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Former US Federal Reserve Chairman Alan Greenspan recommends graduated capital requirements for banks to cut back their size.

“New regulatory challenges arise because of the recently proven fact that some financial institutions have become too big to fail as their failure would raise systemic concerns,” he writes in Friday’s Financial Times.”The solution is to have graduated regulatory capital requirements to discourage them from becoming too big and to offset their competitive advantage.”

Greenspan is widely blamed for allowing financial firms to outgrow government oversight and in October last year he acknowledged that he was partly wrong to resist the regulation of some securities. He said in Friday’s FT that while regulators could enforce collateral requirements, they could not fully forecast if, for example, sub-prime mortgages would turn toxic.

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General Electric cut its quarterly dividend for the first time since 1938, marking a reversal of the conglomerate’s repeated defense of the pay-out and an admission that the severity of the financial crisis defies its expectations. GE plans to slash the quarterly dividend to 10 cents a share from 31 cents, beginning in the second half of this year. The move, which will save the company US$9B annually, ends months of speculation about the pay-out’s fate and could serve to assuage investors’ concerns for its finance arm, GE Capital.

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Investors are buying record amounts of Gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system. The US Mint sold 92,000 ozs of its popular American Eagle coin in January, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007. Other countries’ mints have also reported strong sales. “Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying,” said John Reade, a precious metals strategist at UBS.

Inflows into Gold-backed exchange traded funds also surged in January 2009, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes, and absorbed about half the world’s Gold mine output for January, said Barclays Capital. “We estimate that investment demand [into Gold] could double in 2009 compared to 2007,” said Mr. Reade. “Purchases of physical Gold have jumped over the past six months as investors’ fears about the current financial crisis … have intensified.” The move into Gold is being driven by the very rich, with bankers saying that some clients are hoarding Gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above US $1,000 oz.

Last Monday Gold was trading at US$892 oz. and closed last Friday at US$942.20 + US$ 50.20 (5.6%) on the week. Traders and analysts said jewelry demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewelers demand has not discouraged investors. Jonathan Spall, director of commodities at Barclays Capital in London, said: “We have seen more new enquiries about investing in gold so far this year than during the whole 2008.”

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Last Tuesday Timothy Geithner unveiled a raft of new measures aimed at returning functionality to the besieged credit markets. Geithner outlined the picture of the latest US recovery attempt, i.e., promoting greater transparency and stricter oversight of both established and new financial stability programs, providing capital to institutions in desperate need of a cash infusion, committing up to US$1T to support consumer and business lending, addressing the housing crisis and reducing foreclosures, and stricter oversight of US taxpayer money. “The American people will be able to see where their tax dollars are going and the return on their government’s investment,” the Treasury Secretary said. “They will be able to see whether the conditions placed on banks are being met and enforced.

They will be able to see whether boards of directors are being responsible with the taxpayer dollars and how they are compensating their executives. And they will be able to see how these actions are affecting the overall flow of lending and the cost of borrowing.” This information will be made available on a new Web site: FinancialStability.gov.

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US banks now hold over US$1,000B of cash, which is an unprecedented level and more than five times the typical amount held over the past 40 years. The Big Q: Why? The Big A: Because the banks know that they are heavily exposed to bad loans/assets on their balance sheets and, therefore, they are very reluctant to commit capital to new lending. The European and US governments/central banks can expand borrowing/lending/asset guarantee programs and create asset management companies to buy the financial sector’s distressed loans/assets all they like, but these two courses of action augur serious problems, i.e. the calculation of the transfer price of the distressed loans/assets and the accompanying loss-sharing mechanism between bank owners, creditors and the government or taxpayers.

So, governments will have to inject still more huge amounts of new capital into banks, and perhaps the selective nationalization of weak or insolvent banks, and the sooner it happens, the quicker financial stability will return. An analyst at the Financial Times in London believes that the global banks require at least US$675B of new capital, of which half is probably needed yesterday. To date there is no hard evidence in either Europe or the USA that immediate, direct and decisive government action is taking place to resolve the global banking crisis and, therefore, the eventual economic outcome could still slide from a global recession, which is already largely anticipated by global stock markets, to a deflationary depression. Where are today’s Churchhills, Rosevelts and Thatchers?

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