In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak
Add comment February 20th, 2010
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.
That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.” Secret Banking Cabal Emerges From AIG Shadows – Reilly – Bloomberg
Hat Tip to : Jesse
NY Fed Conspired to Hide Details of AIG Bailouts from Public and Congress
Add comment January 31st, 2010
he big banks have gotten plenty of help with their debts. But what about struggling households and non-financial institutions? Roosevelt Institute Braintruster Marshall Auerback investigates.
Once all the TARPs are tidied up and the quarterly profits no longer a revelation, American consumers will still be swaddled in debt. What’s to stop them from just walking away from it–and who’s to say, if the banks keep this kind of behavior up, we don’t want them to?
In The Holy Grail of Macroeconomics, an account of post-bubble Japan, Richard C. Koo illustrates that highly-indebted corporations with depressed asset holdings and a positive cash flow will embark on sustained debt repayment until their balance sheets are healthy once again. He argues that this happened in Japan over the last two decades and also happened in the U.S. over the four years of the Great Depression. This ongoing debt repayment created decades of economic stagnation, particularly because the fiscal response was so fitful and inconsistently applied.
But does it follow that sustained debt repayment will be the response of a household sector in the U.S. with destroyed asset holdings and high debt? To our way of thinking, it is unclear. This is especially the case with respect to mortgage indebtedness; U. S. households have non-recourse mortgage loans and can walk away from their debts rather than pay them down.
Public opinion polls reveal that Americans are angry about the current economic, healthcare, housing and environmental crises. Polls also document that a significant majority of Americans want the federal government to do something to fix these problems. But you’ve also got the makings of a huge neo-populist anger brewing, largely because (in the words of Frank Rich), “What disturbs Americans of all ideological persuasions is the fear that almost everything, not just government, is fixed or manipulated by some powerful hidden hand, from commercial transactions as trivial as the sales of prime concert tickets to cultural forces as pervasive as the news media.” In other words, even the feds might not be able to help.
The approach to financial reform that the Obama Administration has hitherto adopted is a classic illustration of this problem. Financial institutions are now back to business as usual and have provided limited help to the non-financial sector. In fact, some of them are clearly committed to worsen households’ financial position and have oriented their activity toward this end in order to maximize their profitability. Yet, they have received commitments from the taxpayer totaling $23.7 trillion.
Marshall Auerback argues that a debtor’s revolt would be a good thing.
H/T to Naked Capitalism
Add comment January 18th, 2010
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| Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington |
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
Add comment January 16th, 2010
Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.
Then he got elected.
What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.
How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?
Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.
How did we get here? It started just moments after the election — and almost nobody noticed.
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Add comment December 13th, 2009
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
Add comment November 21st, 2009
The Job Report: Another month, another drop in payrolls. Will it ever occur to our leaders in Washington that what they’re doing isn’t working – and may actually be damaging our economy?
News that the unemployment rate jumped to 10.2% in October, its highest level since 1983, as the economy shed 190,000 nonfarm jobs, underscores the spectacular failure of the so-called fiscal stimulus to stimulate anything other than economic misery.
Since the $787 billion stimulus was passed in February, the economy has lost 2.9 million jobs – for a total of 4.3 million since the end of 2008. The silver lining, some say, is the number of jobs lost each month is shrinking. But they lose sight of this: There’s no guarantee the economy’s 3.5% growth in the third quarter will continue.
Indeed, some worry the economy is on a slow-growth path that will lead to permanently high joblessness, weaker income growth and fewer opportunities. The Blue Chip consensus of more than 50 economists nationwide expects unemployment to remain above 8% at least into 2012.
Why should this be? Well, start with the fact that virtually all job growth comes from companies with fewer than 500 employees, and that startups and very small businesses are responsible for more than half of all new jobs.
Today, these entrepreneurial job creators are running scared. That the White House vows to jack up taxes on those with “high incomes” (that is, entrepreneurs) is one reason why. Next year’s scheduled expiration of the Bush tax cuts that pulled the economy out of the 2001 recession is another.
Higher income taxes, a flood of stiff new regulations and the possibility of at least $2 trillion in new taxes related to cap-and-trade and a health care overhaul over the next decade have created a climate of uncertainty – for small and large businesses alike.
Businesses are hunkered down. They have $1 trillion in cash stashed away, but they won’t invest out of fear it’ll be taxed away or some government czar will tell them how to run their business.
At the same time, banks have a record $800 billion in reserves but can’t seem to find any worthy borrowers.
The White House claims its stimulus “saved or created” 640,000 to 1 million jobs. But no evidence shows that’s true. Stimulus has failed. If anything, borrowing hundreds of billions of dollars to fund such feckless initiatives is destroying private-sector jobs. Time has come for a dramatic change of course.
The Stimulus Plan Has Failed – Editorial, Investor’s Business Daily
Add comment November 8th, 2009
As the front-page story in today’s Times points out, the relationship between AIG and its longtime former CEO, Hank Greenberg, is getting more and more fascinating. On the one hand, Greenberg still owns a lot of stock in the company and is keen to see it become viable again. (I happened to speak with him a few weeks ago–I’ve got to make sure the conversation was on the record before providing more detail, but the short version is that his feelings on this point are pretty unambiguous. It’s a mixture of his personal pride in having built the company and his own financial interest.) On the other hand, Greenberg does seem intent on competing against it aggressively.
This particular detail from the Times story caught my eye:
The firm [that is Greenberg's current firm, C.V. Starr & Company] seems to be focusing on the specialized lines of business insurance that once made A.I.G. stand out. The government had hoped to leave those businesses at A.I.G. intact after selling off most of its other operations, like life insurance and household finance.
That’s basically what I’ve heard, too–I think the hope is to sell off the overseas life insurance and annuities business in particular. (The current CEO, Robert Benmosche, is a former life insurance executive and may decide to hang on to the domestic parts of those businesses.)
Now, if Greenberg were only making a push into the overseas consumer businesses, then there wouldn’t be much of a conflict. But commercial insurance is at the heart of AIG’s plans going forward. Moreoever, the reason those specialty lines have been so profitable over the years is that AIG has had little in the way of competition there and a lot of pricing power. If Greenberg and C.V. Starr are getting into those businesses, it could have a pretty direct effect on AIG’s bottom line.
Add comment October 31st, 2009
Once upon a (not long ago) time, there was a widely established set of blueprints for regimes of monetary and exchange rate policies, one expected to fit not only the full range of economies in the global arena, but also to serve as a guide for international monetary cooperation. Confidence in the effectiveness of those blueprints has been shattered by the scale and simultaneity of asset price booms and busts that led to the current global economic crisis. A reshuffle of views on monetary and exchange rate policies may turn out to be a companion to the revision of financial regulation.
It is now increasingly accepted that, to some degree and width, mainstreaming reactions to asset price moves in monetary policy is to become a new norm. It is also becoming clear that the previous world of theoretical determinacy and optimum rules of conduct is to give place to less-obvious policy choices and more discretion.
The purpose of this note is to highlight how the special complexity and indeterminacy intrinsic to international monetary-financial relations will deepen under the new regime. In the case of financial transactions between advanced financial systems and emerging markets, there is in addition an asymmetrical impact in terms of higher foreign reserve requirements on the latter.
The determinate world of inflation targeting and exchange-rate corner solutions
“The past 10 years have been the decade of inflation targeting. (…) Narrowly defined, inflation targeting commits central banks to annual inflation goals, invariably measured by the consumer price index (CPI), and to being judged on their ability to hit those targets. Flexible inflation targeting allows central banks to aim at both output and inflation, as enshrined in the famous Taylor Rule. The orthodoxy says that central banks should essentially pay no attention to asset prices, the exchange rate, or export prices, except to the extent that they are harbingers of inflation”(Frankel. 2009).
Asset price cycles were seen as basically harmless – or non-significant as a channel of transmission of monetary policy, as in the case of developing economies without financial depth. Even when the frequent appearance of bubbles started to be acknowledged, the belief – “the Greenspan doctrine” – was that attempts to detect and prick them at an early stage would be impossible to accomplish and potentially harmful. If necessary, resorting to interest rate cuts to safeguard the economy after bubble bursts would be a safer procedure.
Low and stable inflation could then be attained through a forecast-oriented, anticipatory manipulation of basic interest rates, as the single focus for monetary authorities. Movements of floating nominal exchange rates would reinforce the effectiveness of interest rates set to target inflation. Stable inflation would also lead to low risk premiums and higher financial stability.
In the case of small countries, fixing the nominal exchange rate and abdicating of monetary policy would import stability from inflation-targeting countries. The “Great Moderation” period, with developed economies exhibiting relatively low inflation rates and output fluctuations from mid-80s onward, seemed to vindicate that confidence.
This world of presumed stable and stabilizing monetary and financial spheres was shaken by the global financial crisis. With hindsight, asset price booms and busts became acknowledged as both increasingly pervasive and harmful: real-estate and stock-market booms leading to excess US household debt and to fragile asset-liability structures; a generalized bubble burst pushing the global economy to a quasi-collapse.
Endogenous creation of liquidity and the “sea of bubbles”
Chapter 3 of the latest IMF’s “World Economic Outlook” brings evidence on the presence of real-estate and stock-market asset price busts over the past 40 years (WEO – ch.3). The recent experience with widespread busts of both house and stock prices is singular in the last 40 years (Chart 1). However, one can observe not only the frequency of previous episodes, but also that those “asset price busts are relatively evenly distributed before and after 1985 – a year that broadly marks the beginning of the ‘Great Moderation’” (p.95).
The Arrival of Asset Prices in Monetary Policy by Otaviano Canuto
Add comment October 25th, 2009
DONE AND UNDONE In 1933, left, Franklin Roosevelt signed the law that separated banks from securities firms. In 1999, Bill Clinton signed the bill that undid the separation.
Throughout the history of American commercial life, one cultural trait has tended to dominate: Americans are optimists, a people prone to seeing the glass as not merely half-full but rapidly expanding, and bearing liquid that might yet be turned into gold.
The Crisis and the U.S.’s Casino Culture – Peter Goodman, New York Times
Add comment September 23rd, 2009
One of the lessons from AIG is that a company can be brought down by collateral demands even before the swaps are triggered by defaults. If the buyers of the swaps have the right to demand additional collateral as CMBS tranches are downgraded–a very likely scenario–Wells could find itself having to scramble for liquidity even though the underlying credits haven’t yet triggered the credit default swap payments. This, recall, is exactly what killed AIG.
Add comment September 19th, 2009
This week, as you may have noticed on Monday, but had probably forgotten by this morning, was the first anniversary of the collapse of Lehman Brothers.
For Rip Van Winkles who look at their finances only once a year and note that stockmarkets, house prices and currencies are today pretty much where they were a year ago, Lehman was a second-tier Wall Street investment bank that went bankrupt on September 15 2008: 9/15 is not ingrained in our memories like 9/11 but it triggered what was briefly the biggest financial crisis in history and inspired widespread prophecies of a 1930s-style Great Depression and the end of the capitalist world as we know it. We now know that the sky did not fall in as the Chicken Little commentators predicted, but does this mean that all the fuss was just a storm in a teacup?
The answer is no. As a result of Lehman’s bankruptcy, millions of people have needlessly lost their jobs, hundreds of thousands of homes have been needlessly repossessed and trillions of dollars, pounds and euros have been needlessly added to the debt burdens of governments around the world. I repeat that word needlessly because most of these losses would not have happened if Lehman had been supported or wound down in an orderly way.
The chaotic collapse of Lehman was the heart attack that turned a serious, but manageable, ailment in the world of finance and the housing markets into a near-death experience for the real economy of industry and jobs. In short, the world changed with Lehman.
9/15 Is a Date We Should Never Forget – Anatole Kaletsky, Times of London
Add comment September 18th, 2009
The oversight panel — led by Harvard law professor Elizabeth Warren — acknowledged the difficulty confronting Paulson and his team.
The report said while 18 of the 19 large institutions that underwent “stress tests” by the Federal Reserve in the spring probably are prepared to handle a downward turn in the economy, smaller banks would have a substantially more difficult time.
Those banks may need to raise an additional $12 billion in capital to guard against mortgage loans going bad, the report states.
Banks face continued stress from the billions of dollars in toxic mortgage assets still on their balance sheets, a congressionally appointed watchdog said Tuesday, something that could prompt the Treasury Department to expand its rescue programs. [Read More]
Add comment August 12th, 2009
Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »
1 comment July 25th, 2009
Hank Paulson appeared before the House committee on (Lack of) Oversight and (Prevention of) Government Reform last week to defend his actions in the Bank of America/Merrill Lynch deal. For those of you who haven’t been following along, Bank of America CEO Ken Lewis has accused Ben Bernanke and Hank Paulson of pressuring him to complete the Merill acquisition even after discovering that the losses at Merrill were several orders of magnitude higher than what he thought when the deal was struck. Bernanke and Paulson allegedly told Lewis that he and the entire board would be replaced if he didn’t conceal the losses until the deal was approved by shareholders.
I didn’t think Hammerin’ Hank’s reputation could fall any further but after listening to his arrogant testimony this week, I think I have to revise that. Paulson cast himself as the hero in his testimony:
“Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life,” he said in written testimony prepared for a hearing Thursday.
While losses have been staggering, “that suffering would have been far more profound and disturbing” had the government not intervened, he will tell the House Oversight and Government Reform Committee.
“Our responses were not perfect … But, having had the benefit of some time to reflect, and to consider views expressed by others, I am confident that our responses were substantially correct and they saved this nation from great peril,” Paulson wrote.
Well, gee, thanks Hank. There is no way to know how things would have turned out if you hadn’t bailed out every firm that acted as a counterparty to your net worth (Goldman Sachs), but it’s nice to know it hasn’t affected your self esteem.
While Bernanke prudently fell back on the “I don’t recall” defense, Paulson, believe it or not, defended his threat to Lewis:
Paulson said he told Lewis that reneging on the promise to purchase Merrill would show “a colossal lack of judgment.” He then pointed out to Lewis that the Fed could remove management at the bank if it saw fit, he said.
“By referring to the Federal Reserve’s supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America’s regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment,” Paulson said.
Paulson said he believed his remarks to Lewis were “appropriate.”
Faced with being forced out with only a golden parachute to cushion his fall, Lewis decided that maybe those Merrill losses weren’t really so important that they needed to be disclosed to BAC shareholders prior to voting on the merger. Based on the performance of BAC’s stock price since then, shareholders might disagree, but hey that’s a small price to pay for saving the “system”, right?
The charge that the failure of large financial institutions represents a systemic risk is one that suffers from a lack of evidence. Is the system really better off maintaining Citigroup on life support rather than letting it die a natural death? Is the system really better off by expanding the allegedly already too large to fail Bank of America? Is the system really better off when poorly managed companies are rescued at the expense of those who acted more prudently? Is the system really better off when losses are spread far and wide rather than concentrated with those who took the risks? What message does it send to prudent managers when their imprudent competitors are bailed out? Will they be so prudent next time?
The economic success of the US is not dependent on maintaining the status quo. Capitalism is a system which requires failure to advance. The failure of a few companies is not evidence that capitalism has failed but evidence that it is working. Failure sends a message to other market participants that the practices that caused the failure should be avoided. That message applies not only to private companies but to the government institutions that also failed us in this crisis. Attempting to return to the status quo rather than allowing private company failures and reforming failed government institutions does not advance us as a society. It mires us in mediocrity.
It is Paulson, Bernanke and Bush who showed a colossal lack of judgment. It is the management of Bear Stearns, AIG, Lehman, Merrill Lynch, Fannie Mae and Freddie Mac who showed a colossal lack of judgment. It is Alan Greenspan and all the member of the Federal Reserve who showed a colossal lack of judgment. It is most of Congress that showed a colossal lack of judgment. It is Tim Geithner and President Obama who continue to show a colossal lack of judgment. And it is the American taxpayer who will have to pay the tab for the colossal lack of judgment shown by all of them.
The long term consequences of government actions over the last two years will become evident to investors in the coming years, but for now, attention is focused on the immediate situation. And the immediate situation is still improving. The stock market rallied 7% last week as earnings season kicked off with some highly visible positive surprises. Goldman Sachs, JP Morgan, Bank of America and Citigroup all reported better than expected earnings (thanks in large part to the implicit guarantee of the government) and the remainder of the financial sector seems likely to follow suit in the coming weeks. Intel and IBM got the tech sector off to a good start. Next week will see a flood of companies reporting their second quarter results and while there will be a few disappointments such as Google last week, I believe the aggregate numbers will continue to be better than the market expects.
Paulson: A Colossal Lack of Judgment – Joseph Calhoun, Alhambra Inv.
Add comment July 22nd, 2009
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
Fiscal Ruin of Western World Beckons – A Evans-Pritchard, Daily Telegraph
Add comment July 21st, 2009
July 15 (Bloomberg) — Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.
The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at “potentially inflated values” should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are “inflated,” that again calls into question the quality of banks’ results.
Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices — and behavior — than truly getting markets back on their feet.
Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.
Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market.
The losses are “a big part of the toxic asset issues facing banks,” Miller added.
Balk at Losses
A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.
Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better.
Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported, according to a report last month by Jack Ciesielski, editor of The Analyst’s Accounting Observer.
The rule changes allowed companies to sidestep some impact of mark-to-market accounting on securities, many of them backed by mortgages, that have fallen in value for an extended period.
Saved From Losses
The “maneuver saved eight of the firms — Prudential Financial Inc., SI Financial Group Inc., First Commonwealth Financial Corp., National Penn Bancshares Inc., Bank of New York Mellon Corp., Zenith National Insurance Corp., Sun Bancorp Inc. and American Equity Investment Life Holding Co. — from reporting first-quarter losses instead of net income,” Ciesielski wrote.
Another rule change allowed companies in some cases to ignore market values and use their own estimates for troubled assets. That helped Wells Fargo & Co. avoid what may otherwise have been a $4.5 billion hit to its capital.
This was all part of ongoing and often unsuccessful efforts to push prices in a particular direction.
Last fall, the Securities and Exchange Commission instituted a temporary ban on selling financial stocks short — or betting they would decline in value — to try and prop up the value of bank shares. Talk about reining in speculation in commodity markets, meanwhile, is designed to keep prices for oil and some foodstuffs from rising too high. And all arms of government have tried since the credit crunch began to keep home prices from falling.
Buyers Don’t Play
Efforts to direct prices usually fail because buyers aren’t willing to play along. Financial stocks continued to fall despite the short ban.
And the congressional flip-flop on how banks should value assets shows that such efforts can backfire.
The logjam in the drive to modify troubled mortgages is vexing the Obama administration. It is in some ways a problem of the government’s own making. To try and undo it, the House’s Frank and the Senate’s Dodd wrote late last week to banking regulators complaining about valuations of home-equity loans.
The chairmen said, “We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value.”
Fudging Confirmed
Throughout the crisis, investors have worried that banks are fudging their numbers. Now congressional leaders are confirming those fears.
Underlining the political nature of their request, Dodd and Frank didn’t call for an investigation of the supposedly “inflated” values.
That’s no reason for the SEC to stand pat. The agency needs to act, now that it has an allegation from top legislators that potential financial-reporting abuses are taking place at banks.
Failure to follow up will send a message that it is all right for banks to cook their books, so long as the resulting values are seasoned to suit the current political taste.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
Barney Frank, Chris Dodd Do Banking Back Flip – David Reilly, Bloomberg
Add comment July 15th, 2009
Washington’s enormous expansion of the government’s spending share of GDP to over 40 percent — including Bailout Nation, TARP, and government takeovers in numerous industries — is eerily reminiscent of Old Europe’s old policies. In a twist of irony, Europe seems to be moving toward a lower-tax-and-spend-and-regulate, Ronald Reagan–type approach, while we in the U.S. are regressing to the failed socialist model of Old Europe. This makes no sense.
Here’s the clincher: Year-to-date, Dow Jones stocks are off 7 percent, while China stocks are up 71 percent. The world index is up 4 percent. Emerging markets are up 25 percent. They’re all beating us. None of this is good.
We’re going the wrong way. That’s why stock markets are not voting for the United States anymore.
Washington Is Going the Wrong Way – Larry Kudlow, CNBC
Add comment July 14th, 2009
William White predicted the approaching financial crisis years before 2007’s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.
White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
Then, after 15 years in the world’s most secretive gentlemen’s club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.
And now this.
White is wearing his pinstriped suits again. He has just returned from California, where he gave a talk at a large mutual fund company. Then he packed his bags again and jetted to London, where he consulted with the Treasury. After that, he returned to Switzerland to speak at the University of Basel, and then went on to Frankfurt to present a paper at the Center for Financial Studies. From there, White traveled to Paris to attend a meeting at the Organization for Economic Cooperation and Development (OECD). Finally, he flew back across the Atlantic to Canada. White is clearly in demand, including in North America.
Since the economy went up in flames, the wiry retiree has been jetting around the globe like a paramedic for the world of high finance. He shows no signs of exhaustion, despite his rigorous schedule. In fact, White, with his gray head of hair, is literally beaming with energy, so much so that he seems to glow.
Perhaps it is because someone, finally, is listening to him.
Listening to him, that is, and not to his rival of many years, the once-powerful former chairman of the US Federal Reserve Bank, Alan Greenspan. Greenspan, who was reverentially known as “The Maestro,” was celebrated as the greatest central banker of all time — until the US real estate bubble burst and the crash began.
Before then, no one in the world of central banks would have dared to openly criticize Greenspan’s successful policy of cheap money. No one except White, that is.
The Economist Who Predicted the Crisis – Balzli & Schiessl, Der Spiegel
Add comment July 11th, 2009
Last week saw the publication of some of the scariest numbers so far in this recession. Britain suffered its worst quarterly fall in GDP since 1958: a year when Harold Macmillan was prime minister and the Soviet Union was launching Sputnik satellites into space. The 2.4% fall in the first quarter of 2009 was equivalent to about 10% at an annual rate.
In America the unemployment rate hit its highest level since 1983: when the American embassy in Beirut was bombed and Michael Jackson first performed the “Moonwalk”. Paul Krugman, a Nobel prize-winning economist, has estimated America has lost 6.5m jobs since the start of this recession.
To make matters worse Arnold Schwarzenegger, the governor of the state of California, declared a state of fiscal emergency in his state. The fiscal plight of the American states adds to the ballooning of federal debt discussed in this week’s cover story.
Under such circumstances it is not surprising that Stuart Thomson, the economist at Ignis, talks of a “WWW recovery”. He is not referring to the internet but to the pattern of apparent recovery followed by a decline back into the mire.
After nine months of severe pain it should be apparent to all that the recovery, when it comes, will not be easy. The economies of the developed world are in a dire state.
With the benefit of hindsight it would have been better to take some pain in the short term, rather than the sustained torture by a thousand cuts. For example, letting some large banks and auto makers go under would no doubt have been unpleasant. But if the destruction of old business helped pave the way for the generation of new ones, the longer-term effect could be beneficial.
Of course, it makes sense to minimise the extent of human suffering. Those who lose their jobs should, as far as possible, get help in finding work in new or expanding economic sectors.
In any case, the current recession is hardly painless. As Greg Mankiw, a professor of economics at Harvard, points out in his blog the level of American unemployment now is much higher than the Obama administration forecasted in January. This is despite its huge stimulus plan.
Better to take misery in the short run than face a protracted period of unpleasantness.
Better to Face Our Economic Pain Now – Daniel Ben-Ami, Fund Strategy
Add comment July 7th, 2009
ProPublica and Washington Post Staff Writer
Monday, June 29, 2009
General Electric, the world’s largest industrial company, has quietly become the biggest beneficiary of one of the government’s key rescue programs for banks.
How a Loophole Benefits GE in Bank Rescue – Washington Post
Add comment July 1st, 2009
Combine Japanese cultural tendencies toward formality, politesse, and indirection with the usual central banker’s love of opacity and econo-jargon, and you’d expect that a meeting with the Deputy Governor of the Bank of Japan would be a one-way trip into a cloud of vagueness. But in a meeting Monday, Kiyohiko Nishimura, Yale-trained economist, former Tokyo University professor and deputy governor of the Bank of Japan, gave one of the most lucid and useful explications of the credit crisis and its aftermath that I’ve heard– and I’ve heard a lot of them. And even more surprisingly, it was pretty optimistic.
A Japanese central banker is well situated to comment on the current global crisis, given Japan’s own sad history of dealing with the overhang of a credit/real estate bubble—or, more accurately, of not dealing with it. The government and private-sector’s uncertain policies condemned Japan to a traumatic lost decade of slow growth.
Nishimura shared a talk he’s been giving—including at a Federal Reserve Bank of Chicago conference in May—about the comparative post-bust experience of Japan in the 1990s and the U.S. today. It’s titled: “The Past Does Not Repeat Itself, But it Rhymes.” The rhyming can clearly be seen in a chart showing what he dubbed a “remarkable resemblance in developments between the U.S. crisis and Japan’s ‘lost decade.’”
The U.S. is experiencing what Japan did in the 1990s, but seven times faster.
U.S. Crisis is Like Japan’s, Only Seven Times Faster – D. Gross, Newsweek
Add comment June 26th, 2009
Old habits die hard—especially bad ones, and especially when they’re backed by well-heeled lobbyists and a powerful congressional committee chairman.
It was hard not to draw that conclusion over the past week, as Wall Street and Washington alike prepared for President Barack Obama’s much-anticipated June 17 speech outlining the Administration’s proposals to overhaul financial regulations. Despite the promise of tough reforms from the President and his top economic officials, the Administration—in its decision to put off tough political battles over regulatory turf and reining in executive pay—appeared to be backing away from the stiffest moves that were on the table.
With the worst of the crisis appearing to recede, the political will to take on those tough constituencies appeared to be fading as well. With it may go a once-in-a-generation opportunity to aggressively tackle some badly needed changes in the U.S. financial system.
“Is the drive for reform losing steam? Yes, absolutely,” says Daniel Clifton, a Washington-based policy analyst at institutional broker Strategas Research Partners. With Congress signaling that it is unlikely to act on the President’s financial-system reforms until the fall, Clifton and other observers warn that this week’s regulatory plan could be highly vulnerable to attack for five months. Short of an unexpectedly sharp return of crisis in the financial sector, which would force the Administration and Congress to conclude that the costs of retaining much of the status quo intact are too high, Clifton believes the push for reform “will lose a lot more momentum by October.”
The aim of the Administration’s regulatory plan, largely developed by Treasury Secretary Timothy Geithner, is to create a more effective and powerful regulatory structure that would have a better chance of preventing the sort of unseen and out-of-control financial excesses that brought about the current global crisis. In an op ed article in the June 15 Washington Post, Geithner and Lawrence Summers, director of the National Economic Council, said their goal is “to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.” The plan will try to rein in systemic risk by “raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms.” It will give the Federal Reserve the power to unwind financial holding companies whose failure could threaten the world’s economy. And it will try to strengthen consumer and investor protections on products ranging from “credit cards to annuities.”
Is Obama Flubbing the Financial Fix? – Jane Sasseen, BusinessWeek
Add comment June 18th, 2009
The weekend G8 communiqué, coming after four months of stabilisation in most financial markets, seemed to mark the official end of the financial crisis. If so, what lessons should be learnt for economic and financial policies in the months ahead? The history of the crisis in the next few paragraphs may not be the standard version presented by most commentators and economists, yet recent events suggest it to be a plausible account of what went wrong.
The blunders that produced last autumn’s financial crisis had nothing to do with the supposedly inflationary monetary policies of Alan Greenspan, or the fiscal profligacy of Gordon Brown, or with Mervyn King’s lack of practical market experience, or Hu Jintao’s mercantilist approach to currencies and exports. All these and many other factors contributed to the vulnerability of the world economy, but none of them would have been enough to cause its near-collapse last autumn. For that we can blame the unforced errors of a man almost forgotten since he slipped quietly out of office at the beginning of this year: Henry Paulson, the former US Treasury Secretary and ex-chairman of Goldman Sachs.
To understand how a localised financial problem in one segment of the US mortgage market turned into a near-collapse of the global financial system we need to recall Mr Paulson’s astonishing misuse of mark-to-market accounting standards to expropriate the shareholders of Fannie Mae and then to bankrupt Lehman Brothers. What made matters even worse was his inability to understand the systemic consequences of what he was doing. Anyone who doubts the importance of individuals in economic history should recall that the single worst day of last autumn’s entire financial crisis, as measured by the widening of risk spreads on interbank credit, was September 23. That was the day Mr Paulson appeared before the Senate Finance Committee to explain what he wanted to do with the $700 billion he had requested from Congress. This was the moment when everyone realised the world’s most powerful economic official did not know what he was doing.
Once the key role of personalities and financial policies is recognised, it is hardly surprising that things began to improve almost as soon as Mr Paulson was replaced by a competent Treasury Secretary, Tim Geithner. A collapse of share prices on Wall Street triggered by the Lehman bankruptcy in September ended the very day after President Obama responded to attacks on Mr Geithner’s personal probity by offering his unqualified support. A week later, the suicidal mark-to-market accounting regulations were dismantled. And it is no coincidence that the financial crisis, at least in America and Britain, effectively ended that week. From that point onwards, the US Government found itself collecting tens of billions of dollars in repayments from supposedly insolvent banks. Far from being forced to nationalise almost every bank and running out of money with which to refinance toxic assets, as predicted by panic-mongering Nobel Laureate economists, the US Treasury now finds itself almost embarrassed by the hundreds of billions of dollars it has budgeted for supporting a banking system that no longer needs state support.
Paulson Caused the Financial Crisis – Anatole Kaletsky, Times of London
Add comment June 17th, 2009
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