Felix Salmon

Remember the Financial Crisis Responsibility Fee? It seemed like a great idea at the time, raising money for Treasury while at the same time acting as something of a too-big-to-fail tax which would help give banks a disincentive to grow too big or to move away from a stable deposit-based funding base.

But the stated purpose of the bank tax was to repay TARP — and now it seems that the TARP shortfall is going to be less than $30 billion. So it’s both politically and rhetorically hard to get it passed right now. Jim Pethokoukis reports that “it wasn’t included in the summer’s financial reform bill for fear of scaring away Republican support,” but says that it might yet be resuscitated as a way of making up the government’s losses on Fannie and Freddie.

For the time being, however — and for the foreseeable future through the rest of Obama’s first term in office — the bank tax seems to be dead, even as similar taxes in Europe have never been more popular. It’s yet another sign of how European and American attitudes towards the banking sector are diverging: while the Americans took a hard line in the regulatory negotiations in Basel, they’re much less keen on bank-specific taxes. The Europeans tend to move the other way, towards laxer regulation and higher taxes. In a world where financial services are borderless and globalized, that divergence is little more than a recipe for regulatory arbitrage.

Elizabeth Warren isn’t shy about taking sides in the debate between rules-based and principles-based regulation:

In her speech and in an interview earlier in the day, Warren said she hopes to take a more “principles-based approach” to regulation, rather than simply saddling companies with more of what she calls “thou shalt not” rules — which make for burdensome, costly compliance and which banks often start trying to skirt as soon as they are written

“Regulators can make more pronouncements from on high, identifying suspicious practices in the various markets and banning them. Or regulators can layer on more disclosure requirements,” Warren said in her remarks. “But neither restores customer trust.”

Rather, she said, “Let’s measure our success with simple questions” — Can customers understand a product? Do they know the risks? Can they easily figure out what it really costs?

Warren, remember, is a law professor: she knows full well that the main effect of laying down rules is to send a thousand lawyers scurrying to find ways around them. And she’s surely also seen the way in which other regulators — the SEC springs to mind — become overrun by lawyers looking for people breaking rules, rather than regulators trying to ensure a clean and level playing field.

At the same time, principles-based regulation is new to the US, and will be worrying to banks who will never know for sure whether what they’re doing is allowed or not.

Good.

It’s true that a malicious and vengeance-minded principles-based regulator would be capable of wreaking havoc on the banking industry, but the same can be said of a malicious and vengeance-minded rules-based regulator, too.

The fact is that it makes perfect sense for a consumer-protection bureau to regulate from the point of view of the consumer, rather than from the point of view of bank managers. Warren’s simple questions are good ones, and they’re hard to capture with rules. If banks provide valuable products to consumers, then consumers will value them. If, on the other hand, banks create products which are designed to prey on human foibles, then consumers will come to believe, in Warren’s words, that “dealing with banks is like handling snakes – do it long enough and you’ll get bit.”

Ultimately, the Consumer Financial Protection Bureau could prove an important case study for other U.S. regulators thinking about moving to a principles-based approach. Such an approach is hardly sufficient to fend of a crisis, as the UK’s Financial Services Agency can attest. But it probably stands a better chance of doing so than thousands of pages of new rules.

Has Gretchen Morgenson buried something explosive in her story today about the FCIC testimony of a mortgage-analysis executive in Sacramento? Here’s her 28th and 29th paragraphs:

Because these loan samples were provided to the Wall Street investment banks that commissioned them, they could see throughout 2006 and into 2007 that the mortgages they were financing and selling to investors were becoming increasingly sketchy.

The results of the Clayton analyses were not disclosed to investors buying the loan pools. Instead, Wall Street firms used the information to pressure the lenders issuing the most troubled loans to accept a lower price for them, according to prosecutors who have investigated these cases.

If you remember, the SEC’s central accusation against Goldman Sachs was that it lied to its clients — it knew something important about the Abacus deal which the clients didn’t know, and Goldman didn’t see fit to enlighten them.

That case, centered on one deal at one bank, resulted in a $550 million fine, and billions of dollars of market capitalization wiped off Goldman’s share price.

Yet it seems here that something similar was going on very regularly, not only at Goldman but also at Citigroup, Deutsche Bank, UBS, Merrill Lynch, Bear Stearns and Morgan Stanley.

This time, the lie of omission was not that John Paulson was both choosing and shorting the CDS in a synthetic CDO. Rather, it was that Clayton Holdings had analyzed the mortgages going into subprime mortgage pools, and found that only 54% of the loans going in to subprime mortgage pools met the lenders’ underwriting standards, and that 28% of the loans sampled were outright failures. Many of those failures ended up being accepted into the pools, rather than rejected.

Obviously, the numbers varied from bank to bank. (Goldman’s almost endearing in its doomed attempted defense that “the percentage of deficient loans that went into its pools was smaller than Clayton’s average”.) But it seems here that the banks knew that their loan pools were dirty — they told as much to the originators, and tried to to get a discount on the loans as a result. But they didn’t bother to inform the investors in those pools.

In fact, the banks might even have had an incentive to put together dirty pools. After all, dirty loans come cheaper — and so you can make more money when you sell them off to bond investors at the same price as cleaner loans.

If prosecutors are chatting away to Morgenson about this, I suspect that indictments are coming down the pike. And given how important the SEC’s case against Goldman turned out to be, a series of big cases against a whole slew of investment banks could have enormous repercussions for their reputation and their share prices. So beware, anybody buying stock in Goldman, Citi, BofA or Morgan Stanley: there’s serious litigation risk here, I think.

Robert Peston has a theory for why Ireland can’t bail in the sophisticated institutions which lent untold billions to the country’s beleaguered banks:

Take a look at the latest figures from the central bankers’ bank, the Bank for International Settlements, on just the exposure of overseas banks to Ireland (in other words, credit provided by pension funds, hedge funds and wealthy individuals would be on top of this).

Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively.

To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn’t sound altogether prudent, does it?

As for direct bank-to-bank lending, overseas banks have provided Ireland’s banks with €169bn of loans, which is also greater than Irish GDP.

Here’s the point: an economy as open and as dependent on foreign finance as Ireland’s cannot afford to alienate its creditors. If those overseas lenders asked for their money back now, Ireland’s recent fall back into a modest economic contraction could spiral into dark deep prolonged recession or even depression.

The implicit assumption here is that if the Irish government took away its backstop of Irish banks’ debts, there would be a mad dash for the exits, all of the banks’ creditors would refuse, overnight, to roll over any of their debts and the resultant liquidity crisis would make the Lehman collapse look positively modest.

It’s like there’s a whole new level to the famous adage: if you owe the bank $10 million, then you have a problem. If you owe the bank $10 billion, then the bank has a problem. But if you owe the banks $844 billion, then now the problem is back on you again, since at any time the banks can turn you into Iceland overnight.

I think the fear here is a very realistic one. In an ideal world, of course, the banks would understand the need for burdens to be shared and would also understand that staying invested in a healthy Ireland, even with a modest haircut on their original investment, is a much better outcome for all concerned than a mad panic and sovereign default with the debt of Irish banks falling in value to pennies on the dollar.

But we don’t live in an ideal world and the collective-action problems here are all but insurmountable: at the first whiff of a haircut, everybody’s going to want to be the first to bail out entirely. Ireland’s technocratic elite seems to understand that and so it’s unhappily bailing out its foreign lenders at 100 cents on the euro, even the government continues to slash spending domestically. It’s not fair, everybody knows that. But it might be unavoidable.

There’s all manner of delicious irony here: a company called Antedon bought the European headquarters of Goldman Sachs for £355 million ($562 million) in 2007, complete with a lease to the bank which runs until 2026. Yet somehow Antedon has contrived to default on the loan, and the buildings have now been seized by Antedon’s lenders, a group led by Landesbank Berlin.

The details are unclear, not least because the original story is behind the notorious Sunday Times paywall. But on the face of it, it seems that Landesbank Berlin agreed to a deal whereby Antedon would have to pay them more money than it was receiving, in rent, from Goldman Sachs. And what’s more, since the lease runs until 2026, there was no way for Antedon to increase Goldman’s rent payments. (And yes, Goldman Sachs has rented out all of the two buildings in question, except for a tiny slice of retail.)

I can’t see any other explanation of what’s happened here. Even if Antedon was in deep negative-equity territory on its investment, it wouldn’t gain anything from defaulting on its loan so long as Goldman’s rent payments covered its mortgage obligations. After all, Antedon has now lost all of Goldman’s rent payments, and title to the buildings.

Did Antedon really commit to pay its lenders more money than Goldman was contractually obliged to pay in rent? Did it think that it could make up the difference by jacking up rents sharply in 2026? And what were the lenders thinking? It’s all very odd, to say the least. But this might be a great opportunity for Goldman to buy Peterborough Court and Daniel House outright. They’re very beautiful buildings, although Goldman might have outgrown them at this point: the two buildings have only 318,439 square feet of office space between them, compared to 2.1 million square feet in Goldman’s new NYC headquarters.

Which makes me wonder: if it’s impossible to implement size caps when it comes to banks’ balance sheets, can we maybe at least cap their square footage? It’s surely a more sensible idea than Antedon’s 2007 real-estate deal.

William Wild has an intriguing idea which could be applied not only to new stimulus funds but even to energy-infrastructure funds left over from the first stimulus which haven’t yet been spent. His premises are simple; here’s how I understand them.

• It’s a good idea for the government to subsidize renewable-energy projects, but we want those projects to be viable, post-subsidy.
• There’s lots of equity capital floating around the green-tech space, but precious little debt.
• Increasing the amount of debt in renewable-energy projects won’t meaningfully decrease the amount of equity capital available. If anything, the opposite is true.
• We need to get banks lending again, and it would be great if government subsidies could be leveraged with bank debt.

Wild’s proposal addresses all of these ideas, quite simply:

At least 70% of any project’s commercial capital (excluding the subsidy) should be in the form of non-recourse commercial bank debt.

It’s an intriguing idea. At some point, there’s enough government subsidy in the project that banks will be willing to lend into it. (The subsidy can be in any combination of debt, equity, or even outright grants: the only thing that matters from the banks’ point of view is that they’re senior to the government.) Since banks aren’t doing much lending into renewable-energy projects right now, this could help jumpstart a whole new set of renewable-energy groups within commercial banks, who would rapidly become expert on the economics of the sector, and help it to grow.

The big potential problem is that such a rule would delay green-tech projects unnecessarily, and even prevent certain interesting projects from happening at all. Banks are by their nature very conservative when it comes to things like this, and Wild’s rule would essentially give them veto power over any and all new projects seeking government subsidy. I’m not sure we want that. But I do like the idea of dragging them into the sector. It’s surely a much better use of their funds, from both a financial and a societal perspective, than subprime housing loans were.

I’m generally plugged-in enough to various news streams that if there’s a big story one day, I’ll notice it before it gets splashed across the front pages of the newspapers the following morning. So I was surprised to see today’s WSJ, with its huge headline running across the top of the front page: “SEC Blasted on Goldman“. The story itself is a long one, and is the work of no fewer than four reporters, with a fifth writing an associated blog entry.

The story is about David Kotz, the SEC’s inspector general, who appeared in front of the Senate Banking Committee yesterday. Kotz was the author of a 159-page report into the SEC’s handling of the Allen Stanford Ponzi scheme, which was released on the same day that the SEC filed its explosive charges against Goldman Sachs. Unsurprisingly, the Goldman charges dominated the business-news cycle, and the Stanford report, which was highly critical of the agency, was, in the words of Reuters, “largely unnoticed”.

So when Senators asked Kotz about the timing of the Goldman lawsuit, his answer can hardly have come as much of a surprise. “It would strain credulity to think it was coincidental,” he said, adding: “I can’t give you a conclusion right now, but it was suspicious.”

Yet somehow, atop this non-commital non-news, the WSJ has managed to construct a damning indictment of the SEC and its entire case against Goldman. Ashby Jones even went so far as to say that Kotz “basically hinted that there may have been more politics than law factoring into the commission’s decision to sue Goldman Sachs”.

Er, no, he didn’t. Kotz might not have like the timing of the Goldman suit. But he said nothing about the substance of it, and he did not hint that the decision to sue Goldman was a political one. It makes sense that once the SEC decided to sue Goldman, it then decided to do so on the day that Kotz’s report was released, in order to deflect attention from the report. That’s what Kotz was implying yesterday. It does not make sense that the SEC decided to sue Goldman just so that it could have something with which to deflect attention from Kotz’s Stanford report. That’s what the WSJ is implying — and what it says that Kotz is implying.

After all, the dark arts of burying bad news hardly constitute a front-page-worthy news story with four different reporters. And I don’t in any case think that Kotz’s answers yesterday really justify an “SEC Blasted” headline, no matter where it’s placed.

But maybe the WSJ is just going back to its roots in terms of reflexively defending big banks whenever they’re attacked by the government. Back in 1933, the Pecora Commission interrogated Charles Mitchell, the chairman of National City Bank, revealing that he had paid himself astonishing sums, and furthermore had avoided paying taxes on any of it. Here’s how Michael Perino describes the reaction of the press, in his new book about Pecora:

If Pecora’s goal was to create outrage, he succeeded magnificently. The only thing dividing most newspapers was which part of the testimony was more outrageous. The Washington Post went with the bonuses (the paper ran the line “Huge Pay Told” over Mitchell’s picture). For the New York Times, it was the taxes — “Mitchell Avoided Income Tax in 1929 by ‘$2,800,000 loss,’” its headline read… The Wall Street Journal’s coverage was, perhaps not surprisingly, notably different. It thought the most significant aspect of Mitchell’s testimony was his huge purchases of City Bank stock during the crash. The Journal gave only cursory treatment to the bonuses and, as for taxes, merely buried near the end of the article that there had been “temporary transactions in connection with taxation.”

Within days, Mitchell had resigned from National City. But it seems the WSJ has no regrets about spinning stories about big banks in very favorable ways.

The Chase online-banking fiasco is continuing into this morning, at least according to Twitter chatter. The bank’s website went down on Monday night, was completely offline until Wednesday, and has been unreliable since then. And the response from the bank has been laughable:

Bank spokesman Joseph Evangelisti said that it did not want to post updates until it had a full understanding of the problem.

Have these people learned nothing from corporate cock-ups from Eurostar to BP? You get out in front of the issue, you apologize and make good to your customers even before you know what went wrong, and, crucially, you communicate frequently on Twitter, which is the first place that people look, these days, for updates relating to rapidly-evolving situations.

Except — get this — Chase isn’t on Twitter. There’s an @chase account, but it belongs to a guy who describes himself as “just some punk kid with a camera”. Similarly, @jpmorgan belongs to Josh Morgan.There’s an @jpmorganchase account, but it’s empty. And at one point there was an @chasebank account, but that has now been suspended, for reasons which are unclear.

The results are predictable enough:

“From this customer’s point of view, management doesn’t seem to care one bit,” said Mike Underhill, a J.P. Morgan Chase customer in West Chester, Ohio…

J.P. Morgan said it expects to issue an apology to consumers, but it had said little on Tuesday about why more than 16 million online customers lost electronic access to their accounts…

“There is a brand and reputational risk here,” said Jacob Jegher, an online banking analyst for financial-services consultancy Celent, citing a flurry of Twitter posts on Wednesday critical of the bank. ‘There is a backlash going on in social circles that is out of control.”

One of the biggest issues that customers have with their banks is that of communication: banks are incredibly bad at telling their customers what’s going on.

What’s more, this whole episode underlines the way in which it’s silly to assume that bigger banks have more robust websites. In fact, the opposite is true, especially in the case of banks like Chase which are the result of many mergers and therefore have to cobble together all manner of disparate legacy systems.

And it also says a lot about redundancy within big corporations, or the lack thereof. The damage from this outage is many orders of magnitude less severe than the damage from the BP oil spill, but both of them are cases where any attempt at back-up plans or redundancy failed. Chase tried to update its website, but didn’t have a backup system in case the update failed; BP tried to put in a blowout preventer, but it didn’t work.

Evangelisti told the NYT’s Eric Dash that the outage “would not have a material effect on the bank’s earnings”, and I daresay he’s right about that. But investors should still care. Chase is one of the biggest consumer banks in the world, and it has proved, this week, that it’s incapable of communicating with those consumers. Insofar as it still has customers inherited from more outgoing banks like WaMu, this episode is likely to accelerate the rate at which they leave for somewhere smaller, simpler, and more reliable. If and when such banks finally arrive.

London fund manager Barry Olliff seems to be on the same page as Silicon Valley venture capitalist Ben Horowitz when it comes to paying employees.

Here’s Olliff:

Selfishness creates an attitude of negotiation at the point of salary, bonus and option notification. At City of London we do not negotiate any aspect of remuneration…

If we are genuine in wishing to create a team culture then there is a need to treat employees as a team. This in effect means that we do not pit them one against another. Rather we attempt to instil in them that the competition is outside the firm, which actually is where it is.

The net result of the above is that there is little intrigue at the point of salary and general compensation disclosures. Staff accept that the way it is, is the way it is. If they do not like it they can leave which sometimes happens within a year of joining.

And here’s Horowitz:

A CEO creates politics by encouraging and sometimes incenting political behavior—often accidentally. For a very simple example, let’s consider executive compensation. As CEO, senior employees will come to you from time to time and ask for an increase in compensation. They may suggest that you are paying them far less than their current market value. They may even have a competitive offer in hand. Faced with this confrontation, if the request is reasonable, you might investigate the situation. You might even give the employee a raise. This may sound innocent, but you have just created a strong incentive for political behavior.

This kind of thinking runs counter to what one finds at Goldman Sachs, where there’s a real emphasis on rewarding — and punishing — individuals:

On Wall Street, becoming a partner at Goldman Sachs is considered the equivalent of winning the lottery.

This fall, in a secretive process, some 100 executives will be chosen to receive this golden ticket, bestowing rich pay packages and an inside track to the top jobs at the company.

What few outside Goldman know is that this ticket can also be taken away.

As many as 60 Goldman executives could be stripped of their partnerships this year to make way for new blood, people with firsthand knowledge of the process say. Inside the firm, the process is known as “de-partnering.”

The two philosophies are not completely incompatible. Great team members can and should be rewarded with raises and promotions, even when such things aren’t the result of negotiations, and Goldman partners don’t negotiate their position in any real sense: they’re quietly vetted, and then called in to the CEO’s office to be told the good news. What’s more, Goldman does try to reward people who build great teams and who work for the greater glory of the franchise instead of trying to burnish their personal credentials.

But all the same, Goldman is a company of 35,000 employees with just 375 partners — and Goldman president Jon Winkelried once said that making partner was viewed as the real beginning of a career at the firm. Given that one in four of Goldman’s existing partners faces the humiliation of de-partnering next month, it’s reasonable to assume that Goldman employees, both before and after they make partner, are competing against their colleagues just as much if not more than they’re competing against their actual competitors.

I do think it’s possible to create a bank built around teams which can last for years and which aren’t torn apart by an up-or-out culture. But such banks tend to be small, and it’s definitely seems as though it’s easier to build those structures if, like Olliff, you’re on the buy side rather than the sell side. Any idea as to why that should be the case?

Two of the smartest people I’ve met are coming out this morning with an unexpected (to me, at least) criticism of the Basel III rules.

Mohamed El-Erian:

“The phasing-in period for the new capital requirements is surprisingly long, which will add to the skepticism about the robustness of the bank capital enhancement efforts.”

Joe Stiglitz:

“While it’s understandable, given the weaknesses and the failings of the banking system, that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk. Given the high levels of payouts in bonuses and dividends, it seems a little unconscionable to continue putting the public at risk with an argument that they cannot more rapidly increase their own capital.”

I haven’t been particularly worried about the timetable up until now, mainly because I haven’t seen much evidence that any systemically-important banks are going to take advantage of the long phase-in period to get away with having capital levels lower than the eventual minimum.

Of course, systemically-important banks are going to have an extra too-big-to-fail capital requirement slapped onto them, over and above the minimum requirements laid out yesterday. So it’s just as well that all of them are currently in compliance with the vision that the BIS technocrats have for smaller banks around the world. (Deutsche Bank might not be there today, but it will be once it’s done raising $12 billion in new capital.)

But the big bonuses that Stiglitz is worried about are overwhelmingly paid out by banks which would be compliant with these new Basel III rules even if they were implemented tomorrow. And once a bank is compliant, the market will punish it severely if it slides back during the phase-in period.

It seems to me that when it comes to the big players in the interbank markets, and any bank with a decent-sized capital markets division, the Basel III standards are de facto in place right now; the only exceptions are banks which have already been nationalized. Or am I missing something here?

John Carney today writes about what he calls “the deeper problem” behind the Basel III negotiations: “how regulators can assess capital requirements without a functioning market process”.

Ideally, he says, “we wouldn’t have regulatory capital requirements at all”, and banks would voluntarily raise their capital levels because doing so would decrease their funding costs. But in an age of moral hazard and government guarantees, that doesn’t work.

But underlying all of this is the idea that there’s an art to setting an optimal capitalization ratio, so that it’s not too high and not too low. My feeling, by contrast, is that left to their own devices banks will always have too little equity and too much debt, for the reasons that Carney glosses and also just because they tend to trust each other too much, believing that in extremis they can always exit most of any given interbank position overnight.

Certainly I haven’t seen any correlation between leverage and profitability when it comes to the world’s banks. The most profitable bank I’ve ever covered on a regular basis is Brazil’s Banco Itaú, and it tends to have pretty conservative leverage. Meanwhile, Europe is full of extremely highly-levered banks which make relatively modest profits.

It seems to me, then, that excess banking-system leverage is something which happens in mature markets when the normal engines of bank profitability, such as loan growth, start running dry. In Carney’s ideal unregulated market, banks would start off with quite high capital ratios when economies are young and growing fast, and then slash that equity in a desperate attempt to preserve return on equity as their economies start to mature and growth slows down.

And while the emerging markets are no strangers to banking crises, the fact is that the most dangerous such crises are always the ones which take place in large, mature economies.

That’s where regulators — by which I mean the Bank for International Settlements, in Basel — have to step in, by forcing all countries to adopt a bare minimum capital requirement which will protect the system in two main ways: it will make bank failures less likely and less frequent, and it will improve the ability of the rest of the system to withstand any bank failure which does still occur.

Within reason, and so long as the requirement is imposed globally, there’s no reason that it can’t be very strict indeed; the noises coming out of Basel are a very good start. There’s very little downside to tougher capital requirements, and the people who complain about them most likely are probably just those who fear that their bonuses are going to fall. But that’s a feature, not a bug.

Bill Black has a detailed round-up of what we know about Kabul Bank, and where the US went wrong. He’s particularly scathing about this quote from Stephen Biddle:

U.S. officials and defense analysts say that challenging local power brokers and criminal syndicates, many of which depend on U.S. reconstruction contracts and ties to the Afghan government for support, would likely add to the unrest in southern Afghanistan and produce a higher U.S. casualty rate. “Putting an end to these patronage networks would not come cheaply,” said Stephen Biddle, a senior fellow at the Council on Foreign Relations who has advised U.S. commanders in Afghanistan.

By contrast, allowing some graft among Afghan power brokers on the condition that they agree to limit their take and moderate predatory activities, such as their use of illegal police checkpoints, could promote near-term improvements, Biddle said. “We spend a lot more money in Afghanistan than the narcotics trade,” he said. “A lot of money that funds these networks comes from us. So we can essentially de-fund these networks, taking away their contracts.”

Black’s response pulls no punches:

He is wrong about corruption, fraud, and predation. Biddle finds it necessary to create this euphemism for corruption (“patronage networks”). He believes that he can calibrate graft and dial his desired level of corruption as if he were using a rheostat to change the intensity of a light. He thinks he can get them to “limit their take” and “moderate” “their “predatory behavior.” He thinks he can get Karzai to “defund” his political cronies. His appeasement strategy has never worked. It will fail and the failure will “not come cheaply.” It will kill and maim Afghans, NATO troops, and foreign aid and construction workers.

Black also asks a very important question I haven’t yet seen posed, let alone satisfactorily answered:

Where were the auditors? PWC was Kabul Bank’s auditor. It missed everything.

The big picture here is that Kabul Bank seems to have been acting as a conduit for taking as many foreign aid dollars as possible and transmogrifying them into offshore holdings belonging to the president’s cronies. And it did all of this openly, with impunity, knowing that the US government was unwilling or unable to put a stop to it.

The result could well be much more damaging to Afghanistan, and to US interests there, than any number of military failures.

I fear that during the crucial years when Kabul Bank was becoming dominant in the country, the US was looking elsewhere: it was more interested in Iraq than in Afghanistan, and insofar as it cared about Afghanistan at all, it cared about the military situation much more than about the financial one. Ann Marlow assured us on the WSJ op-ed page in April 2006 that “while Afghans are lacking in education and management skills, they have a culture that values honor and honesty”. So obviously, there was nothing to worry about. Right?

John Cassidy has very little patience for Ben Bernanke’s latest attempt, in front of the FCIC, to explain how Lehman Brothers was allowed to fail so catastrophically. Bernanke is now saying that Lehman was in such bad shape that it would have failed whether or not the Fed had stepped in to guarantee its debts; like Cassidy, I’m very suspicious of that argument, since a Fed guarantee would have stopped any bank run cold in its tracks.

So what does Bernanke mean when he says that “the view was that failure was essentially certain in either case”? My feeling is that Bernanke, along with Hank Paulson, had an unnecessarily binary idea of what exactly “failure” meant. They were faced with a choice between the chaotic collapse that we saw, on the one hand, and a much more orderly failure, on the other; and they utterly failed to grok how much worse the first option was than the second.

Bernanke has long said that the Treasury “did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm” — but now it seems that he’s also saying something which demonstrates much weaker leadership. If we lose billions of dollars and Lehman still fails, goes the argument as I understand it, then we will have failed too. So we might as well just let Lehman fail on its own. Even if the consequences of that decision are orders of magnitude worse.

A leader will take a hit for the greater good. A profit-driven trader like Hank Paulson, not so much. As Cassidy puts it:

Many people from Lehman and Barclays suspect that the real barrier to the Barclays rescue wasn’t the legal niceties in London but a reluctance on the part of Bernanke and others—Treasury Secretary Hank Paulson in particular—to fill the gaping gap in Lehman’s balance sheet by providing a Bear-style loan from the Fed, which could have topped fifty billion dollars.

With hindsight, $50 billion would have been a very small price to pay for an orderly wind-down of Lehman Brothers. But Bernanke and Paulson, it seems, were too caught up in wanting to avoid “failure” to work that out.

Amy Davidson has a good round-up of the tragic bank run at Kabul Bank, which is threatening not only the largest and most important bank in Afghanistan but also what remains of that country’s shattered political economy. But you can pretty much learn everything you need to know from reading two sentences from the excellent WaPo report:

Speaking Wednesday from his villa in Dubai, which was paid for by Kabul Bank, Mahmoud Karzai, the president’s brother, said cash withdrawals from the bank were a “little bit more than usual” but did not threaten to cause a meltdown. A full-scale run on Kabul Bank, he added, “would be a major disaster.”

Yes, the president’s brother is a part owner of the bank, and he’s living in Dubai, in a villa paid for by the bank — which, incidentally, handles the payroll for Afghan soldiers and schoolteachers — and really, what could possibly go wrong?

As the FCIC revisits the Lehman Brothers failure for the umpteenth time, the U.S. is faced with yet another decision about whether or not to bail out a bank whose failure could have enormous systemic consequences. Is there any precedent for one country bailing out another country’s bank? Would the money come from Treasury or from the Pentagon? And how on earth would such an action play in the midterm elections?

It’s all extremely fraught, but the conclusion to the WaPo story pretty much sums it up, I think.

One senior Afghan official, who spoke on the condition of anonymity, said that he had hoped for the best but that “the worst is happening.”

America is certainly finding the military strategy in Afghanistan hard going. But could it be that the country will finally be undone by it bankers?

The apple, it seems, doesn’t fall far from the tree:

Litton Loan Servicing received more consumer complaints than any other loan servicer in the three years through June 2010, according to the Better Business Bureau. The 794 complaints against Goldman Sachs’ Litton led Morgan Stanley’s Saxon Mortgage at 631 complaints, American Home Mortgage at 597, Ocwen at 521 and Barclay’s HomEq at 161. The BBB gave Chase, Litton and Ocwen “F” grades due to the volume of complaints filed, their failure to respond and the seriousness of many complaints. Facing a BBB investigation in 2005 prompted by excessive complaints, the BBB voted to revoke Litton’s membership, but Litton promptly resigned. “They were arrogant,” said Dan Parsons, president of the BBB’s Houston chapter. “It was all about how much money they could make.”

I’m sure that Goldman has often regretted buying Litton, but I also get the feeling that it’s kind of their painting in the attic — the place where the dark Goldman id gets its fullest and most honest expression. Lloyd Blankfein was famously passed over for a job at Goldman before getting a job as a commodities trader at its J Aron subsidiary and rising stratospherically through the ranks; I wonder whether some dark genius at Litton will similarly manage to vault up to become senior Goldman management. After all, subprime mortgage servicing is just about the only part of the financial markets which is even more arrogant than commodities trading.