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from MacroScope:

Is that a bailout in your pocket?

There was an awkward moment of tension at the Milken Global Conference in Los Angeles, when a buysider on one panel asked a Wall Street banker whether he had pocketed taxpayers' bailout cash.

The tit-for-tat began when several panelists at the "Outlook for M&A" session began griping about the U.S. government's tax policy, which they said dissuades corporations from bringing overseas profits back home because of punitive taxes.

The panelists – including James Casey, co-head of global debt capital markets for JP Morgan, Anthony Armstrong, an investment banker at Credit Suisse, and Raymond McGuire, global head of corporate and investment banking at Citigroup – predicted that the M&A market might get a big boost if the U.S. were to offer a tax holiday of sorts for repatriated profits.

They also suggested such a move could be a boon for hiring and economic growth: Tilman Fertitta, a panelist who is chairman and CEO of the consumer products company Landry's, said he would certainly feel the incentive to do more deals and invest more at home if he could bring back his overseas profits without being taxed. He even wondered why Mitt Romney and Barack Obama hadn't made such a proposal a key point in their election campaigning.

But just before the executives could launch into a profit repatriation samba, another panelist stopped the music.

Maria Boyazny, CEO of distressed debt investing firm MB Global Partners, pointed out that previous government actions that were supposedly intended to spur the economy had only saved Too Big To Fail banks and bolstered the financial industry's fortunes. ("No offense to anybody on the panel," she said in that but-I'm-going-to-offend-you-anyway tone.)

In the intervening time, she said, corporate America has only gotten richer by cutting jobs and hoarding capital. She then wondered aloud where all the $700 billion in bailout money and trillions of dollars in Federal Reserve stimulus programs had actually gone.

from MacroScope:

Selective transparency at the Fed

It’s something of a dissonant communications strategy: Fed officials are willing to tell us what they think will happen three years from now, but not what they discussed three years ago.

The Federal Reserve's public relations arm holds up the chairmanship of Ben Bernanke as a model of transparency. And it’s true. Press conferences and federal funds rate forecasts are major steps forward for a central bank that until the mid-1990s didn’t even tell the markets what it was doing with interest rates.

Still, the old habits of secrecy die hard. Monetary policy transparency aside, the Fed has remained adamantly opaque in other ways – to the point that it took a Bloomberg News lawsuit for it to name the recipients of emergency era loans.

Similarly, it took a Freedom of Information Act request from MSNBC and The Huffington Post to obtain a mostly blacked out version of transcripts for Fed meetings during the worst of the U.S. financial crisis. The Fed only releases full transcripts of its meetings with a five year lag, arguing that this allows policymakers to conduct their discussions more freely.

New research from economists Xavier Freixa and Christian Laux examining the nature of regulatory failures during the crisis makes an interesting distinction between mere disclosure, the raw release of data, and transparency, which is a more directed effort to communicate that information to the public.

We interpret disclosure as providing information, while transparency arises when the information is effective in reaching the market, being adequately interpreted and used.

from Unstructured Finance:

UF’s Weekend Reads

Here is Sam Forgione's suggested weekend reads. And a reminder to our UF readers in the US that daylight savings time begins on Sunday, so set those clocks forward 1 hour.

From The New Yorker:

Nick Paumgarten traversed the restless egos of Davos for a candid look at the event. The story captures the ambivalence many feel toward the well-hyped forum.

From The Atlantic:

Megan McCardle asks how and why companies get complacent, even when they know they’re sinking, using GM and Blockbuster as examples.

From The Economist:

from The Great Debate UK:

Hypocrisy piled on humbug

The row over bankers‘ pay and honours has presented the depressing spectacle of British public life at its nadir, with hypocrisy piled on humbug.

On the one hand, we hear bankers and their apologists arguing that their rewards are required to keep them from running off to sunnier climes, which prompts a number of questions. First, when bankers claim that they have to be paid a fortune in recognition of the size of the organizations they run, we may well ask: how many banks of this scale are there in the world today? How many are so hungry for skills like those of Britain’s bank bosses that they are willing and able to offer these sorts of rewards?

Three or four, maybe, at most – after all, several of the world’s largest banks are now owned by the Chinese Government, so they are unlikely to want a British boss any time soon, and the others do actually have a full management complement anyway. By definition, the number of vacancies at this level is extremely limited, so the danger of an exodus of top British bankers is much exaggerated.

In any case, does it really matter?

After all, even before the crash, there was quite a lot of sniping at high City payoffs and we were told at the time that the outrageous salaries and bonuses were needed to secure the services of people like (Sir) Fred Goodwin et al – and since then we have had ample opportunity to assess the true value of their high-price expertise.

Is it really being suggested now that the banks collapsed because pre-crisis pay rates were insufficient to attract competent CEO’s?

Or is the argument that, if they had paid less astronomic salaries, the banks would have lost even more money than they actually did in 2008-9?

from MacroScope:

European rescue: Who benefits?

The words "European bailout" normally conjure up images of inefficient public sectors, bloated pensions, corrupt governments. But market analyst John Hussman, in a recent research note cited here by Barry Ritholtz, says the reality is a bit more complicated:

The attempt to rescue distressed European debt by imposing heavy austerity on European people is largely driven by the desire to rescue bank bondholders from losses. Had banks not taken on spectacular amounts of leverage (encouraged by a misguided regulatory environment that required zero capital to be held against sovereign debt), European budget imbalances would have bit far sooner, and would have provoked corrective action years ago.

In other words, even if state actors mishandled government finances, Wall Street was, at the very least, an all-too-willing enabler.

from The Great Debate UK:

Greece deal is a compromise and, once again, the banks have won

By Laurence Copeland. The opinions expressed are his own.

Whenever I see photos of Chancellor Merkel these days, I’m reminded of the lugubrious features of the creature in the Restaurant at the End of the World, as it recommended to guests which part of its own anatomy they should eat. The details of the “Deal to Save the Euro” are still mysterious and have been given a misleading spin in the official releases, but one or two points seem clear.

First, the package is a compromise – a little bit of default (as required by a reality check) plus assistance to Greece which looks very generous but is still not enough to give it a realistic chance of paying its remaining debts. So the can has been kicked further down the same road yet again.

The second point is one I am as fed up of writing as you probably are of reading: once more, the Banks Have Won. On the one hand, the French President wanted some kind of blanket balance-sheet tax, supposedly to contribute to the cost of the bailout. This was a daft idea for all sorts of reasons, not least the fact that it would have penalised the banks which behaved responsibly along with the irresponsible, the sort of outcome we have seen only too often in the last three years.

Germany, or at least Angela Merkel, wanted a solution which involved some contribution from the private sector creditors (mostly the banks, of course), which she has in the end got. Now the first thing to be said is that the words “private sector” ought to be in inverted commas, because we have seen time and again since 2007 how, one way or another, bank losses end up being borne by the taxpayers, so that any serious hit on the banks would have been deflected on to the public sector anyway.

And then, of course, the British banking sector is half state-owned in any case – all of which begs the question: why all the fuss? Why were negotiations held up for weeks over the issue of how much the private sector should contribute?

In the end, how much are the so-called private sector lenders going to contribute to the rescue?

from Anthony De Rosa:

A teachable moment

Is a crisis in education less important than a crisis of our capital markets? At the end of 2008, the federal government took aggressive measures to ensure that a supposed complete financial meltdown would be averted by purchasing troubled assets and restoring liquidity to the largest banks in America. Only a few months following the bailout of these banks, many of them paid out healthy bonuses to the same executives responsible for causing the situation to unfold.

Today, in Wisconsin, we watch teachers fight to ensure they receive a five figure salary. According to The Atlantic, the average salary for teachers in Wisconsin is slightly worse than the national average with starting salaries of $32,642 and a maximum with a master's degree of $60,036. Meanwhile, the average Wall St. bonus, not salary, fell to a measly $128, 530. Goldman Sachs paid $431,000 on average.

Is it fair to compare the salaries of Wall Street executives to the teachers in Wisconsin? Are the jobs on Wall Street more valuable than the ones in education? It seems like an easy answer, with Wall Street profits reaching $27.6 billion last year. But with our job market thinning and unemployment hovering around 9% it seems wise to invest in education to help build the jobs of tomorrow. The financial sector is but one component of our economy, an economy sorely needing diversification based on how apparent it is now that we depended on Wall Street to create capital and jobs for far too long.

Countries like Japan and China are busy making investments in science, infrastructure and education. It's already been all but conceded that China will soon have a larger economy than the United States in a few short years. What are we doing to compete?

America is locked in a battle over budgets, and many of the calls for streamlining our government are well intentioned. The problem is not that we are trying to cut too much, but we're focused on cutting the most minor expenses that help the most vulnerable, the largest base of potential workers who make up the unemployed. The largest personal incomes are being protected, tax cuts for the top 2%.

The teachers in Wisconsin are a microcosm of the misguided efforts to make America more fiscally responsible. How can anyone say with a straight face that we need to get these minuscule teacher's salaries in line when we dump trillions of dollars into failing banks, essentially tossing out the entire element of risk? If you're too big too fail, what's stopping you from making the same risky moves and doing it all over again?

from The Great Debate UK:

Should a country always stand behind its banks?

Ever since the financial crisis broke in 2008 some of the world’s major banks have their governments to thank for their survival. The fates of Royal Bank of Scotland or Citibank would have been much worse without large injections of capital from the UK and U.S. authorities. The UK government pumped more than £37 billion into its largest banks in the immediate aftermath of the Lehman Brothers crisis. Ireland took that a step further when it guaranteed all of its banks’ deposits and liabilities. This was affordable, the Irish government said at the time.

However, this policy failed spectacularly. Ireland’s bailout of its banking sector brought the country to the edge of bankruptcy and forced it to accept a 82 billion euro bailout loan from the IMF/ECB and the European Union. More than 30 billion euros of this loan is to re-capitalise the Irish banking sector and the rest is to shore up the state’s finances. The conditions of the loan mean that Ireland will have to implement harsh austerity measures for many years to come that will inevitably hurt growth.

So should governments always stand behind their banks? There are some success stories. Back in 2008, when the global financial sector teetered on the brink of collapse, it was necessary for the world’s major central banks and governments to offer unlimited support to their banks. The chief reason for this was to ensure that credit flowed through the economy to foster growth. In truth however, a mixture of stringent capital rules caused banks to shrink their balance sheets in the teeth of the recession, which didn’t help the overall economy but did boost their balance sheets. In the first six months of 2010 the UK’s four largest banks: Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC (the latter two did not receive bailouts) made combined profits of £13.6 billion. This is a far cry from the £22.3 billion they lost in 2008.

The U.S. banking sector has also seen earnings recover sharply. The Federal Deposit Insurance Corporation (FDIC) announced that the earnings for U.S. banks rose by $14.5 billio in the third quarter of 2010. Now that the banking sector is back on its feet again one can hope that credit conditions will also become more supportive of economic growth. And strong earnings also increase the chances that taxpayers will profit from the capital injections at some point.

So why did things go so wrong for the Irish? There are two reasons. Firstly, the government’s guarantee to cover banks liabilities was too hasty. It didn’t inject capital, instead it promised to write an unlimited number of blank cheques. Secondly, there was a mis-match between the size of the banks’ liabilities and the size of the state. Ireland’s economy was 210 billion euros in 2008, the cost to bailout Anglo Irish Bank alone is at least 30 billion euros, and by some estimates it could be 50 billion. This makes the $40 billion plu capital injection (which then turned into equity) into Citibank look like small change for a $14 trillion economy like the U.S.

The trick is for governments not to bite off more than they can chew, and make sure they have conducted a rigorous analysis of a bank’ liabilities before underwriting its future losses. If you don’t do this then the punishment can be harsh, as Ireland has found out.

On paper Ireland’s banks guarantee doesn’t look like such a good idea, but a bank is also part of a country’s social fabric. Its citizens trust the banks to look after their deposits and expect 24-hour access to their money to fund their living costs – paying for a mortgages, school fees, clothing and food. If customers can’t access their money this hits confidence in the central plank of capitalism – the banks. The US has the FDIC to protect deposits of up to $250,000; Ireland didn’t have an equivalent institution so in October 2008 it had to offer a government guarantee for deposits. This was the right thing to do; however, it should have stopped there. A government should protect the hard-earned savings of its citizens, but it is learning how expensive it can be to essentially take on the risk for banks’ bondholders as well.

from UK News:

No-one comes out well in Ireland’s political posturing

Poker, chess, chicken. Pick whichever analogy you like: there's a high stakes game being played in Irish politics and it's not a game their international partners much like. Since Ireland said on Sunday it would be asking for help from the EU and IMF --  little more than  two days ago, though it seems like a lifetime -- the pieces of the political game have moved almost without cease. Ironically, though, the net result may be little different to what was forecast before the tumultuous events of the past 48 hours: a four-year austerity plan outlining 15 billion euros in savings, a by-election Fianna Fail are set to lose, the harshest budget on record on December 7, and an election in early 2011.

It started with the government's bailout appeal. What should have led to a few weeks of EU/IMF negotiations was immediately overshadowed by the surprise move of the junior coalition party, the Greens, who stunned voters - and, it appears, their partners Fianna Fail themself, itself, when it announced it would not continue to be part of the government once 2011 budget measures were implemented.

Next move came from two politicians that few knew were even playing in the game: the independent lawmakers on whom the government relies for parliamentary majority. Jackie Healy-Rae and Michael Lowry threw the success of the budget - and the immediate future of the government - into doubt after saying they might not back the budget after all. This threw the ball to opposition parties Fine Gael and Labour who took it, ran with it, and demanded a snap election.

Back to Prime Minister Brian Cowen, whose poker face kept everyone guessing for several tense hours. He was to make a statement, the government reported. The Twittersphere ignited with rumours he would resign, markets wobbled. But no, Cowen stood firm and swatted the ball  back to the opposition. I'll call an election, he said, but not before the budget is passed and implemented -- effectively daring Fine Gael and Labour to vote it down and so be branded unpatriotic and self-interested in the process.

Then, stalemate. The opposistion went strangely quiet as they mulled what to do. Fine Gael disappeared into a huddle for over three hours to devise a plan. Then Fien Gael's Enda Kenny showed his hand: 'Bring forward the budget date' he demanded with a flourish. Cowen stood up, paused for a few seconds, and simply said 'No'.

There may be no more hands left to play, if you choose to view this as a high stakes poker game, or moves to make, if you'd prefer chess. The budget looks likely to go ahead on December 7, it looks likely to pass since Fine Gael have now also started trotting out the national interest line. And an election will follow in early 2011. But the net result of the last few days' political posturing has been to add to international uncertainty about Ireland, and raise the ire of political partners, who have been at pains to stress that Ireland must get its four-year plan and budget out as planned if it wants aid. No-one has come out well, nerves are shredded, and Irish people appear fed up and frustrated by the gaming. The four-year plan may put a halt to the manoeuvres for now - expect plenty more before the year is out.

from James Pethokoukis:

TARP reconsidered

Interesting piece by former FDIC head Bill Isaac on the bank bailout:

In truth, customers of money market funds had already been calmed when Treasury issued a 100% guarantee of their money – before TARP was enacted.  The FDIC had the authority to reassure depositors under existing law, as was in fact done shortly after the TARP was enacted.

Two weeks after the TARP was enacted, Paulson abandoned the toxic asset plan and announced that the money would instead be used to shore up the capital of banks.  I had argued against the TARP in part because I believed capital infusions would support much more new lending than would the purchase of toxic assets.  Moreover, I believed capital infusions would be far less costly to taxpayers.

However, the TARP was not needed for capital infusions because the FDIC had existing authority to provide capital to banks.  I preferred strongly that the FDIC manage a capital infusion program rather than the highly politicized program Treasury implemented.

Treasury made two egregious mistakes on the capital program and many smaller ones.  The first blunder was to order nine large financial institutions – CitiGroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, Bank of New York/Mellon, Merrill Lynch, Morgan Stanley and State Street – to accept $125 billion of taxpayer money that most of them did not need or want.

To some extent he adopts the John Taylor theory that it was the chaotic nature of the TARP roll-out that destabilized markets. Yet he also says he was in favor of capital injections.