Highlight: EU Leaders' Comments After Summit Talks

[elleng]

Source: nyt/reuters

Following are highlights of comments and other senior officials after their talks, which will resume later on Friday.

BRITISH PRIME MINISTER DAVID CAMERON

ON INTERGOVERNMENTAL TREATY:

"I said before I came to Brussels that if I couldn't get adequate safeguards for Britain in a new European treaty, then I wouldn't agree to it. What is on offer isn't in Britain's interests, so I didn't agree to it."



Read more: http://www.nytimes.com/reuters/2011/12/09/business/business-us-eu-summit-highlights.html?_r=1&hp

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Additional/Clarification:

EU Leaders Agree Fiscal Pact, Falter on Treaty Change.

http://www.nytimes.com/reuters/2011/12/09/world/europe/news-us-eurozone.html?hp

[dkf]

1. The UK, their laws and their lax regulation are a huge problem.

[Spider Jerusalem]

2. Not really, the problem is with the Eurozone states, not the UK

Britain is no more of a problem than the US which has worse laws by and large and less regulation. And somehow it's hard to imagine the US signing on to a treaty that would result in other countries imposing new taxes on financial transactions in New York that would disproportionately affect the US as they aren't applied globally and would have the result of reducing the competitiveness of the American financial sector as a result. Which is what the current UK/EU bust-up is about.

[dkf]

3. You must have not seen this...

http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe

Or this

MF Global and the great Wall St re-hypothecation scandal

http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/

[Ghost Dog]

4. Exactly. From the second link:

... Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).

This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.

In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.

BEWARE THE BRITS: CIRCUMVENTING U.S. RULES

Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules...

/... http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/


And from the first link (essential reading):

... it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). ...

... a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." ...

/... http://www.zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe

[dkf]

6. Nice synopsis. I can't believe it takes yet another failure to bring attention to this problem.

[Ghost Dog]

5. EU suffers worst split in history as David Cameron blocks treaty change

Britain was left isolated this morning with just three other countries, Sweden, Hungary and the Czech Republic, as an exultant Nicolas Sarkozy hailed a “historic” breakaway “euro plus” bloc that would pursue fiscal and economic union via a new treaty outside the EU.

The Prime Minister insisted that he had been prepared to support treaty change among all 27 of the EU’s members to allow the 17-strong eurozone to take measures to tackle its debt crisis and to enforce tough new fiscal rules for the single currency. But after 11 hours of bad-tempered talks, Mr Cameron said that he had blocked the changes because France and Germany and refused to agree to a “protocol” giving the City of London protection from a wave of EU financial service regulations related to the eurozone crisis...

... President Sarkozy said that British demands had been “unacceptable”.

“We would have preferred a deal at the level of the 27,” he said. “That wasn't possible taking into account the position of our British friends. In order to accept treaty revision among the 27 EU states, David Cameron asked us - something we all judged unacceptable - for a protocol to be inserted into the treaty granting the United Kingdom a certain number of exonerations on financial services regulations.

"We could not accept this, since we consider, quite on the contrary, that a part of the world's woes stem from the deregulation of the financial sector.”

/... http://www.telegraph.co.uk/news/worldnews/europe/eu/8945155/EU-suffers-worst-split-in-history-as-David-Cameron-blocks-treaty-change.html


Is the issue of sensible-regulation vs. insane-deregulation-in-favor-of-the-City-Wall-St-nexus of the financial system worth this split? In the opinion of many: Yes.