While
fears of a default by a European state compounded by anticipation of a
significant slowdown in the US and Europe send stock markets plunging and put
many players on their guard, it is astounding to observe the discrepancy that
exists between the real economy and the financial world. Though it may be true
that financiers are able to anticipate the markets (sometimes even anticipating
possible anticipation…), sudden movements and increased volatility are
heightened by regulations that are no longer fit for today’s purpose.
In
our opinion, three measures are now needed to try to steer back on a course to
reason financial players who are running adrift, helmless and without a
captain.
1. Modifying the rules for valuing financial
assets. The implementation of mark-to-market for all financial players
(whether long-term investors or speculators) automatically leads them to reduce
their exposure to risk even if they were prepared to maintain a position over
the long term. Regulators need to urgently come up with different rules for
investors, proposing that mark-to-market not be used to value products that
investors/banks/insurers might hold for 15/20 years, which would enable them
not to fund these loans, now considered questionable, at a level of 50/80%.
Such a measure was applied in the 1990s to enable European banks to carry
losses on property financing. It could be rapidly implemented for Greece, de
facto reducing the burden of non-repayment and giving Greece the time to pay
back its debt.
2. Prohibiting securities lending/borrowing by
depositaries without the knowledge of the owner of the securities. For all non-speculative market
players, this mechanism which is supposed to promote liquidity is these days
like catching a falling knife. It encourages the creation of increasingly more
complex products and growing speculation since the majority of depositary banks
lend their securities without even alerting investors... The proliferation of
financial products and accelerated rates of volatility could be significantly
lowered if the securities lending/borrowing activity was considerably reduced.
This measure would be strongly opposed by banks/market players who thrive on
the proliferation of complex products; however it is now indispensable if we
want to return to responsible financing.
3. ECB buyback from marketplaces. The
privatisation and proliferation of marketplaces on the pretext of promoting
competition now distorts play since many transactions take place outside of the
market with zero transparency. The nationalisation of European marketplaces and
the requirement that transactions take place on these markets would enable the
ECB to regulate the market and to monitor in particular when transactions
become abnormal (in fast trading for example).
However,
these necessary measures would probably lead regulators to separate the various
financial activities in order to ensure that commercial banks are not put at
risk by speculation, that management companies have the ability to refuse
investment bank products and that investment banks have the necessary equity
capital to ensure their sustainability in the event of an incident affecting
their trading strategies.
Confronted
with the current financial crisis, it is a matter of urgency for the financial
system to return to its primary function: serving the needs of the real
economy, a function completely forgotten by the major players whose main
preoccupation today is preserving the model that has ensured them 30 years of
growth.
Olivier de Guerre
PhiTrust
Active Investors
Investor and Shareholder
41 rue Boissy d'Anglas
75008 - Paris
Tel.: +33 1 55 35 07 55 - Fax: +33 1 55
35 07 50
