Opinion

Ben Walsh

from Counterparties:

Capital raise

Ben Walsh
Apr 9, 2014 21:59 UTC

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US banks need $95 billion more capital by 2018. A new federal rule will raise the leverage ratio – a bank’s capital versus its total assets – to a minimum of 5%, while all FDIC-insured banks will see their ratio rise to 6%.

When the rule takes effect, the US will have a higher capital requirement than theinternational Basel III agreement's 3%. Dealbook’s Peter Eavis says the leverage ratio is a “more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking”. The FT’s Gina Chon and Tom Braithwaite point out that the rule “does not allow banks to use their own models” (cough, risk-weighted rules, cough).

Matt Levine digs into the method for calculating leverage ratio and finds it’s actually more than just capital divided by total assets. But he thinks that’s a good thing, because bankers should be continuously confronted and terrified by the inchoate, contingent businesses they are trying to manage.

Tim Pawlenty, head of bank trade group the Financial Services Roundtable, isn’t happyabout new divergence between US and international rules: “This rule puts American financial institutions at a clear disadvantage against overseas competitors”.

Jim Pethokoukis thinks banks and their lobbyists should stop complaining. The rule change, he says, isn’t that drastic – “megabanks could borrow only 95% of money they lend versus 97% under Basel” – and could lead to a virtuous cycle where better-capitalized banks are less risky, less risk leads to lower return expectations from shareholders, and lower return expectations from shareholders makes bank take fewer risks.

from Counterparties:

Euro we go again

Ben Walsh
Apr 7, 2014 21:40 UTC

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The bond markets finally have something nice to say about Greece and Spain. Or at least Greece and Spain are reaping the benefit of ECB president Mario Draghi’s recent comments. Last week, Greek bond yields fell to pre-bailout levels, and the Spanish government sold $7 billion of debt at the lowest rates since the crisis -- lower, in nominal terms, than the US government is paying to issue Treasury notes.

After keeping rates unchanged last week, Draghi told the press that the central bank “talked about lower interest rates, we talked about a lower deposit facility rate, we talked about prolonging the fixed-rate full allotment, we talked about QE”. The central bank is fighting falling inflation across the region, and deflation has already hit at least five eurozone countries.

Bloomberg View’s Mark Gilbert tries to make sense of the fact that “Spain, where more than a quarter of the nation is unemployed, is paying less than the world's biggest economy, which also happens to own the global reserve currency of choice and the deepest and most liquid bond market anywhere”. The only explanation he thinks makes sense is that the “bond market is telling us that it thinks quantitative easing is coming to the euro region”.

from Counterparties:

Environmental balance sheet

Ben Walsh
Apr 4, 2014 21:27 UTC

Want to sign up for the Counterparties email? Click here. Climate change, the latest UN report finds, is very bad already – and it’s getting worse.

The NYT condenses the study’s gloomy findings: ice caps and sea ice are melting; droughts, heatwaves, and heavy rainstorms are intensifying; the ocean is acidifying; “fish and many other creatures are migrating toward the poles or in some cases going extinct”. The Economist says climate change can no longer be seen as a stand-alone risk. Instead, it is already interacting with social, political, and economic risks. All of which means, Philip Bump writes, “more violence, less food”.

The report – which assesses the state of climate research – puts an increased focus on the need for "resilience and adaptation to inevitable climate change", says Fred Pearce. Nevertheless, the final 48-page summary of the report excluded, due to objections from the US and other rich countries, a World Bank estimate that developing nations need $100 billion a year to deal with climate change's effects. The estimate was included only in the rarely read text of the full, 2,500-page report.

No one – neither governments nor markets – is doing a good job putting an accurateprice on carbon. The Environmental Defense Fund, National Resources Defense Council, and the Institute for Policy Studies put out a report criticizing the US government’s $37 a tonne estimate of the costs of carbon as too low. The largest carbon market in the world, the EU Emission Trading Scheme, prices a tonne of carbon at between €6 to €7, but Ken Arrow and his co-authors argue that the cost of of a tonne of carbon could be as high $64:

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Watching for bubbles like a hawk

Ben Walsh
Apr 3, 2014 21:57 UTC

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Fed governor Jeremy Stein, the central bank’s resident bubble cop, is resigning effective May 28. He will return to Harvard’s economics department, which he left in 2012.

The NYT’s Binyamin Appelbaum writes that Stein “helped to provide an intellectual rationale for the cautious evolution of the Fed’s stimulus campaign”; he has also spoken with precision on ending the problem of too-big-fail banks and argued that how crowdfunding could be directed towards community investment.

Despite below-target inflation and and high unemployment, Stein has focused on worries that quantitative easing will promote excessive risk-taking, potentially causing bubbles, and leading to another financial crisis.

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Multiplication nation

Ben Walsh
Apr 2, 2014 22:14 UTC

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“You can't legislate demographics”, says Derek Thompson, surveying the economic drag of America’s low birthrate. Blame, in part, the world-record cost of giving birth in America, and the recession, for the decline of babies. Reihan Salam and Matthew Klein don’t want to legislate for demographics, but they do want to tax incentivize for them. Here’s Salam’s solution:

Who should pay more? Nonparents who earn more than the median household income, just a shade above $51,000... We all benefit from the work of parents. Each new generation reinvigorates our society with its youthful vim and vigor. As my childless friends and I grow crankier and more decrepit, a steady stream of barely postpubescent brainiacs writes catchy tunes and invents breakthrough technologies that keep us entertained and make us more productive. The willingness of parents to bear and nurture children saves us from becoming an economically moribund nation of hateful curmudgeons.

Not everyone is ready to write a rejoinder to Rust Cohle-esque anti-natalism into the tax code. Matt Yglesias wrote in 2009 that a focus on the economic consequences of the birth rate is a vestigial agrarian impulse. His preferred policy is essentially fertility neutrality: “To deliberately constrain people from having large families would be abhorrent, but it’s not clear to me that we should be going out of our way to encourage them to do so”.

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Guilty Motors?

Ben Walsh
Apr 1, 2014 22:08 UTC

Want to sign up for the Counterparties email? Click here. In the first three months of 2014, GM has recalled 6.3 million cars. Among those recalled are all 2005-2010 Chevy Cobalts, whose ignition switches have been faulted for 13 deaths so far.

GM CEO Mary Barra told Congress today that she “cannot tell you why it took years for a safety defect to be announced”.

Heidi Moore thinks the reason lies in the company’s sclerotic and hubristic corporate culture. The company never really changed after its 2009 bankruptcy, Moore says, and “all of that talk – of the reborn American automaker, of bets paid and dollars won – seems like a hollow spectacle”. James Pethokoukis agrees: “There is not much a $50 billion government check can do about a dysfunctional corporate culture except temporarily paper over it”.

GM’s internal safety and quality control procedures certainly look inadequate. The company knew about the ignition switch problem in 2001 and decided not to fix it in 2005 because it would have cost too much. GM was also aware of numerous other other problems with the Cobalt, the NYT reports based on state data. Before the ignition issues became public, “it was already seen as a lemon”: owners reported problems as farcical as windows falling out.

from Counterparties:

Flash mob

Ben Walsh
Mar 31, 2014 22:08 UTC

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“The US stock market... is rigged.” That was Michael Lewis’ one sentence summation of his new book Flash Boys on last night’s 60 Minutes.


In an excerpt of the book in the NYT, Lewis writes that around 2007, one of the Royal Bank of Canada’s stock trading teams began seeing odd market behavior: quotes vanished as soon as orders were entered. Other big banks and hedge funds were having the same problem. In trader-talk, the market kept moving away from them, no matter what they bid or offered. High-frequency traders were milliseconds ahead, buying, selling, and, perhaps most importantly, canceling quotes faster than RBC. The market wasn’t fair, and speed was the reason why.]


“High-frequency trading is a tax on investors”, says Barry Ritholtz. Institutional investors pay a “skim” to HFT shops on every trade. Just how big the skim is is unclear – Lewis puts the daily gains from US HFT trading at $160 million, or about 0.07% of average daily volume of $225 billion – but its very existence is, to Ritholtz, “prima facie proof that something is amiss”.

from Counterparties:

Roasted Turkey

Ben Walsh
Mar 28, 2014 21:51 UTC

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For the last 10 years, Turkey has been a growth miracle. It increased exports by afactor of ten; GDP and per capita income rose threefold. But the cornerstone of that economic success – political stability – is now under threat.

Prime minister Recep Erdoğan isn’t on the ballot in Sunday’s local Turkish elections, but they’re all about him, says Oray Egin. Erdoğan blocked Twitter (the ban was laterreversed), succeeded in shutting down YouTube due to “national security concerns”, has been caught up in a bribery scandal, and was the target of massive protests.

Polls and currency markets are predicting that Erdoğan’s ruling AK Party will win a plurality. Aid of food, clothing, coal, and other necessities has kept support among working class voters strong.

from Counterparties:

Citi-wide failure

Ben Walsh
Mar 27, 2014 21:22 UTC

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Citigroup can now claim worst-in-class stress test performance. For the second timein three years, the Federal Reserve rejected the bank’s capital plan. Citi proposed raising its dividend from a penny to 5 cents and repurchasing up to $6.4 billion in stock. However, the Fed rejected the plan, saying it doubted the “overall reliability of Citigroup’s capital planning process”.

Embarrassingly for Citi management, Bloomberg’s Michael Moore and Elizabeth Dexheimer write that the Fed found issues in planning areas it had previously flagged. These include the bank’s “ability to project losses in ‘material parts of its global operations’ and to reflect all business exposures in its internal stress test”. In February, Citi announced it had uncovered $400 million in loan fraud in its Mexican subsidiary, forcing it to restate its 2013 earnings.

While Citi passed the Fed’s quantitative hurdles, it failed on qualitative grounds. Matt Levine explains:

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Recovery-lite

Ben Walsh
Mar 26, 2014 21:55 UTC

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The Great Recession ended in June 2009. The average post-war recovery, Jared Bernstein notes, lasts just 58 months before there’s another recession -- and this recovery is now 57 months old. But even as the recovery enters its statistical autumn, most Americans haven’t noticed that it ever happened at all. A recent NBC/WSJ poll found 57% of respondents thought the US economy was still in a recession.

Josh Barro points to barely-there wage growth to explain the disconnect. Between 2009 and 2012, real incomes of the 99% grew at a meager 0.1% annually. The longer term trend, he points out, is clear:

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