Friday, December 25, 2009

Repaying bailout funds

During the global financial crisis, many banks were on the verge of collapse. The collapse of one big bank could trigger the collapse of other banks, risking the stability of the entire global financial system. The US Government stepped in to provide billions of taxpayer funds under the TARP (troubled assets relief program) program to stabilize and restore confidence in the system.

The taxpayers were shocked that these bailed out banks continue to pay huge bonuses to their top executives. The Government decided to introduce caps on the salaries and bonuses that could be earned by these executives.

Many bailed-out banks have decided to return the TARP money, so that they can continue to be relieved from the caps on these huge bonuses. They are able to get money from their shareholders, as the global financial system has now been restored. They can go back to the "good old days".

How did the banks make huge profits during these "good old days"? They take big gambles. They bet billions of dollars on financial trading and on creating asset bubbles, through housing, mergers and acquisations,  leveraging and financial engineering (also called "innovation").

If they get it right, they make billions of dollars of profit. If they get it wrong, the hold the global financial system to hostage.

The world has to put a stop to these huge gambles. The banks should be banned from these types of gambling. They key role is to do basic banking services, such as collecting money and giving loans to businesses and households. It may be boring, but it is a valuable service that builds real wealth.

As long as the governments condoned and even encouraged such gambling behavior, in the name of creating "financial hubs", the global financial system will continue to be at risk.

Tan Kin Lian


Anonymous said...

Dear Mr Tan
You are not alone in your call for banking reforms.

America's "Glass Steagall Act" was enacted in 1933 to curb banking excesses after the 1929 stockmarket crash.


The Act was repealed in 1999, after 66 years. It's no coincidence we have seen a lot of bubbles since 1999.

In the aftermath of the global stockmarket crash of Oct 2008, there have been increasing calls to bring back the Glass Steagall Act.

Just do a google search:
"bring back the Glass Staegall Act"

But too bad for us in Singapore. We are benchmarking ourselves against "best practices" i.e. "blind following the blind".

So we'll just have to wait until USA brings back the Glass Steagall Act first.

Then we wait for the high faluting speeches and debates in parliament. And the deliberations of our Singapore journalists.

And then finally the words of wisdom from "Mount Olympus" to pronounce and bless the new financial directions and regulations in Singapore.

And then by magic, our small country has once again led the "free world" into a new of doing things ... the Singapore way. Giving fresh insights and perspectives into a very big and previously insoluble global problem.

Good article

Another good article

Results of google search for bringing back the Glass Steagall Act

Anonymous said...

The main argument given by the Banks for paying their top executives huge bonuses is that these people help the banks making huge profit.

If the banks stick to their key role of ”collecting money and giving loans to businesses and households” they will make good profit but not huge profit.

But banks making huge profit by
(1) overcharging their customers
(2) underpaying the depositers
(3) selling lucrative financial products (such as minibonds, high notes, pinnacle notes ….)
(4) involving in high return high risk activities (such as structuring/trading of CDOs….)

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