International Bankruptcy For Banks Discussed at Zürich Conference; LaRouche Responds

September 20, 2009 (LPAC)— A proposal for a bankruptcy reorganization of multinational banks, is covered on the Saturday front page of the financial daily Neue Zürcher Zeitung. Under the headline "Bank Regulation Has Its Traps/Global Bankruptcy Procedure Discussed," the article reports on a high-level conference organized by the Europa Institut of the Zürich University on Sept. 18, where an international bankruptcy solution was put forward by a Swiss regulator, Eva Hüpkes. Mrs. Hüpkes is member of the Swiss Federal Banking Commission and is one of the three members on the organizing board of the conference. Mrs. Hüpkes is also a member of the Financial Stability Board, which includes central bankers, regulators and government representatives of member countries.

"A global bank insolvency procedure for large banks would greatly reduce systemic risks. But such an insolvency procedure is not feasible in the short term. This was made clear in a seminar at Zürich University," says the article. The bankruptcy procedure is not politically feasible, Mrs. Hüpkes says, because "governments" are against.

In reporting Hüpkes' intervention, the NZZ writes: "The worst problem first: Worldwide many banks are considered too significant to die — therefore they enjoy de facto a state guarantee. The 'solution' is in principle at hand: a global agreement on the orderly liquidation of large international banks, in order to avoid having each new failure threaten a systemic crisis. This could make guarantees for big banks superfluous. But such a global agreement remains unrealistic in the short term, because of a lack of will by national governments.

"According to the latest FSB report, in insolvency cases, national solutions will be applied, like it or not. According to Hüpkes, it should be made easier to disentangle large banks, than the case today: From a national standpoint, it should be possible to somehow separate 'systemically relevant' parts — by this, the payment system as well as the domestic savings and credits system are meant — from the rest of the crisis-struck institution. Several opinions, however, yesterday showed that the concretization of this 'somehow' faces legal, political, and economic obstacles. One model would be that banks hit by a crisis should first sell systemically relevant parts — either to the private sector or to the state.

"However, until such models become reality, the main burden for the bureaucratic regulation of banks lies in liquidity and capital provisions.... Representatives of banking and research sectors, however, warned against excessive expectations from capital provisions (if the crisis is large enough, even a thicker capital cover would not be sufficient) and against the danger of new wrong incentives (if the capital quota is too high, the banks could be pushed into taking more risks)."

The conference also dismissed the bonuses issue as "secondary" and as a "sidebar issue."

A major editorial in the NZZ, published on the same page as the remainder of the article, discusses whether international banks have learned from the crisis and have gone back to a business-oriented model. The conclusion is: No, if you look at Goldman Sachs. GS is making profits today using the same schemes as in the past. Things are different in Switzerland, where the two large banks, partly by their own decision, partly forced by regulators, have gone back to a business model more oriented to activities generated by its clientele.

LAROUCHE RESPONDS:

Lyndon LaRouche responded to this report as follows.

There is no competent purpose in such proposals, unless an equivalent of the Glass-Steagall standard is the premise for such action.

1. Presently ongoing general breakdown-crisis of all among the world monetarist systems has been ongoing, with qualitatively worsening, cancerous-like effects, since September 2007. The "bail-outs," in the order no less than tens of trillions of dollars in the U.S. alone, have presently eliminated any possible reform within the framework of the existing international monetarist system.

2. The only effective remedy depends upon replacing the existing monetary systems, as systems, entirely. We must proceed by using a U.S. model of a Glass-Steagall standard, putting banks under in-bankruptcy protection by national governments, and supplying long-term, state-backed credit under a credit system, rather than a monetary system, while destroying the dubious forms of monetarist speculation. (e.g., reversing the Euro "reform.")

3. The operative intent must be to establish a global, fixed-exchange-rate system among what may be classed as viable nation-states' banking, while eradicating all remnants of a floating-exchange-rate monetarist system, for its replacement by a global fixed-exchange-rate credit system, rather than a Keynesian or comparable form of monetarist system. Such a reform, if backed by a consortium of participating major powers as the principal sponsors, would restart the world economy and responsible forms of national and international banking under a fixed-exchange-rate credit system shared among responsible nations, as supplemented by good-sense adaptation to the economies of other nations.

4. The feasibility of such an undertaking depends upon a general agreement to replace a monetary system with a credit system of participating national credit-systems, while closing down monetarist systems.

5. A related problem is located in the lunacy of globalization. The monetization associated with a globalized system, has destroyed the ability of nations to buffer their national economic security behind the protection of national sovereignties as a protective border against international avalanches of panic. This change to a kind of New Tower of Babel, has introduced new, previously non-existent source of danger for the world economy under the crisis-conditions of today. Since such creatures as former PM Tony Blair, while in abundance, are not edible, protectionist remedies among perfectly sovereign nation-states is the only actual source of remedies.

6. One can not base an economic reform on orderly reconciliations among venereal diseases or drug lords. The monetarist system of today is a venereal disease, and a drug on the world. First cancel it in bankruptcy reform, and create a new, Glass-Steagall-modelled, protectionist form of international credit system. Then, quickly set the wheels of credit back in motion under the auspices of the new credit system which replaces the unsalvageable monetarist system.

— Lyndon.