MacroScope

Ferguson’s fury: Harvard historian decries female welfare recipients

Another panel, another group of rich guys talking about income inequality in America.

That seemed to be a running theme of the Milken Global Conference by the time Tuesday afternoon rolled around in Los Angeles – particularly when the well-known and notably tart Harvard historian Niall Ferguson took to the stage to decry single welfare moms as lazy drags on society.

Ferguson was responding to comments made by Jeff Greene, the billionaire real estate investor and Democrat who lost (badly) a 2010 bid to represent Florida in the Senate.

Greene recalled a single mother with five children he met on the campaign trail. She was fat (“over 300 lbs”) and depended on a welfare check of just over $600 to put food on the table for her kids, once numbering five. But one kid died in a gang fight, another was locked up and two others were involved in gangs and the drug trade, Greene recalled.

“She could barely take care of herself, much less her kids,” he said, resigned to the idea that this unnamed woman would never work or even attempt to work, much less wean herself off welfare.

Is that a bailout in your pocket?

There was an awkward moment of tension at the Milken Global Conference in Los Angeles, when a buysider on one panel asked a Wall Street banker whether he had pocketed taxpayers’ bailout cash.

The tit-for-tat began when several panelists at the “Outlook for M&A” session began griping about the U.S. government’s tax policy, which they said dissuades corporations from bringing overseas profits back home because of punitive taxes.

The panelists – including James Casey, co-head of global debt capital markets for JP Morgan, Anthony Armstrong, an investment banker at Credit Suisse, and Raymond McGuire, global head of corporate and investment banking at Citigroup – predicted that the M&A market might get a big boost if the U.S. were to offer a tax holiday of sorts for repatriated profits.

Citi solicits staff donations for its political lobby

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Citigroup, the third largest U.S. bank, is actively soliciting donations from its employees for its political action committee (PAC) or fundraising group. In a letter to staff obtained by Reuters, the bank stressed the importance of the upcoming presidential and Congressional elections, urging staff to give to Citi’s PAC. From the letter:

Our Government Affairs team already does a great job promoting our positions on important issues to lawmakers, but there is one thing that each of us can do to enhance their efforts: contribute to Citi’s Political Action Committee (PAC).

Citi PAC is one of the most effective tools we have to amplify the voice of the company in Washington and enhance our profile with lawmakers.  The PAC provides the resources to help suport government officials who share our views on key policy objectives and who understand the impact various policy decisions may have on overall economic investment and growth.

Stocks rally not sustainable: Prudential

Want the recent rally in stocks to last? Don’t count on it, says John Praveen of Prudential Financial. The Dow Jones industrial average is up over 20 percent since September, and has gained 7 percent since the start of the year. But Praveen sees too many headwinds for the boom to continue.

The pace of gains thus far in 2012 is likely to be unsustainable and volatility is likely to remain high as several downside risks remain. These include:

1) Greek risks: The second Greek bailout and debt restructuring deal are likely to be a short-term reprieve, with still high Greek debt/GDP burden and Greek elections due in April.  A negative election outcome with no clear mandate and/or a new government reneging on its commitments (to reduce debt) could potentially roil markets.

Too big to fail banks? Break ‘em up, Fisher says

Dallas Federal Reserve Bank President Richard Fisher wants the biggest U.S. banks broken up, calling them a danger to financial system stability and their perpetuation a drag on the economy.  It’s an argument he’s made before – in full-length speeches, asides to reporters, parries to audience questions. (For the latest iteration, see Dallas Fed bank’s annual report published Wednesday.)

Indeed, Fisher is among the most consistent of Fed policymakers. He’s against further quantitative easing – has been ever since QE2, back in 2010. (By contrast, Minneapolis Fed President Narayana Kocherlakota supported QE2, before reversing course and opposing new rounds of monetary easing in 2011 and 2012). He’s against big banks, of course. He says repeatedly that uncertainty over taxes and regulation, not too-high borrowing costs, is what is holding back businesses from investing and hiring.

He’s even consistent with his jokes: several times last year Fisher lampooned the Fed’s increasing emphasis on transparency, quipping that no one wants to see a “full frontal” view of a 100-year-old institution. That particular joke dates back to at least 2006, according to a transcript of a Fed policy-setting meeting from October of that year. “Uncertainty is the enemy of decisionmaking,” Fisher said then, lambasting market participants eager for the Fed to provide more clarity on its views. “Of course they want more frequent forecasts. Governor Kohn and I talked about this before. They want a full frontal view. I find a full frontal view most unbecoming.”

CDS and the self-fulfilling default

Wall Street-made financial instruments purportedly created to protect investors against default actually hasten corporate bankruptcies, according to a new study. And it’s not Occupy protesters bashing these credit default swaps (CDS) –  the report comes from none other than the New York Society of Security Analysts. Its findings are as follows:

We present evidence that the probability of credit rating downgrade and the probability of bankruptcy both increase after the inception of CDS trading. […]

Lenders who insure themselves by buying CDS protection help push borrowers into bankruptcy, even though restructuring may be a better choice for the firm from the conventional (without CDS protection) lenders’ perspective.

European rescue: Who benefits?

The words “European bailout” normally conjure up images of inefficient public sectors, bloated pensions, corrupt governments. But market analyst John Hussman, in a recent research note cited here by Barry Ritholtz, says the reality is a bit more complicated:

The attempt to rescue distressed European debt by imposing heavy austerity on European people is largely driven by the desire to rescue bank bondholders from losses. Had banks not taken on spectacular amounts of leverage (encouraged by a misguided regulatory environment that required zero capital to be held against sovereign debt), European budget imbalances would have bit far sooner, and would have provoked corrective action years ago.

In other words, even if state actors mishandled government finances, Wall Street was, at the very least, an all-too-willing enabler.

Why banks need (way) more capital

The mantra that regulation is holding back the U.S. economic recovery is playing into Wall Street’s efforts to prevent significant reforms of the financial industry in the wake two major crises – one of which continues to rage in the heart of Europe. The sector’s staunch opposition to reform was captured in JP Morgan’s CEO Jamie Dimon’s claim that new bank rules are “anti-American.”

A new report from the Organization for Economic Cooperation and Development (OECD) suggests the opposition to substantially higher capital requirements is misguided. In particular, economist Patrick Slovik argues that a move away from the Basel accords’ “risk-weighted” approach to capital rules toward a hard-and-fast leverage ratio is the only way to prevent banks from finding creative ways to hide their true risk levels.

When the Basel accords first introduced the calculation of regulatory capital requirements based on risk-weighted assets, it was not expected that for systemically important banks the share of risk-weighted assets in total assets would consequently drop from 70% to 35%. Nor was it expected at the time that the financial system would transform high-risk subprime loans into seemingly low-risk securities on a scale that would spark a global financial crisis.  […] Tighter capital requirements based on risk-weighted assets aim to increase the loss-absorption capacity of the banking system, but also increase the incentives of banks to bypass the regulatory framework. New liquidity regulation, notwithstanding its good intentions, is another likely candidate to increase bank incentives to exploit regulation.

When speculation squashes innovation

Paul Volcker famously joked in the wake of the 2008 credit crisis that the most important financial innovation of the last few decades had come not from Wall Street’s fancy footwork but rather the engineering acumen that created the ATM. A paper published by the National Bureau for Economic Research lends some academic credence to Volcker’s view. In particular, the research of Alp Simsek, a Harvard economist, finds the very uncertainty that esoteric new securities introduce into financial markets eats away at benefits arising from greater credit availability:

Financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing. My main result shows that financial innovation also always increases the speculative variance. This is true even if traders completely agree about the payoffs of new assets. The intuition behind this result is the hedge-more/bet-more effect: Traders use new assets to hedge their bets on existing assets, which in turn enables them to place larger bets and take on greater risks. This effect suggests that financial innovation is more likely to be destabilizing in more complete financial markets and when it concerns derivative assets.

The author argues that rules prohibiting too many new types of securities from being introduced at once – so that traders don’t go too crazy too quickly – isn’t enough. As the crisis showed, when push comes to shove, hard-and-fast rules deliver better results than efforts at industry self-discipline.

Despite Wall St cheers, jobs still in a rut

Looking at the commentary from bank economists on this morning’s “stronger-than-expected” employment report, you would think the country is on a clear path to recovery. Jack Ablin, chief investment officer at Harris Private Bank, was downright euphoric:

This is critical, this is the most important data that we have seen this cycle. This is going to get people’s attention. This confirms that most of the negativity we have seen in the market is derived from the market itself and not the data.

Never mind that nearly half of the 103,000 new jobs “created” in September were accounted for by the return of thousands of striking Verizon workers to their jobs. Brian Dolan, chief strategist at Forex.com, didn’t let that caveat tamp his enthusiasm: