Felix Salmon

Linking would have prevented Sorkin’s errors

Felix Salmon
Apr 13, 2010 16:33 UTC

Joe Weisenthal is right to adjudicate the beef between Paul Krugman and Andrew Ross Sorkin in favor of Krugman, who clearly never said what Sorkin says he said. And that’s not the only error in Sorkin’s column. For instance:

Every couple of months the Treasury Department takes a moment to strategically leak some good news about the bailouts. It happened again on Monday, when a Treasury official told The Wall Street Journal that America’s coffers would be only $89 billion lighter after all accounts were settled from the rescues, down from an earlier estimate of $250 billion…

Of course, there’s a small problem with all this happy Washington math: it doesn’t take into account the piles of cash we’re likely to lose on Fannie Mae and Freddie Mac, the huge mortgage finance companies.

But look at the WSJ story that Sorkin references:

Treasury Department officials say the tab is likely to reach $89 billion, which includes the Troubled Asset Relief Program, capital injections into Fannie Mae and Freddie Mac, loan guarantees by the Federal Housing Administration and Federal Reserve moves such as buying mortgage-backed securities and propping up the commercial-paper market.

The lesson here, I think, is simple: link! If Sorkin had simply provided a link to the WSJ story, it would have been much more obvious that the new estimate includes Frannie bailout monies. And if he had felt the need to link to Roubini and Krugman when characterizing their opinions, he would probably never have ended up so far off base.

Linking isn’t just being polite: it makes you a better journalist. And it should be compulsory in any article or column which mentions material easily available on the internet.

Update: My bad: Sorkin was right and I was wrong, the $89 billion does not include most of the Frannie losses, as the WSJ story (which Sorkin still should have linked to) finally gets around to saying at some point after I’d stopped reading it. But my point about linking stands! Not least because it was easy to follow my link and find my error.


I’m supprised it’s taken so long for someone to point this out. I don’t want to go into the detais (as Felix has, and has come around in favor of Andrew) but what Sorkin writes is the impression of has come across anyway (and much media certainly says that Krugman says nationalise the banks). Nationalize or not, I wont go much into Krugman. I live in Athens and whether K. had any say in it or not, to hear him at a speech you had to pay 1000 euros. So, whats the point? More traffic to NYT and Too Big Too Fail.

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Unsafe security

Felix Salmon
Apr 13, 2010 15:57 UTC

Matt Yglesias reacts to the tone-deaf military reaction to the horrific crushing-to-death of a 68-year-old woman by a five-ton military truck on Monday:

The fact that people conducting a security operation on American soil can’t even react to accidentally killing an old lady by saying “we’re sorry we killed that woman” rather than lets “make sure the pedestrian didn’t run into the truck as it was moving” doesn’t inspire a ton of confidence.

He’s completely right, of course. (And it’s worth noting that she wasn’t, actually, a pedestrian: she was on her bike.)

It’s worth recalling the experience of Sean Medlock, who was also hit (but, thankfully, not killed) by a government vehicle while he was crossing the street in Washington. The main repercussion of that incident was that Medlock got served with a $20 jaywalking ticket — while he was lying on a gurney — for walking diagonally across an intersection four blocks away from where he was hit.

After that incident, the Daily Caller put together a handy brief history of US security vehicle accidents. The main lesson of that list seems to be that it’s not only innocent bystanders who risk their lives when they inadvertently end up near a motorcade; it’s also the motorcade staffers themselves. It’s long past time, I think, that someone takes a very hard look at the safety procedures surrounding these things. Or, rather, the lack thereof.


Now you can try to imagine what the average Iraqi or Afghan feels they have to deal with…

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Security theater online

Felix Salmon
Apr 13, 2010 14:28 UTC

Mark Pothier has a well-written and compelling write-up of a great paper by Cormac Herley of Microsoft, which demonstrates that most of the things we do on the instruction of various IT departments are a waste of time. My favorite datapoint is that fully 100% of certificate error warnings — those roadblocks you get sometimes when you try to visit a secure website — are false positives.

Next time I log in to my computer at Reuters, I’m going to have to change my password — again. But as Pothier says, that won’t do any good to anybody:

Users are admonished to change passwords regularly, but redoing them is not an effective preventive step against online infiltration unless the cyber attacker (or evil colleague) who steals your sign-in sequence waits to employ it until after you’ve switched to a new one, Herley wrote. That’s about as likely as a crook lifting a house key and then waiting until the lock is changed before sticking it in the door.

The biggest losers here are actually companies like Reuters itself, which pays its employees to spend thousands of hours jumping through silly hoops set by IT people, despite the fact that there’s no real evidence that jumping through those hoops does any good at all.

For instance, I’ve had an email address since 1993, when storage space cost $2,000 per gigabyte; it now costs about 5 cents per gigabyte. In those 17 years, I’ve never deleted a non-spam email: I haven’t felt the need. But now Reuters is telling me that I can’t have more than half a gigabyte of storage space for my email (about 3 cents’ worth) unless I spend a very significant amount of time deleting at least 100MB of email per week. No matter how little my time is worth, it’s certain that the value of 100MB of freed-up disk space is lower than the value of the time I’m going to spend doing the deleting. (Not to mention the value of the time of the people I asked about raising my email quota.) But still the rules persist: maybe they were put in place back in 1993, and have never been changed.

It’s not just my time which is being wasted, either. Last night I spent about half an hour on the phone to First Direct, my bank in England, trying to navigate their incomprehensible online banking security system. I talked to two real people, who walked me through all the various steps, and who had information I didn’t and therefore could tell me that when the system seemed as though it was telling me that my password was wrong but the answer to my personal question was right, in fact it was the other way around. The cost to First Direct of its employees’ time was vastly greater than any benefit to the bank, as Pothier explains using a US example:

For banks, the greater potential for damages comes not from a phishing attack itself, but indirect expenses. Herley used Wells Fargo as an example. He wrote that if a mere 10 percent of its 48 million customers needed the assistance of a company agent to reset their passwords — at about $10 per reset — it would cost $48 million, far surpassing Wells Fargo’s share of the $60 million in collective losses.

The bigger picture is simple:

In the paper, Herley describes an admittedly crude economic analysis to determine the value of user time. He calculated that if the approximately 200 million US adults who go online earned twice the minimum wage, a minute of their time each day equals about $16 billion a year. Therefore, for any security measure to be justified, each minute users are asked to spend on it daily should reduce the harm they are exposed to by $16 billion annually. It’s a high hurdle to clear.

I think it’s reasonable to assume that the idiotic practice of masking passwords by turning them into dots takes up a good minute of people’s time each day, and saves much less than $16 billion a year if it saves anything at all. (In fact, there’s a strong case to be made that it actually costs companies money, rather than saving them anything.) But it’s all part of the greater apparatus of security theater now, and a lot of people think that it’s making them safer somehow, even when it isn’t. So our time will continue to be wasted, and at some point in the next few weeks I’m going to spend $50 worth of my own time to save a couple of pennies in email storage costs. But hey, at least I got a blog post out of it.


Its a brilliant write up , at Reuters best you can observe and blog it, its great analysis and thank you for such a compelling study.

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Felix Salmon
Apr 13, 2010 03:33 UTC

Does incarceration make people black? — MR

Matija Grguric spent 7 months building Falling Water out of lego — Apartment Therapy

Tarantino vs the Coen Brothers — NYMag

BofA’s earnings: Which philosopher do you follow? — Crain’s New York

Why taking risk isn’t all that smart: Eric Falkenstein on the “mistaken syllogism at the bottom of portfolio theory” — Falkenblog


I’d like to recommend this:

http://www.calculatedriskblog.com/2010/0 4/wamu-hearings-start-tomorrow.html

“The Inspectors General’s report on WaMu will be issued on Friday – Sewell Chan at the NY Times reported Saturday: U.S. Faults Regulators Over a Bank

Regulators failed for years to properly supervise the giant savings and loan Washington Mutual, even as the company wobbled … a federal investigation has concluded.

The report, prepared by the inspectors general for the Treasury Department and the Federal Deposit Insurance Corporation, is expected to be released Friday. A draft was obtained by The New York Times.

A huge bank out of control and regulators ignoring the problem … this is quite a story. And no surprise at all.”

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Why the Greek recovery rate hasn’t fallen

Felix Salmon
Apr 13, 2010 03:29 UTC

Peter Boone and Simon Johnson have an interesting take on the EU’s bailout of Greece: that it doesn’t in fact bail out Greece’s bondholders at all, since any reduced probability of default is more than made up for by an increase in bondholders’ loss if and when there is a default.

The danger for private debt holders is clear: Sovereign loans invariably treated better in a restructuring than private debt. So the European aid in some sense squeezes private debt holders. They will be pleased there is no near term default, but it means their recovery value has gone down if things get bad again. Greek long term yields will probably stay high.

This doesn’t ring true to me, for a couple of reasons. Firstly, Boone and Johnson themselves were the people who said just last week that the recovery value on Greek debt would likely be just 35%. It can hardly have dropped much from there.

And secondly, it’s simply not true that sovereign loans are “invariably treated better in a restructuring than private debt”. There is a class of official-sector loans which gets what’s known as “preferred creditor status”; that includes loans from the IMF, and Greece is going to get some IMF funds. But common-or-garden loans between sovereigns — Paris Club loans, as they’re known in the trade — most certainly do not get special treatment, nor are they generally considered senior to private-sector bonds. In fact, off the top of my head I can’t think of a single instance where a country remained current on its debt to bilateral creditors while defaulting on its bonds. And most of the lending to Greece will be bilateral, rather than coming from the IMF.

In restructurings, countries will sometimes do a deal with their bilateral creditors first, and then expect their bondholders to tag along under what’s known as “comparability of treatment”. But that doesn’t mean that the bilateral creditors are treated better than their private-sector counterparts, it just means they’re treated the same. And certainly debtor nations have historically found it much easier to default on bilateral loans than to default on their bonds.

But let’s get out of the world of theory and into reality for an example: look at the US government bailout of General Motors and Chrysler. The government lost lots of money on that deal, and most emphatically was not treated better in the restructuring than private bondholders were. My guess is that if Greece ever ends up defaulting on its debt, the same is going to be true of the eurozone countries which bailed it out.


As usual, I am impressed with your knowledge of a dizzying array of topics. But I wonder if the automaker bailout analogy is an apt one. During the auto bankruptcies, the Obama Administration was new and bent over backwards to make the auto bailout seem “fair” (and by that, I mean they wished to approximate a ‘normal’ BK process). The Administration was not wholly successful in preventing public outcry, but their intent was clear. In the case of the EU mess, I would imagine Greece’s repayment priorities are much different. Greece might find it politically expedient for the sake of their status as an EU member to honor loans made by their sovereign creditors, while they might see private credit as less forgiving/more fickle and therefore less worthy of a priority payout. The US government was the source of funds and therefore could not act as an “honest broker” through the auto BKs while also pushing for full repayment on its loans; Greece is the recipient of government funds and therefore does not have the same options or priorities as the US did.

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What was Lehman doing with Hudson Castle?

Felix Salmon
Apr 13, 2010 03:10 UTC

There’s one thing that newspapers can do and bloggers can’t, and that’s splash a big story all over the front page and just by doing so make it news. Newspapers like the NYT and WSJ have built up very good reputations over decades, and so if they tell you something then they’re trusting you to trust them:

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

It’s a juicy story, and I daresay it’s even true. But I can’t see the smoking gun for all the smoke. Lehman ceased to be the controlling shareholder of Hudson Castle in 2004. And no matter how many times I read this, I simply can’t understand it at all:

Hudson Castle created at least four separate legal entities to borrow money in the markets by issuing short-term i.o.u.’s to investors. It then used that money to make loans to Lehman and other financial companies, often via repurchase agreements, or repos. In repos, banks typically sell assets and promise to buy them back at a set price in the future.

One of the vehicles that Hudson Castle created was called Fenway, which was often used to lend to Lehman, including in the summer of 2008, as the investment bank foundered. Because of that relationship, Hudson Castle is now the second-largest creditor in the Lehman Estate, after JPMorgan Chase…

Hudson Castle might have walked away earlier if not for Fenway’s ties to Lehman. Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary. The loan was secured by part of Lehman’s investment in a California property developer, SunCal, which also collapsed. At the time, other lenders were already growing uneasy about dealing with Lehman.

Further complicating the arrangement, Lehman later pledged those Fenway notes to JPMorgan as collateral for still other loans as Lehman began to founder. When JPMorgan realized the circular relationship, “JPMorgan concluded that Fenway was worth practically nothing,” according the report prepared by the court examiner of Lehman.

This is all, obviously, extremely complicated. Hudson Castle was borrowing short and then lending that money out to banks like Lehman, which would post securities as collateral. (That’s the first thing that doesn’t make sense: since when are repo rates higher than CP rates?)

But obviously Hudson was lending unsecured as well, or else its security interest wasn’t well structured, because now it’s a major Lehman creditor.

Yet at the same time Hudson — or its Fenway subsidiary — borrowed $3 billion from Lehman. And those notes “were used to back a loan from Fenway to a Lehman subsidiary” — this is the point where I completely fail to understand what’s going on. And that loan from Fenway to Lehman was also secured by another loan, to a California property developer — so now it was secured twice? And the Fenway notes were used as security twice over, as well, since besides being pledged back to Fenway they were also pledged to JP Morgan?

Certainly there was some very crazy stuff going on around Hudson Castle — and knowing what we know about Lehman, it’s entirely plausible that the crazy stuff was all designed “to shift investments off its books”. But the main reason I have to believe that story that is that I trust the NYT. If I read this story on a blog somewhere, I’d dismiss it as borderline-incomprehensible conspiracy-theory rambling; but since I saw it featured prominently in the NYT, I know that some highly respected and respectable journalists and editors really believe there’s a story here.

I just wish they’d done a better job of showing us what Lehman was doing, rather than just telling us — and then trying to support their assertions with a series of details which really doesn’t make any sense.

Update: The NYT has now added this graphic to the story, which helps:


Ultimately, though, it still seems that Lehman was the lender of cash here: it’s not clear how this structure gets investments off its books at all. The only part of the structure which might do that is the bit on the far left, but $3 billion seems a very large sum to pay for facilitating a simple secured loan.


Hudson Castle appears to be a standard asset backed commercial paper or ABCP conduit (i.e. shadow bank used to move/finance assets off balance sheet). It’s my impression (because the Fed started treating commercial paper issued by captive conduits as acceptable bank collateral) that many ABCP conduits were supported by the banks that formed them after the ABCP collapse of 2007. (That is, the banks started buying the commercial paper of conduits that were backed by their own guarantees to avoid being forced to take tens if not hundreds of billions of dollars of assets on balance sheet suddenly in 2007/08.) So purchases like Lehman’s of Fenway paper are just examples of what had to happen to keep the ABCP market from collapsing totally (instead of partially).

Posted by csissoko | Report as abusive

Adventures in financial literacy

Felix Salmon
Apr 12, 2010 20:19 UTC

This is one of the silliest things I’ve read in ages:

As economists, elected officials and the American public ponder how to strengthen the U.S. economy by rebalancing the nation’s spending and consumption with savings and investment, an alarming majority of U.S. teens say they lack the knowledge to understand and effectively reconcile the two, according to the eleventh annual “Teens and Personal Finance Survey” conducted by Junior Achievement (JA) and The Allstate Foundation.

The poll itself shows that, contra the alarmism of the press release (and of certain coverage thereof), teens are in fact perfectly sensible when it comes to their personal finances. When asked why they don’t use a budget, for instance, the top two answers are very good answers indeed: “My parents take care of all my expenses”, and “It’s not necessary given the amount of money I have.”

The poll affects surprise that only 58% of teens are interested in money management and that 54% of them say they are unsure about how to effectively use credit — but the simple fact is that teens tend to have one of the best money-management systems in the world. They know exactly how much money they have at any given time, and they have no access to credit at all, so if they want something they have to save up for it. (Or get someone else, like their parents, to buy it for them.) And of course they’re unsure how to effectively use credit, for much the same reason that I’m unsure how to effectively fire a grenade launcher.

But the most delicious part of the whole survey is this pair of charts. Remember that they’re being published by an organization which is trying to teach financial literacy:


“Percentages may not total 100 due to rounding”, it says, which might can’t explain why the right-hand chart adds up to 102% 112%, and which also doesn’t explain why the colors on the right-hand legend are mixed up, with the lime-green and brown colors switched.

More seriously, the left-hand chart, which adds up to only 88%, shouldn’t be a pie chart at all, since it’s not meant to add up to 100%. It’s just the percentages of teenagers who answered in a certain way to three entirely different questions. There’s no pie here to chart: no whole which is split up into differently-sized pieces. Is it too much to hope that a financial-literacy organization might display a bit of financial literacy itself, before it starts getting all alarmist about the fact that teenagers don’t tend to worry overmuch about where to invest their nonexistent savings?

Update: JA, which put the survey together, responds in the comments, and still doesn’t get how stupid these pie charts are! If this person really doesn’t understand why a pie chart has to add up to 100%, I’m more convinced than ever that they have no business preaching financial literacy. Also in the comments, maynardGkeynes makes a point I’ve made many times in the past: that it’s a good thing to know that you don’t know about money. If you run these teens through a financial-literacy program, they’ll say they’re more financially literate than they do right now. But, in truth, they won’t be — they’ll just be more overconfident than they are right now when it comes to matters financial.


There is a difference between financial literacy and numeracy.
You could probably balance your budget without being able to understand when a venn diagram or bar chart is more appropriate than a pie chart.

For the right hand “pie” allowing multiple answers was the mistake. The questions should have been:
A. You manage your money.
B. You don’t manage your money.
C. Don’t know/not sure/refused.

The left hand pie is simply a disaster. As pointed out MANY times; it isn’t a pie.
At best it is three pies:
1 Invest your money: 55% sure 45% not very sure/not sure at all.
1 Budget your money: 75% sure 25% not very sure/not sure at all.
1 Spend your money: 82% sure 18% not very sure/not sure at all.

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Ivory Coast’s bond exchange gets it exactly right

Felix Salmon
Apr 12, 2010 18:54 UTC

It’s sheerest coincidence that the UK’s new anti-vulture-funds law came into force just as the Ivory Coast was concluding its astonishingly successful debt swap. The Republic took all of its six defaulted Brady bonds, and swapped them for one brand-new $2.3 billion global bond due in 2032. And it got well over 99% of bondholders to tender their bonds into the exchange: this has to count as one of the most successful sovereign distressed-debt exchanges ever.

Part of the reason it was a success is that the haircut is quite low, at just 20% of the principal amount outstanding: if you tendered a defaulted bond with a face value of $1,000, you got in return a performing bond with a face value of $800. That’s quite a good deal, even if the coupon on the new bonds is quite low in the early years: it starts at 2.5%, and steps up to 5.75% in 2013.

Another reason is the relatively small number of creditors: although these were technically bonds which could be owned by anyone, in practice the bondholders were just a few dozen banks and hedge funds who could be invited around a table into London Club negotiations.

But also the hedge funds involved knew full well that a holdout strategy was very unlikely to work, especially once take-up of the offer reached a critical mass. As part of the bond exchange, the holders of the old bonds voted to strip away their waiver of sovereign immunity, meaning that it would be essentially impossible to take Ivory Coast to court in an attempt to collect on the defaulted debt.

One interesting aspect of the Ivorian exchange is that it took place exactly along the lines of the new UK law: essentially the London Club was bailed in to what the Paris Club had already agreed. Does that prove the law’s not needed, or does it show how powerful the law was even before it was passed? My feeling is that the truth is somewhere in the middle, and that although Ivory Coast didn’t really need this law, it might come in handy for other HIPC countries.

There’s been much less wailing and gnashing of teeth from the buy side than I would have expected when it comes to this law, so it seems to me that investors turn out to have been one short step ahead of it. They’re already happy to enter into deals like the Ivorian exchange, and they’re reasonably confident that now the law has been passed, it’s not going to get expanded to include future indebtedness or non-HIPC countries. But at the same time, the law will probably help to clear up a few outstanding cases like the ongoing one against Liberia. I still don’t think it was particularly necessary, and I dislike governments messing around with contracts ex post, but it might conceivably do some good at the margin.


If the point is retiring as much debt as possible at the lowest price, it was successful. If it is intended to encourage further investment in Ivory Coast, it is debatable as this hair cut was after the original 80% haircut. It is more a sign of the pavlovian response to any liquidity and the big institutions dominating this paper. The reality is that Ivory Coast only got HIPC terms because of French pressure within the World Bank to expand the ratios to encompass their sphere of influence in West Africa…

And as to attracting further investment, Ivory Coast’s French advisers have insisted (with IMF support) that they should default on recently placed local currency bonds and notes on the basis that if the holder is foreign it constitutes external debt and they must default… Something that makes one wonder if Paris Club conversion clauses continue to have validity…

The fact that all the holders of the CFA paper were London based is well known…

Now that is far sighted, isn’t it?

Posted by MFSheehan | Report as abusive

The search for Basel III loopholes begins

Felix Salmon
Apr 12, 2010 15:56 UTC

Patrick Jenkins of the FT has two great articles today following the maneuvering around Basel III. The big-picture story is clear: banks around the world are ganging up to try to weaken and/or delay Basel III’s implementation.

Most of the arguments could be made only by banks who have been drinking their own kool-aid for so long that they no longer have any idea what sounds ridiculous and what doesn’t. I hope that the world’s central bankers aren’t going to be swayed by stuff like this:

Bankers say that by Friday’s deadline the committee will be inundated with protests, complaining that the the proposals – designed to insulate the industry from another financial crisis – could backfire, cutting bank profits to unsustainably low levels…

Banks’ return on equity levels would be cut by at least a half, according to many bankers and analysts, to as little as 5 per cent. They argue that the industry would find it impossible to attract new investors, in competition with more profitable sectors.

Actually, banks are entirely sustainable so long as their profits are positive. A return on equity of 5% is still going to be significantly higher than the developed world’s GDP growth rate, so I see nothing unsustainable there. Might it mean that banks couldn’t grow as fast as they want to? Yes, but that’s a feature, not a bug. And so long as banks are profitable, they don’t need to attract new investors. In fact, if more profitable sectors get more investment and banks get less, that’s surely a good thing from the point of view of global productivity. The banking sector is far too big, as a percentage of GDP, and needs to shrink in comparison to sectors which create much more real value.

This part scares me more, though:

The danger, says the Institute for International Finance, the global bank lobby group, is that if Basel takes too draconian a line, hopes for a co-ordinated global approach to include the US could crumble.

The question of the US is absolutely the elephant in the room. America, remember, hasn’t even adopted Basel II yet, and Basel III is a revision to Basel II. So it’s crucial that the US take a lead on this. But I’ve heard very little in the way of noises from senior US officials about how aggressive they’re being in terms of pushing through Basel III. Instead, I’ve heard a lot of stuff in the passive voice, and I fear that the US simply isn’t investing sufficient political capital in Basel III to make sure that it will get implemented on time in this country.

So other countries’ concerns seem to be taking center stage. The French, for instance, don’t want their banks to be fully responsible for the capital requirements of subsidiaries, when other shareholders hold a large minority stake. But of course they should be, because when push comes to shove the majority shareholder is ultimately going to be liable for losses at the subsidiary — just as Citigroup and others were ultimately responsible for their nominally off-balance-sheet vehicles.

And then there’s the vexed question of turning losses into capital:

The planned ban on most deferred tax assets – counting prior-year losses as capital on account of its potential boost to after-tax earnings – is particularly sensitive in Tokyo, where in some years they have accounted for the majority of bank capital, according to estimates.

But never mind, Goldman Sachs is here!

The more entrepreneurial investment banks – traditionally the likes of Goldman Sachs, JPMorgan and Deutsche Bank in this kind of area – have spent recent weeks touting new product ideas to banks that will be hit by the new rules.

The initiatives are focused in particular on ways in which deferred tax assets – to be outlawed as capital under current Basel thinking – can be turned into cash or an equivalent that would be valid for capital purposes.

Bankers say the assets could be sold at a discount of 20-30 per cent, either via actual sales or using derivative instruments, to non-bank buyers.

In principle, this could work. If a bank can turn its deferred tax assets into hard cash, then that’s great, it can count that hard cash as capital. But the whole point about deferred tax assets is that only the entity which suffered the loss in the first place can benefit from them: they’re not tradable or fungible, and if you never make a profit, they’re worthless. (Just ask General Motors.) So who would buy these things, and how? If they create an obligation of the bank to pay to investors the first X dollars in future profits, I can imagine all manner of accounting shenanigans.

I think that Jenkins is absolutely right to be suspicious of this kind of financial innovation:

Many bankers will support the initiatives as good creative thinking. But critics will see them as the latest evidence that banks have not learned their lesson from the crisis and will always focus on arbitraging the system for a profit, however tough the rules.

The whole point of Basel III is that it’s meant to be robust and Roman; these new products are a way of turning it complex and Greek again before it’s even been finalized. Which is depressing.


Perhaps I’m mistaken, but a few years ago I thought I read that even Basal II rules weren’t adopted, which would have been significant today due to set capitalization ratio for derivatives (which would have been new at the time)… have things recently changed?

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