TW: If one person has retained his reputation amidst the financial carnage of the past couple of years it is Paul Volcker. Apparently the ranking Republican on the Banking Committee does not hold him in such high esteem though. Folks somehow think Republicans are less to blame for the finanical crisis than the Dems but I am highly skeptical. Their ideological pursuit of deregulation since the 1980's (with Democratic support at times) has set the table for many of the recent problems.
If not Volcker what do they support, more deregulation? Higher Wall Street bonuses?
From Time:
"That was quick. Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, is throwing cold water all over President Obama's bank bashing populism of last month. According to dealReporter,
A proposal by former Federal Reserve Chairman Paul Volcker to limit bank's proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter. Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration's call to levy a USD 90bn tax on banks. . . . Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.
This could just be a negotiating position, but the signs do not point to much optimism. A staffer for Chris Dodd, the Democratic chairman of the committee, is quoted later in the story saying of his boss, “He is not going to risk bipartisan support to make the White House happy.”http://swampland.blogs.time.com/2010/02/01/volcker-rule-and-bank-tax-doa-in-senate-suggests-shelby-r-ala/
Showing posts with label Financial Regulation. Show all posts
Showing posts with label Financial Regulation. Show all posts
Thursday, February 4, 2010
Saturday, January 30, 2010
Inequality And Finace Reform
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
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
Thursday, December 3, 2009
Let Them Eat Cake
TW: But for the occasional Larry Kudlovian adherent (i.e. James Pethokoukis) few explicitly make the let them eat cake argument even if supply side economics ("cutting taxes on capital" is a dog whistle for cutting capital gains, corporate taxes and taxes on the wealthy) is essentially just such an argument. Yet why not make the let them eat cake arguments?
From Simon Johnson at Baseline Scenario:
"In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular. After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.
This argument is deeply flawed along three dimensions.
1.Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).
2.It is a mistake to assume that any country’s institutions (the laws, rules and norms that govern behavior) are fixed for all time. In reality, institutions change all the time – partly in reaction to who has wealth and power, and what they are trying to do. What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?
3.Can the rich and powerful really be counted on to save the system, or just themselves? Go back carefully through the early history of the Great Depression (see Lords of Finance). Certainly the big New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they – and the New York Fed – were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.
When the Bank of England’s Andrew Haldane speaks of a “doom loop,” he is describing the declining future for our middle class. Powerful financiers, by and large, did just fine during the Great Depression."
http://baselinescenario.com/2009/12/01/feudal-lords-of-finance/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29
From Simon Johnson at Baseline Scenario:
"In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular. After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.
This argument is deeply flawed along three dimensions.
1.Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell).
2.It is a mistake to assume that any country’s institutions (the laws, rules and norms that govern behavior) are fixed for all time. In reality, institutions change all the time – partly in reaction to who has wealth and power, and what they are trying to do. What are the odds that our financial super-rich will want to build democracy and strengthen the middle class?
3.Can the rich and powerful really be counted on to save the system, or just themselves? Go back carefully through the early history of the Great Depression (see Lords of Finance). Certainly the big New York players saved banks and securities firms that were seen to be part of their club (e.g., Kidder Peabody), but they – and the New York Fed – were not so inclined to save financial institutions they regarded as less than central (e.g., Bank of the United States), even if this meant thousands of people lost their life savings.
When the Bank of England’s Andrew Haldane speaks of a “doom loop,” he is describing the declining future for our middle class. Powerful financiers, by and large, did just fine during the Great Depression."
http://baselinescenario.com/2009/12/01/feudal-lords-of-finance/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29
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."
Monday, October 26, 2009
Greed Trumps Fear Every Time
TW: Despite the beliefs of libertarian ideologues and those who take Ayn Rand too literally, capitalism needs rule sets. Auditors, banks, regulations and ratings agencies are crucial to well-functioning capitalist society. Unfortunately these rule monitors have dropped the ball. Enron bared the pitfalls with auditors. The credit crisis has done likewise with the ratings agencies. Greed is always in a battle with fear. Greed usually wins hence perhaps the need for some regulations.
From McClatchey News:
"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
..."The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.
After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.
...Moody's was spun off from Dun & Bradstreet in 2000...Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.
...Ratings agencies thrived on the profits that came from giving the investment banks what they wanted, and investors worldwide gorged themselves on bonds backed by U.S. car loans, credit card debt, student loans and, especially, mortgages...Nobody cared about due diligence so long as the money kept pouring in during the housing boom.
...One Moody's executive who soared through the ranks during the boom years was Brian Clarkson, the guru of structured finance. He was promoted to company president just as the bottom fell out of the housing market...Several former Moody's executives said he made subordinates fear they'd be fired if they didn't issue ratings that matched competitors' and helped preserve Moody's market share.
...The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.
...Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."
From McClatchey News:
"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
..."The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.
After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.
...Moody's was spun off from Dun & Bradstreet in 2000...Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.
...Ratings agencies thrived on the profits that came from giving the investment banks what they wanted, and investors worldwide gorged themselves on bonds backed by U.S. car loans, credit card debt, student loans and, especially, mortgages...Nobody cared about due diligence so long as the money kept pouring in during the housing boom.
...One Moody's executive who soared through the ranks during the boom years was Brian Clarkson, the guru of structured finance. He was promoted to company president just as the bottom fell out of the housing market...Several former Moody's executives said he made subordinates fear they'd be fired if they didn't issue ratings that matched competitors' and helped preserve Moody's market share.
...The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.
...Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."
Subscribe to:
Posts (Atom)