By Dimitris N. Chorafas (auth.)
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Extra info for Basel III, the Devil and Global Banking
Its management left much to be desired, and among other deficiencies featured a totally inadequate approach to the control of exposure – being a sort of predecessor to Lehman Brothers. LTCM investors, including pension funds and several banks, rushed to put their money with the company, because from its launch in 1994 the hedge fund reported handsome profits: a 27 percent rate of return in 1994, 59 percent in 1995, 57 percent in 1996, and so on until it crashed. There was no regulation in place to deal with LTCM risk, and still there is none – not even in the trimmed-down Basel III.
Novel instruments are to a very substantial extent debt-based. Assetbacked securities such as collateralized mortgage obligations (CMOs), repurchase agreements and securitized packages of receivables are generally Finance and Banking Are Time and Motion Machines 29 considered to be assets, but in reality they are liabilities to the issuer and assets to the holder. In fact, they are ‘assets’ only when the parties to which they pertain honor their financial responsibilities. The situation is similar regarding options, warrants, futures contracts, forward contracts and swaps.
The Finance and Banking Are Time and Motion Machines 25 credit crisis that hit in the first years of the 2007–12 economic earthquake had a direct impact on the value of important real assets (such as real estate),10 as well as on stock markets (particularly on bank stocks). ’) has led to a prolonged malfunctioning of Western economies. Sovereigns and central bankers now appreciate that where the economic and financial system suffered most was in generating future growth, but there is no clear plan on how to repair the damage to ensure a longer-term efficient and resilient financial environment.