Are European lawmakers panicking?

Since Monday, we have had a series of announcements and water-testing:

• Last night, Germany's financial regulator decided to ban naked short-selling of certain euro-zone debt offerings, certain credit default swaps and 10 financial stocks (some discussion this morning about a European wide ban on shorting bank stocks)
• May 18th EU finance ministers passed the draft text of a new Alternative Investment Fund Managers Directive to the European Parliament(text to be finalized in July)
• There are insisting talks of a tax levy on all financial transactions 
• Legislators want to increase custodians’ liability for the assets they look after

All this looks uncoordinated and adds a sense of panicky decisions. From memory, the ban on short-selling for financial stocks during the 2008 meltdown, did not stop bank stocks falling but for a very short period of time. And the market may wonder whether the German authorities know something we don't. In short, European authorities by their actions for the past couple of months are just adding volatility, fear, suspicion, incertitude and overall lack of confidence.
Anyway, it will lead to over-regulation and costs without changing anything to the roots of the problem; it seems that many politicians in Europe are becoming convinced that there is a coordinated plot to kill the euro: pitiful.
They even don't understand that all these measure are going to trigger a flow of funds and skills out of the EU to more friendly places in Europe, Asia, Middle East and the US.
Barring European investors buying offshore funds will not improve the euro-zone economy and its imbalances, the root of the problem. It will only reduce their return on investment. In an open world, there is no point to become introverted, it is the surest receipt for a prolonged sub-average growth and durable impoverishment of Europeans. More regulation in Europe will lead to more outflow.
To European individual investors, don't worry, open accounts outside the EU and be free to invest in the best of breed that suits your risk/return profile.
In the meantime, the euro will continue falling (I wonder whether the European politicians, beside the rhetoric, are not doing everything possible to push the euro down).
Look at European stocks that will benefit from the euro fall and continue to remain clear from banking stocks. Precious metal have probably entered a consolidation phase and will provide entry points during the summer.
Finally, I have not changed my stance: Greece will default whatever it will be called.
Source:
The Economist: The AIFM directive - An other European mess

http://www.economist.com/business-finance/displaystory.cfm?story_id=16156357

Bloomberg: Germany to Ban Naked Short-Selling at Midnight

http://www.bloomberg.com/apps/news?pid=20601010&sid=ao6BsFTFFiKc

Bloomberg: Swaps Soar on Germany’s ‘Act of Desperation’: Credit Markets

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajxxDiFsQuto&pos=2

New regulation in the financial sector: US and Europe

I reproduce in extenso RGE Monitor's Newsletter regarding new proposed financial sector's regulation in the US and Europe:

"As decided at the latest G20 meeting, authorities around the world are devising micro- and macro-prudential reforms in order to strengthen the resilience not only of single financial institutions but of the entire financial system by extending oversight to all important financial institutions, products, and activities.

The United States

In the U.S., the Obama administration introduced its widely anticipated regulatory reform proposal on June 17. Its five main components include:

1. The establishment of the Fed as systemic risk regulator and supervisor of “too-big-to-fail” institutions in return for Treasury permission requirement for extraordinary liquidity programs. The plan proposes creation of a “Council of Regulators” (formerly the President’s Working Group) chaired by Treasury but with advisory powers only;
2. The creation for the first time of a regulatory regime for all financial derivatives, as well as a requirement that the originator, sponsor or broker of a securitized vehicle retain “skin in the game” – i.e., a financial interest of at least 5% in its performance;
3. The creation of a new Consumer Financial Protection Agency with rules against predatory lending and transparency standards at the retail level;
4. A new resolution mechanism that allows for the orderly divestiture of any non-bank financial holding company whose failure might threaten the stability of the financial system, including investment banks, large hedge funds and major insurers such as AIG;
5. Adopting a leadership role in the effort to improve and coordinate global regulation and supervision.

The main points of contention in Congress are likely to include the scope of the new regulatory powers conveyed to the Federal Reserve in view of the arguably minimal use it made of its already existing regulatory powers in the run-up to the crisis. Equally controversial are the need and the powers of the new Consumer Financial Protection Agency. Furthermore, some policymakers and market participants are equally worried about the potentially stifling effect of too much regulation on financial innovation.

The European Union and Switzerland

Two days after the Obama plan’s introduction, on June 19, EU leaders reached agreement on a new framework for coordinated (rather than unified at EU-level) macro- and micro-prudential supervision along the lines proposed by Jacques de Larosiere and endorsed by the European Commission on June 9. Regarding the macro-prudential authority, the new European Systematic Risk Council (ESRC) will comprise EU central bank governors and will most likely be chaired by the ECB president. The Council will issue financial stability risk warnings and macro-prudential recommendations for action to supervisors and monitor their implementation. In contrast to the U.S. Federal Reserve, however, EU central bankers will not oversee and regulate systemic cross-border institutions directly. ECB vice president Lorenzo Bini Smaghi, in a June 19 speech, deplored this discrepancy.

The EU agreement also establishes a new micro-prudential authority at EU-level. In particular, the European System of Financial Supervisors, comprising three new European Supervisory Authorities, will help ensure consistency of national supervision and strengthen oversight of cross border entities. This will be accomplished by setting up supervisory colleges and establishing “a European single rule book applicable to all financial institutions in the Single Market.”

Importantly, the new EU-level supervisory authority will have binding decision powers in the case of disagreement between the home and host state supervisors, including within colleges of supervisors. EurActiv cites the following example: “If Italian and Polish supervisory authorities disagree regarding recapitalization of an Italian bank operating in Poland, for example, it would be the new EU-level authority that would settle the issue with binding decisions.” However, EU leaders are clear in their agreement that “decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of Member States.” This precludes any ex ante burden-sharing provision, a very controversial issue. As EurActiv explains: “Should a major financial institution fail, there will be no European competence to establish which countries will have to foot the bill and by what means. National interests are likely to prevail again on this issue.”

Up until now, then, an EU-wide resolution regime for cross-border banks remains unaddressed. While this is welcome news for Britain, which worked hard to confine any EU interference to a minimum, smaller EU countries as well as non-EU countries with large banking sectors have a problem.

Not by coincidence, Philipp Hildebrand, vice president of the Swiss National Bank, noted on a June 18 speech: "The lack of any clearly defined and internationally coordinated wind-down procedure contributes to a de facto obligation on the part of the state to provide assistance to these institutions." Small countries, in particular, will need to develop wind-down rules for crisis situations. One possible consideration, according to Hildebrand is to "split off those units of a bank that are important for the functioning of the economy and wind down the rest."

‘The rest,’ of course, might include foreign EU operations in need of domestic backing. In terms of pro-active regulatory interventions, the Swiss have been at the forefront with an overall leverage cap for their large institutions, an innovative ring-fencing framework for bad assets at UBS, and a risk-adjusted remuneration scheme at Credit Suisse (i.e., to pay top bankers based on the performance of the toxic waste they originated or acquired on behalf of the bank).

The UK established new resolution powers for national institutions in the Banking Act 2009 in the aftermath of Northern Rock. Large and complex financial institutions, however, still await a comprehensive solution, a fact noted in Mervyn King’s June 17 speech. He noted that “one important practical step would be to require any regulated bank itself to produce a plan for an orderly wind down of its activities,” i.e. akin to making a will. That kind of information would also be a valuable input for the new EU cross-border regulators.

Alternative Investment and Derivatives Regulation

In the U.S., the President’s plan requires all advisers to hedge funds and other private pools of capital, including private equity funds and venture capital funds whose assets under management exceed some modest threshold, to register with the SEC under the Investment Advisers Act and provide sufficient information for effective systemic risk supervision. Similarly, under the EU Commission draft regulation, managers of hedge funds and similar ‘alternative investment funds’ that handle at least €500m (€100m for those using borrowed money) would have to be registered in trade repositories and provide information about leverage. For now, the draft law applies only to managers, rather than funds, because many funds are based offshore. After three years, the rules will get tougher for funds based outside the EU. Although the EU plan was under heavy attack by the industry, the latest U.S. backing should put any hope of a reversal to self-regulation to rest.

New rules in major financial centers also require all financial derivatives to be brought under the regulatory umbrella. As part of the U.S. plan, standardized credit default swaps (CDS) and other over-the-counter (OTC) derivatives will be required to clear through a central counterparty and trade on exchanges and other transparent trading venues. More customized products will be required to register with a central registry that makes aggregate data available to the public and detailed positions for regulators. In the European framework, the UK secured that the new EU supervision will not cover clearing houses for derivatives – an important objective for the City of London who is global leader in terms of trading volumes of derivatives."

I will have only one comment (besides the fact that I do believe that State regulation will sow the seeds of further and even more damaging crises - just look at the increasing indebtedness of States in the West for the past 40 years): the emerging markets' banking system is in much better shape and does not need to increase regulation. Interesting...

Source:

RGE Monitor's Newsletter: June 24, 2009
http://www.rgemonitor.com/

G20 summit and today's markets

Markets reacted very positively to the G20 announcements (full press release). In essence:

• More regulation and overseeing of the finance industry, and for the first time hedge funds
• More money ($1.1 billion in all), in particular to the IMF that will treble its available resources to $750 billion and see its role strongly reinforced
• More transparency with tax havens

The rest is rhetoric and we will see how the details of today's decision develop. I however note that the reasons for the crisis (lax monetary policy, over indebtness, poor governance and incompetence) were in no way dealt with in the communiqué nor the solutions to cleanup banks balance sheets; this is left to each country to decide.

• More regulation is still vague on its form and implementation, whilst regulators should have done their job right in the first place: why should they be better in the future? I feel we need better regulation, not more regulation.

• More money? Fine, this will bring more well paid employment to Washington. At least it will leave governments not directly involved in baling-out some countries in Eastern Europe and elsewhere. After all, when one sees the disunity in Europe about the subject, it is politically easier and probably more efficient to let international organisations take care of it. Remember nevertheless that the $1.1 trillion (1) is not funded (2) will be spread over 2 years and (3) represents +/- 5% of all money committed by States individually and collectively as well by international organisations. However, this probably is the most interesting part of the summit.
  

• More transparency with tax heavens? Luckily the conference took place on the 2nd of April, but what a joke! The well-timed publication of the OECD progress report on tax heavens (dated April 2) would be quite fun if the matter was not serious. I could not find the Delaware and Nevada (US), St Barthelemy (France), Hong Kong and Macao (China), or Dubaï, and the list is far from exhaustive. Governance and equity should start with Head of States. True, politicians are back in force, and I am afraid, this is not good news for the future.

I am therefore not as enthusiastic as most commentators (where they waiting for the worse after postures played by some countries like France? - usual politician tactic to make sure they will show to their public (1) the conference is a success and (2) each of them is the victor). I however do not dismiss that the rally will continue for some time since the Conference did not end up in shamble.

Markets reacted positively to the summit, extending their early gain in Europe with Germany up +6.07% and the UK +4.28%. The Dow passed the 8,000 mark but did end up at 7,978, +2.79%.

The ECB surpised with a 25 b.p. rate cut to 1.25% vs a 50 b.p. the market was expecting. At the press conference, ECB president Jean-Claude Trichet did however say that the current level is "not the lowest limit", suggesting at least one more 25 b.p. cut.

The EUR rallied vigorously ending the day +1.7% at 1.3463.

Precious metals were under pressure with markets rallying and the G20 meeting announcing the sale of gold (limited amount however at approximately 5% of IMF holdings). Gold ended down 2.3% at 905.33/oz, off the lows of the day ($895.25/oz).