Lieber Jürgen und Geldfreunde,
Ihr müßt das über die Giralgeldschöpfung nicht lesen. Es handelt sich wirklich um eine unnütze Leerlaufdiskussion unter Amateuren, die soweit ich sehe, zum Glück auf Deutschland beschränkt ist und hier weitgehend auf die Gesellfritzen. Ich habe nur herzhaft lachen müssen, wie ich das gesehen habe und wollte Jürgen mal zeigen, auf was er sich einläßt, wenn er diese Diskussion weiter führen will. Der Trick mit der Giralgeldschöpfung ist zwar in der Tat erst vor etwa 50 Jahren aufgedeckt worden, obwohl er schon lange von den Banken praktiziert wurde, aber mittlerweile ist eindeutig geklärt, daß und wie er funktioniert, aber es ist eben immer noch etwas schwer zu verstehen. Ich werde gelegentlich mal im Kapitalismusforum darauf antworten und das auch hier reinstellen.
Ich hänge hier aber mal etwas viel wichtigeres dran, das ihr wirklich über Weihnachten mehrmals in Ruhe lesen solltet. Es handelt sich vielleicht um eines der wichtigsten Dokumente unserer Zeit und es dürfte wohl in die Geschichte eingehen, ähnlich vielleicht wie die amerikanische Unabhängigkeitserklärung. Vielleicht bringt es die Wende im größten Geldbetrug aller Zeiten Es handelt sich um die Klageschrift von Reg Howe und ihr werdet sehen, es ist wirklich Dynamit!
The Matisse
Table
Gold Anti-Trust Action Committee - GATA
Topic du Jour
The following Complaint was filed on December 7, 2000, in the United
States District Court for the District of Massachusetts, Boston,
Massachusetts. For publication here, the original document has been
converted to HTML format. While every effort has been made to
reproduce it exactly, the official version is the filed document.
UNITED STATES DISTRICT COURT
District of Massachusetts
Civil Action No.
00-CV-12485-RCL
______________________________________
)
Reginald H. Howe, )
Plaintiff, )
)
v. )
)
Bank for International Settlements, )
Alan Greenspan, )
William J. McDonough, )
J.P. Morgan & Co. Inc., )
Chase Manhattan Corp., )
Citigroup, Inc., )
Goldman Sachs Group, Inc., )
Deutsche Bank AG and )
Lawrence H. Summers, )
Secretary of the Treasury, )
Defendants. )
______________________________________)
COMPLAINT
I. Jurisdiction
1. This is a complaint for damages and injunctive relief
arising out of manipulative activities in the gold market
from 1994 to the present time orchestrated by government
officials acting outside the scope of their legal or
constitutional authority and certain large bullion banks
active in the over-the-counter gold derivatives markets and
on the Commodities Exchange ("COMEX") in New York.
The complaint alleges horizontal price fixing in violation of
Section 1 of the Sherman Act, securities fraud in violation of
Section 10(b) and Rule 10b-5 of the Securities Exchange Act
of 1934 ("Exchange Act"), common law fraud and breach of
fiduciary duty by the directors of the Bank for International
Settlements with regard to holders of its American issue, and
violations of the Constitution by federal officials acting
under color of federal law but wholly outside the scope of
their legal or constitutional authority. Subject matter
jurisdiction of the federal claims is based on 15 U.S.C. s.
15(a) (antitrust) and s. 78aa (violations of the Exchange
Act), 28 U.S.C. s. 1331 (federal question), s. 1337 (commerce
and antitrust) and s. 2201 (declaratory relief), and 12 U.S.C.
s. 632 (international banking and financial transactions).
Supplemental jurisdiction of the common law claims is
based on 28 U.S.C. s. 1367.
II. Parties, Venue and Standing
2. The plaintiff, Reginald H. Howe, is an American citizen,
residing currently and at all times material hereto at 49 Tyler
Road, Belmont, Massachusetts 02478. He is suing in his
individual capacity as: (1) the duly registered holder of six
shares of the American issue of the Bank for International
Settlements; and (2) the holder of 1200 depositary shares of
Gold-Denominated Preferred Stock, Series II, of
Freeport-McMoran Copper & Gold, Inc. The plaintiff is the
proprietor of The Golden Sextant (www.goldensextant.com),
an internationally recognized website containing
commentaries, essays and analyses relating to gold, and a
member of Golden Sextant Advisors LLC. The plaintiff has
engaged in research and analysis on gold derivatives, which
are instruments such as forward contracts, futures, options
and swaps whose value is tied to -- or derived from -- the
price of gold, and in this connection has uncovered
considerable evidence of their use to manipulate gold prices.
3. While the plaintiff has not assigned any part of this action
to others and retains full control thereof, he has received
and expects to continue to receive support, both financial
and informational, from the Gold Anti-Trust Action
Committee Inc. ("GATA"), a civil rights and educational
organization formed under Delaware law in January 1999 to
expose manipulation of the gold market by certain bullion
banks. The plaintiff was a contributor to GATA's study on
the gold market, Gold Derivative Banking Crisis, which is
posted at its website (www.gata.org) and has been
downloaded in full PDF format more than 20,000 times. The
plaintiff was also a member of the GATA delegation that
met with the Hon. Dennis L. Hastert, Speaker of the U.S.
House Representatives, in May 2000 to present to him the
conclusions of the GATA study. Much of the evidence cited
in this complaint comes from GATA's many friends and
supporters worldwide.
4. The defendant Bank for International Settlements
("BIS"), frequently described as"the central banks' central
bank," describes itself as an international organization but
has not been so designated under the International
Organizations Immunities Act, 22 U.S.C. s. 288 et seq. The
BIS is headquartered at CH-4002 Basle, Switzerland. Its
principal owners and customers are the central banks of the
major industrial nations. The BIS accepts gold deposits,
makes gold loans, holds approximately 200 metric tonnes of
gold for its own account, and is an active participant in the
gold market. Its manager responsible for foreign exchange
and gold, Giancomo Panizzutti, received the"Man of the
Year Award" from the COMEX at its annual gold dinner in
New York recently. Under the auspices of the BIS, gold
derivatives (along with foreign exchange, interest rate, equity
and other derivatives) are subject to significant regulation
and reporting, including: (1) the Basle Capital Accord, which
sets minimum bank capital adequacy requirements for
off-balance sheet derivatives; and (2) protocols for disclosure
of information regarding derivatives, both in the financial
statements of individual firms and through reports prepared
by national regulatory authorities as well as by the BIS from
country data submitted to it.
5. The defendant Alan Greenspan is Chairman of the Board
of Governors of the U.S. Federal Reserve System ("Fed"),
20th Street and Constitution Avenue, NW, Washington,
D.C. 20551. Mr. Greenspan has served ex officio as a
director of the BIS continuously since September 1994.
When the BIS was formed in 1930, 15% of its original
capital -- the so-called American issue or tranche -- was
subscribed publicly in the United States, thereby giving the
Fed the right to vote these shares when, as and if it assumed
the two seats allocated to the American issue on the BIS's
board. However, by a public pronouncement issued May 15,
1929, Secretary of State Henry L. Stimson forbade"any
officials of the Federal Reserve system either to themselves
serve or to select American representatives as members of
the proposed International Bank." In fact, the two American
seats on the BIS's board remained vacant until July 1994,
when Mr. Greenspan, without any formal authorization by
Congress, the President or the Secretary of State, acted to
assume them for the Fed. Since September 1994, the Fed's
two nominees have participated fully in the affairs of the BIS
and voted the shares of the American issue.
6. The defendant William J. McDonough is President of the
Federal Reserve Bank of New York ("N.Y. Fed"), 33 Liberty
Street, New York, New York 10045. Mr. McDonough has
served as a director of the BIS continuously since September
1994, occupying the second seat allocated to the American
issue under the BIS's original plan of organization. As of
August 2000, approximately 7127 metric tonnes of
"earmarked" gold belonging to foreign official institutions,
mostly central banks, were held in custody accounts at the
N.Y. Fed, down from 8621 tonnes at the end of 1995. At the
end of 1999, the N.Y. Fed held gold certificates covering over
40% of the total U.S. gold stock, far more than any other
Federal Reserve Bank, and up from 30% ten years
previously.
7. The defendant J.P. Morgan & Co. Inc. ("Morgan") is a
global financial services firm with its head office at 60 Wall
Street, New York, New York 10260, and a usual place of
business at 2 International Place, Boston, Massachusetts.
Morgan is a major international bullion bank. Its
wholly-owned commercial bank subsidiary, Morgan
Guaranty Trust, is required to provide regular quarterly
reports on its gold derivatives to the U.S. Controller of the
Currency ("OCC"). As of June 2000, Morgan reported
US$29.7 billion notional amount of gold derivatives, up
from $18.4 billion one year earlier.
8. The defendant Chase Manhattan Corp. ("Chase") is a
bank holding company with its head office at 270 Park
Avenue, New York, New York 10017, and a usual place of
business at 101 Federal Street, Boston, Massachusetts. Chase
is a major international bullion bank and recently often a
heavy seller of gold on the COMEX. Its wholly-owned
commercial bank subsidiary, Chase Manhattan Bank, is
required to provide regular quarterly reports on its gold
derivatives to the OCC. As of June 2000, Chase reported
US$35 billion notional amount of gold derivatives, up from
$20.5 billion one year earlier.
9. The defendant Citigroup, Inc. is a diversified financial
services holding company with its head office at 153 East
53rd Street, New York, New York 10043, and a usual place
of business at 1 International Place, Boston, Massachusetts.
Citibank N.A. ("Citibank"), Citigroup's wholly-owned
commercial bank subsidiary, is a major international bullion
bank, and is required to provide regular quarterly reports on
its gold derivatives to the OCC. As of June 2000, Citibank
reported US$11.4 billion notional amount of gold
derivatives, up from $7.2 billion one year earlier. Together,
Morgan, Chase and Citibank accounted for about 83% of
all gold derivatives reported to the OCC in June 2000, and
75% one year earlier. In combined notional amount, the
gold derivatives of these three banks increased by over $30
billion, or by over 65%, during this one year period while
those of all other reporting U.S. commercial banks remained
virtually flat at slightly over $15 billion.
10. The defendant Goldman Sachs Group, Inc. ("Goldman")
is a global investment banking and securities firm with its
head office at 85 Broad Street, New York, New York 10004,
and a usual place of business at 125 High Street, Boston,
Massachusetts. Goldman is a major international bullion
bank and recently often a heavy seller of gold on the
COMEX. Goldman is generally regarded as a major
purveyor of gold derivatives. However, not being a
commercial bank, Goldman does not report its gold
derivatives to the OCC.
11. The defendant Deutsche Bank AG ("Deutsche Bank") is
an international bank with its head office at Taunusanlage
12, D-60262, Frankfurt am Main, Germany, and a usual
place of business at One Federal Street, Boston,
Massachusetts. Deutsche Bank is a major international
bullion bank and recently often a heavy seller of gold on the
COMEX. In June 1999 Deutsche Bank acquired Bankers
Trust, a U.S. commercial bank which itself had a significant
gold derivatives business. In its 1999 annual report,
Deutsche Bank reported approximately US$51.2 billion
notional amount of gold derivatives at year-end, up from
$16.2 billion one year earlier. Most of this increase came in
the last half of the year.
12. The defendant Lawrence H. Summers is the Secretary of
the Treasury. Pursuant to 31 U.S.C. s. 5302, the Secretary of
Treasury has exclusive control of the Exchange Stabilization
Fund ("ESF") subject only to the approval of the President.
The ESF and the Fed are the only instrumentalities of the
federal government with broad statutory authority to trade
in gold. This authority was conferred at a time when the
dollar was officially defined by Congress as a specified
weight of gold, and when maintenance of the dollar's official
gold value was a matter of substantial legal and practical
concern. Public financial statements of the ESF provide
evidence of its intervention in the gold market, particularly
since 1998.
13. Collectively the defendants represent all the principal
parties required for a just and complete adjudication of the
price fixing claims. The publicly reported gold derivatives of
two other major international banks engaged in this
business, UBS AG and Credit Suisse Group, do not show the
same extraordinary growth patterns over the past two years
as the gold derivatives of the defendant bullion banks, nor
have these two Swiss-based banks recently been reported as
frequent heavy sellers of gold on the COMEX. An
examination of the gold hedging activities of the world's two
largest gold mining companies, AngloGold Ltd. based in
South Africa and Barrick Gold Corp. based in Canada,
suggests that both companies have material non-public
knowledge of the gold price fixing scheme which they have
used to their advantage, but neither company appears to
play a critical role in implementing the scheme.
14. The plaintiff purchased his BIS shares, which then traded
over-the-counter in Basle but now trade on the Swiss
Exchange, in 1989 through an American brokerage firm. The
shares were held in street name until 1997, when the plaintiff
registered them in his name on the books of the BIS and
soon thereafter received share certificate no. 031419
inscribed to him at his U.S. address, where the certificate
remains. The plaintiff purchased his 1200 depositary shares
of Gold-Denominated Preferred Stock, Series II, of
Freeport-McMoran Copper & Gold, Inc., at various times
from 1995 through 1999. By its terms, each depositary share
pays a quarterly cash dividend equal to the value of
0.0008125 ounce of gold and will be redeemed in February
2006 for the cash value of 0.1 ounce of gold. The quarterly
dividends are cumulative, but to date all payments have
been timely made based on the arithmetic average of the
London PM gold price over the relevant preceding five-day
period.
15. By a"Note to Private Shareholders" dated September
15, 2000, mailed to the plaintiff at his U.S. address, the BIS
gave notice that its board planned to vote at a meeting on
January 8, 2001, to compel all private holders of the
American, Belgian and French issues to surrender their
shares against a payment of SwF16,000 (approx. US$9280)
per share notwithstanding an opinion from J.P. Morgan &
Cie SA, a wholly-owned French-based subsidiary of Morgan,
setting the per share net asset value at US$19,099, or more
than twice what the BIS proposes to pay for the shares that
it plans to take.
16. Venue is based on 28 U.S.C. s. 1391(b)(2) as to all
defendants, s. 1391(c) with respect to the corporate
defendants having usual places of business in Boston,
Massachusetts, s. 1391(d) with respect to the BIS and
Deutsche Bank, and s. 1391(e)(2) and (3) with respect to
Messrs. Greenspan, McDonough and Summers, all of whom
are acting"under color of [federal] legal authority" with
respect to the matters alleged notwithstanding that their
conduct falls wholly outside their legal and constitutional
authority. Venue of the claims under the Exchange Act is
also based on s. 27 thereof, 15 U.S.C. s. 78aa. Venue of the
claims under the Sherman Act is also based on s. 12 of the
Clayton Act, 15 U.S.C. s. 22, as to the corporate defendants.
III. Development of Today's Gold Market
17. From 1792 to the closure of the gold window in August
1971, gold functioned in an official monetary role under the
Constitution and laws of the Unites States. Gold's use in
ordinary domestic coinage ended in 1934 with the monetary
measures of the New Deal, including the devaluation of the
dollar from $20.67/ounce to $35/ounce and a general
prohibition on the ownership of gold by United States
citizens. Under the Bretton Woods Agreements (59 Stat. 512
(1945)) adopted after World War II, gold remained at the
center of the international monetary system and the United
States committed itself to redeeming dollars presented by
official foreign monetary institutions at the legal standard of
$35/ounce. When the United States unilaterally ceased
redeeming dollars for gold in August 1971, the Bretton
Woods system collapsed. Since then, the international
payments system has moved to floating exchange rates with
no currency convertible into gold at fixed parities. The
Second Amendment to the Articles of the International
Monetary Fund ("IMF"), adopted under U.S. pressure in
1978, further limits the use of gold for official monetary
purposes.
18. In 1972, Congress authorized and directed the Secretary
of the Treasury to establish a new par value for the dollar of
$38/ounce (Pub. L. 92-268, s. 2, 86 Stat. 116 (1972)), which it
amended in 1973 to $42.22/ounce or 0.828948 IMF Special
Drawing Right. Pub. L. 93-110, s. 1, 87 Stat. 352 (1973).
Effective April 1, 1978, Congress repealed the 1973 par value
act, leaving the dollar for the first time since 1792 statutorily
undefined with reference to gold or silver. Pub. L. 94-564, s.
6, 90 Stat. 2661 (1976), repealing 31 U.S.C. s. 449. See 31
U.S.C. ss. 314, 821, repealed by Pub. L. 97-258, s. 5, 96 Stat.
877 (1982).
19. In 1974, Congress eliminated the restrictions that it had
adopted forty years earlier on private ownership of gold by
American citizens. Shortly thereafter trading of gold
contracts was resumed on the COMEX. In 1977, Congress
repealed the prohibition on gold clauses in private contracts,
enabling the issue of gold-linked securities. Under the Gold
Bullion Coin Act of 1985 (31 U.S.C. s. 5112, as amended by
Pub. L. 99-185, 99 Stat. 1177), Congress authorized the
United States to resume issuing gold coins having a legal
tender face value but to be sold to the public at a price equal
to the market value of the bullion at the time of sale plus
costs of minting and distribution.
20. By its actions described in paragraphs 18-19 above,
Congress effectively relegated gold to the status of an
ordinary commodity for purposes of federal law, leaving its
value against the dollar to be determined by market forces
and without intervention by the Treasury, the ESF or the
Fed, none of whom were given any legislative guidance
whatsoever with respect to any particular price or price level
for gold.
21. Although gold is now an ordinary commodity under
federal law, it retains its intrinsic character as permanent,
international money. Many of the world's nations, and most
of its central banks, continue to hold significant quantities
of gold as a part of their international monetary reserves. Of
the estimated approximately 120,000 metric tonnes of
above-ground world gold stocks, some 32,000 tonnes are
currently claimed as reserves by official monetary
institutions. (One metric tonne equals 32,150.7 troy ounces.)
After the U.S. dollar, gold is the second largest component
of official international monetary reserves. In addition, its
price is widely regarded as an important economic indicator,
particularly as a measure of U.S. inflationary pressures and
the international strength of the dollar.
22. Because of its intrinsic character as money and its
availability in quantity, gold functions in today's
international markets as a stateless currency. Like any major
currency, gold is not only borrowed and loaned at interest,
but also arbitraged in spot and forward markets against
other currencies on the basis of relative interest rates.
Although gold interest rates are generally referred to as
"lease" rates, the term is technically a misnomer. Gold is
borrowed to be spent and repaid like a currency, not rented
to be used and returned like a house or a car.
23. Since they were delinked, the dollar and gold have
developed different interest rate structures. Lease rates on
gold generally run at significantly lower levels than dollar
interest rates, creating a situation of"contango" in gold
futures, meaning that the dollar prices of gold for future
delivery are higher than the spot price for current delivery.
(The opposite of contango is"backwardation," meaning
that spot prices are higher than futures prices.) Against the
dollar, the contango on gold expressed as a percentage is
roughly the U.S. Treasury bill rate less the lease rate. For
gold to go into backwardation, this number would have to
turn negative, i.e., the lease rate would have to exceed the
Treasury bill rate.
24. Unlike other commodities where situations of contango
and backwardation often
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Von prudendbear
<a href=http://www.prudentbear.com/slides/Warburton/sld001.htm>Grafiken zum Text</a>
Damit dürfte auch dem letzten Zweifler klar werden, wohin die Reise geht.
Frohes gruseln
Diogenes (trotzdem: ;-))
Debt and Delusion: The Threat to Global Financial Stability from the Over-accumulation of Debt
by Peter Warburton
December 13, 2000
The following was presented at the Seminar for the Royal Institute of International Affairs, Chatham House, 23 November 2000. Peter Warburton is the author of ‘Debt and Delusion’, Penguin, 2000.
(Accompanying slide presentation)
Introduction
Debt and Delusion was completed in July 1998 and published the following March. Its principal objective was to alert economists, market professionals and anyone else who might be listening to the dangerous expansion of debt in the financial system and its likely consequences. A subsidiary purpose was to draw attention to the role of financial sophistication in cloaking the extent of the danger. A third aim was to highlight the subversive and culpable role of central banks in the process.
This short paper reiterates the debt threat and chronicles some of the developments of the past two or three years that support the original thesis and confirm that a collision with economic reality is imminent. The time frame offered in the book was as follows: that the defining event or crisis would probably not occur before the end of 1999, possibly not occur by the end of 2001 but, barring a miracle, would have occurred by the end of 2003. This rough time-line still seems about right.
This paper begins with a re-statement of the basic thesis of Debt and Delusion. The next sections cover the development of debt aggregates in recent years, the increasing dispersion of the gearing distribution for companies and the rising incidences of default and other measures of delinquency. The concept of a global default rate is introduced and linked to predictive indicators such as credit and swap spreads and the share price relatives of banks with significant capital markets activities.
Finally, the potential triggers of a credit crisis that were featured in the book are revisited. These were the risk of European disintegration, the fragility of the US bond market, Japan’s lingering debt crisis and the vague but genuine threat of techno-terrorism.
Re-statement of the basic thesis
The metanarrative concerns a global credit cycle whose origins can be traced to the early-1980s and which is now close to maturity. In the past, credit cycles have been synonymous with commercial bank credit cycles and hence with monetary expansions. Each cycle lubricates the growth of new industries with funding for fixed investment and research, but there is also what Joseph Schumpeter described as the secondary wave, in which there are"clusters of errors, waves of optimism and overindebtedness". He writes:
"new borrowing will then no longer be confined to entrepreneurs, and ‘deposits’ will be created to finance general expansion, each loan tending to induce another loan, each rise in prices, another rise"
Business Cycles, 1939
The current credit cycle began with a strong bias towards conventional bank credit but blossomed as a capital markets phenomenon during the 1990s without the inflationary consequences that might otherwise have been expected. The capital losses on property-based lending suffered by North American and European banks in the early 1990s marked a significant stage in this transition, which spawned the dramatic elevation of investment banks and the fund management industry. The seismic shift away from the money markets to the capital markets has transformed the inflationary outlook and redefined the relationship between the central bank and private sector financial institutions. The close and exclusive relationship that formerly existed between central banks and commercial banks (and the discount houses) has been replaced by a new close and exclusive relationship between central banks and investment banks. In so far as commercial banks have diversified into capital market activities, some of the larger ones still have a place at the top table.
Throughout this transitional process, central banks have actively or passively supported the development of a sophisticated financial markets infrastructure without serious prior consideration of its implications for the overall stability of the financial system. In the early 1980s, as concern about international banks’ financial health mounted and complaints of unfair competition (from Japanese banks) escalated, the Basel Committee on Banking Supervision began to consider uniform capital standards for these banks. These efforts culminated in the Basel Capital Accord of 1988 which set down minimum capital requirements for international banks from the G10 nations. As the BIS now readily concedes, the financial innovation of the 1990s has created ample incentives and opportunities for regulatory capital arbitrage and has led to a reduction in the effectiveness of the Basle Accord. In mid-1999, the Basel Committee proposed a new capital adequacy framework built on the three pillars of minimum capital standards, a supervisory review process and effective use of market discipline. However, the new framework will continue to apply only to banks and will probably be based on banks’ internal risk rating models rather than any external capital requirement.
In essence, central banks have acquiesced to the market participants’ desire to be self-regulated, judging that banks know the profile of their own credit and market risks better than any regulator. By adopting this approach, central banks appear to have abdicated their role as pre-emptive guardians of the credit and financial system. They have retained a role as trouble-shooters and lifeboat providers, as evidenced in the numerous international financial crises since 1994 and in the vital co-ordinating role played by the New York Fed in the LTCM debacle in 1998. Central banks have lost the ability to influence the overall quality of credit decisions being made, which is steadily deteriorating, while retaining a commitment to prevent a systemic collapse. This is a classic example of moral hazard, where risk-takers are emboldened to take larger risks by the expectation of central bank intervention in the event of an extreme loss, regardless of whether the loss is incurred by a bank.
In parallel to these developments, the cost of risk capital has been severely distorted at various times, leading to excessive credit creation and poor investment decisions. Critically, the long-running expansion of global equity market valuations is a by-product of the global credit cycle. As the private sector has gravitated towards capital market debt rather than bank debt or equity issuance, earnings per share growth has been inflated and price-earnings multiples exaggerated. Private sector asset values have exploded far beyond the increase in their debt, creating the illusion of soaring net worth and mass prosperity. Further borrowing has been undertaken using these distorted corporate and personal balance sheets as collateral.
Several major countries have experienced a surge in the ratio of business investment to GDP during the late-1990s, with a particular emphasis on ICT spending. While this investment may well yield its benefits in time, the dominant explanation for rapid GDP and productivity growth in recent years, especially in the US, is the hyperactive credit cycle. Abnormally high business returns have been obtained only because of the extraordinary market and credit risks that have been absorbed. Prospective returns to capital are liable to fall, while the latent risks will become more obvious.
In summary, the thesis under examination is that the global credit cycle is running out of steam due to declining credit quality. Central banks and other para-regulators have no effective means of preventing the credit cycle from reaching its terminus. For the cycle to continue will require yet more willing lenders and worthy borrowers. In their absence the cycle will eventually expire, revealing the extent to which corporate and individual borrowers have been financing expenditures from credit sources rather than cash flow generation. When the credit cycle turns into reverse, the terms of borrowing will deteriorate, loans may be called and a profoundly deflationary and unpleasant scenario will unfold. This will be a better time to evaluate so-called productivity miracles.
Recent development of debt aggregates
When the book was written, data was available only to end-1997 at best. In the past two and a half years, the various channels of debt extension have been extremely active. Three types of debt are considered: loans, advances and mortgages, debt securities (principally bonds) and other forms of credit including consumer and security credit. The US dollar will be used as the standard monetary unit, while noting that the growth of debt and other financial aggregates in recent years has been restrained by the appreciation of the dollar. On a trade-weighted basis the appreciation has averaged around 4% per annum since 1995.
Loans, advances and mortgages
Our starting point is the growth rate of OECD broad money supply, from which some longer-term trends can be discerned (figure 1). Central bank regulation has ensured that a measure of discipline has been exerted over monetary aggregates in the developed world. The excessive growth pace of banks’ balance sheets in the 1980s culminated in the bad debt experiences of 1990-93, but by 1995 a fresh acceleration of bank credit had begun. The liabilities side of the balance sheet has tended to lag behind the growth of lending to the private sector in recent years, as shown by the Euroland chart (figure 2) and the selection of other countries in figure 3. In all the major countries except Japan, which is a notable exception, private sector loans are expanding at an average annual rate of 10% to 12%. A few countries supply the IMF with a broader definition of loans. Figure 4 contrasts the striking 15% average growth rate of US private sector borrowing with those of Canada and Japan. For the record, US commercial bank and savings institutions’ loans amounted to $4.47trn at mid-2000. Other mortgages reached $4.35trn, making a total of $8.82trn. This compares with $7.02trn at end-1997 giving an annualised growth rate of 9.6%.
As a footnote, international bank lending (in dollar terms) has stagnated over the past 18 months after growth rates of 8.5% in 1997 and 9.6% in 1998.
Debt securities
Using the BIS Quarterly Review as the standard source, the amount of domestic debt securities outstanding at end-March 2000 was $31 trillions, up from $26 trillions at end-1997. This represents a compound annual growth rate of 8.1%. International debt securities expanded from $3.5trn to $5.5trn over the same 9 quarters for an annualised growth rate of 22.4%. Combining domestic and international aggregates, the annual growth pace is a shade under 10%, measured in US$. If we allow for the multilateral appreciation of the US$, the compound growth rate rises to 14% per annum. Figure 5 contrasts the moderating pace of public sector bonds outstanding with the acceleration in domestic corporates and eurobonds.
Other debt forms
Statistics on domestic non-bank consumer credit and borrowing from other financial institutions (other than in the form of mortgages) are sparse for all but a few countries, although some broad magnitudes can be inferred by comparing data sources. In round terms, there appears to be about $4.5trn of such credit as compared to a global loan, advance and mortgage stock of $36trn. In the US, non-bank consumer and security credit rose from $0.84trn to $1.15trn between end-1997 and mid-2000, for an annualised increase of 13.7%. The burgeoning credit card industry has moved aggressively into European consumer markets, fuelling typical debt growth of 15% to 20% per annum.
The overall debt picture
It is obvious from the above that the relatively slow growth of banks’ domestic balance sheets in the past decade, reflected in the OECD money supply growth rates, has been a poor guide to the overall pace of global credit growth. Figure 6 estimates the global gross debt position at mid-2000 using a variety of official data sources (mainly IMF, BIS, Eurostat and the US Federal Reserve) and some industry estimates. Aggregate debt amounts to $90trn, which is close to 300% of GDP. A comparable figure for end-1997 is $68.5trn, or 250% of world GDP. The implied annual growth rate of global gross debt since 1997 is a breathtaking 11.5% in US$ terms or 11.3% expressed in notional world currency. (Between these dates there was little change in the external value of the US$.) Undeterred by rising interest rates and strongly-worded speeches from central bank personnel, the global credit cycle has powered ahead relentlessly.
The arithmetic of global debt is not difficult to grasp. If the gross debt aggregate is growing by 10% to 15% per annum and the nominal GDP growth rate is only 5% to 7%, then the ratio of the two is plainly spinning out of control. The downward trend in nominal interest rates since the early-1980s, reflecting the success of anti-inflation policies, has protected borrowers from the consequences of increasing financial leverage for long periods. Yield curve arbitrage has also played a part. But the day is approaching when the costs of debt service for the debt-rich portions of the global private sector will begin to absorb an uncomfortably large share of their incomes. All credit cycles, even one as universal and complex as this, are destined to abort.
Increasing debt dispersion in the private sector
A feature of developments in the world bond market since 1996 has been the diminishing share of the outstanding bond stock attributable to governments and their agencies, despite the sterling efforts of the US agencies to compensate for the redemption of Treasury debt. In 1996, the share of government bonds in the total was 61%, but this since fallen to 54%. Using the BIS statistics for net issuance in 1999, the public sector was responsible for $1.6trn (44% of the total), financial institutions, $1.3trn (35%) and the corporate sector, $0.76trn (21%). The balance has been shifting year by year towards a faster pace of private sector issuance, notably in the eurobond market.
Debt outstanding in the domestic corporate and eurobond markets has increased by 11.5% per annum since the end of 1990, and by 17% a year since the close of 1997. Expectations of the extent and scope of private sector access to the bond market have risen wildly over the past three years, culminating in the request for an expected $200bn from the telecom services industry alone in 2000. The unspoken assumption is that the global bond market will accommodate all reasonable demands placed upon it. Indeed, the conventional wisdom is that there is presently a shortage of quality issuance because several large economies are running public sector surpluses and are therefore in the process of redeeming triple-A debt.
One of the arguments frequently encountered is that the rapid growth of the eurobond market is beneficial in that the lending risk has been diversified much more effectively than a corresponding increase in bank debt. This sentiment could be shared more enthusiastically if there were evidence that the stock of bank loans was shrinking! However, the reality is that the growth of debt instruments has not displaced the demand for loans. Both loans and debt securities show brisk growth, suggesting that any repayment of bank debt by companies from the proceeds of a bond issue prompts banks and non-banks to find new loan customers.
Thus far, the discussion has been presented in terms of gross debt, knowing that some institutions that issue debt, hold it in another form as an asset. The prime example is the securitisation of mortgage and credit card receivables. If it could be shown that netting factors had a commanding influence, then the gross debt position would appear less threatening. Yet the available evidence with regard to the corporate sector points in the opposite direction: corporations are becoming more disparate in their profitability, liquidity and capital gearing characteristics from one year to the next. There is a clear evidence that some large corporations, notably in the transport, communications, media and technology sectors, have supplemented their traditional loans with debt securities. In the US non-farm, non-financial corporate sector, the ratio of debt to net worth at historic cost has risen from 70.8% at end-1997 to 82.7% at mid-2000. The additional flexibility offered by the debt securities markets has been instrumental in fattening the tails of the corporate distribution.
Illustration from the UK corporate sector
The analysis of aggregates is a necessary and useful starting point, but in recent years a startling dispersion of the distribution of individual companies around the averages has arisen. An excellent discussion of this phenomenon can be found in the June 2000 issue of the Bank of England’s Financial Stability Report in the article entitled"Stylised facts on UK corporate financial health" by Andrew Benito and Gertjan Vlieghe. The authors examined the public accounts of over 1000 companies in each year between 1974 and 1998 to understand how various indicators of financial health had changed. They discovered that the variation across companies’ profitability and profit margins increased sharply from 1994 and in capital gearing from 1995. The authors concluded:
"Despite the broadly favourable outlook for the corporate sector as a whole, the least profitable companies in 1998 were much less profitable than even the least profitable companies in the recessions of the early 1980s and 1990s. Similarly, the capital gearing of the most highly geared companies reached levels in 1998 not seen in the past quarter-century. These results imply that the downside risks facing creditors of the corporate sector may have been greater in recent years than suggested by aggregate corporate performance alone."
If this was true of 1998, the disparities are likely to be significantly greater in 2000 after an economic slowdown (in late-1998) and a massive increase in aggregate gearing. According to Benito and Vlieghe, the gross return on capital of the worst 10% of companies was less than -25% in 1998, the gross profit to sales ratios of the weakest decile were less than -8%. The capital gearing of the 10% most highly geared companies rose from 58% in 1990 to 77% in 1998. The authors also looked at the industrial decomposition of firms with low profitability and high capital gearing. Far and away, the highest concentrations of weak characteristics were found in the transport and communication sector. These firms accounted for 20% of the sample but supplied 37% of the firms with low profitability and 34% of those with high capital gearing. Remember, they were looking at 1998, not 2000.
Total borrowing in the form loans and bonds by the transport and communication sector was about £35bn at end-1998; today it is approaching £60bn, with the bulk of the financing coming from the capital markets. Indeed, the share of the sector in cumulative net capital issues by UK non-financial corporations since mid-1988 has exploded from 5% in 1995 to 22% by mid-2000. The concentration of lending risk in this sector is a deeply worrying feature, not least because UK exposures have been compounded by similar developments throughout Europe.
The dispersion of corporate performance into the tails of the distribution creates an asymmetry in the capital markets and generates an upward bias to the cost of capital for the median firm. The terms on which firms are able to borrow from either banks or capital markets are driven by expectations of loan losses.
Implications for debt delinquency
There are three broad types of information covering business and personal financial failure. First, data on the numbers of business insolvencies and personal bankruptcies. Second, estimates of the value of the liabilities of insolvent companies. Third, official statistics covering the incidence of debt write-down and delinquency (e.g. non-performing loans where accrued interest is added). The phenomena of large-scale bankruptcy has seldom occurred outside the context of an economic recession and an associated fall in the level of employment. Epidemics of bankruptcy and loan arrears are almost always connected to the loss of corporate and personal income and are concentrated at the lower end of the corporate and personal income scales, where saving levels are negligible.
However, there is another type of debt delinquency which afflicts corporations of significant scale. This type involves the debt-financed over-expansion of otherwise healthy companies in pursuit of competitive advantage. In a liberal credit regime, where all competitors find their capital demands are satisfied, the opportunity arises for massive financial losses even in the context of an apparently stable and growing economy. The telltale signs of this type of delinquency are sudden increases in capital gearing and increasing unease among equity shareholders regarding the company’s strategy. As the last in line to be repaid in the event of liquidation, the equity holders have the most to fear from over-expansion.
The coincidence of rapid private sector borrowing with signs of increasing dispersion in capital gearing suggests that weakening corporate credit quality is a much more serious problem than is commonly perceived, particularly by banks in judging their bad debt provisions. The immediate issue is not the risk of failure among the vast swathes of small and medium-sized businesses, as occurred in the early 1990s, but that there could be some high profile corporate debt disasters waiting in the wings. Only last week, the doubtful future of a $1.7bn loan extended to Sunbeam, a US appliance maker, prompted heavy downgrades for Bank of America, Wachovia and First Union. In October, Xerox Corporation declared its first loss for 16 years and suffered a dramatic widening of its credit spread to 550 basis points over a 5-year Treasury bond. Xerox has more than $24bn of liabilities.
If the indications of eroding credit quality are accumulating in the US, then Japan offers a demonstration of this process in full flood. Previous attempts to subsidise nearly-failed companies have finally been abandoned and the incidence of bankruptcy has soared. Worse still, some extremely large corporations have joined the casualty list, including two insurance companies. Figure 7 expresses the liabilities of failed companies as an annual rate in US$.
On a much lesser scale, credit quality problems have also arisen in the personal lending markets of the US and UK, where a multiplication of credit card issuers has expanded credit access to high, medium and low earners alike. Some issuers have been actively targeting the weaker credit risks - single people, previous mortgage defaulters and those with court judgments against them. Such evidence as we have suggests that lenders underestimate the margin protection they require when extending credit to the lower-income and non-householder groups. A pattern of increasing write-downs in credit card debts during a period of buoyant economic growth and unusually high employment can only be regarded as a sign of trouble ahead.
A very approximate attempt to quantify the current pace of credit erosion is presented in figures 8 and 9. Figure 8 takes known or estimated default rates for loans, bonds and other debt forms and applies them to the relevant instruments in figure 6. The weighted average annual default rate on global gross debt is estimated at 0.8%. The default rates for corporate bonds are drawn from Moody’s press notices. Moody’s default rates refer to numbers of loans rather than amounts. If bond defaults are concentrated in smaller size issues, then the weighted default rates for bonds will be overestimated in figure 8. It is no easier to estimate the rate at which the loan book is eroding. Even if the figures are broadly accurate (and there few direct observations), it does not follow that banks and non-banks will make loss provisions at this rate. Typically, provisions are raised abruptly only when the dimensions of the credit problem begin to hit home.
Figure 9 represents these estimates in terms of implied annual defaults, reaching a total of $735bn for 2000. Before dismissing them out of hand, remember that Japan is suffering bankruptcies on an unprecedented scale (figure 7) and that US personal bankruptcy filings were 1.24m in the 12 months ended June, admittedly an 8% fall on the previous year. Suppose that the average debt of bankrupt individuals is $100,000, then the value of personal default would be $124bn. The 37,000 business bankruptcy filings, at an assumed $5m average debt, would rack up another $185bn. In the aggregate, the loss of $735bn is manageable but by no means comfortable. Considering that the tier 1 and equivalent capital of all the world’s banks and financial institutions is probably of the order of $3trn to $4trn, this constitutes a very serious rate of capital attrition, between 18% and 25% per annum.
A great deal more research is required before these estimates can be treated as a reliable basis for analysis or policy-making. The purpose of presenting the tables in their rough-cut form is to sound a wake-up call to the financial community regarding the escalation of systemic risk. Again, the excellent Bank of England Financial Stability Review has tackled the issue of international credit risk in an article by Simon Buckle, Alastair Cunningham and Philip Davis. Using ex post annual default rates for bonds of different ratings, they have weighted sovereign, bank and corporate credit default probabilities to derive an overall credit exposure of the UK to all other countries from which money is owed. At end-1999, the 22 largest international risk exposures amounted to $3.1bn using this method.
One of the objections to the use of the rating agency assessments is that ex ante and ex post default rates could differ greatly. To the extent that private sector borrowers have become much more prominent in the debt securities market, there is good reason to suspect that historical default rates attached to particular ratings may underestimate the risks embodied in corporate bonds today.
Predictive indicators of future trouble
Credit spreads in relation to government debt benchmarks give a running commentary on the evolution of default risk. As a very approximate guide, the credit spread in percentage points should bear a close relationship to the annual probability of default. Since the beginning of 1997, credit spreads in virtually every dimension and every country have widened. They trended upwards for most of 1997 and 1998 as the Asian financial crisis unfolded, before exploding in late summer 1998 due to Russia’s debt default and the ensuing LTCM crisis. Convergence rallies in the final quarters of 1998 and 1999 were short-lived and at the start of this year credit spreads ratcheted back to their 1998 peaks in many instances. In September and October, US corporate credit spreads and especially junk bond spreads have widened still further.
Increasingly, investment and commercial banks and securities dealers find themselves as the buyers of last resort in the interest rate swaps, corporate and asset-backed securities markets. The steady increase in explicit and implicit exposure to the risky fringes of the bond market, particularly for investment banks, has amplified the risks to their own balance sheets. The share price relatives of US investment banks (figure 10) tumbled in the autumn of 1998, in the summer of 1999 and, from even loftier heights, have slumped again in October-November 2000. Even these falls may not be sufficient to reflect the deterioration in the corporate credit environment.
Large, diversified commercial banks are less obviously at risk, but they too experienced a severe loss of relative equity market performance in 1990 and again in 1998. A superficial examination of figures 11 and 12 for US and UK banks, respectively, suggests that these difficult questions will be asked of them once more.
A brief diversion: telecom bonds
Prospective corporate issuers, not least in the telecom sector, have become frustrated by the interruption to the fundraising service offered to them by the bond markets. Like a defective mobile phone network, the service has faded out at their moment of greatest need. Just as the industry commits to purchase expensive UMTS licences, the bond market replies"no signal - try later". What is all the more irritating to these large phone companies is that governments and their agencies are making regular calls on the bond market without difficulty. For example, Japan issued $154bn of new public sector bonds in the first three months of the year despite the knowledge that the leading debt rating agencies were poised to make a sovereign downgrade.
According to this complacent market view, the heady expansion of debt instruments is a thoroughly desirable development and poses no threat to financial stability. Rather, the obligation to make regular interest payments is viewed as a healthy discipline on companies that might otherwise become flabby and inefficient. In addition, the substitution of bank borrowing by bonds tends to diversify the specific risk associated with the borrower. Indeed, the expansion of private sector bonds has coincided with an improvement in the capital strength of commercial banks’ balance sheets and startlingly high rates of return on capital. At the same time, risk management techniques have improved beyond recognition, reducing the amount of regulatory capital deemed necessary to secure the desired degree of protection from extreme events. In any case, it is widely believed that central banks have become much more proficient at anticipating and preventing financial crises.
However, on closer examination, these market platitudes are not remotely reassuring. Commercial banks may have lower direct exposures to individual companies, but through their involvement in corporate bonds, syndicated loans and derivatives their overall exposure to corporate risk is much greater than before. How otherwise could they deliver returns on equity which are consistently 7 percentage points higher than the risk-free yield? And why has there been a steady increase in all-corporate US credit spreads over Treasuries since early 1997, culminating in the prevailing 170 basis point premium. How is this consistent with supposed record rates of corporate profitability? Improved risk management techniques are most welcome, but how can we know that historical variances and covariances will resemble those faced in the future? More to the point, how can we know that central banks will continue to stave off the multi-dimensional threat of financial instability?
Who has been buying the bonds?
According to the Bank for International Settlements in Basel, a net $3.6 trillion of debt instruments were issued in 1999. It is naïve to suppose that these new issues are matched by a voluntary flow of global savings, garnered by pension funds, insurance companies, mutual funds, savings institutions and banks. The numbers simply don’t add up. The World Bank’s estimate of global GNP for 1999 is $29.2trn at current prices and exchange rates. Applying the gross saving rate for the OECD of 22%, yields an estimate of gross global saving of $6.4trn per annum, of which roughly two-thirds is deployed directly in the form of investment in physical assets. Of the remaining $2.2trn, some will be diverted to equities and property investments. How is it possible to finance $3.6trn of net bond purchases? Even allowing for potential asset switching in favour of bonds, the annual absorption of between $2.5trn and $4trn of net bond issues for the past 5 years is a mystery. It is solved only by the assumption of colossal financial leverage using money market borrowing.
In other words, the absorption of colossal bond issuance is contingent on the availability of credit to financial institutions, not on the supply of savings. Ultimately, it is the commercial and investment banks that sponsor the bond market through the extension of credit facilities to their customers in the financial sector. Since the banks regard the bonds as collateral for their loans, it is not difficult to see how ugly this situation would become if the corporate bond market suffered a major setback, such as a high-profile default. Companies finding themselves unable to raise funds in the bond market because of its troubled state would be unlikely to find a bank loan either, except at exorbitant cost.
Where should we look for emerging signs of stress in the financial system? Why, to banks of course! The telecom services industry offers a contemporary symbol of credit excess, but it is the banks who have multiplied their business risk exposures across the spectrum of high-growth sectors. If corporate access to the bond market is restricted, then the pace of economic expansion will slow and the need for loan loss provisions will increase. If, on the other hand, banks persist in extending credit facilities to the speculative purchasers of corporate bonds, then the evil day is merely postponed and the potential losses from bond market exposure will escalate. One of the tell-tale signs of trouble in the autumn of 1998 was the relative under-performance of US and European bank shares. Watch this space.
Potential triggers of a credit collapse
Status of crisis triggers:
1. US bond market: steadily deteriorating
2. Japan's lingering debt crisis: entering new phase of potential volatility
3. European disintegration: looks less imminent
4. Techno-terrorism: a little less worrying after the passing of Y2K
There is a myth abroad that this global credit cycle will only come to an end if there is some external trigger. As long as there is no ill-judged interest rate hike, no Middle East war, no Tokyo earthquake, no volcanic eruption in the Canary Islands (resulting in a tidal wave that submerges the Eastern Seaboard) and so on, then everything will carry on as before. No such catalyst, although it might well prove sufficient, is actually necessary. Unsustainable processes are quite capable of crumpling under the weight of their own absurdity.
Conclusion
The outworkings of the over-accumulation of debt have become much more obvious and widespread since the summer of 1998. Despite the acceleration of global GDP growth between 1997 and 2000, the global default rate on borrowings has risen appreciably relative to that of the mid-1990s. In some cases, valid parallels can be drawn with default rates in the recession years of 1990-91. This is not a static process that will sit still while we carry out more research. The dynamics of credit cycles as they approach their culmination are violent and unstable processes. It would not be unusual if the default rate were to double within 12 months and then doubled again in the following year. This is a time for vigilance and strong preventative action, not a time for redesigning the global architecture. There is no opportunity to re-engineer the ship once it has left the harbour.
Peter Warburton is the author of ‘Debt and Delusion’, Penguin, 2000.
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