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International mobilization to restore Glass-Steagall
Support Glass-Steagall: Open Letter to U.S. Congress from Daisuke Kotegawa
10 June 2013
The following letter was written this weekend by Japanese ex-official, Daisuke Kotegawa to members of the U.S. House and Senate urging them to pass Glass-Steagall through both houses of Congress. To Congressman (Senator) My name is Daisuke KOTEGAWA, currently the research director of the CANON Institute for Global Studies in Tokyo and a former representative of the Government of Japan at the Board of the International Monetary Fund. As a bureaucrat of the Ministry of Finance in the Government of Japan, I was in charge of the financial crisis in Japan in late 1990s. Attached is my presentation at the Schiller Institute in Germany which emphasizes the importance of the reintroduction of Glass-Steagall Act to get out of ongoing world economic crisis. I hope that your efforts in your Congress will save this world. Sincerely yours, Daisuke Kotegawa Mr. Kotegawa addressing the April 13-14 Schiller Institute Conference in Frankfurt, Germany As a director of the Ministry of Finance, I was in charge of liquidations of major financial institutions in Japan in 1997 and 1998, such as Yamaichi Securities, LTCB and NCB. That time, we succeeded in containing the gigantic scale of liquidations and avoiding Japan becoming an epicenter of world economic crisis. During the weekend when we liquidated these institutions, we unwound all cross border transactions including huge amount of derivatives. Such unwinding was not done by authorities of the United States and the United Kingdom at the liquidation of Lehman Brothers, which triggered world economic crisis. Despite our success, however, we were heavily criticized by national public and international opinion leaders who are struggling now to deal with crisis including Larry Summers. As a result we went through investigation of public prosecutors and I lost several friends who worked with me; some were arrested and others committed suicide, along with board members of major financial institutions which were liquidated. It is quite strange to see that those Japanese who worked for avoiding world economic crisis were punished, while nobody that are responsible, have been punished. In the meantime, as a survivor of the crisis, it is easy for me to predict what will happen next in the ongoing crisis; a de-ja-vu of ten years ago. Why people in Europe are suffering from economic crisis? The answer is simple. Bubble since early 2000s exploded with the Lehman shock. What is an economic bubble then? An economic bubble occurs when people dream that prosperity would last forever. In the case of Japan, people dreamed that prices of real estate and stocks in Japan would rise forever. What happened in western world? Crisis now was triggered by the completion of the abolition of Glass-Steagall Act in 1999. This policy change enabled investment banks to mobilize deposits collected by commercial banks as the source of their dealings; which sometimes could be called as gambling. It also set the stage whereby loss incurred by dealings of investment banks can be covered by injection of public money in order to save financial system. Amount of dealings of investment banks including derivative transaction skyrocketed. False, virtual and imaginary profits or commissions as a result of these dealings brought investment bankers extraordinary incomes and bonuses. Investment banks in Wall Street, such as Goldman Sachs, Merrill Lynch, Morgan Stanley and JP Morgan, and in City of London, such as Barclays, Royal Bank of Scotland, Lloyds, enjoyed unprecedented level of profits. Some institutions outside Anglo-Saxon countries, which were partly Americanized, such as Deutsche Bank and UBS, followed the suits. The other imaginary bonanza was experienced in Europe during the same period. This should be called EU membership bubble. Newcomers to EU and sometimes candidates of membership enjoyed extraordinary capital inflows, which led them to steep increase of wages and prices of real estate. The membership standards were sometimes maneuvered artificially, using derivatives proposed by investment banks. These bubbles collapsed in 2008 with the liquidation of Lehman Brothers. In the USA and in Europe, they seem to have learned nothing from the crisis in the late 1990s — that is, how we should try to maintain confidence in the financial markets, and the difference between the regular kind of economic slowdown, and the crisis that was caused by the financial crash. Examples are abundant starting crisis in Mexico in 1994, followed by Asian crisis and financial crisis in Japan which I was in charge. As I have mentioned again and again, repeatedly, there are two steps countries must do to deal with an economic crash caused by the financial crash: Firstly, countries must restore confidence in their financial system and then, secondly, by way of fiscal stimulus, countries must revitalize real economy. In order to restore confidence in financial system, countries must create three kinds of safety nets, that is, 1. Establish a mechanism to bail out financial institutions; 2. Establish a system by which you can log the non-performing loans; and 3. Establish a system whereby you can guarantee interbank lending, by the government. These safety nets were established in transatlantic region in October 2008 after Lehman shock. But, then, order of actions to be put these system was completely wrong. Let me present you an ideal way that should have been done. 1. A rigid examination of balance sheets by public authority based upon mark-to-market accounting would calculate an honest amount of non-performing loans. 2. Such calculation must have disclosed unprecedented amount of non-performing loans, because there were no quoted prices for securitized products after the Lehman shock/ 3. Most of major banks in Western world, investment banks in particular, would become vastly insolvent as a result. 4. Total amount of public injection required to bail out those banks must be calculated honestly and be disclosed to the public. This process is essential to inform the market the magnitude of the problem and, once bail-out will be done, restore confidence by showing that all amounts of non-performing loans was covered by injection of public money and surviving banks are clean. 5. Most of investment banks must be liquidated because the amount of public money is beyond the level which can be covered by public money. 6. Managers and board members of failing institution which needed public money have to be prosecuted for their responsibility of making the use of taxpayers money indispensable to save financial system. In the case of the United States and European countries those kinds of very neutral, dependable financial examinations by the banking authorities have never been conducted, and the actual outcome of those examinations has never been made public. Instead a fake examination called stress-test was introduced to distract attention. Bankers have been window dressing their balance sheets, which should have been condemned as insolvent long time ago. Without that kind of transparency, it is impossible to persuade all the participants in the market that all the financial institutions’ balance sheets have been cleared. This is an anecdote. When we suffered from financial crisis in Japan, we received many advices and preaching from prominent economist in the USA, including Larry Summers. They can be summarized as follows; 1. Banks should be hard-landed, that is to say should be liquidated. 2. Stick to mark-to-market accounting to calculate the amount of non-performing loans 3. Do not stop short sales 4. Do not bail out banks. As you can easily recall, after Lehman shocks, these advices were never observed by themselves. If most of investment banks had been liquidated after Lehman shock, European government bonds would have not been under the attack of short sales and credit default swap by investment banks. It was those investment banks that attacked European government bonds in view of high profits in a short run as a desperate struggle to get out of insolvency. Such attack brought about tightening up budget despite the fact that, after financial crisis, government is required to put in fiscal stimulus because households and private corporations have to squeeze their balance sheets for repaying their over-borrowing. As mentioned above, however, activating such fiscal stimulus has been made difficult by the attack of investment banks on government bonds. European authorities have not prosecuted banks responsibilities who caused this crisis and gained the most. Instead they have recommended completely wrong policy of fiscal austerity and put the burden on ordinary taxpayers. This is a ridiculous situation and, if such stupid policy will continue, Europe will have to suffer from two lost decades, I am afraid. Taking this opportunity, I would like to comment on a stupid, crazy policy taken by EU authorities regarding Cyprus. It is of the utmost importance to guarantee a certain level of the amount of deposits for all depositors in the country. So, in most countries now, we have a certain ceiling under which all deposits would be protected during any kind of financial crisis. But what happened in Cyprus was completely opposite to this policy — they have been trying to introduce a system whereby depositors are also asked to lose part of their deposits. This will completely destroy the confidence in the financial system, and thereby aggravate the financial crisis. So, I can’t understand why people in Brussels should use this kind of stupid policy, which in everybody’s eyes, at a glance, is a completely wrong policy to maintain the confidence in the financial system. Let me elaborate why. As you know, a bank can operate as long as it maintains 10% of its total assets as equity. The essence of banking business is this creation of confidence. Take an example whereby a bank has total assets of 100 million. It does not need to keep 100 million available for payment, because, as long as confidence in the system is sustained, depositors would not demand to pay their deposits back in an instance. The difference of 100 million and the requirement of 10 million can be used as the source of lending in addition to the equity held by the bank. The policy taken by EU completely destroys such confidence. It violates basic notion how a bank can exist and operate. I hope that this kind of policy, which has been advised by Brussels, will be reversed as soon as possible, because this will have tremendous contagion effects to other countries in question. It is of vital need now that Glass-Steagall Act be reinstated and investment banks be liquidated as soon as possible to save Europe. This is a war against filthy bankers who gained a lot of money from gamble and let taxpayers pay their loss, while they avoided paying tax using tax havens, and financial authorities who are their allies. This is a war for diligent workers who work hard, save small amount of money in deposits in commercial banks and honestly pay their tax. That’s my view. Thank you. |