of pro-cyclical financial structures, requiring EVERY DOLLAR to come into existence as a debt.

    Mr. Taleb has been openly acknowledging that his Black Swan epistle is investment-risk peepeedicking when compared with what he finds are the REAL problems with the overall economic and the money system.

    Taleb is awakened to the problem, but not the solution.

    We cannot have a system with SO MUCH DEBT, he says.
    We need more "equity" in the money system.
    So, either a little financial alchemy, or a switch to debt-free money.
    Those are the choices.

    If you read How Debt Money Goes Broke, and you think about Paulson locking these guys down and twisting their arms to accept an increase in "excess reserves", it paints a picture that can not be denied for long.
    The Chicago Plan for Monetary Reform.
    Dust it off and begin again.

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