Banking crisis now one of solvency not liquidity, says Bank of England governor

In March 2008, as the financial world was starting to fully grasp the financial crisis that lay ahead, Bank of England governor Mervyn King suggested a secret bailout of the world’s banks backed by capital from wealthy nations.

In a meeting held six months before the British government announced a £500 billion bank rescue package, King told US treasury deputy secretary Robert Kimmitt and US ambassador to Britain Robert Tuttle that a co-ordinated effort was needed to recapitalise the global banking system.


The cable notes: “The G-7 is almost dysfunctional on an economic level, said King. Key economies are not included, especially those that have large and growing pools of capital. King said that a new international group was needed to address the issue.”

According to the cable, King suggested the US, UK, Switzerland and Japan could form a temporary new group to jointly develop an effort to bring together sources of capital. King also suggested an auction for banks to be able to sell off unwanted securities, such as the sub-prime mortgages that contributed to the disaster, without signalling to the market that a bank was in trouble or having to accept “distressed valuations”.



U/S Jeffery and A/S O’Brien press UK on Iranian banks

Senior United States officials urged British banking regulators to take a stronger international lead in scrutinising Iranian banks who were suspected of financially supporting Tehran’s nuclear and missile programs. US treasury assistant secretary Patrick O’Brien expressed his concern to UK officials because Iran was using state-owned financial institutions — including Bank Sepah, Bank Melli and Bank Saderat — to “facilitate its proliferation efforts” and its “support for terrorism”.

He also said that, with four Iranian banks continuing to operate in London, Middle East and Asian countries were unlikely to take any action on its Iranian banks unless the UK moves first: “If the UK acted publicly, the US would be willing to take that message to the Middle East and Asia to press for similar action in other jurisdictions.”

Chief executive of the Financial Services Authority Hector Sants defended the handling of Iranian banks, telling the US officials that they were taking implementation of UN Security Council regulations very seriously and the FSA had instituted an” intense supervisory regime”.

Phil Robinson, director of the financial crime and intelligence division, said the FSA had “pushed the boundaries” of what it can do in looking at the parent entities in Tehran. Says the cable: “All the Iranian banks are ‘keeping their noses clean’ in the UK, explained Robinson, and the FSA can only address actions of the London-based subsidiaries.”



The bank guarantee: an Irish solution to an Irish problem

US officials were concerned about the Irish government’s grasp of its financial problems as long ago as October 2008. In a meeting with Irish banking regulators held soon after the government secured banking deposits in 2008, US diplomats noted they were being a “bit optimistic” in their assessment of the banking sector.

The cable reveals Irish banking officials told US officials the guarantee of savings was a result of a “herd mentality” in the financial sector, which was based mostly on “rumor and innuendo” rather than any hard facts. Kevin Cardiff, second secretary general at Ireland’s department of finance, told diplomats he was “confident” a bailout of the sector would not be needed:

“Cardiff echoed the regulator and pointed out that auditors contracted by his Department to look at the books of at least two of the institutions under pressure came away with ‘a favorable impression of the loan books’. While he admitted that the amount of ‘speculative loans, or those that are not currently productive, is not insignificant’, he stressed that all involved in putting together the package were confident that the government would not be forced to bail out the banks.”

Last month, the Irish government, crippled by debt brought on through speculative lending, was forced to accept an 85 billion euro bailout from the International Monetary Fund and the European Union. The Irish government has planned austerity measures which will cut expenditure by 10 billion euros and raise taxes by 5 billion euros over the next four years.



Spanish ambassador on Western Sahara, migration, Islamists

Spain was secretly in favour of Morocco forming a “credible autonomy plan” for the disputed Western Sahara territory, a string of cables sent from embassies in the region reveal today. One cable reveals that Spanish foreign minister Miguel Angel Moratinos believed a solution “similar to the approach which Spain has taken with its own region of Catalonia” was appropriate.

Morocco and the Polisario Front, an Algerian-backed movement seeking independence in Western Sahara, currently dispute the territory.

Spain was unable to make its plans clear because of their reliance on Algerian natural gas and Moroccan labour and trade co-operation, US diplomats observed. “[Spain is] in the awkward position of having to maintain good relations with both nations,” the cable noted.



Pope Benedict’s visit to Sao Paulo

Pope Benedict XVI’s four-day visit to Sao Paulo, the first trip to Latin America of his papacy, was “received with popular enthusiasm and saturation media coverage”. The cable offers some observations on the controversial issue of abortion, illegal in Brazil, noting: “In the days leading up to the visit, the abortion issue was the subject of some intemperate exchanges between government and Brazilian church officials.

Health Minister Jose Temporao was accused by some sectors of the Church of making “aggressive statements” that were “far from Jesus’s teachings”. Special Secretary for Women’s Policy Nilcea Freire opined that the Church and fundamentalist religious groups should not act as “censors” of public debate. The cable commented:

“Though the crowds who attended the Pope’s public events were smaller than organizers had hoped for, they were nonetheless impressive, and those who were there were generally enthusiastic. There was a ‘feel good’ quality to the entire visit. Much of the criticism that did take place was predictable. For example, Leonardo Boff, an early liberation theologian who eventually left the priesthood after several times being disciplined by Cardinal Ratzinger’s Congregation for the Doctrine of the Faith, wrote that the Pope continues to insist on doing battle with modernity, ‘seeing in it the arrogance of man seeking to emancipate himself through his own strength’, without seeking God’s help… More than anything he sees in it secularism, materialism, and relativism.

“Other Brazilians appeared not to enjoy being told how to live their lives. However, many commentators were even-handed, giving the Pope credit for his straight talk and stressing that people were absolutely free to heed him or not, according their own judgment and the dictates of their conscience.

“And there is no doubt that a great many Catholics were deeply moved by his presence and his words, and by the fact that of all the places he might have visited, he chose Brazil.”