Opinion

The Great Debate

from Breakingviews:

Why Citigroup would be better in bits

By Rob Cox

The author is a Breakingviews columnist. The opinions expressed are his own. 

Nine years ago, Breakingviews proposed an “extreme idea” to Citigroup’s then-leader Charles Prince. The $240 billion New York bank’s market capitalization was lower than the worth of its parts valued separately. By splitting into three separate units, the idea was, Prince could hand shareholders an extra $50 billion or so, the equivalent of one entire U.S. Bancorp at the time.

As it turned out, Citi had bigger concerns ahead. The housing crash exposed spectacular losses, wiping out capital and necessitating a government bailout. Prince was sent dancing onto the golf course. With the crisis now fairly distant in the rear-view mirror, however, it’s time for current Chief Executive Michael Corbat to revisit the case for a breakup.

Now cleaned up and well capitalized, Citi’s market cap today is about $160 billion – though any loyal shareholders are still nearly 90 percent worse off than in 2005. Despite the revamp, the bank is still prone to the stumbles that have proved characteristic since Sandy Weill, Prince’s predecessor, stitched the behemoth together.

This year, for example, Citi revealed an embarrassing fraud at its big Mexican subsidiary, Banamex. While not material to Citi’s capital, the $400 million swindle rekindled concerns that sprawl makes it too complex to manage. That’s one reason the Federal Reserve subsequently thwarted Citi’s plans to increase its dividend.

Slicing Citi into more manageable pieces would be one way to soothe regulators at home and abroad, not to mention U.S. taxpayers fearful of being on the hook for another bailout in the future. For any voluntary breakup to gain support, though, it would need to reward shareholders well beyond breaking the dividend logjam. Some arithmetic on Citi’s component parts suggests that’s possible.

from Anatole Kaletsky:

Yellen’s remarkably unremarkable news conference – and why it’s a good thing

Yellen holds a news conference following two-day Federal Open Market Committee meeting at the Federal Reserve in WashingtonJohn Maynard Keynes famously said that his highest ambition was to make economic policy as boring as dentistry. In this respect, as in so many others, Federal Reserve Chair Janet Yellen is proving to be a loyal Keynesian.

Yellen’s second news conference as Fed chair conveyed no new information about the timing of future interest rate moves. She gave no hints about an “exit strategy” for the Fed to return the $3 trillion of bonds it has acquired to the private sector. She told us nothing about the Fed’s expectations on inflation, employment and economic growth -- not even about the board’s views on financial volatility, regulation, asset prices or bank credit policies.

Yellen refused even to repeat, or repeal, her earlier answer to a question about the meaning of the “considerable period” she expected between the end of tapering and the first rate hike. At her first news conference, Yellen responded to a similar question by blurting out “six months.” This caused an eruption of volatility in financial markets -- that lasted about five minutes.

from Breakingviews:

Rob Cox: The worry now is a brewing M&A bubble

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Stop worrying about the tech bubble – there may be an even bigger one inflating beyond the confines of Silicon Valley. The corporate urge to merge has gone into global hyper-drive this year. Deal activity has surged as investors egg companies on and bid up the shares of acquirers well beyond mathematical explication, or prudence. As new metrics from interested parties are trotted out to justify the irrational, it’s time to exercise caution.

So far this year companies have announced some $1.3 trillion worth of transactions around the world, according to Thomson Reuters data. That’s nearly double the level of activity a year ago. European corporations have fueled even greater increases. Much of this is pent-up demand and a delayed response to the past year’s remarkable runup in stock market values.

from Bethany McLean:

How Ralph Nader learned to love Fannie and Freddie

Corrects story issued February 18 in third-to-last paragraph regarding efforts to contact Ralph  Nader.

“It is time for [government-sponsored enterprises] to give up ties to the federal government that have made them poster children for corporate welfare. Most of all, Congress needs to look more to the protection of the taxpayers and less to the hyperbole of the GSE lobbyists. –Ralph Nader, testimony before the House Committee on Banking and Financial Services, June 15, 2000

“Fannie Mae and Freddie Mac should be relisted on the NYSE and their conservatorships should, over time, be terminated. –Ralph Nader, letter to Treasury Secretary Jacob Lew, May 23, 2013

Populism: The Democrats’ great divide

One day after President Barack Obama called for moving forward on trade authority in his State of the Union address, Senate Majority Leader Harry Reid (D-Nev.) declared, “I am against fast track,” and said he had no intention of bringing it to a vote in the Senate.

Reid’s announcement came after 550 organizations, representing virtually the entire organized base of the Democratic Party outside of Wall Street, called on Congress to oppose fast track. Though obscured by the Democrats’ remarkable unity in drawing contrasts with the Tea Party-dominated Republicans in Congress, the debate between an emerging populist wing of the Democratic Party and its still-dominant Wall Street wing is boiling.

For a constantly disputatious “big tent” party, Democrats are remarkably unified behind the jobs and inequality agenda the president ticked off in his State of the Union address — raising the minimum wage, immigration reform, paycheck fairness for women, paid family leave, investment in infrastructure, education and research and development, and an “all of the above” energy strategy. Republicans block action on all these relatively modest reforms, providing ammunition for Democrats in the November midterm elections.

Obama’s small steps won’t fix inequality

President Barack Obama is taking on the challenge of increasing the United States’ all but stagnant economic mobility.

He wants, he said in Tuesday’s State of the Union Address, to both “strengthen the middle class” and “build new ladders of opportunity” into it. His modest plan — modest so that it does not need the congressional approval he’s unlikely to receive — includes raising the minimum wage for federal contract workers and offering workers a new workplace retirement savings account option.

It’s a nice start. But nowhere near enough.

The United States’ sluggish economic mobility is not new. According to a paper recently published by academics at Harvard University and the University of California, Berkeley, it has been mediocre for those born in the 1970s, and it is just as bad for those born 20 years later.

Why conservatives spin fairytales about the gold standard

ILLUSTRATION: Matt Mahurin

The Federal Reserve is celebrating its 100th birthday trapped in a political bunker.

At few points since the Fed’s founding in 1913 has it taken such sustained fire. It’s taking fire from the left, because its policies favor Goldman Sachs, Bank of America and the other financial corporations that are most responsible for the 2008 financial meltdown and the Great Recession. But it is also taking fire from the right.

Conservative or Tea Party Republicans have a different kind of criticism. They reject the notion that the Fed should even have the power to regulate the money supply and “debase” the dollar. They believe in hard money and a return to the gold standard.

‘Democratic wing’ of Democratic Party takes on Wall Street

The chattering classes are fascinated by the Republicans’ internecine battle to redefine the party in the wake of the George W. Bush calamity and the Mitt Romney defeat — from Senator Rand Paul’s revolt against the neoconservative foreign policy, to intellectuals flirting with “libertarian populism.” Less attention has been paid, however, to the stirrings of what Senator Paul Wellstone dubbed “the Democratic wing of the Democratic Party” — now beginning to challenge the Wall Street wing of the party.

Perhaps the strongest demonstration of this was the barrage of “friendly fire” that greeted the White House’s trial balloon on nominating Lawrence Summers to head the Federal Reserve Bank. More than one-third of Democrats in the Senate signed a letter supporting Janet Yellen, now vice chairwoman of the Fed. More than half of the elected Democratic women in the House of Representatives signed a similar letter. Many were appalled at the notion of passing over the superbly qualified Yellen for Summers, with his notorious record of denigrating and dismissing women.

But, as Katrina vanden Heuvel, editor of the Nation wrote in the Washington Post, Summers also drew opposition because he was the “poster boy for the Wall Street wing of the party — literally.” (Summers joined then-Treasury Secretary Robert Rubin and then-Federal Reserve Chairman Alan Greenspan on the now risible 1999 Time magazine cover celebrating the “Committee to Save the World” — before the global financial collapse exposed the folly of their policies).

Derivative rules: Global problem needs global solution

The 2008 financial crisis demonstrated how interconnected the global financial system is. What began as a real estate bubble fueled by subprime mortgages in many states ballooned into a global financial panic of unprecedented magnitude. Bundles of poorly underwritten mortgages generated toxic derivatives bet on in a global market. When the dust settled, there was broad agreement that not only did we need a new financial regulatory regime, it had to be globally coordinated.

The United States, the European Union, Britain, Japan and other nations should come up with a regulatory regime that works across all borders. This does not have to be the exact same set of rules and regulations, but rather compatible systems, based on a common set of definitions and structures.

The need for international coordination in swaps is particularly important, for many of them involve parties in different countries. One common derivative, for example, an exchange-rate swap, allows parties in the United States to get payments in dollars while those in Europe are paid in euros. Any variation is the exchange rate between the two currencies is covered by the swap — for a fee.

A case of lobbysts vs. small cap investors

It’s tick season again: the time of year when those small, seemingly unimportant beasts emerge and attack the unsuspecting or unaware. This year, they seem to be everywhere and have a particularly robust group of carriers. The problem with ticks is that, while they seem benign, they can cause significant harm to those who are not vigilant.

But this is not about those annoying little creatures that hang out in the tall grass and spread Lyme disease. We’re talking about the kind on Wall Street, transported not by deer, but by a loud army of lobbyists.

Representative David Schweikert (R-Ariz.) and this army of lobbyists, a loose-knit association of exchanges, traders and others who stand to gain financially, are asking the Securities and Exchange Commission and Congress to consider legislation that will increase the cost of trading the stocks of smaller companies — those with market capitalizations of less than $500 million. Those stocks are often less-liquid stocks than those of large-cap businesses.

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