Felix Salmon

TED’s Reformist Manifesto is, for all his bluster, a pretty standard wishlist in terms of what kind of regulatory structure you’d set up if you were starting from scratch. It can really be boiled down to one principle: minimize the amount of unregulated financial activity, while also minimizing the amount of regulatory bureaucracy.

The problem, of course, is how we get there from here. Last night I moderated a panel on the future of Wall Street, and there was definitely a consensus that we’ve wasted our crisis and that both Wall Street and Washington have started drifting into complacency. I don’t believe that Barney Frank and Chris Dodd have given up on implementing regulatory reform, but I do believe that the longer it takes, the weaker it’ll be. And I also see almost nothing in the way of constructive help on such matters from the Republicans, when this is an issue which should really unite the parties, rather than divide them.

The bigger problem is that regulatory reform is fundamentally boring: anybody who was sentenced to covering Basel II would occasionally drift into a revery about quitting their job and doing something much more interesting instead, like covering clearing and settlement.

There are lots of areas where small details make a very big difference, and groups like FASB and the ABA can spend years debating single paragraphs in long regulatory documents. The big-picture stuff is important, but the granular stuff is important too, and that’s where the bank lobby can slow things down to the point at which nothing ever happens. Meanwhile, the population as a whole will have moved on from being angry at banksters: the window of opportunity where politicians can actually get votes by announcing that they’ve merged the Office of Thrift Supervision with the Office of the Comptroller of the Currency has already closed.

Maybe we really should go around paying bankers $20 million a year: it’s the only way to keep the outrage at the minimum necessary level to get any substantive changes done. Or maybe we should set up a system whereby if a regulatory-reform bill hasn’t been signed into law by say March, Ben Bernanke’s renomination will automatically be pulled and he’ll be replaced by Matt Taibbi. That might help concentrate minds a little.

Today’s must-read is Laura Blumenfeld’s tale of Neel Kashkari, mountain man, building a wooden shed in the wilds of Northern California:

Kashkari is recalling his testimony before Congress, while splitting logs to feed the stove for the winter. He is down to his last two chain-sawed trees.

“Members of Congress will tell you they agree with you, and then in public they blast you. I understand their anger, but the playing at politics when so much was at stake –”

Whack. The ax blade flies off its wooden handle.

I’m not sure why exactly Kashkari invited Blumenfeld to hang out with him in the mountains, watching “sweat dot the skin between the hairs on his forearms [as] he does 20 reps of lower-back extensions”, but it’s quite the portrait — especially with the accompanying photo gallery by Linda Davidson — of the Washington technocrat on detox.

Kashkari, like Bernanke, has regrets, but his are small and pretty technical:

He also made mistakes — a punitive interest rate on the American International Group intervention, he says, and a clause allowing unilateral changes to the Capital Purchase Program contracts — decisions executed quickly in the crisis and recognized belatedly by him on the road to Lake Tahoe, while biking up a 9 percent grade, his thoughts grinding round.

What’s more, he’s not out of the rat race, by any means: he’s still wedded to his BlackBerry, complete with Bloomberg alerts; he covets home delivery of the Wall Street Journal; he’s talking about going back to Washington some day; and he’s even talking to Hank Paulson about taking another job in financial services before the year is out. All the log-splitting is essentially an extended vacation, not a true change of lifestyle. After all, he is a Goldman man. Given his extremely valuable experience at Treasury, it would be foolish for him not to monetize that somehow.

Yesterday was the EMTA annual meeting, complete with its venerable and always interesting panel of buy-siders. My favorite is always Hari Hariharan of NWI managment: when asked what his favorite trade is, he never says something simple like “long Brazil”. Instead, it’s invariably a complex relative-value trade: this year he said that “a one year forward 2s-5s steepener in Korea could be an offsetting trade to receiving front-end Mexico”. You’re welcome.

Hari’s a smart and insightful guy, though, he’s not (just) a nerdy quant. When asked whether we were in an emerging-markets bubble, he pointed out that although property prices in Hong Kong are hitting insane levels in the region of $9,000 a square foot, those prices are being paid in cash, and banks aren’t lending against those values. And without leverage, of course, there’s a limit to how much harm a bubble can cause.

Similarly, I get the feeling that for all that Brazilian equities have been skyrocketing in dollar terms of late, that doesn’t mean that Brazilian companies have anything like the same access to the equity capital markets that they did before the crash: the primary markets haven’t recovered as well as the secondary markets, and people spending new money are still displaying signs of caution.

What’s more, in spread terms, emerging markets aren’t looking particularly bubbly, at least by 2007 standards when the EMBI+ index got as tight as 153bp over Treasuries. Right now, it’s 317bp over. In yield terms, however, things are much closer: 6.51% now (or yesterday, anyway, when the panel was going on and before the jobs report came out) compared to 6.37% at the low in in June 2007.

Mark Dow, of Pharo management, added that right now it’s easy to see bubbles everywhere, since we’re still so burned from the bursting of the last one. It’s a good point: while emerging-market assets may or may not be overpriced right now, it’s probably not particularly helpful to worry about bubbles. That said, everybody was a bit worried about the tens of billions of dollars flowing into Brazil from Japanese toushin funds: they’re not good for Brazil, and they’re unlikely to work out very well for Mrs Watanabe, either.

So although there’s bound to be some sort of correction in Brazil and other emerging markets sooner or later, that doesn’t mean they’re currently in a bubble. It just means that traders are making lots of money on the momentum trade right now, which isn’t the same thing at all.

Ben Bernanke was contrite yesterday, as well he should have been:

“There were mistakes made all around,” Mr. Bernanke said. “I did not anticipate a crisis of this magnitude and this severity.”

We should have required [banks to hold] more capital, more liquidity,” Mr. Bernanke added. “We should have required more risk-management controls.” He also said the Fed was “slow on some aspects of consumer protection.”

All the same, he says, he should continue to have the job he failed at:

“In the area where we had responsibility, the bank holding companies, we should have done more,” he told lawmakers. “That is a mistake we won’t make again.”

I tend to agree with him. It’s true that the litany of accusations against Bernanke is a long one: a loyal Greenspanite during the Maestro era, Bernanke not only failed to see the financial crisis coming, but reacted to it in an ad hoc manner, losing his independence from Treasury in the process. But that just goes to underline how hard it is to construct a strong, proactive regulator. The way to maximize your chances of success when constructing such an entity is to start with the strongest, smartest regulator you have, and then improve it. Clearly, that’s the Fed, with its control of the money supply, its intimate knowledge of national and international capital flows, and its outposts scattered all around the country.

Is Ben Bernanke the right person to lead the Fed of the future? I’m less sure about that, but for the time being it makes sense to keep him where he is. With any luck, by the time his second term has ended, the government will have passed a comprehensive regulatory reform bill of some description, and it will be much clearer what the Fed’s role in general, and the chairman’s role in particular, is going to be. At that point, the president will know exactly what skillset is required. For the time being, it’s hard to see that replacing Bernanke with anybody else would constitute an improvement — especially not when the leading other contender for the job is Larry Summers.

Today’s jobs report is genuinely encouraging, I think. Unemployment is down a little to 10%; employment is “essentially unchanged”, in the words of the release; payrolls in prior months were revised upwards; total hours worked went up; wages went up; what’s not to like?

Still, it’s early days yet, and it’s still more likely than not that unemployment is going to top out well above the 10.2% rate from which it fell this month. It’s great to have a little bit of holiday cheer in the last payrolls report of 2009. But winter still hasn’t started yet.

Palin: Obama birth certificate ‘a fair question’ — Politico

Gawker, of all outlets, is the first to put the White House pool reports online. ABC, Politico, where were you? — Gawker

Eliot Spitzer and Terry Richardson: what the … ? — Interview

And the winner of the “most egregious listicleization” award is Slate’s “write like Sarah Palin” contest — Slate

Simon Cowell, painted in Marmite on toast. Obvs. — YouTube

SEC pushes to reform mutual fund fees — Reuters

Dubai : Dubai World :: USA : Frannie? — Breakingviews

Behavioral economics works great. Behavioral finance? Not so much — Kedrosky

Gerhard Richter at the Serpentine. Gorgeous — YouTube

Legislation could cut JPM’s derivatives revenues by $3 billion, or 50% — Crain’s

Amidst the orgy of one-year-on reminiscing in September, I missed Kirsten Grind’s 4,000-word story on the failure of WaMu, which is well worth reading.

She gives a great impression, for instance, of what a bank runs look like, circa 2008:

A longtime customer in Orange County brought a cake to her branch that spelled out in frosting, “We love you WaMu,” and then closed her account. Another customer at a branch in Southern California withdrew all her money and then, feeling guilty, returned the next day with a freshly baked peach cobbler for the branch’s staff, according to a former WaMu manager. Her money, however, stayed away.

Each day, Brinks Security trucks pulled up to replenish WaMu ATMs across the country. Before the crisis, the trucks delivered about $30 million in cash a day nationwide, Freilinger said. During the September bank run, they delivered as much as $250 million a day.

The general impression from Grind’s article is that WaMu was certainly going bust: it had been downgraded to junk by Moody’s, and was about to appear on the FDIC’s problem-banks list, where its size would mean it had no anonymity. It was in the midst of a second bank run when it got taken over; further runs were all but certain.

The big question, though, is whether the FDIC gave a nod and a wink to potential acquirers that they would be able to buy WaMu in a distressed sale from the FDIC, rather than having to take on all its liabilities by buying it from shareholders.

Grind doesn’t go into the details of capital structure, though, and I wonder: absent FDIC intervention, is there any way for a bank’s bondholders to take control of the company, wiping out the shareholders? My guess is there probably isn’t, and that such an outcome won’t even be possible in the brave new world of living wills and ex ante resolution regimes. But I’m sure all those bondholders — who got all but wiped out themselves — wish that there had been.

Banks’ public disclosures have always been on the opaque side. But now things are worse than ever, according to Nomi Prins, who should know:

In the cases of Bank of America, Citigroup and Wells Fargo, the preferred tactic is re-classification and opaqueness. These moves make it virtually impossible to get an accurate, or consistent picture of banks ‘real money’ (from commercial or customer services) vs. their ‘play money’ (used for trading purposes, and most risky to the overall financial system, particularly since much of the required trading capital was federally subsidized).

At Bank of America, says Prins, “the firm doesn’t truly know what’s going on inside its new problem child, or doesn’t want to tell”. Citigroup regularly changes how it reports earnings, splitting the company up in different ways in different years so as to make like-for-like comparisons impossible. And at Wells Fargo, trading revenues are buried as an unknown percentage of each of the four different reporting groups.

The reasonable conclusion to draw from all this is that trading revenues at all three banks are much higher than they’d necessarily want us to know or think. After all, the stock market values trading revenues on a much lower multiple than old-fashioned commercial banking revenues, which are much less likely to disappear or even turn negative for no obvious reason, and which are also much less reliant on trying to keep traders happy with ever-increasing bonuses.

Is there any way to get the SEC to force these banks to report their trading revenues in a consistent manner, allowing for sensible comparisons both between banks and over time? Or will they always find a find a way to bury them somewhere invisible? I think we all know the answer to that one.

Is the US government powerless to prevent the return of the plutocrats? Or does it actually, secretly, need the plutocrats to return? Here’s Tim Geithner, today:

“You cannot address those long-term deficits, you cannot put the government of the United States in a position that we can go back to living within our means, unless you repair the damage done to this economy and to its revenue base.”

Translation: we need to return to our bubble-era levels of income.

It’s worth remembering that income for America is the same thing as income for Americans: 81% of federal revenues come from income and payroll taxes.

Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer.

Given the government’s insatiable appetite for cash, it’s only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don’t pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue.

The government’s interests, then, are naturally aligned with those of the plutocrats — and when that happens, the chances of change naturally drop to zero.

Update: Kevin Drum does the math, and concludes that “the federal government doesn’t have much of an incentive to maintain lots of income inequality”.

It’s December, which means it’s bonus season, and time for more than the usual amount of bellyaching about pay. Will Bank of America’s TARP repayment give it a bit more wiggle room in terms of CEO compensation, thereby broadening the field of potential successors to Ken Lewis? Will General Motors be able to find a CEO when it’s state-owned and therefore probably won’t be able to pay a typical private-sector salary? Will Goldman Sachs be able to persuade shareholders that its $16 billion bonus pool is reasonable?

Meanwhile, there’s an even bigger row over pay at state-owned banks across the pond, with RBS’s directors threatening to resign en masse if the Treasury vetoes its bonus plan.

The underlying problem here is a fundamental disconnect between the plutocrats and the people. Politicians and their constituents simply have no time any more for people paying themselves multi-million-dollar salaries, especially when the companies in question only exist in their present form thanks to hundreds of billions of dollars in government interventions.

Back in March, at what was in hindsight the low point for both the markets and for political sentiment more generally, I genuinely feared class warfare. I don’t think we’re there any more: it’s hard to keep that angry for that long, and feelings have become a little more muted. But that doesn’t mean that the anger has disappeared entirely.

We’re at a fork in the road right now. People who were comfortable with seven- and eight-figure salaries a couple of years ago have a natural tendency to want to return to the status quo ante; the rest of us see a once-in-a-lifetime opportunity to bring executive pay down to the kind of levels which normal human beings can relate to. Given that the pay levels of old clearly did no good and colorably did a great deal of harm, that doesn’t sound like an unreasonable request. But there aren’t any mechanisms in place to make it happen, and when the likes of Kenneth Feinberg try to impose some kind of sense and order, the immediate reaction is to try to wriggle out from under his oversight.

So the plutocrats, it seems are going to win. They had a nasty couple of years, by plutocrat standards, and in a handful of companies operating under de facto state control they don’t quite have the free rein they would ideally like. But the system as a whole hasn’t changed, and those who thought that it might can’t quite believe how naive they were.

Seeking Alpha to Pay Contributors? — Red Herring

The Too Much Joy Royalty Statement — TMJ

“Isn’t a 42-disc set of Dr. Quinn, Medicine Woman taking things just a bit too far?” — Slate

Gay marriage decisively defeated in NY senate, by 38 votes to 24. Unutterably depressing. — NYT

The phrase “world-class CEO” is always a dead giveaway for delusion — Baseline Scenario

Technium, explained — YouTube

Goldman’s defenestration test is a go. Lloyd, watch your back! — NYP

What was really going through Fritz Henderson’s mind yesterday? Try asking his daughter — Jalopnik

The FDIC’s EconomicInclusion.gov website is a fantastic resource for information on the unbanked — it has all the latest figures, including the rather depressing fact that if you look at the black and hispanic population in the US, one in five is unbanked. Single mothers, too, are disproportionately likely to be unbanked, none of which should come as a surprise: all of these things are basically proxies for the likelihood of being poor. And of course if you don’t have a bank account that just makes you poorer, since you’re forced into a system where banking services are much more expensive.

Not having enough money to feel they need an account is the most common reason why unbanked households are not participating in the mainstream financial system…

About 66 percent of unbanked households use the following alternative financial services (AFS): non- bank money orders and non-bank check-cashing, pawn shops, payday loans, rent-to-own agreements (RTOs), and refund anticipation loans (RALs).

Not mentioned on the list but also increasingly popular are prepaid debit cards, which are better than things like pawn shops and check cashers, but still much worse than just opening an account at the local credit union.

Be sure to play with the map at the top of the website: you can see state-by-state data there, as well as see major conurbations broken out. For instance, in the Riverside-San Bernadino area of California, over 24% of hispanics are unbanked; in Mississippi, one in three blacks are unbanked, and another one in three blacks is underbanked.

It’s not clear what if anything the government is doing about this problem, but it’s definitely a problem. If we can spend this much effort on trying to get healthcare for all, can we spend a tiny fraction of that on trying to get banking services for anybody who wants them as well?

David Reilly has a good column today about bank health and capital ratios, honing in on the crucial fact that having a fair amount of capital is not in and of itself sufficient to reassure investors — or even the FDIC — that a bank is healthy. 96% of banks are well-capitalized, according to the FDIC, but 7% of banks are on its problem list, which means that there are dozens of at-risk banks which are also adequately capitalized.

That makes perfect sense to anybody who remembers Lehman Brothers or even Washington Mutual: if investors think that huge losses are coming around the corner, or that a bank is incapable of making sustainable profits over the long term, then no amount of capital today is likely to reassure them that a bank is safe. As Reilly explains:

Measures of capitalization are different from overall gauges of bank strength, known as Camels ratings. These ratings look at more than just bank capital. The acronym stands for capital, assets, management, earnings, liquidity and market sensitivity.

Camels ratings, which are secret, are supposed to reflect “the bank’s overall financial condition,” according to the FDIC’s Web site, and rank banks on a scale of 1 to 5. An institution rated 4 or 5 is placed on the FDIC problem list.

It is possible for a bank to technically be well- capitalized, yet receive poor-enough scores in other areas of its Camels rating to land on the problem bank list.

Camels ratings are, for good reason, kept highly confidential. But the point here is that they’re about more than just capitalization, despite the fact that the two can get elided: Reilly talks, a bit awkwardly, about “problem banks that are supposedly well-capitalized”.

In any case, stock-market investors don’t necessarily reward well-capitalized banks and punish those with only thin layers of equity — in fact the opposite is true much of the time. Even bond-market investors, who should know better, seem to be getting dragged back into the arena of complacence and moral hazard which proved so devastating last year.

There are lots of potential landmines which don’t show up in banks’ capitalization ratios. Reilly mentions modified mortgages; there’s also commercial real estate; quasi-sovereign emerging-market debt; and trillions of dollars in leveraged loans which have done very well of late but still look scary to anybody who’s been avoiding the Kool-Aid. And that’s just on the balance sheet: there can also be big problems in terms of the quality of management, or steadily-growing expenses on the income statement. On top of all that are liquidity issues: if a bank doesn’t have a large base of federally-guaranteed deposits, it’s always vulnerable to a run, no matter how much capital it has.

So while capitalization ratios are a more useful metric than, say, charities’ overhead ratios, there’s still a huge amount of information they ignore or obscure. Banks are complex entities, and can’t be boiled down to a single ratio. And if you think your bank is safe just because it has a capital ratio in double digits, it’s worth taking another look.

Tim Ogden is on the warparth, blogging and tweeting and putting out press releases all trying to “kill the myth of overhead ratios”:

The month between Thanksgiving and Christmas is often known as giving season, not just for Christmas and Hannukah gifts but because many people make major donations to charity this time of year.

Given the global recession, it’s more important than ever to make those charitable dollars go further by putting them in the hands of charities that do the most good. For years, donors have been relying on one measure to evaluate charities—the overhead ratio.

I’m with Tim on the importance of looking at outputs rather than inputs — although of course that’s harder than just looking at a single unreliable metric.

But is it really true that donors in general have been relying to a great degree on overhead ratios? Allison Fine seems to think so. If it’s really the case that large number of philanthropists have been using overhead rates as a proxy for effectiveness, the world of corporate philanthropy clearly needs much more shaking up than I’d thought.

On an individual level, I think that people generally give to causes they believe in, or because of some personal connection to the non-profit in question: I can’t believe that overhead ratios play a huge role in the decision-making process, although once you’ve started supporting a certain charity, looking at a low overhead ratio can help you feel that much better about your decision.

But if you are one of the people for whom overhead ratios are very important, then go read Tim’s post. You’re part of the problem, providing incentives for charities to spend extra effort fudging their numbers, as opposed to actually doing good in the world. And you’re also contributing to the slightly poisonous idea that there’s something morally dubious about non-profit workers being paid for what they do. This Christmas, I’m even thinking of giving money straight to non-profit employees, rather than to the charity itself, as a way of saying thank-you for all the amazing (and extremely underpaid) work that they do.

I’ve always had a soft spot for the original logo, dataing back to when Roubini Global Economics first launched at rgemonitor.com in April 2005:

Soon, however, it turned blue, although the monitor lizard remained:

And then it got even more gussied up:

Now, the lizard’s gone entirely, and the RGE Monitor name seems to be on the outs too. The brand is just Roubini Global Economics, at Roubini.com:

It even has a shadowy version:

The good news is that the silly little ™ sign seems to have disappeared. In any case, I guess that all talk about separating the RGE brand from Nouriel Roubini himself has gone by the wayside, and that they’re happy that Paul Krugman is referring to RGE strategist Arnab Das as “the Roubini people”. It’s Nouriel’s global economy, everybody else is just people.

Update: tentakles suggests that the new logo should have been a monitor lizard ripping the flesh from a vampire squid. File under “missed opportunities”, I guess.