Editor's Note: We are republishing this story from Dec. 15, 2010, in light of Julian Assange's 60 Minutes interview that aired last night.
This was likely missed by many readers in December as it moved off our front page quickly. The importance is obvious for those (ourselves and many other blogs) who have made the case since 2008 that we were, and still are, facing a solvency crisis. A tsunami of Fed liquidity and FASB accounting black magic can only do so much. The global banking pig is already wearing lipstick and full make-up and it's still pretty ugly, despite Bernanke's best efforts at printing and pretending his way to future bliss and a spot in the Keynesian hall of fame.
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Original Story from Dec. 15, 2010
We have just come across a Wikileaks U.S. Embassy cable concerning a March 17, 2008 meeting with Central Bank of England Governor Mervyn King.
Wikileaks U.S. Embassy Cable
Monday, 17 March 2008, 18:27
C O N F I D E N T I A L LONDON 000797
EO 12958 DECL: 03/17/2018
TAGS ECON, EFIN, UK
SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY
SAYS BANK OF ENGLAND GOVERNOR
Classified By: AMB RTUTTLE, reasons 1.4 (b) and (d)
1. Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle. King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there's a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the U.S., UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks.
Systemic Insolvency Is Now The Problem
2. King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. He said it is hard to look at the big four UK banks (Royal Bank of Scotland, Barclays, HSBC, and Lloyds TSB) and not think they need more capital. A coordinated effort among central banks and finance ministers may be needed to develop a plan to recapitalize the banking system.
Unblocking Illiquid Mortgage-Backed Securities
3. King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs. He said we need to find an auction system where banks could move paper they want to sell without fear of stigma that the market views selling at a low price as a sign that a bank is in trouble. King said, however, he did not yet know how to structure such an auction and that further dialogue was needed. Kimmitt acknowledged the need to find ways to unblock these markets and said we should remain in touch bilaterally as well as in the G-7, the Financial Stability Forum, and the central banks.
A Possible Approach To Recapitalization
4. The G-7 is almost dysfunctional on an economic level, said King. Key economies are not included, especially those that have large and growing pools of capital. King said that a new international group was needed to address the issue. It could be a temporary group, and he suggested that perhaps the central banks and finance ministers of the U.S., the UK, and Switzerland could coordinate discussions with other countries that have large pools of capital, including sovereign wealth funds, about recycling dollars to recapitalize banks. King said Japan might not be included because it has little to offer. King noted, though that including the Japanese might force their hand in finally marking to market impaired assets. Kimmitt said that he was cautious about starting new groups in the international financial community because of the inevitable debate around whom to include.
5. The King proposals were not casual ideas developed in the course of luncheon conversation. It was clear that his principal objective in the meeting was to outline his outside-the-box thinking for Kimmitt. King included very few details about his proposals and was content to present broad concepts, thereby planting the seeds for future discussion. END COMMENT.
6. Participants: USG: Ambassador Robert Tuttle; Deputy Secretary Kimmitt; Eric Meyer, Office Director for Europe;
SIPDIS Robert Saliterman, Spokesman, International Affairs, U.S. Treasury; Warren Chane, ECONOFF. UK: Mervyn King, Governor, Bank of England; Chris Salmon, Private Secretary.
7. Deputy Secretary Kimmitt has cleared this message.
More coverage of this story...
BoE Sought Global Bank Bailout in 2008
The head of the Bank of England had sought to set up a group with the United States, Switzerland and Japan to recapitalize major global banks six months before the financial crisis engulfed them, U.S. diplomatic cables show.
Mervyn King plotted a secret bailout of the banking system six months before Gordon Brown decided to take action. The Bank of England governor told U.S. officials in March 2008 that ‘a co-ordinated effort to possibly recapitalise the global banking system’ was needed to save it from collapse, according to documents released by WikiLeaks. Mr Brown did not come up with his master plan to tackle the financial crisis until September 2008 following the collapse of U.S. investment bank Lehman Brothers. The delay raises a major question over his claims that he was the brains behind the bailout and had ‘saved the world’.
LONDON (AP) — U.S. diplomats say Bank of England Governor Mervyn King suggested that Britain, the U.S., Switzerland and possibly Japan bail out the global banking system in March 2008 — some six months before the financial crisis peaked.
In a U.S. embassy cable published by The Guardian on Tuesday, King is reported as telling U.S. ambassador to Britain Robert Tuttle and U.S. Treasury deputy secretary Robert Kimitt that the four countries might form "a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks."
King suggested the new group would override the "dysfunctional" Group of Seven industrialized nations. But Kimmitt expressed caution about starting new groups because of inclusion debates.
DB here. It's not even close, really. The 4 largest banks are insolvent many times over. Their puny and massively over-leveraged capital bases would not just be wiped out, they would be turned into negative multiples of the original equity.
Then take the next step and understand that these same criminally fraudulent and insolvent institutions, are paying their executives $144 billion in bonuses this year, based on false accounting that was endorsed by Congress and jammed down the throats of FASB in June of 2009.
I wrote about the criminal insolvency of banks here.
Bill Black has made the case recently here...
- William Black With Dylan Ratigan: "There Is Bank Fraud Everywhere And BERNANKE Is Leading The Cover-Up," PLUS Part 2 Of Seize Bank Of America
This is a must see...
More detail on this clip is here...