Counterparties: Government’s governance problem

June 12, 2013

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The US and UK have a unique sort of corporate governance mess on their hands. Both countries are trying to deal with the complications of owning a multi-billion dollar financial institution, and are having a hard time doing so.

Britain’s problem is RBS, which the government owns 81% of as a result of 2008 bailout that ended up costing $71 billion. In the US, it’s Fannie Mae and Freddie Mac, the mortgage giants that have been under federal conservatorship since 2008.

Hours after a senior official at the Bank of England called for a more certain timetable for RBS’s privatization, CEO Stephen Hester, who took over in November 2008, unexpectedly announced his departure.

Reuters’ Matt Scuffham reports that the RBS board decided Hester need to be replaced after he refused “to make an open-ended commitment to remain”. Analysts, the WSJ says, were “surprised and disappointed” by Hester’s departure just as the bank’s privatization process is getting underway. Faisal Islam thinks Hester’s exit may be a sign that the government wants to restructure how it manages the bank, something it has had trouble doing in the past.

The US government, meanwhile, is facing a lawsuit from Fannie and Freddie shareholders seeking $41 billion in damages for improperly seizing the companies in 2008. Fannie’s stock has been on a tear recently, based on the essentially speculative rationale that the government will decide to privatize the company. Matt Levine makes the great point that the bailout-related lawsuit could should cause the government to keep its hands on the mortgage companies:

Fannie and Freddie were designed to carry out a public purpose while also making money for private shareholders. When those goals conflicted, the public purpose won and the private shareholders were thrown into the abyss. If you’re the government: that’s perfect. Except now those shareholders are suing, as shareholders tend to do. If you’re the government: why would you set yourself up for more of that?

Jesse Eisinger argues that Congress continues to find new and interesting ways to bungle Fannie and Freddie’s rehabilitation. Neither of the two main proposals to reform Fannie and Freddie, Eisinger writes, reflect what we’ve learned about the housing market since the crisis. Not that Frannie were ever that sound to begin with. The companies were flawed all along, Eisinger says: “hybrids, privately held institutions with government charters – along with too much political influence and too little capital.” – Ben Walsh

On to today’s links:

Mysteries Explained
Don’t worry, credit cards are the reason you’re a bad person – Derek Thompson

Big Brother Inc.
About half a million private contractors have access to top-secret info – Brad Plumer

New Normal
The President’s report on the “Great Gatsby Curve” – White House

Foreign exchange rate benchmarks may have been manipulated daily for the last decade – Bloomberg
Maybe all that FX market manipulation was just standard trading – Felix Salmon
The term “market manipulation” used to mean something – Matt Levine
Dan Loeb is giving more money to charter schools to get back at the teachers’ union – Bloomberg

“The tectonic plates of the world economy are shifting” – David Wessel
Are central bankers finally losing control of long-term interest rates? – BI

Health Care
The overlooked driver of health care costs: lack of competition – Eduardo Porter

Why Pandora just bought a radio station in South Dakota – Bloomberg Businessweek

Ya Think
Large banks are still Too Big to Fail, and S&P is on it! – FT

JP Morgan
Jamie Dimon doesn’t agree with JP Morgan – Jonathan Weil

Niche Markets
The French film industry threatens to torpedo major US-EU trade talks – Reuters

Crisis Retro
Regulators say AIG Financial Products is having trouble managing risk again – Shahien Nasiripour

The JOBS Act has been a big missed opportunity to spur more small company IPOs – Steven Davidoff

That Kanye West interview everyone is talking about – NYT

A majority of Americans responded truthfully to a survey – WSJ

And, of course, there are many more links at Counterparties.

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