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The collapse of the interrelations between units of the global financial system has created chaos... many voices are trying to reestablish the threads that weave the various levels of the system back together... limits... everyone is calling for limits...  But are limits really a sound framework for controlling the world's financial system? Who defines, controls and enforces the limits?  Should the Bank of International Settlements, the Bank of England, the Federal Reserve, the Bank of Japan? Or should politicians... or the global investment banks... Citi, Deutsche, HSBC, Goldman, Société Générale et al? Or is the limit setting a dance between these parties... where the communication and decision making happens at formal and informal settings? I want to suggest that defining more robust "shock absorbers" is not a long term solution... the global financial system is much too concentrated... there is an important solution for global financial stability and that is transparency... it should start in the US with the Federal Reserve...  ~~~~ " House Republican leader John Boehner called for the Federal Reserve to disclose the recipients of almost $2 trillion of emergency loans from American taxpayers and the troubled assets the central bank is accepting as collateral.... " ~~~~ 

~~ Transparent = stable ~~

International limits  +  +  +  ~~~~ " Angela Merkel, the German chancellor, turned the tables on her international critics on Wednesday by accusing the US and other governments of making “cheap money” a central tool of their economic management, thus planting the seeds of a similar crisis in five years. “Excessively cheap money in the US was a driver of today’s crisis,” she told the German parliament. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.” ~~~~

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~~~~ " THE US Treasury market, the foundation of government bond and corporate bond markets worldwide, is suffering a crisis of confidence at the worst possible moment. Investors in treasuries are the lenders enabling the US government bail-out of the country’s broken financial institutions. That leaves them financing purchases of equity of volatile and highly questionable worth and backing a ragbag of distressed assets.  For now, treasury yields are at record lows across the term structure as investors with cash to invest conclude that they can trust no one else with their money. But investors must wonder at what point the expanded supply of government debt and its use will make the borrower inherently less creditworthy. There is an even more pressing concern for many participants in this increasingly swollen market: the settlement system has broken down. Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under. With global stock markets plummeting, investors are still turning to treasuries as a safe haven. But investors might become nervous if something is not done soon to sort out the market’s problems. “As yet investors are still coming in, but in the longer term the worry is the lack of functionality in the treasury market. That could impact investor perception on a longer-term basis,” says Mike Pond, US treasury and inflation-linked strategist at Barclays Capital in New York. If investors turn their back on treasuries, the US government will find it increasingly difficult and expensive to raise money and roll over its maturing debts. Upward pressure on interest rates will occur at a time when the government needs to be loosening monetary policy in order to jump-start a domestic economy that is heading towards a depression. As a result of fails to deliver, the most transparently priced instrument available now has investors scratching their heads. The natural balance of supply and demand has been altered and the true price of treasuries has become obscured. The effects are being seen across other bond markets." ~~~~   National limits +  +  + ~~~~ " The U.S. rescued Citigroup Inc, agreeing to shoulder most losses on about $306 billion of the bank's risky assets, and inject new capital, bolstering investor hopes that the government will support big banks as the economy sinks into recession.... ....Even so, taxpayers are now on the hook for nearly $250 billion in potential losses in the $306 billion portfolio, including commercial real estate loans, leveraged loans, and other assets, representing 15 percent of Citigroup's $2.05 trillion balance sheet. Citigroup will absorb the first $29 billion in losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. The Treasury Department, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest. In return, Treasury and the FDIC will get $27 billion in preferred shares, of which $7 billion are a fee that Citigroup pays in exchange for the government guarantee. The government is also getting warrants to buy $2.7 billion in Citigroup common stock at $10.61 per share for a potential stake of about 4.5 percent. That's on top of the roughly 3.3 percent the government is entitled to buy under a previous deal. "To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview on Monday. Citigroup estimated the injection will give it a Tier 1 capital ratio of 14.8 percent, more than twice what the government requires. The government also increased Citigroup's access to the Fed's discount window, adding liquidity. The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy." ~~~~ Firm level limits +  +  + From Standard and Poors Assessing Trade Risk Management... ~~~~ " ... Risk Management must assign firm-wide limits and should have the authority to assign limits down to the divisions, businesses, and desks after sufficient dialogue with the business heads and other senior management. ... clear policies should exist that require the Business Unit management to assign and monitor limits for traders. Desk heads must assign limits to individual traders after adequate dialogue with Risk Management.... .... Aggregate level limits should be assigned down to the first (or lowest) aggregate level node in the limit structure (in most cases the desk level), while sensitivity, stress, and stop-loss limits should be assigned down to the trader level as well.... ' ~~~~   Math Povray at Flickr.... cool images ...