Furthest Right

Why international finance is tricky

The international angle is very important. Geithner and Bernanke keep saying that the problem is that no one knows how much the toxic assets are worth. But that’s not the full story. If the counterparties and beneficiaries of the toxic assets held by American banks are also American, it would be relatively easy for Geithner and Bernanke to gather them in a room and make them come to a ‘reasonable’ agreement about how much these securities were worth. After all, even the most powerful hedge funds must ultimately bow to the power of the Fed and Treasury, especially in a crisis.

But with most of the counterparties in other countries, the job becomes much more difficult. There’s no way for Bernanke and Geithner to force European banks, for example, to accept any particular valuation of derivatives or bank bonds—not without the cooperation of the foreign regulators.

In fact, right now we have the worst of both worlds. U.S. banks own securities which may or may not obligate them to pay a large amount of money to foreign investors. And foreign banks have assets on their books which no one trusts are worth what they say. The uncertainty is killing both the borrowers and lenders.

Business Week

Great article. Foreign investors have both the advantage of being able to buy our stuff, and the advantage of being able to isolate themselves behind their local legal systems. That doesn’t make it easy to gain agreement.

For legal purposes, we should probably create an imaginary nation for all international purchases to take place in. Its rules would apply as the properties would technically be “in” that country, and its purchasers would be required to set up a proxy company of some sort there.

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