TW: I think the notion that some financial firms and individuals are betting with the house's (i.e. our tax dollar via "bailouts") money is a core frustration with our current system. This is a manageable attribute of our system which at the end of the day has many positive attributes as well. The mega returns achieved by some distort not only the financial markets but our overall economic stats and growth rates.
From Economist:
"THERE are many reasons for the rise in inequality in Anglo-Saxon nations over the last 30 years. Globalisation has played its part by allowing capital, financial and human, to shift to where it is least taxed and constricted; the arrival of China and India into the global economy has put pressure on wages of unskilled workers. A move from a manufacturing-based to a service-based economy has diminished the power of labour unions, and increased the premium paid to "talent", all the way through from software designers to sports stars. (Up until 1962, British footballers were subject to a maximum wage.) The advantages of private education have given the children of wealthy parents a head start.
But I wanted to put forward an issue that has not often been mentioned; leverage. The Anglo-Saxon economies have been in the vanguard of credit growth and in the dominance of the financial sector.
Imagine that a casino gave much larger credit limits to its punters. Whereas the odds would still favour the house, you would get much bigger gains for the winners and losses for the losers. Similarly in financial markets, rapid credit growth allows more investors and bankers to roll the dice. Some will be skilful; more will be lucky and, as Nassim Taleb, points out in Fooled by Randomess, we will find it hard to tell the difference.
But the crucial difference with a casino is that credit growth in the asset markets turns the odds in favour of the punter. The use of borrowed money to buy assets drives asset prices higher, and encourages banks to lend more money against those assets.
Furthermore, this system rewards those who have assets in the first place. The poor who have few assets don't get to take part.
What about subprime lending? Well one can see the subprime borrowers as the last ones allowed into the Ponzi scheme. The fastest growth in such lending came in 2005 and 2006; the subprime borrowers were thus the suckers lured in at the top of the market.
All this is why controls on bank leverage are so important. It was the high level of leverage that allowed bankers to make big bets, ultimately with taxpayers' money. Control the leverage and banks will make smaller profits in the boom times, and thus pay lower bonuses. But this is a slow process..."
http://www.economist.com/blogs/buttonwood/2010/01/inequality_and_leverage
Showing posts with label Credit Crisis. Show all posts
Showing posts with label Credit Crisis. Show all posts
Saturday, January 30, 2010
Friday, January 22, 2010
Be Careful What You Ask For...
TW: Populism is fun, it lets many folks blow off steam frequently without the burden of thinking too hard or reconciling those emotions to actual governance. It is also dangerous. Both political parties will try to harness its power for their electoral benefit. I assure you the Republican establishment is merely using the teabaggers as pawns as their core philosphy of what is good for Wall Street is good for them (think Chamber of Commerce) does not jive well with the teabaggers.
Many "street" pros who have spent the past year lamenting "guvmint" intervention are starting to get nervous about "populist" policies actually being enacted.
From Paul Kedrosky:
"My friend Doug Kass has out a lucid musing on the market’s Howard Beale moment. There is a populist uproar in progress, one that people overlook at their peril.
'The populist uproar is geared toward the incumbent, toward anyone in power. It does not run on party lines, nor is it focused on health care. It is the zeitgeist of dissatisfaction, a sign of the times. Maybe it's a function of high unemployment or the electorate ticked off at the wealthy and the largest institutions (especially of a banking kind). This dissatisfaction was expressed in the Democratic tsunami that brought Obama the Presidency, and it was seen yesterday in the Massachusetts Senatorial election that brought Brown the Senate seat. In other words, the mood of the country has been changing for a while, and it is being reflected in a very negative view toward those who have not suffered from high unemployment or from wayward derivative bets (and still got paid). And, as I have written before, this will lead to policies that are arguably needed but, generally speaking, are valuation deflating.
…While I recognize that historically political gridlock is generally seen as a market positive, it might not be this time as the nation needs sound direction and leadership, not legislative inertia. Given the complexity and scope of our country's fiscal problems, obstruction and the perception of continued divisive and partisan political agendas and the lack of an overall governmental community (which could thwart desperately necessary legislative solutions) might quickly be seen as a negative.' "
http://paul.kedrosky.com/archives/2010/01/the_markets_how.html
Many "street" pros who have spent the past year lamenting "guvmint" intervention are starting to get nervous about "populist" policies actually being enacted.
From Paul Kedrosky:
"My friend Doug Kass has out a lucid musing on the market’s Howard Beale moment. There is a populist uproar in progress, one that people overlook at their peril.
'The populist uproar is geared toward the incumbent, toward anyone in power. It does not run on party lines, nor is it focused on health care. It is the zeitgeist of dissatisfaction, a sign of the times. Maybe it's a function of high unemployment or the electorate ticked off at the wealthy and the largest institutions (especially of a banking kind). This dissatisfaction was expressed in the Democratic tsunami that brought Obama the Presidency, and it was seen yesterday in the Massachusetts Senatorial election that brought Brown the Senate seat. In other words, the mood of the country has been changing for a while, and it is being reflected in a very negative view toward those who have not suffered from high unemployment or from wayward derivative bets (and still got paid). And, as I have written before, this will lead to policies that are arguably needed but, generally speaking, are valuation deflating.
…While I recognize that historically political gridlock is generally seen as a market positive, it might not be this time as the nation needs sound direction and leadership, not legislative inertia. Given the complexity and scope of our country's fiscal problems, obstruction and the perception of continued divisive and partisan political agendas and the lack of an overall governmental community (which could thwart desperately necessary legislative solutions) might quickly be seen as a negative.' "
http://paul.kedrosky.com/archives/2010/01/the_markets_how.html
Saturday, January 16, 2010
Wednesday, December 23, 2009
Banker Hypocrisy
TW: This piece frames the relative hypocrisy of many business folks their mantra is simple: if something goes wrong it is the government's fault, if something goes right it is due to their own brilliance. Ironic coming from a banker. And somehow this banker survived the government's malevolence whilst his poor competitors did not. An on-going theme now is to give the Fed and the government no credit for averting a catastrophe whilst accepting little or no personal responsibility for the crisis. Again ironic coming from those who constantly get all righteous about various forms of personal responsibility.
Anyone who spouts Ayn Rand is immediately dubious in my eyes. Many of my contemporaries came of age reading Rand during the Reagan administration, I fear they have been scarred for life especially as many of them did not read more than one or two books total the entire time I knew them.
From Economist:
"...the latest guest is John Allison, CEO of BB&T a regional American bank. Mr Allison is hard-core devotee of the work of Ayn Rand, and consequently, the interview is not very interesting. His answer to basically every question asked is: the government did it. Like so:
Question: What bank regulatory mechanisms, if any, might have prevented the crises?
John Allison: In my opinion, the crisis was primarily created by government policies, specifically the Federal Reserve putting in too much money under Greenspan where we had negative real interest rates for two years. And then Bernanke inverted interest rates, which created terrible pressure on bank margins. We couldn’t have had a bubble in the economy if the Fed hadn’t printed too much money. It ended up in the housing market because of Freddie Mac and Fannie Mae, these two giant government sponsored enterprises. So it wasn’t really the regulatory structure that created the problems, it was government policy from the Fed and through Freddie Mac and Fannie Mae.
This is wrong in many different ways. First, the suggestion that a bubble was impossible without a complicit Fed is absurd; Mr Greenspan was holding rates low to clean up after a bubble that had just popped, which inflated in an environment of high Fed rates. Secondly, low rates or no, America was running a massive trade deficit with China and a huge petroleum deficit with oil exporters, the flipside of which was a capital account surplus. Other countries were purchasing huge amounts of American debt, including gobs of mortgage debt. Mr Greenspan might have raised the fed funds rate high enough to deflate the rising housing bubble, but only at the cost of a severe recession. The whole of the blame for the money pouring into housing cannot be pinned on the American government.
Meanwhile, the definition of a subprime loan is one which cannot be guaranteed by Fannie Mae and Freddie Mac. The story of the massive growth in subprime originations in the latter stages of the bubble is the story of growth in non-agency mortgage lending. Fannie and Freddie did begin purchasing mortgage debt originated by other lenders, which did free up capital for additional mortgage lending, but it's just not right to say that the government is responsible for the housing bubble.
And Mr Allison essentially acknowledges this fact just a few minutes later:
Question: What was responsible for BB&T’s relative success and why weren’t other banks so fortunate?
John Allison: Well, BB&T certainly, we’ve had our challenges and we always have made mistakes, but we have done much better than other financial institutions and I primarily think it’s because of the value system we have at BB&T. We’ve had some good strategies and good execution, but they are very secondary to the fact that we were very much a principal driven organization. We’ve had a very strong culture around ethics and values for a long period of time and we’ve reinforced that over and over again. And that value system is based on rationality, which demands honesty, demands integrity, demands a long-term perspective on your business...
Interestingly enough, our value system kept us from making the negative amortization or what are the pick-a-payment mortgages. I remember pick-a-payment mortgages where somebody buys a house and their interest is $1,000 a month, but they only pay $500 a month. We chose not to do those kind of mortgages, not over some grand insight, because at the time, you could sell them in the secondary market, but because one of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. We expect to make a profit doing it, but we don’t consciously want to ever do anything that’s bad for our clients. We knew real estate markets wouldn’t appreciate a 10% a year forever, we didn’t except them to depreciate like they had, but we knew that people would be taking an inordinate risk with those pick-a-payment mortgages and we chose not to do them over ethics, not over economics. So BB&T’s strength, I believe, has been its value system.
Mr Allison credits BB&T's relatively good performance through the crisis with its policy of not doing dumb, irresponsible, excessively risky, or unethical things. But if BB&T were free to not be stupid and unethical, then surely other financial institutions were as well. But, he implies, they opted not to follow that path, and as a result they suffered big losses, which triggered the broader financial crisis. Thus Mr Allison argues that the crisis stemmed from poor decisions made by his competitors.
As much as I support that conclusion, I'm forced to rethink it by Mr Allison's later espousal of a return to a gold standard and an elimination of deposit insurance. That is, he very much wants to reverse the main policy changes that prevented this recession from turning into the Great Depression."
http://www.economist.com/blogs/freeexchange/2009/12/pointing_the_finger
Anyone who spouts Ayn Rand is immediately dubious in my eyes. Many of my contemporaries came of age reading Rand during the Reagan administration, I fear they have been scarred for life especially as many of them did not read more than one or two books total the entire time I knew them.
From Economist:
"...the latest guest is John Allison, CEO of BB&T a regional American bank. Mr Allison is hard-core devotee of the work of Ayn Rand, and consequently, the interview is not very interesting. His answer to basically every question asked is: the government did it. Like so:
Question: What bank regulatory mechanisms, if any, might have prevented the crises?
John Allison: In my opinion, the crisis was primarily created by government policies, specifically the Federal Reserve putting in too much money under Greenspan where we had negative real interest rates for two years. And then Bernanke inverted interest rates, which created terrible pressure on bank margins. We couldn’t have had a bubble in the economy if the Fed hadn’t printed too much money. It ended up in the housing market because of Freddie Mac and Fannie Mae, these two giant government sponsored enterprises. So it wasn’t really the regulatory structure that created the problems, it was government policy from the Fed and through Freddie Mac and Fannie Mae.
This is wrong in many different ways. First, the suggestion that a bubble was impossible without a complicit Fed is absurd; Mr Greenspan was holding rates low to clean up after a bubble that had just popped, which inflated in an environment of high Fed rates. Secondly, low rates or no, America was running a massive trade deficit with China and a huge petroleum deficit with oil exporters, the flipside of which was a capital account surplus. Other countries were purchasing huge amounts of American debt, including gobs of mortgage debt. Mr Greenspan might have raised the fed funds rate high enough to deflate the rising housing bubble, but only at the cost of a severe recession. The whole of the blame for the money pouring into housing cannot be pinned on the American government.
Meanwhile, the definition of a subprime loan is one which cannot be guaranteed by Fannie Mae and Freddie Mac. The story of the massive growth in subprime originations in the latter stages of the bubble is the story of growth in non-agency mortgage lending. Fannie and Freddie did begin purchasing mortgage debt originated by other lenders, which did free up capital for additional mortgage lending, but it's just not right to say that the government is responsible for the housing bubble.
And Mr Allison essentially acknowledges this fact just a few minutes later:
Question: What was responsible for BB&T’s relative success and why weren’t other banks so fortunate?
John Allison: Well, BB&T certainly, we’ve had our challenges and we always have made mistakes, but we have done much better than other financial institutions and I primarily think it’s because of the value system we have at BB&T. We’ve had some good strategies and good execution, but they are very secondary to the fact that we were very much a principal driven organization. We’ve had a very strong culture around ethics and values for a long period of time and we’ve reinforced that over and over again. And that value system is based on rationality, which demands honesty, demands integrity, demands a long-term perspective on your business...
Interestingly enough, our value system kept us from making the negative amortization or what are the pick-a-payment mortgages. I remember pick-a-payment mortgages where somebody buys a house and their interest is $1,000 a month, but they only pay $500 a month. We chose not to do those kind of mortgages, not over some grand insight, because at the time, you could sell them in the secondary market, but because one of the fundamental commitments in our mission is to help our clients achieve economic success and financial security. We expect to make a profit doing it, but we don’t consciously want to ever do anything that’s bad for our clients. We knew real estate markets wouldn’t appreciate a 10% a year forever, we didn’t except them to depreciate like they had, but we knew that people would be taking an inordinate risk with those pick-a-payment mortgages and we chose not to do them over ethics, not over economics. So BB&T’s strength, I believe, has been its value system.
Mr Allison credits BB&T's relatively good performance through the crisis with its policy of not doing dumb, irresponsible, excessively risky, or unethical things. But if BB&T were free to not be stupid and unethical, then surely other financial institutions were as well. But, he implies, they opted not to follow that path, and as a result they suffered big losses, which triggered the broader financial crisis. Thus Mr Allison argues that the crisis stemmed from poor decisions made by his competitors.
As much as I support that conclusion, I'm forced to rethink it by Mr Allison's later espousal of a return to a gold standard and an elimination of deposit insurance. That is, he very much wants to reverse the main policy changes that prevented this recession from turning into the Great Depression."
http://www.economist.com/blogs/freeexchange/2009/12/pointing_the_finger
Sunday, November 29, 2009
Schadenfreude Alert: Dubai Edition
TW: Obviously we should be careful on the Schadenfreude front given our precarious economic performance since 2001 but why not...
Saturday, November 7, 2009
Capital Always Wins
TW: Folks for millenia have been getting pissed off about capital screwing labor. Our nation revels in worshiping capital (and its associated derivative- credit). This go round has been especially delightful as the capital markets figured out how to absorb increasing proportions of folk's wealth through pension funds, 401Ks etc. Then crashed.
Now "Wall Street" is roaring back far ahead of the median household (which has barely moved forward for forty years anyway). There is populist anger. But the brilliant folks known as Americana are chiefly orienting their ire at those trying to initiate universal health care, maybe do some financial regulation and raise taxes on the wealthy. Things which would actually help mitigate the capital v. labor imbalance.
From Randy Forsythe at Barrons via the Big Picture blog:
“THE RISING TIDE LIFTS ALL SHIPS, but the galley slaves aren’t feeling it. They’re rowing harder than ever to make up for their colleagues who have been thrown overboard (getting rid of that extra weight improves the vessel’s efficiency).
Now, after a long spate in the doldrums, the captain has called for those still manning the oars to pick up the pace to move some cargoes, which had been notably scarce for well on a year and a half. It seems that money had been showered down like manna from heaven (this was before helicopters). That it came from a printing press or by pledging the credit of the land mattered little. Some of the money was spent, which, in turn, brought forth new orders of goods, since the storehouses had been emptied. And thus the need for the slaves to pick up their pace.
It has all put dough in the pouches of the owners and the captain of the ship, but there isn’t much for the slaves. And, no surprise, that’s caused some grumbling below. Not that there’s much the galley slaves can do about it, lest they become the next to get tossed overboard.
The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.
But for the laborers, it’s been another story entirely. The unemployment rate shot up to 10.2% in October, the highest since 1983, when we were coming out of what had been the worst recession of the post-World War II era. Even the doleful double-digit rate understates the joblessness; more folks are dropping out of the labor force or are among those having to work part-time involuntarily. If you add them to the army of the unemployed, you get what the bean-counters euphemistically call an “underemployment rate” of 17.5% last month, up a full half-percentage point from September.”
Now "Wall Street" is roaring back far ahead of the median household (which has barely moved forward for forty years anyway). There is populist anger. But the brilliant folks known as Americana are chiefly orienting their ire at those trying to initiate universal health care, maybe do some financial regulation and raise taxes on the wealthy. Things which would actually help mitigate the capital v. labor imbalance.
From Randy Forsythe at Barrons via the Big Picture blog:
“THE RISING TIDE LIFTS ALL SHIPS, but the galley slaves aren’t feeling it. They’re rowing harder than ever to make up for their colleagues who have been thrown overboard (getting rid of that extra weight improves the vessel’s efficiency).
Now, after a long spate in the doldrums, the captain has called for those still manning the oars to pick up the pace to move some cargoes, which had been notably scarce for well on a year and a half. It seems that money had been showered down like manna from heaven (this was before helicopters). That it came from a printing press or by pledging the credit of the land mattered little. Some of the money was spent, which, in turn, brought forth new orders of goods, since the storehouses had been emptied. And thus the need for the slaves to pick up their pace.
It has all put dough in the pouches of the owners and the captain of the ship, but there isn’t much for the slaves. And, no surprise, that’s caused some grumbling below. Not that there’s much the galley slaves can do about it, lest they become the next to get tossed overboard.
The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.
But for the laborers, it’s been another story entirely. The unemployment rate shot up to 10.2% in October, the highest since 1983, when we were coming out of what had been the worst recession of the post-World War II era. Even the doleful double-digit rate understates the joblessness; more folks are dropping out of the labor force or are among those having to work part-time involuntarily. If you add them to the army of the unemployed, you get what the bean-counters euphemistically call an “underemployment rate” of 17.5% last month, up a full half-percentage point from September.”
Tuesday, October 27, 2009
Becker and Pethkoukis Missing the Point
TW: Pethkoukis entitles his post the "Exec. Comp. the Great Distraction". The piece to which he refers by conservative economist Becker asserts the Great Recession/Credit Implosion is not attributable to obscene executive/Wall Street compensation. He may be right. But obscene compensation is a symptom of the disease within our economy not a primary cause.
The outrage over compensation is not because folks attribute the crash to the compensation but because it appears unearned, inequitable and based upon power structures which benefit those at the top of the pyramid. Because the compensation structures did not "cause" the Crash is no reason not to address the compensation structures.
From Gary Becker via Jim Pethokoukis"
"I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash. These executives bought large quantities of mortgage-backed securities and other securitized assets because they expected this to increase the average return on their assets without taking on much additional risk through the better risk management offered by derivatives, credit default swaps, and other newer types of securities. They turned out to be badly wrong, but so too were the many financial economists who had no sizable financial stake in these assets, but supported this approach to risk management.
The experience of other financial crashes also does not indicate that either the level or form of compensation of top financial executives were major factors in precipitating these crashes. Thousands of banks failed during the Great Depression, as did hundreds of American savings and loans institutions during the 1980s, without heads of these institutions in either case getting particularly high pay, or pay that was mainly in the form of bonuses and stock options. My impression is that this same conclusion applies to the Mexican bank crisis of the mid 1990s, and the Asian financial crisis at the end of the 1990s.
The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors. Financial institutions underrated the systemic risks of the more exotic assets, and apparently so too did the Fed and other regulators of financial institutions. In addition, large financial institutions may have recognized that they were “too big to fail”, and that they would be rescued by taxpayer monies if they were on the verge of bankruptcy because they took on excessively risky assets."
The outrage over compensation is not because folks attribute the crash to the compensation but because it appears unearned, inequitable and based upon power structures which benefit those at the top of the pyramid. Because the compensation structures did not "cause" the Crash is no reason not to address the compensation structures.
From Gary Becker via Jim Pethokoukis"
"I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash. These executives bought large quantities of mortgage-backed securities and other securitized assets because they expected this to increase the average return on their assets without taking on much additional risk through the better risk management offered by derivatives, credit default swaps, and other newer types of securities. They turned out to be badly wrong, but so too were the many financial economists who had no sizable financial stake in these assets, but supported this approach to risk management.
The experience of other financial crashes also does not indicate that either the level or form of compensation of top financial executives were major factors in precipitating these crashes. Thousands of banks failed during the Great Depression, as did hundreds of American savings and loans institutions during the 1980s, without heads of these institutions in either case getting particularly high pay, or pay that was mainly in the form of bonuses and stock options. My impression is that this same conclusion applies to the Mexican bank crisis of the mid 1990s, and the Asian financial crisis at the end of the 1990s.
The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors. Financial institutions underrated the systemic risks of the more exotic assets, and apparently so too did the Fed and other regulators of financial institutions. In addition, large financial institutions may have recognized that they were “too big to fail”, and that they would be rescued by taxpayer monies if they were on the verge of bankruptcy because they took on excessively risky assets."
Friday, October 23, 2009
Controlling Banker Compensation
TW: I thought financial industry compensation was messed up years ago, nothing in the past year has changed my mind. I have met many talented people in my life and career including many in finance. I assure you those in finance are no more talented than the rest. This latest gig where but for the grace of massive governmental intervention every damn banker would have ended up like Lehman partners. And where due to the horrible under-capitalization of banking entities throughout most of the world, the yield curve is being held low at the short end so that banks can mint money like crazy but the bankers now feel entitled to record bonuses is f'ed up. Why these folks think it is their own freaking brilliance that is driving their now highly profitable situation is beyond me although given their pervasive arrogance it is hardly surprising. Yet...
Yet...what to do. Without the government intervention and low rates, your ATM card would have failed to work at some point last October and the economy would be at best in a depression.
The pieces below deriding the latest moves to limit pay are more or less accurate. Folks sense (rightly) something is wrong but I do not believe anyone really knows what to do about it. The tea baggers march against "Wall Street" but raucously oppose "government intervention". The left generally has no clue on how to deal with finance other than to "protect consumers" which usually translates into marginally useful to mostly useless regulations which have little to do with how power is accumulated and money disbursed on amongst financial oligarchs.
I certainly have no suggestions.
From Marginal Revolution (via Pethokoukis):
"There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?"
From Naked Capitalism(also via Peth):
"The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.
If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments."
Yet...what to do. Without the government intervention and low rates, your ATM card would have failed to work at some point last October and the economy would be at best in a depression.
The pieces below deriding the latest moves to limit pay are more or less accurate. Folks sense (rightly) something is wrong but I do not believe anyone really knows what to do about it. The tea baggers march against "Wall Street" but raucously oppose "government intervention". The left generally has no clue on how to deal with finance other than to "protect consumers" which usually translates into marginally useful to mostly useless regulations which have little to do with how power is accumulated and money disbursed on amongst financial oligarchs.
I certainly have no suggestions.
From Marginal Revolution (via Pethokoukis):
"There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?"
From Naked Capitalism(also via Peth):
"The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.
If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments."
Wednesday, September 30, 2009
A Little Sculpture
(click to enlarge)
From the Big Picture blog:
" quoting WSJ-'The artwork is a critique of the global financial crisis, with the bull representing Wall Street and the man pinned to the wall representing Bernard Madoff.'
Three odd things about this Chinese sculpture: 1) It appears that Madoff has horns (wonder what THAT means) and 2) The bull appears to be badly flatulent.
Worst of all, it somehow implies that it was Wall Street captured or uncovered Madoff’s crimes — when in fact it was the Bear market that revealed his sins."
TW: Some Chinese culture I like.
Tuesday, September 22, 2009
Worship v. Problem Solving
From Barry Ritholz at Big Picture Blog:
"...I'm watching Rudy speak on CNBC about bank bailouts and bank regulation — and I am comforted by the simple fact that he is not in charge. As critical as I have been about the Obama administration’s economic approach, it has been about the policy response, not the understanding of the crisis.
The mayor, on the other hand, is frighteningly clueless in a Phil Gramm kinda way — he clearly does not understand how the crisis occurred, what caused the collapse, and how to fix it. Instead spouts the same discredited meme — that too much regulation was the problem. He is old school, well coached in free market aphorisms and now discredited market worship.
Its a shame that none of the anchors queried him as to what current regulations he would get rid of. (Nothing like letting a hanging curveball pass you by for a called strike)."
TW: Obama and the Dems are criticized for not "fixing financial regulation" in a post-crisis environment. They should be criticized although from what I can tell there is ZERO consensus on what should be done. Wall Street from my view is the best at bitching about regulations (i.e. up until last fall) until they need them (last fall until this spring) when they whine until they feel like they no longer need them (now). Many folks sense we "something" needs to be done, but what?
That said as Ritholz frames, there is a big difference between wrestling with real issues and just throwing out ideological rhetoric. Keep this in mind as we go forward not only with finance reform but all governance.
"...I'm watching Rudy speak on CNBC about bank bailouts and bank regulation — and I am comforted by the simple fact that he is not in charge. As critical as I have been about the Obama administration’s economic approach, it has been about the policy response, not the understanding of the crisis.
The mayor, on the other hand, is frighteningly clueless in a Phil Gramm kinda way — he clearly does not understand how the crisis occurred, what caused the collapse, and how to fix it. Instead spouts the same discredited meme — that too much regulation was the problem. He is old school, well coached in free market aphorisms and now discredited market worship.
Its a shame that none of the anchors queried him as to what current regulations he would get rid of. (Nothing like letting a hanging curveball pass you by for a called strike)."
TW: Obama and the Dems are criticized for not "fixing financial regulation" in a post-crisis environment. They should be criticized although from what I can tell there is ZERO consensus on what should be done. Wall Street from my view is the best at bitching about regulations (i.e. up until last fall) until they need them (last fall until this spring) when they whine until they feel like they no longer need them (now). Many folks sense we "something" needs to be done, but what?
That said as Ritholz frames, there is a big difference between wrestling with real issues and just throwing out ideological rhetoric. Keep this in mind as we go forward not only with finance reform but all governance.
Re-TARP-ed
TW: I have yet to meet a financial industry professional who does not believe our financial system was on the brink of collapse last fall. Not collapse as in another bank would have gone down like BofA, or the market would have gone down even more, but collapse as in your ATM would not have worked for awhile perhaps a long while and if that had happened for even a day or two things would have gotten real interesting really fast.
That said now that the world (for now at least) has not fallen apart, certain panderific folks are going to come out of the woodwork to claim TARP was not necessary. There were fools like Mike Pence saying as much at the time and I would expect intellectually challenged folks like Palin to make such claims. But Mitt Romney knows better. He is something worse- a pander monkey, a tendency he exhibited often during the Republican primaries.
From James Pethokoukis at Reuters:
"OK, here is what the front runner (at least according to the online betting markets) for the 2012 GOP nomination said at the Value Voters summit over the weekend:
'When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!'
Now that does sounds like a repudiation of TARP. And here is what Mitt Romney told me in March:
'The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. … The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.'
Now that does sound like an endorsement of TARP. If Romney liked it then and doesn’t like it now for policy reasons, I think that is OK. But if that is the case, he should explain is reasoning and change of mind. Of course, the cynical explanation is that Romney now realizes that among many conservative GOPers, endorsement of TARP is almost a disqualifier for the 2012 nomination. So he is trying to muddy his support a bit..."
http://blogs.reuters.com/james-pethokoukis/2009/09/21/did-romney-flip-flop-on-tarp/
That said now that the world (for now at least) has not fallen apart, certain panderific folks are going to come out of the woodwork to claim TARP was not necessary. There were fools like Mike Pence saying as much at the time and I would expect intellectually challenged folks like Palin to make such claims. But Mitt Romney knows better. He is something worse- a pander monkey, a tendency he exhibited often during the Republican primaries.
From James Pethokoukis at Reuters:
"OK, here is what the front runner (at least according to the online betting markets) for the 2012 GOP nomination said at the Value Voters summit over the weekend:
'When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!'
Now that does sounds like a repudiation of TARP. And here is what Mitt Romney told me in March:
'The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. … The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.'
Now that does sound like an endorsement of TARP. If Romney liked it then and doesn’t like it now for policy reasons, I think that is OK. But if that is the case, he should explain is reasoning and change of mind. Of course, the cynical explanation is that Romney now realizes that among many conservative GOPers, endorsement of TARP is almost a disqualifier for the 2012 nomination. So he is trying to muddy his support a bit..."
http://blogs.reuters.com/james-pethokoukis/2009/09/21/did-romney-flip-flop-on-tarp/
Saturday, July 25, 2009
Debt And "Wall Street" Sitting In a Tree K-I-S-S-I-N-G
TW: (click on to enlarge). The graph shows a fairly linear relationship between GDP and financial services growth. Fin service firms make money in many ways as debt grows (i.e. fees from debt placements, arbitrage etc.). This speaks to the simpatico and the power between increasing debt and financial service firms. Understand as well as debt rose prices on other assets (i.e. real estate, stocks, commodities) also rose creating yet more opportunities for fees etc. Food for thought.
Tuesday, July 21, 2009
Why Ideology Fails?
From Jim Kwak at Baseline Scenario:
"After the wholesale discrediting of the strong form of the efficient markets hypothesis, Robert Shiller may be the most respected financial economist in the world at the moment:
'Finance is a huge net positive for the economy. The countries that have better-developed financial markets really do better. . . . I think that we’re less than halfway through the development of financial markets. Maybe there’s no end to it.'
I think Shiller’s first and second sentences are almost certainly true. There is a strong correlation between having a high material standard of living and having a relatively sophisticated financial system; think of the United States, Japan, and Germany as opposed to Zimbabwe, for example. But you can’t infer that more financial market “development” is always better. (I’m not saying that Shiller necessarily believes that, but most of the defenders of financial innovation take it for granted.)
Just because something is good, it doesn’t necessarily follow that more of it is better. Take food, for example. It’s pretty obvious that over a wide range – say from 0 to 1500 calories per day – more food is better for you. For most people that range probably extends up to 2000 calories or a little more. After that, not so much.
I and others have made this point about financial innovation. You could make a similar argument about health care technology. To a point, using more technology – scans, implants, drugs, etc. – does correlate with better outcomes. Beyond that point, if the technology is being used instead of preventative medicine and old-fashioned doctoring, it doesn’t provide much incremental value, and may actually hurt. (If, in addition, the high use of technology is pushing up the cost of health care and making it unaffordable for millions of people, then it may really hurt.) Really all we’re talking about is the fact that marginal returns tend to diminish, and they can diminish to zero.
I’m not saying that we should put a lid on financial (or medical) innovation once and for all. As the economy changes over the next decades and centuries, the financial system we need will change as well. But this fallacy that more of a good thing must always be better is so simple and so deep-seated that it’s worth being aware of it."
TW: The above is why, amongst other reasons, ideology fails. Those who blindly follow ideology almost always believe more of something is better and when the ideology leads to bad results they claim the ideology executed better or more forcefully will ultimately triumph.
Ideology should provide a framework for use in combination with practical solutions. Not a mindless basis for one size fits all.
"After the wholesale discrediting of the strong form of the efficient markets hypothesis, Robert Shiller may be the most respected financial economist in the world at the moment:
'Finance is a huge net positive for the economy. The countries that have better-developed financial markets really do better. . . . I think that we’re less than halfway through the development of financial markets. Maybe there’s no end to it.'
I think Shiller’s first and second sentences are almost certainly true. There is a strong correlation between having a high material standard of living and having a relatively sophisticated financial system; think of the United States, Japan, and Germany as opposed to Zimbabwe, for example. But you can’t infer that more financial market “development” is always better. (I’m not saying that Shiller necessarily believes that, but most of the defenders of financial innovation take it for granted.)
Just because something is good, it doesn’t necessarily follow that more of it is better. Take food, for example. It’s pretty obvious that over a wide range – say from 0 to 1500 calories per day – more food is better for you. For most people that range probably extends up to 2000 calories or a little more. After that, not so much.
I and others have made this point about financial innovation. You could make a similar argument about health care technology. To a point, using more technology – scans, implants, drugs, etc. – does correlate with better outcomes. Beyond that point, if the technology is being used instead of preventative medicine and old-fashioned doctoring, it doesn’t provide much incremental value, and may actually hurt. (If, in addition, the high use of technology is pushing up the cost of health care and making it unaffordable for millions of people, then it may really hurt.) Really all we’re talking about is the fact that marginal returns tend to diminish, and they can diminish to zero.
I’m not saying that we should put a lid on financial (or medical) innovation once and for all. As the economy changes over the next decades and centuries, the financial system we need will change as well. But this fallacy that more of a good thing must always be better is so simple and so deep-seated that it’s worth being aware of it."
TW: The above is why, amongst other reasons, ideology fails. Those who blindly follow ideology almost always believe more of something is better and when the ideology leads to bad results they claim the ideology executed better or more forcefully will ultimately triumph.
Ideology should provide a framework for use in combination with practical solutions. Not a mindless basis for one size fits all.
Tuesday, July 14, 2009
The Credit Crisis Continues
TW: Despite much happy talk and the clear ability of certain financial institutions (i.e. Goldman Sachs) to either exert tremendous skill or tremendous gaming techniques depending upon your perspective; our financial markets remain precariously weak.
There are many observers at this point who believe our government is essentially seeking to bluff its way through the credit crisis. It creates a bit of a quandry, if the bluff works the demand for reform will be minimized, if it fails we are all f'ed. Therefore, the odds of real reform of the sort that would actually minimize the risk of the next crisis seems small. Folks like the status quos especially those which benefit themselves and especially those which benefit the incumbent powers that be.
From Floyd Norris at NYT:
"...Despite the slight opening of financial markets since the winter panic eased, this country does not have a decently functioning financial system. It is the Federal Reserve and the Treasury that decide which financial companies stay in business, which is something you expect from a centrally planned socialist economy, not from the great bastion of the free enterprise system.
Many of the better-off banks were able to repay the TARP money to the government, but they remain dependent on F.D.I.C.-guaranteed loans. CIT would be okay, at least in the short term, if it could get such loans.
There has been a lot of hand wringing over the failure of the Obama stimulus plan to get the economy moving, but where attention is really needed is the failure to get the financial system going. That was never going to be easy, but the worst possible decision was to allow the banks to fudge their financial statements. The Obama administration did not lift a finger to prevent Congress from demanding such a move, which the Financial Accounting Standards Board made under duress.
It is not easy to be sure how much difference that made in financial statements, although it clearly allowed some banks to pretend their losses are less than they really are — at least as measured by market values. The banks claim those market values are ridiculously low, but they will not divulge exactly what assets they own, or where they value them.
We are back to a situation where no one knows which balance sheet can be trusted. In that climate, the easiest decision is to trust no one — or at least no one without a credit line backed by Uncle Sam. Citi is too important to fail, but CIT may not be.
What has been needed for a long time is a way to figure out how much toxic assets are worth, and to get them off bank balance sheets and into the hands of speculators with secure funding. Then the financial institutions, with solid capital and believable balance sheets, could go back to lending, both to the public and to each other. It is tragic that has not happened."
http://norris.blogs.nytimes.com/2009/07/13/rip-cit/
There are many observers at this point who believe our government is essentially seeking to bluff its way through the credit crisis. It creates a bit of a quandry, if the bluff works the demand for reform will be minimized, if it fails we are all f'ed. Therefore, the odds of real reform of the sort that would actually minimize the risk of the next crisis seems small. Folks like the status quos especially those which benefit themselves and especially those which benefit the incumbent powers that be.
From Floyd Norris at NYT:
"...Despite the slight opening of financial markets since the winter panic eased, this country does not have a decently functioning financial system. It is the Federal Reserve and the Treasury that decide which financial companies stay in business, which is something you expect from a centrally planned socialist economy, not from the great bastion of the free enterprise system.
Many of the better-off banks were able to repay the TARP money to the government, but they remain dependent on F.D.I.C.-guaranteed loans. CIT would be okay, at least in the short term, if it could get such loans.
There has been a lot of hand wringing over the failure of the Obama stimulus plan to get the economy moving, but where attention is really needed is the failure to get the financial system going. That was never going to be easy, but the worst possible decision was to allow the banks to fudge their financial statements. The Obama administration did not lift a finger to prevent Congress from demanding such a move, which the Financial Accounting Standards Board made under duress.
It is not easy to be sure how much difference that made in financial statements, although it clearly allowed some banks to pretend their losses are less than they really are — at least as measured by market values. The banks claim those market values are ridiculously low, but they will not divulge exactly what assets they own, or where they value them.
We are back to a situation where no one knows which balance sheet can be trusted. In that climate, the easiest decision is to trust no one — or at least no one without a credit line backed by Uncle Sam. Citi is too important to fail, but CIT may not be.
What has been needed for a long time is a way to figure out how much toxic assets are worth, and to get them off bank balance sheets and into the hands of speculators with secure funding. Then the financial institutions, with solid capital and believable balance sheets, could go back to lending, both to the public and to each other. It is tragic that has not happened."
http://norris.blogs.nytimes.com/2009/07/13/rip-cit/
Tuesday, June 30, 2009
The Madoff Whiners
TW: Completely agree with this Nocera piece. If it were up to me, Madoff would be drawn and quartered in Central Park. But, the whining from his investors is pathetic. Should some of the investors be pissed at their advisors who took a fee while doing lame diligence? Yes. Were they smug thinking they were in a "special" fund? Frequently. Many people have had their asses kicked in this market. Most of all they should be pissed at themselves. Nut up and move on.
From Joe Nocera at NYT:
"...Let’s dispense first with the idea that the S.E.C. should be reimbursing Madoff victims. Why? Government agencies make mistakes, treat people unfairly, and do all sorts of things we all wish they wouldn’t. But by law, the federal government cannot be sued when it carries out an unjust prosecution or, for that matter, when it fails to uncover a giant fraud. Government negligence led pretty directly to the recent financial crisis. Does that mean the feds should be reimbursing us for our stock market losses? Of course not. Because it’s not really the S.E.C. that would be paying out the money — it would be the taxpayers. Why should my tax dollars go to helping Madoff victims? This is not 9/11.
Besides, as I’ve argued before, the S.E.C.’s negligence notwithstanding, shouldn’t the Madoff victims have to bear at least some responsibility for their own gullibility? Mr. Madoff’s supposed results — those steady, positive returns quarter after blessed quarter — is a classic example of the old saw, “when something looks too good to be true, it probably is.” What’s more, most of the people investing with Mr. Madoff thought they had gotten in on something really special; there was a certain smugness that came with thinking they had a special, secret deal not available to everyone else. Of course, it turned they were right — they did have a special deal. It just wasn’t what they expected.
Outside the courthouse today, television reporters interviewed victims, all eager to tell their tales of woe. And their stories, in many cases, truly are heart-wrenching. Hopes and dreams have evaporated. Homes have been lost. Retirees are having to take minimum-wage jobs. Their anger at Mr. Madoff is understandable, to say the least. But to see them lash out at Irving Picard, the bankruptcy trustee, made me realize that too many of them still seem to think that someone should have to make them whole. The whole point about Ponzi schemes is that there is not enough money to make anybody whole — they were robbed, pure and simple, and the government is not in the business of reimbursing for robberies. Not even when the cops stumble across the robbers and then mistakenly let them go."
http://executivesuite.blogs.nytimes.com/2009/06/29/madoff-victims-get-over-it/
From Joe Nocera at NYT:
"...Let’s dispense first with the idea that the S.E.C. should be reimbursing Madoff victims. Why? Government agencies make mistakes, treat people unfairly, and do all sorts of things we all wish they wouldn’t. But by law, the federal government cannot be sued when it carries out an unjust prosecution or, for that matter, when it fails to uncover a giant fraud. Government negligence led pretty directly to the recent financial crisis. Does that mean the feds should be reimbursing us for our stock market losses? Of course not. Because it’s not really the S.E.C. that would be paying out the money — it would be the taxpayers. Why should my tax dollars go to helping Madoff victims? This is not 9/11.
Besides, as I’ve argued before, the S.E.C.’s negligence notwithstanding, shouldn’t the Madoff victims have to bear at least some responsibility for their own gullibility? Mr. Madoff’s supposed results — those steady, positive returns quarter after blessed quarter — is a classic example of the old saw, “when something looks too good to be true, it probably is.” What’s more, most of the people investing with Mr. Madoff thought they had gotten in on something really special; there was a certain smugness that came with thinking they had a special, secret deal not available to everyone else. Of course, it turned they were right — they did have a special deal. It just wasn’t what they expected.
Outside the courthouse today, television reporters interviewed victims, all eager to tell their tales of woe. And their stories, in many cases, truly are heart-wrenching. Hopes and dreams have evaporated. Homes have been lost. Retirees are having to take minimum-wage jobs. Their anger at Mr. Madoff is understandable, to say the least. But to see them lash out at Irving Picard, the bankruptcy trustee, made me realize that too many of them still seem to think that someone should have to make them whole. The whole point about Ponzi schemes is that there is not enough money to make anybody whole — they were robbed, pure and simple, and the government is not in the business of reimbursing for robberies. Not even when the cops stumble across the robbers and then mistakenly let them go."
http://executivesuite.blogs.nytimes.com/2009/06/29/madoff-victims-get-over-it/
Friday, June 12, 2009
How Soon We Forget
TW: We are no where near out of the economic woods but folks are eager to forget any notions of reform and move on to the usual partisan bickering. In particular the old mantras of limited government are moving front and center. Folks want limited government except of course when they want their asses saved.
I made the mistake (a thankfully rare one) of turning on CNBC this morning where the lamentations were rife about "shaky policies out of Washington, getting in the way of Wall Street ". About the last time I had on CNBC was last fall when the same exact schmucks were screaming, begging even for "drastic government action".
From Steve Pearlstein at WaPo:
"Last fall, during the darkest days of the financial crisis, if you'd predicted that by the middle of this year, 10 of the biggest banks would have paid back all $68 billion of their bailout money and begun to raise private capital again, that General Motors and Chrysler would have been run through a dramatic bankruptcy restructuring and that the stock market would be up 35 percent from its lows, I probably would have given you 10-to-1 odds that you were wrong.
Now that it's all come to pass, you might think we'd take a moment and offer a pat on the back to the people who helped to engineer this little miracle -- folks like Hank Paulson, Ben Bernanke, Tim Geithner, Neel Kashkari, Sheila Bair, Barney Frank and so forth. There was nothing preordained about this fortuitous outcome. Nor, given the extraordinary amount of government intervention, can most of the credit go to the free market's natural self-correcting process.
Instead of celebrating this feat of economic policy, however, there are those who seem more in the mood for second-guessing and recrimination.
A House subcommittee yesterday worked itself into a self-righteous lather over the strong-arm tactics used by then-Treasury secretary Paulson and Bernanke to persuade Bank of America to go through with its purchase of Merrill Lynch after the bank discovered, long after it should have, that the firm known for being bullish on America had a balance sheet full of manure.
Committee members were shocked that regulators would threaten to use their supervisory powers to remove Bank of America's directors and chief executive if they backed out of the transaction at the last minute.
Never mind that if the deal had collapsed, the federal government would have had to step in with tens of billions of additional taxpayer dollars to prevent Merrill from collapsing and taking the already wounded financial system down with it.
And never mind that confidential Federal Reserve documents obtained by the committee showed that Bank of America itself -- with its own mounting losses and thinly capitalized balance sheet -- would have been the first and biggest casualty in such a meltdown.
Now that the deal has gone through and crisis has been averted, committee members were only too willing to summon a full measure of self-righteousness to denounce what they saw as a market-distorting abuse of governmental authority.
...For sheer hypocrisy, however, you can't beat Republican Sen. Bob Corker of Tennessee. Last November, Corker took to the Senate floor to denounce the Bush administration's proposal for bailing out domestic auto manufacturers, saying it didn't force the companies to do enough to restructure their costs and their operations. Among his big concerns: oversize dealer networks that prevented even the strongest dealerships from making a decent profit.
Fast forward to today, as Chrysler and GM are finally undergoing the radical downsizing and restructuring that Corker had long demanded. And what does Corker have to say about that? He's outraged at the way the discontinued dealers have been treated and is pushing legislation to ensure that they get at least six months to wind down their operations and receive full refunds from the automakers for any unsold cars or parts.
...Every crisis generates its own set of leaders willing to take risks, twist arms and even bend a few rules to get us through it. Every crisis also generates its own set of political ankle-biters. It's not hard to tell the two apart."
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/11/AR2009061104224.html?wprss=rss_business
I made the mistake (a thankfully rare one) of turning on CNBC this morning where the lamentations were rife about "shaky policies out of Washington, getting in the way of Wall Street ". About the last time I had on CNBC was last fall when the same exact schmucks were screaming, begging even for "drastic government action".
From Steve Pearlstein at WaPo:
"Last fall, during the darkest days of the financial crisis, if you'd predicted that by the middle of this year, 10 of the biggest banks would have paid back all $68 billion of their bailout money and begun to raise private capital again, that General Motors and Chrysler would have been run through a dramatic bankruptcy restructuring and that the stock market would be up 35 percent from its lows, I probably would have given you 10-to-1 odds that you were wrong.
Now that it's all come to pass, you might think we'd take a moment and offer a pat on the back to the people who helped to engineer this little miracle -- folks like Hank Paulson, Ben Bernanke, Tim Geithner, Neel Kashkari, Sheila Bair, Barney Frank and so forth. There was nothing preordained about this fortuitous outcome. Nor, given the extraordinary amount of government intervention, can most of the credit go to the free market's natural self-correcting process.
Instead of celebrating this feat of economic policy, however, there are those who seem more in the mood for second-guessing and recrimination.
A House subcommittee yesterday worked itself into a self-righteous lather over the strong-arm tactics used by then-Treasury secretary Paulson and Bernanke to persuade Bank of America to go through with its purchase of Merrill Lynch after the bank discovered, long after it should have, that the firm known for being bullish on America had a balance sheet full of manure.
Committee members were shocked that regulators would threaten to use their supervisory powers to remove Bank of America's directors and chief executive if they backed out of the transaction at the last minute.
Never mind that if the deal had collapsed, the federal government would have had to step in with tens of billions of additional taxpayer dollars to prevent Merrill from collapsing and taking the already wounded financial system down with it.
And never mind that confidential Federal Reserve documents obtained by the committee showed that Bank of America itself -- with its own mounting losses and thinly capitalized balance sheet -- would have been the first and biggest casualty in such a meltdown.
Now that the deal has gone through and crisis has been averted, committee members were only too willing to summon a full measure of self-righteousness to denounce what they saw as a market-distorting abuse of governmental authority.
...For sheer hypocrisy, however, you can't beat Republican Sen. Bob Corker of Tennessee. Last November, Corker took to the Senate floor to denounce the Bush administration's proposal for bailing out domestic auto manufacturers, saying it didn't force the companies to do enough to restructure their costs and their operations. Among his big concerns: oversize dealer networks that prevented even the strongest dealerships from making a decent profit.
Fast forward to today, as Chrysler and GM are finally undergoing the radical downsizing and restructuring that Corker had long demanded. And what does Corker have to say about that? He's outraged at the way the discontinued dealers have been treated and is pushing legislation to ensure that they get at least six months to wind down their operations and receive full refunds from the automakers for any unsold cars or parts.
...Every crisis generates its own set of leaders willing to take risks, twist arms and even bend a few rules to get us through it. Every crisis also generates its own set of political ankle-biters. It's not hard to tell the two apart."
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/11/AR2009061104224.html?wprss=rss_business
Tuesday, June 2, 2009
Government Borrowing Does Not Mean More Borrowing
TW: There has been much fretting recently about Treasury sales and how much debt governments are putting into the market. This fretting to a certain degree misses the point that a couple of years ago the same quantity of debt was being pushed but by private borrowers.The above is not the prettiest graph but it makes a point. Total U.S. borrowing- public and private- has not changed much during the Great Recession. One our borrowings from "foreigners" have not increased as a result of the increased government spending. Two, imagine what would be happening to the economy if total borrowing had suddenly plummeted from the $2 trillion level to far below $1 trillion? That is how depression environments are created.
The government has stepped in to provide liquidity and spending when private demand collapsed. For sure the government will have challenging calls to make when transitioning interest rates up and borrowing down. There will be huge controversy about how soon to raise interest rates- some will want them low to facilitiate economic growth others higher to ward off inflation.
Our longer-term fiscal challenges remain. But the chart above helps outline why temporary policies are crucial to creating a longer-term solution.
From Brad Setser at Council on Foreign Relations:
"...As households and firms rediscover their animal spirits and start to borrow more, the amount the government borrows needs to fall...More immediately, while the US is borrowing less from the rest of the world, it is still borrowing from the rest of the world. A smaller trade deficit is still a trade deficit, and financing that deficit requires ongoing inflows from the rest of the world. That means that some creditor needs to increase their exposure to the US...."
http://blogs.cfr.org/setser/2009/05/31/more-government-borrowing-doesnt-necessarily-mean-more-total-borrowing/
Sunday, May 24, 2009
Keeping Things In Perspective
From Kevin Drum at Mother Jones:
"...BankUnited in Florida has finally been taken into receivership. No surprise there, but the price tag might be: apparently the FDIC estimates the takeover will ultimately cost taxpayers a cool $4.9 billion-and that's for a bank with less than $15 billion in assets."
TW: Think about that one for a second. $5 billion that is a nice chunk of change. With all of financial carnage which has occurred over the past year or so, to a certain degree we have become immune to these announcements. But put that in perspective $5.0 billion could buy a lot of things: education for needy kids, meals for the undernourished, a nice cushy padded cell for Dick Cheney. Some group of executives ran that bank into the ground, the conservatives bitch and moan and whine about guvmint but at the end of the day you the taxpayer are cleaning up the turds of "capitalists" and free markets gone wild. A little good effective regulation can go a long way.
"...BankUnited in Florida has finally been taken into receivership. No surprise there, but the price tag might be: apparently the FDIC estimates the takeover will ultimately cost taxpayers a cool $4.9 billion-and that's for a bank with less than $15 billion in assets."
TW: Think about that one for a second. $5 billion that is a nice chunk of change. With all of financial carnage which has occurred over the past year or so, to a certain degree we have become immune to these announcements. But put that in perspective $5.0 billion could buy a lot of things: education for needy kids, meals for the undernourished, a nice cushy padded cell for Dick Cheney. Some group of executives ran that bank into the ground, the conservatives bitch and moan and whine about guvmint but at the end of the day you the taxpayer are cleaning up the turds of "capitalists" and free markets gone wild. A little good effective regulation can go a long way.
Tuesday, May 19, 2009
Today's Credit Card BS Meme
From: Reader X
Sent: Tuesday, May 19, 2009 2:17 PM
To: trey white
Subject:
I like Obama 1 minute & then hate him next. Guy is squeezing the middle class to death.. seems like all I’m ever doing is covering for the slackers. Latest being this credit card bill where now I have to be penalized for paying my card off on time to subsidize the losers who don’t pay theirs..
“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.
_________________________________________________________
From: trey white
Sent: Tuesday, May 19, 2009 2:21 PM
To: Reader X
Subject: RE:
You are going to take the credit card issuers chief lobbyist’s BS verbatim and decide Obama is “squeezing you to death”
I have deleted twice other commentary in this email so I will leave it at that.
_________________________________________________________
From: Reader X
Sent: Tuesday, May 19, 2009 2:26 PM
To: trey white
Subject: RE:
But it makes sense the banks have to supplement that income some how.. I don’t think they will go as extreme as charging interest immediately on purchase but I just hate being penalized b/c of other people’s greed.
_________________________________________________________
From: trey white
Sent: Tuesday, May 19, 2009 2:30 PM
To: Reader X
Subject: RE:
IF credit issuers were mandated to provide cards to bad risks then the meme makes sense
Look at it this way, if this meme were true, then your rates have been held down because the bad risks are subsidizing you in which case you are taking money out of the poor people’s pockets. Is that likely? If it is true, then your rates need to go up to a “fair” non-subsidized level.
In reality and what will happen barring some sort of mandate to provide cards to bad customers, credit issuers can simply not issue cards to the bad risks. This whole
story is BS perpetrated by credit card companies.
_________________________________________________________
From: Reader X
Sent: Tuesday, May 19, 2009 2:35 PM
To: trey white
Subject: RE:
This is why I run things by you before I get too worked up. If they simply don’t issue card to bad risks then I’m OK. makes sense and in reality doing people a favor so they don’t get themselves in further trouble.
In actuality cutting back of cards has already taken place as the amount of offers in the mail has dropped dramatically..
Sent: Tuesday, May 19, 2009 2:17 PM
To: trey white
Subject:
I like Obama 1 minute & then hate him next. Guy is squeezing the middle class to death.. seems like all I’m ever doing is covering for the slackers. Latest being this credit card bill where now I have to be penalized for paying my card off on time to subsidize the losers who don’t pay theirs..
“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.
_________________________________________________________
From: trey white
Sent: Tuesday, May 19, 2009 2:21 PM
To: Reader X
Subject: RE:
You are going to take the credit card issuers chief lobbyist’s BS verbatim and decide Obama is “squeezing you to death”
I have deleted twice other commentary in this email so I will leave it at that.
_________________________________________________________
From: Reader X
Sent: Tuesday, May 19, 2009 2:26 PM
To: trey white
Subject: RE:
But it makes sense the banks have to supplement that income some how.. I don’t think they will go as extreme as charging interest immediately on purchase but I just hate being penalized b/c of other people’s greed.
_________________________________________________________
From: trey white
Sent: Tuesday, May 19, 2009 2:30 PM
To: Reader X
Subject: RE:
IF credit issuers were mandated to provide cards to bad risks then the meme makes sense
Look at it this way, if this meme were true, then your rates have been held down because the bad risks are subsidizing you in which case you are taking money out of the poor people’s pockets. Is that likely? If it is true, then your rates need to go up to a “fair” non-subsidized level.
In reality and what will happen barring some sort of mandate to provide cards to bad customers, credit issuers can simply not issue cards to the bad risks. This whole
story is BS perpetrated by credit card companies.
_________________________________________________________
From: Reader X
Sent: Tuesday, May 19, 2009 2:35 PM
To: trey white
Subject: RE:
This is why I run things by you before I get too worked up. If they simply don’t issue card to bad risks then I’m OK. makes sense and in reality doing people a favor so they don’t get themselves in further trouble.
In actuality cutting back of cards has already taken place as the amount of offers in the mail has dropped dramatically..
Wednesday, March 18, 2009
"These People Have No Idea..."
TW: Have refrained from commenting on the AIG mess but I agree with below:
From Economist:
"EDWARD Liddy, the CEO of AIG, is sitting before the capital markets subcommittee of House Financial Services and taking punch after punch from members of Congress. There is no one message coming out of either party: there is only rage, and fear of the angry constituents who are melting the circuits on the Hill.
"We should let AIG go bankrupt and bring in new management," says Walt Minnick, a Democrat from idaho.
"We want the money back," says Judy Biggert, a Republican from Illinois. "We will, perhaps, have to take legal action."
"There has been a criminal conspiracy to hide information from the American people," says Brad Sherman, a Democrat from California.
"No more taxpayer funds," says Jeb Hensarling, a Republican from Texas. "No more bonuses until the taxpayer is made whole."
Loosely speaking, Republicans want to use the AIG scandal to put the brakes on future bail-outs. Loosely speaking, Democrats want to use it to exert more control over America's failing companies. But the clearest message of the hearing is: These people have no idea what they're doing."
From Economist:
"EDWARD Liddy, the CEO of AIG, is sitting before the capital markets subcommittee of House Financial Services and taking punch after punch from members of Congress. There is no one message coming out of either party: there is only rage, and fear of the angry constituents who are melting the circuits on the Hill.
"We should let AIG go bankrupt and bring in new management," says Walt Minnick, a Democrat from idaho.
"We want the money back," says Judy Biggert, a Republican from Illinois. "We will, perhaps, have to take legal action."
"There has been a criminal conspiracy to hide information from the American people," says Brad Sherman, a Democrat from California.
"No more taxpayer funds," says Jeb Hensarling, a Republican from Texas. "No more bonuses until the taxpayer is made whole."
Loosely speaking, Republicans want to use the AIG scandal to put the brakes on future bail-outs. Loosely speaking, Democrats want to use it to exert more control over America's failing companies. But the clearest message of the hearing is: These people have no idea what they're doing."
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