‘Let banks fall’
Governments should stop giving financial support to suffering banks. Let the banks topple over and let corporations find the money they need for investments elsewhere, for instance by issuing bonds. Banks can then focus on providing basic financial services, such as transaction services.
These are the views of Aaron Brown, US based fund manager and financial risk expert, according to a recent article in Dutch newspaper Het Financieele Dagblad.
He regrets the fact that share prices and debts have risen to such high levels, and blames a failing supervision and the unrelenting drive of investors and savers to seek higher profits.
Learn the hard way
At the same time, Brown doesn’t see the rushed government support operations, where billions of dollars are injected into corporations, as the answer. This will eventually lead to a new crisis, because it cripples the self-correcting abilities of the economy. Best is to let banks learn the hard & painful way that risky investments come, well, at a risk.
According to Brown it is time for governments and supervisors to stop thinking so conservatively and start thinking outside the box. Investors that for years on end speculated on ever increasing stock rates were never dealt with. “They were left completely unhindered.” On the other hand, people that realized the stock rates couldn’t continue rising indefinitely and started speculating on stock drops were met with rules and regulations.
Brown
Brown works for AQR Capital Management, an investment management firm currently managing about 20 billion dollars. Before that, he worked as a risk manager for banks such as Citigroup, Morgan Stanley and the Rabobank. He also taught as a professor in risk management at the universities of Fordham and Yeshiva. Brown authored the bestseller The pokerface of Wall Street.
What do you think?
Do you agree that government support is not the answer and banks should learn the hard way to balance the risk on their investments? And do you think banks should limit themselves to providing basic financial services?
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June 23rd, 2009 at 12:10 am
Yes, i agree. Main issue: a bank should have a reservation of approxially 6-7% of their yearly bruto profits. This wil implicated that after 10 years there is a reservation of 60%-70% which can be used in times like this. The goverment and the national bank shout have a controlling function, and also make “terms of conditions” when to use the money, or, a part of it. Max. use 25% up to 45% of the reservation.In this way the bank can make a “cash bound” to their clients.
When a bank is getting in deeper problems they should lent more of their reservation to the consumers (clients) in the market. By that wy the will have a high interest on their money in times like this, with teh security that they can still lent money.