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Fixing the crisis facing bank sector
In the Year of Darkness, 2009, the rulers of this planet devised the ultimate plan. They would reshape the future by changing the past& They created The Aggregator.
- Financial Times
- Published: 23:19 January 21, 2009
In the Year of Darkness, 2009, the rulers of this planet devised the ultimate plan. They would reshape the future by changing the past& They created The Aggregator.
Drawing inspiration from the Terminator, which felt no pity, no pain and no fear, may be no bad thing for the imperilled financial system. Unfortunately, an aggregator bank - a suggested vehicle to buy troubled real-estate assets from ailing banks - would lack the cyborg's unstoppable might.
In theory, a government-financed entity could roam around the banking system absorbing toxic assets, the losses on which have already hobbled the banks while the prospect of further falls in value deters lending. The reality, though, is that, like the original troubled asset relief programme, the Aggregator will founder on some fundamental questions: what goes into the vehicle, how would those assets be managed and, most crucially, how would they be priced?
The latter is the Aggregator's greatest weakness. The suggestion that the Aggregator would pay "fair value" for these assets would inevitably involve the government paying above the market value. That is because forcing banks to recognise further substantial losses on these assets will erode any remaining investor faith in their solvency. If, when liquidity returns, the government's estimate of "fair value" proves to be high, taxpayers lose.
But the government should not continue shovelling subsidies into the banking system without demanding greater control. Some form of nationalisation of banks with the largest exposure to these assets would provide much-needed finality to the authorities'slow-drip rescue efforts and alleviate the need to value assets when separating the good from the bad. Shareholders (for starters) - who have, in any case, seen their investments largely wiped out - will be left with nothing. So be it. If the authorities persist with a failed policy of incrementalism, one thing is certain: they'll be back.
In good times, governments have the luxury of fretting about an ageing population. In bad times, they start to worry about a vanishing one. Singapore, the beneficiary of a population that grew by almost a fifth during the economy's recent fairytale years of high growth and low inflation, is undergoing a sharp reversal. Almost two-thirds of 796,000 new positions since 2003 were filled by foreigners, mostly in construction and financial services. Of them, 200,000 will leave by 2010, reckons Credit Suisse, causing the population to fall 3.3 per cent to 4.68 million.
As harsh as that looks, the prediction implies that the economy merely gives up the jobs it created in 2008 and a portion of the new jobs in 2007. The reality could be far worse. Many expatriates took their leave during a shallow Sars-related recession in 2003, causing population growth briefly to dip below zero. This time, companies will cut deeper. Fourth-quarter gross domestic product contracted 12.5 per cent - the worst on record. The electronics assembly sector, accounting for two-fifths of non-oil exports, has been hard hit.
Data from CEIC, an Asian research house, suggest that unlike in previous slumps, labour productivity had already been declining long before this recession - as early as 2007. Employers may therefore turn a deaf ear to entreaties from the National Wages Council to freeze or cut salaries. The withdrawal of highly paid financial services workers will hurt output, as well as all the satellite industries - domestic helpers, taxi drivers and restaurateurs - that depend on them. UBS, part-owned by the Singaporean government, may be the only big foreign bank not shrinking with impunity.
Today's budget should be a masterclass in pump-priming; the government has already changed a law allowing it to tap into managed reserves as a source of fiscal stimulus. But stopping the reverse diaspora looks beyond it.
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