Lunchtime Links 8-31

Aug 31, 2009 15:24 UTC

Raft of failed banks put U.S. on hook for billions (WSJ) This article notes that loss-share agreements FDIC has signed with healthy banks that acquire failing banks put it on the hook for $80 billion. I think that’s the total figure FDIC could conceivably lose if the loss rate on the assets in question was 100%. That’s fairly unlikely. In any case, bank failure press releases include estimates for losses FDIC expects from each deal, so they’re reserving for them. Of course many bank failures have ended up costing significantly more than FDIC’s initial estimate…

As big banks repay bailout money, U.S. sees profit (NYT) Eegads! I’m linking to this as an example of really unfortunate financial reporting. The U.S. is making a profit on the bank bailout because of a few deals for TARP warrants? Really? Take Goldman. Yeah, our return on the TARP portion of the bailout was positive, but that doesn’t mean the government “made money.” What about the $13 billion the Fed spent to make good on Goldman’s insurance policies with AIG? What about all of the debt FDIC has guaranteed for Goldman? On a risk-adjusted basis, we’re way in the hole. The long-term costs/consequences of explicit government guarantees against failure –which is what these banks now have — is many, many times larger than any profits earned on TARP warrants. Yves has more.

Hard cheese as hard currency (BBC) A good example of how bank credit can boost productivity.

Commercial real estate lurks as next potential mortgage crisis (WSJ) Not if the Fed conspires with banks to extend/amend/pretend!

As hybrid cars gobble rare metals, shortage looms (Reuters) “Jack Lifton, an independent commodities consultant and strategic metals expert, calls the Prius “the biggest user of rare earths of any object in the world.”

Toyota accused of hiding evidence (CBS) “A former attorney for Toyota has accused the automaker of illegally withholding evidence in hundreds of rollover death and injury cases, in a “ruthless conspiracy” to keep evidence “of its vehicles’ structural shortcomings from becoming known.”

Wall Street stealth lobby defends $35 billion derivatives (annual) haul (Bloomberg) I hadn’t seen an estimate of how much Wall Street firms make trading derivatives. It’s a long article, but full of great details. Very good for folks who want to understand issues surrounding derivatives.

Facebook exodus (NYT) No surprise here. Facebook is a fad like any other. Social networks will come and go, burn brightly for a few years and then die slowly as users leave them behind. I think Facebook is unique in that it provides enough value to actually charge users a small amount to keep their profile. I’d pay a buck a month to keep track of all my friends, and have a handy way to send out event notices, etc. Twitter is the one that will go super nova the quickest in my view. Right now it’s highly dependent on a few celebrity tweeters. When they get bored, traffic will disappear quickly…

UAE seizes North Korea shipment of arms bound for Iran (Reuters)

Schoolgirls rumble Ribena vitamin claims (Guardian) Out of New Zealand, a story of a high school science experiment that dismantles one food product’s nutritional claims. Makes you think: What about the hugely unregulated market for nutritional supplements? What’s actually in them? No doubt you can’t trust the labels.

Cool hotel…wait, what’s in that second to last pic? (hotels.com) WTF?

Caught cheating…

caught-cheating

COMMENT

I’m curious about the hotel picture (human nature etc). Can you post something more direct?

Thanks.

Posted by gmak | Report as abusive

Better late than never

Aug 30, 2009 19:43 UTC

FDIC shut down three banks on Friday evening. Still waiting on Corus (& First Fed).

#82

  • Failed Bank: Bradford Bank, Baltimore MD
  • Acquiring Bank: M&T Bank
  • Vitals: As of June 30th, assets of $452 million, deposits of $383 million
  • DIF Damage: $97 million

#83

  • Failed Bank: Mainstreet Bank, Forest Lake MN
  • Acquiring Bank: Central Bank, Stillwater MN
  • Vitals: As of June 30th, assets of $459 million, deposits of $434 million
  • DIF Damage: $95 million

#84

  • Failed Bank: Affinity Bank, Ventura CA
  • Acquiring Bank: Pacific Western Bank, San Diego CA
  • Vitals: As of July 10th, assets of $1 billion, deposits of $934 million
  • DIF Damage: $254 million

Again, apologies for the tardiness of this post. I was moving all weekend…

Sunday links 8-30

Aug 30, 2009 16:07 UTC

(Sorry for the scarcity of posts the last couple days. I was moving and didn’t have internet access.)

Fiduciary duty hits the street, sort of (WSJ) As a CFA charterholder, this issue is near and dear to me. Those selling financial products (brokers, lenders, etc) should absolutely be held to higher ethical standards. If this harms their business, then they shouldn’t be in business in the first place. The article notes that there’s a risk here that existing fiduciary rules for investment advisers may actually get watered down because Wall Street and the SEC want a uniform standard. A uniform standard would be great, but instead of applying the tried and true one, Wall Street wants to find a middle solution that won’t impact its business model, which is inherently conflicted, combining advisory work and principal investing. So in the end, financial consumers could really suffer. [While expanding fiduciary duty is something I support, I'd rather see anti-trust rules that cut Wall Street firms in half, forcing them to spin off all principal investing functions. If these guys want to be hedge-funders, that's fine. But for so many reasons, the conflict of interest with clients being just one, they shouldn't be doing it inside of a bank!]

Fed to citizens: Drop dead! (Reuters) Bloomberg won its FOIA request for details of the Fed’s emergency lending, but the Fed convinced the judge in the case to delay enforcement of her ruling, pending an appeal.

Too big to fail banks now even bigger (WaPo) This story is about a year late. But it notes that while the government pays lip service to the problem of TBTF, we’ve encouraged the biggest banks to grow even bigger. Because its balance sheet wasn’t large enough to handle the failures of Wachovia and WaMu, FDIC kicked the problem upstairs to bigger balance sheets: JP Morgan Chase took on WaMu while Wells Fargo took on Wachovia. And of course Bernanke and Paulson supported (and then forced through) the merger of Merrill Lynch into Bank of America. And there was Bear Stearns, which also got absorbed by Chase with a $29 billion assist from the Fed. Don’t forget that BofA also swallowed Countrywide. Busted balance sheets that are small enough for the market to resolve are allowed to fail. Bigger ones get kicked upstairs to bigger balance sheets, all of which are backed by the biggest balance sheets of all: The Fed’s and Treasury’s.

Green shoot? (Chron.com) At least the government is hiring!

It’s time to admit that money funds involve risk (NYT) I wonder if Joe Nocera saw my piece before he wrote his. He even concludes his on the same note: Tell investors the truth about risk! Good to see the story is getting wider pick-up.

Krugman: Debt is OK! (NYT) Another piece from Krugman in which he argues an additional $9 trillion of federal debt over the next 10 years isn’t a big deal. After all, we’ve had a similar percentage of debt owned by the public before. The problem is that it’s not just the government’s debt we’re talking about here. Krugman points to the late ’50s, when government debt held by the public was higher than today. But a quick glance at data from the Fed’s Flow of Funds report shows that, back then, consumers’ private debts weren’t nearly as large as a % of GDP. In other words, it was easier for taxpayers to service federal debt because they weren’t so indebted themselves. The key driver of economic growth for the past few decades has been non-stop credit expansion. The “above trend” growth that Krugman says he expects can only happen if we get more credit expansion. Yes, that could happen. But in the end, more credit means a more violent unwind. Eventually creditors want to be paid back! Oh, and there’s another big hole in Krugman’s argument: He’s not accounting for the present value of our future liabilities for Medicare and Social Security, the liabilities that, if properly accounted for, would show that today’s national debt isn’t $12 trillion, it’s now over $70 trillion!

Tax chief Charlie a tax cheat too (NY Post) Another bullet point on the list of Charlie Rangel’s ethics violations. He neglected to report A LOT of income. And he’s even cheated on some state taxes. No doubt the Democratic “ethics committee” investigating Rangel will whitewash all of this. Just goes to show that corruption in Congress is a cancer infecting both parties.

How Craigslist still rules with ’90s web design (Wired) A good piece if you don’t know the Craigslist story.

Roubini: The spend and borrow economy (Forbes) Some really tortured stuff in this piece. Roubini is clearly very aware of the threat of too much borrowing and spending. He notes that the government is effectively engaged in a Ponzi scheme: borrowing to pay the interest on past borrowings. I made a similar argument before. But then he argues the counterpoint, that not borrowing/spending enough means we could fall back into recession. So he concludes in that nebulous place we call the “medium term” during which the government will have to pull back from monetary and fiscal stimulus to avoid igniting inflation. The problem is that the medium term doesn’t exist. If the government is able to borrow less without leading to recession, it will only be because consumers are borrowing more. Then when consumers pull back again, economists will demand the government step in with more borrowing. All the while, the total stock of debt will keep expanding. Economists are trying to convince us that there’s a relatively painless way out of this mess. They are wrong.

And you thought smoke rings were cool? (YouTube) The Carousel bubble is amazing. And check out this guy for more.

Four camera angles of a jewelry store heist … from the first, these guys appear successful … from the other three, not so much …

COMMENT

Per the jewelry heist, three thoughts -

1) being in the financial world in the past few years was a FAR easier way to steal than this!

2) golden opportunity for an innocent bystander who thinks – “hey, all the employees just ran out after those guys, I can help myself to everything I can grab!”

3) smart thieves would have a “shopper” in the place before they make a ruckus so that #2 would work for them. Maybe next time, if they are capable of learning.

4) a street camera to get the motorcycle license plates would have made a nice ending to this

Posted by CB | Report as abusive

Peering into our future…

Aug 28, 2009 14:10 UTC

A WSJ article on Japanese elections comes with the following table.

japan-stats

Japan has spent 20 years fighting deflation with loose monetary policy and deficit spending. To what end?

Keynesians point to Japan’s experience as evidence that the U.S. government can borrow much more before interest rates rise. I suspect they’re right. But what’s the point if, at the end of all of that, we’re saddled with unpayable debts?

Sure, deficit spending prevented more violent economic upheaval last year. But the more debts we build up, the longer and deeper the downturn will prove to be over time.

The article has many interesting details…

  • The party that’s been in power for 59 years will likely lose the elections to another, which promises “ambitious spending programs” despite Japan’s huge debt.
  • Incomes continue to fall. Inflated artificially by a credit bubble, Japan’s per capita income once ranked 4th in the world, but has since fallen to 14th.
  • Declining birth rates mean younger Japanese don’t have the voting power to reduce entitlement spending that’s asphyxiating the economy.

My hope is that America finds the political will to deal with debt. If we don’t, even matching Japan’s sorry trajectory will be tough.

COMMENT

Dear friend,
I can accept of your article by 50 percent ratio.
One basic reason for Japan!s economic crisis is that,whatever they used to produce is for export purposes.
She was mainly depended on American Markets.To add that,Now,China is producing,assembling on many electronic,communication devices,agricultural implements,auto spare parts and very strong on small manufacturing products on very cheaper,highly competitive bidding-all created some panic,set back in Japan!s exports.
Many financial institutions were in shaky positions.
Now, I came to know that,very long Ruling party is defeated by her main,strong Opposition Party in recent general elections.
New Prime Minister will bring a stable economic structure and do more protection to its citizens.

Evening Links

Aug 27, 2009 21:24 UTC

Fed says disclosing loans will hurt banks (Bloomberg) That’s sorta the point…

Emergencies inspire crowd cooperation, not panic (BPS Research Digest) I suspect society might also handle financial emergencies better than policy-makers expect.

Bankrupt suppliers seek exec bonuses (Detroit News, ht Mish) “A growing number of bankrupt auto suppliers are seeking court approval to pay tens of millions of dollars in bonuses to key executives, as they shed employees and cut costs.”

U.S. mortgage delinquencies up in July (Reuters)

Case-Shiller confirms false bottom in housing (Mark Hanson) Mark’s expertise is the California real estate market more than anywhere else. That said, he was one of the more prescient commentators out there on housing overall. A lot of folks thought house prices got too high. Most of us had no idea how far they would end up falling. Mark has been on top of the story as long as anyone.

Rapper behind “Roxanne’s Revenge” gets Warner Music to pay for her PhD (NY Daily News) Awesome.

Baseball’s dad of the year (MLB.com) Carrying four kids (fast forward to the end) and still holding wife’s hand. He must do this often b/c the Mrs. seems unimpressed.

Best swing-dancing ever? (YouTube)  Start at the 2:30 mark. 3:27 is awesome.

Inflatable Bag Monsters…

COMMENT

A young friend of mine witnessed an emergency on a beach in Malaysia. The Malays panicked, the Chinese watched inactively, the (young, mainly) Europeans co-operated to solve the problem. It could have been a scene out of Somerset Maugham, but my young friend had no knowledge of old-fashioned views – he’s of the generation that’s been indoctrinated not to stereotype, not to be judgemental. Reality, eh?

Posted by dearieme | Report as abusive

For FDIC, a long tunnel and little light

Aug 27, 2009 20:03 UTC

There’s good news and bad news in the FDIC’s quarterly profile of the banking sector. The good news is that FDIC has more resources than you think to handle the problem banks on its radar. The bad news is that the too-big-to-fail banks aren’t on it.

The balance in the FDIC’s deposit insurance fund ended the quarter at $10.4 billion — its lowest since the savings and loan debacle — but it isn’t the only security blanket protecting insured depositors. The agency also has a “contingent loss reserve.”

If you add the loss reserve to the deposit insurance fund balance, the FDIC’s total resources were $42 billion at the end of the second quarter. Despite 24 bank failures during the quarter, that total actually increased by half a billion dollars.assessments

How could that be? The biggest reason is that the FDIC is finally getting serious about charging premiums for the insurance it provides. Member banks were charged $9.1 billion to replenish the fund last quarter. That’s up from $2.6 billion in the first quarter and $640 million a year ago.

(Click chart to enlarge in new window)

A similar amount may be raised this quarter if the agency charges banks another “special assessment.” While that decision won’t be made till next month, it looks likely. That’s great news for taxpayers who would otherwise have to plug the hole if the FDIC runs out of money.

Banks complain that special assessments put too much pressure on them at a tough time. But it’s their own fault the deposit insurance fund is running so low.

According to a Boston Globe article by Michael Kranish earlier this year, about 95 percent of banks paid nothing for their deposit insurance from 1996-2006. But that wasn’t FDIC’s fault; they were prevented by law from charging premiums. Congress didn’t think it was necessary. Oops.

So the deposit insurance fund will be under pressure for some time. FDIC’s problem bank list grew to 416 at the end of last quarter. These banks have $300 billion of assets.

In total, FDIC estimates the banking sector is wrestling with $332 billion worth of loans and leases on which borrowers have stopped making payments. That excludes hundreds of billions worth of underwater loans that may be current now but will ultimately default. Many banks, including the largest ones, are likely to struggle for some time.slide2

(Click chart to enlarge in new window)

And that’s the bigger story here. Citigroup and Bank of America have received hundreds of billions of dollars of government support, but, precisely because of that support, they’re not on the FDIC’s list. Adding them to it would multiply total problem assets 10 times, to $3 trillion.

Overall, the deposit insurance fund is tiny compared with the total amount of deposits that are insured. The official total is $4.8 trillion, but that excludes “temporary” increases in deposit insurance instituted last fall.

One program, which increased insurance limits to $250,000 for individuals, now backs $725 billion of deposits. Earlier this year it was extended to 2013. The other program, which provides unlimited insurance coverage for transaction accounts, backs $736 billion of deposits. On Wednesday, that program was extended through June of next year.dif-slide

Add those amounts to the official figure and you have the real total: $6.3 trillion, huge relative to the resources of the insurance fund.

(Click chart to enlarge in new window)

Asset prices aren’t going back to their highs of 2006-2007, so loans held against them will be generating losses for years. The FDIC may raise enough cash from banks to fund depositor losses in small and medium-sized banks, but it is clear that the biggest banks are far too large for them to handle.

As a result, the government’s emergency rescue measures aren’t going away for a while. And taxpayers should expect to be writing fat bailout checks to the financial system for years to come.

COMMENT

The PPIP program has been redesigned so that only “securitized” loans are covereed, not whole loans. In effect, this means that only big banks will benefit. Must be nice to have low friends in high places. In 2010 and 2011, commercial real estate resets will begin in ernest, and some estimates say upwards of half of the $2 trillion in these will tank, with smaller and medium sized banks disproportionally taking it on the chin. The FDIC isn’t going to be able to deal with this mess, nevermind the Option-A and other mortgage resets beginning next year as well. Oh well.. it’s just my children’s money, right ?

Posted by Friar Tuck | Report as abusive

Sheila’s slides

Aug 27, 2009 15:59 UTC

Lots of news out of FDIC these last two days. Yesterday they announced rules for private equity investors that want to buy failed banks. They also extended the “temporary” insurance program for transaction accounts to June 30th of 2010. This program insured $736 billion as of June 30th.

Today was the quarterly banking profile. I’ll have more on that in a column later on. In the meantime, here’s Sheila Bair’s slide presentation…

Slide 11 is interesting. It shows the liquidity profile of the deposit insurance fund. There was $21.6 billion of cash and Treasuries available to fund failures as of June 30th, but that could be eaten up by expected failures. If FDIC isn’t able to sell received assets for cash fairly quickly, they may have to draw down their credit line at Treasury.

(For easier reading, click “toggle full screen” top-right and then “+” to zoom in)

Slide Show 2q 2009 Final

COMMENT

So if I have this right, if FDIC needs to borrow from Treasury to cover the DIF, Treasury doesn’t have the money to lend them, right? So Treasury has to borrow money to lend to FDIC, right? So this would be additional deficit spending and debt. Do I understand this right?

Posted by eric | Report as abusive

FDIC lowers capital rule, but there’s a twist

Aug 26, 2009 22:03 UTC

FDIC concluded its quarterly board meeting earlier this afternoon and the big news is it approved lower capital requirements for private equity shops looking to buy failed banks.*

But the weaker requirements come with a silver lining.

The previous proposal was that banks in the hands of private equity would have to maintain Tier 1 capital of 15%, triple the standard of 5% that is currently considered “well-capitalized.”  [Your humble columnist thinks that threshold is way too low, but that's another discussion].

Under the rule that was adopted, such banks will have to maintain a 10% capital ratio, but the definition of capital isn’t Tier 1, it’s Tier 1 common equity.

Tier 1 common equity is close to tangible common equity, which is a stronger measure of capital than simple Tier 1.

Why does this matter? As I wrote about in my column updating Q2 leverage stats, it’s not just the size of the capital cushion that matters. It’s also the quality of that cushion. (If this post seems a little wonky, I recommend going back to that column.)

Common equity is the best cushion of all because it sits in the first loss position. Preferred equity — which is included when calculating Tier 1 but excluded when calculating Tier 1 common — failed totally last year. Banks had issued a bunch in late ’07 and early ’08 in order to boost Tier 1, but because common was nearly overwhelmed with losses, investors higher up the capital structure panicked.

To be sure, the switch to common won’t have any effect on the day-one economics of these deals. Subordinated debt is wiped out when FDIC takes failed banks into receivership.

But this will discourage private equity guys from polluting the capital structure down the line. Hybrid debt issuance that would qualify as capital under Tier 1 won’t qualify under Tier 1 common.

My hope is that this foreshadows a more general move away from Tier 1 in favor of Tier 1 Common or TCE for all banks. The banking system is still desperately undercapitalized in my view, taking into account the loan losses that are festering on balance sheets.

On another front, I was disappointed to see that FDIC abandoned the “source of strength” requirement, which would have required PE shops to put up more capital if their banks falter.

But they maintained the three year holding requirement, and they say that banks falling under the 10% TCE threshold would be subject to prompt corrective action (ht frog). That means FDIC could force them to boost capital back above the 10% threshold.

———–

A question for readers: Are there any protections in place preventing PE shops from using insured deposits to fund investments in other areas? What’s to stop them from using the bank to finance their own LBO deals?

*Readers interested in the nitty gritty can read the FDIC’s Final Statement of Policy here (pdf).

COMMENT

Rolfe -on the question your raised, see Federal Reserve Regulation O – http://ecfr.gpoaccess.gov/cgi/t/text/tex t-idx?c=ecfr&sid=635f26c4af3e2fe4327fd25 ef4cb5638&tpl=/ecfrbrowse/Title12/12cfr2 15_main_02.tpl

It is pretty much prohibited.

Posted by Terry | Report as abusive

Daily linkage

Aug 26, 2009 20:01 UTC

(Reader note: it occurs to me that referring to my links as “lunchtime” links probably discriminates against readers on the West Coast and in Europe who aren’t operating on EST. I’m trying to think of another name. Would love to hear ideas from readers. Send me an e-mail or leave a comment)

newsfrom1930.com (ht Steve Keen) “a daily summary based upon my reading of the Wall Street Journal from the corresponding day in 1930.” Note that on August 24th 1930, the Dow made a new high for the year…

Tax Penalties and the health care bill (WSJ) “Under current law, taxpayers who lose an argument with the IRS can generally avoid penalties by showing they tried in good faith to comply with the tax law. In a broad range of circumstances, the health-care bill would change the law to impose strict liability penalties for income-tax underpayments, meaning that taxpayers will no longer have the luxury of making an honest mistake. The ability of even the IRS to waive penalties in sympathetic cases would be sharply curtailed.”

The case against Bernanke (FT) Morgan Stanley Asia’s chief isn’t happy about Bernanke’s renomination either. Oh yeah, Bernie Sanders agrees with us too!

A second case against Bernanke (Evans-Pritchard) “The thrust of [Bernanke's] academic writings is that the Depression was a “financial event” that could have been avoided if the Fed had flooded the economy with money (by bond purchases) to prevent a banking crash. This theory – half-Friedmanite – has merits. The Fed made horrible mistakes. But it neglects other causes of the slump: industrial over-capacity created by the 1920s bubble, so like today.”

Rakoff not satisfied (Reuters) This is not really a surprising move. At the hearing on August 10th, Rakoff said he wanted initial briefs filed on the 24th and then responses on the 9th. He’s now asked for those responses. A second hearing, if he wants to schedule it, will be announced after that.

Web-browsing makes workers more productive (University of Melbourne) So stop feeling guilty about reading these links! ;)

Downturn dims prospects even at top law schools (NYT) This fall, law students are competing for half as many openings at big firms as they were last year in what is shaping up to be the most wrenching job search season in over 50 years.

Dealer poll calls Cash 4 Clunkers a “nightmare” (autoblog) Gives you an idea of how well this program was managed by the administration…

China: Death row provides most organ donors (AP)

Farmers issue warning after fatal cow attacks (Reuters)

Chopper + Dust + Static Electricity (for my sis in the Air Force)

chopper

COMMENT

It’s your lunchtime and your links. No need to get so politically correct about it. Just keep it the way it was.

Posted by mm | Report as abusive

Money market funds aren’t cash!

Aug 26, 2009 16:56 UTC

Paul Volcker wants to kill money market funds. He says that investors don’t understand them and that the funds could crash the financial system. He’s right.

The root of the problem is that money market funds are sold as “cash equivalents,” when really they’re anything but.

Investors allocating a percentage of their assets to “cash” are typically looking for a “riskless” place to park money. They want their principal protected, but they would  also like a few extra points of interest thank you very much. Free checks ? Even better.

Money market funds can offer all of the above, so naturally investors gravitate to them.

What they don’t realize is that their principal is at risk. The $1 net asset value that money funds market is just an accounting gimmick, a milder version of the same gimmick banks use to avoid writing down bad loans.

Because money market funds hold their assets to maturity, they’re allowed to use so-called “amortized cost” accounting instead of mark-to-market. If the value of securities in the portfolio rises or falls, investors don’t see that because it isn’t reflected in the fund’s share price. So they sleep soundly thinking their principal is perfectly protected.

To be fair, their principal is pretty safe. Most money market funds invest only in high quality ultra-short term paper. If the NAV did reflect the fluctuating value of holdings, it would still be very stable, probably never moving more than a penny or two.

And that’s what Volcker wants to do. He wants to force money funds to abandon accounting gimmickry that essentially permits them to market short-term fixed income funds as a “cash equivalents.”

Last fall, when an investment in Lehman Brothers paper forced the Reserve Primary Fund to break the buck, the veil was suddenly lifted and cash was pulled from money funds everywhere. Agile investors knew the money wasn’t perfectly safe, so they pulled out – redeeming at the promised $1 per share – leaving all the losses to be absorbed by slower shareholders.

That’s how that $785 million investment in Lehman paper turned into a systemic rout that threatened to drain a $3.5 trillion pool of capital from the market over a period of days. To stop the run, Treasury Secretary Hank Paulson offered a blanket guarantee for all money market fund assets, a guarantee that was extended earlier this year.

Volcker doesn’t want investors blindsided again. He wants money funds to stop marketing unbreakable $1 NAVs.

Money fund managers are fighting back because they know this would kill their business. If they can’t market $1 NAVs, their place in the asset allocation pie would be the “fixed income” slice not the “cash equivalent” slice. Investors would dump the funds in favor of bank accounts and CDs.

This would put significant pressure on the banking system. With hundreds of billions of deposits suddenly flowing in, banks would have to raise a lot of capital to protect their balance sheets.

If money funds want to keep operating like banks, fine. But in that case they should raise capital and subject themselves to bank regulation. Money funds aren’t keen on this idea either, it presents a number of problems that would also kill their business.

Perhaps it should be killed. It’s built on the fiction that investors can make riskless profits investing in short-term paper.

But when fiction meets reality, people panic. The only way to avoid that is to tell investors the truth. For money market funds, that means advertising them as what they are – fixed-income funds, not cash equivalents.

COMMENT

I think what is being looked at is putting stability into the system. Seems like everyone wants a hefty return, wants their investments to be totally liquid, and even use it as a checking account. This is a formula for disaster as any run on the fund can leave investors high and dry. As for me I want to spend my time doing something other than watching my money. I want to know that it is there when I want to use it.

Posted by f belz | Report as abusive

Pew: How we should regulate derivatives markets

Aug 25, 2009 20:56 UTC

For those interested in the subject, this 20-pager by Stanford Professor of Finance Darrell Duffie provides a decent primer on issues surrounding derivatives regulation. (Those who prefer to read in pdf format can click here)

(For easier reading, click “toggle full screen” top-right and then “+” to zoom in)

Pew Duffie Derivatives

COMMENT

I like the CIA/Vietnam approach. If they screw this up again we give them a shot of morphine, a 9mm in the ear, and then we dump the body in an alley. It will send a message, and also address the unemployment problem for the kids coming out of the MBA/MS in Finance programs.

Posted by ARJTurgot | Report as abusive

Talking Bernanke

Aug 25, 2009 19:13 UTC

The title of the video is a little unfortunate. I don’t think Volcker would be a realistic option, I just wish we could find someone like him.

Correcting a brain-fart: Ben Bernanke is Chairman — not President — of the Fed.

COMMENT

Adam….if you go to the Video tab on the left, you can scroll through to find this vid. There’s embed code there, which is how I got it onto my blog…

Posted by Rolfe Winkler | Report as abusive

Lunchtime Links 8-25

Aug 25, 2009 16:26 UTC

The boy who heard too much (Rolling Stone) “He was a 14-year-old blind kid, angry and alone. Then he discovered that he possessed a strange and fearsome superpower — one that put him in the cross hairs of the FBI.”

Deutsche Bank plans Tier 1 issue (Reuters) If my reading here is correct, then the pollution of the capital structure continues. For a long time I’ve argued tangible common equity is the best cushion protecting bank balance sheets. Being in the first loss position, it’s the buffer preventing capital structures from collapse. But bank regulators focus on so-called Tier 1 capital, not TCE, which can include preferred securities that sit above the first loss position. Banks prefer to issue preferred stock because issuing more common dilutes shareholders. As Paul Miller at FBR has written in his research, bank capital structures disintegrated last fall because so much of the capital they’d raised in ’07 and early ’08 was preferred as opposed to common.

Should Libertarians defend bank bailouts (Atlantic) I’m a big fan of Megan McArdle’s work, but this is not her best. She tries to back opponents of bailouts into a corner, suggesting as so many do nowadays, that there was really no alternative. She neglects to mention recapitalizations. Earlier this year banks could and should have been recapitalized, forcing losses from the asset side of the balance sheet onto shareholders and junior creditors.

Court orders Fed to disclose emergency loan details (Bloomberg) Bberg’s Freedom of Information Act request pays off. Hopefully this shines a spotlight on one of the dirtier corners of American finance.

Wall St. pay disclosure looms as flash point (Reuters) Speaking of FOIA requests, Reuters wants to know details about what TARP recipients plan to pay their execs. The recipients have submitted proposals to Ken Feinberg, but at present there are no plans to make this public. The quote from the executive compensation lawyer is a hoot. His clients would be horrified(!) if their pay packages were disclosed in the press. It would affect their ability to “raise their kids.” Doesn’t your heart just bleed for kids who would be faced with the traumatic knowledge that daddy makes $25 mil? This is a bad argument anyway, big corporate pay packages are disclosed every year in the proxy filings of every public company in America.

Volcker says money market funds weaken the financial system (Bloomberg)

Beijing loves IKEA — but not for shopping (LA Times)

There go the servers: Lightnings new perils (WSJ) An interesting map in the middle of the article shows the biggest areas for lightning. I lived in Tampa/St. Pete for a bunch of years and boy do I remember some spectacular light shows. I also remember lightning strikes within a block of me on 3 separate occasions.

Do not fear falling bond prices (George Magnus, ht NC) Writing in the FT, the UBS economist says we’ll be wrestling with deflation for a long time.

Retaliating against junk mailers (officeofstrategicinfluence) Mail ‘em a brick with a postage paid envelope attached to a box. I can’t imagine the USPS would let this fly, but the guy who wrote the post says it does….

Nanotechnology brings you … water-resistant carpet

Larry Summers is not happy…

Aug 25, 2009 02:42 UTC

He wanted Ben Bernanke’s job, but he’s not going to get it.  Reuters:

U.S. President Barack Obama will reappoint Ben Bernanke for a second term as chairman of the Federal Reserve on Tuesday, a senior administration official said on Monday.

Bernanke, whose four-year term as head of the U.S. central bank ends on January 31, 2010, will also be praised by Obama for his handling of the financial crisis, the official said.

If Summers was the only other option on the table, then I’m not so disappointed Bernanke is sticking around.  That said, I think Fed policy under Bernanke has been terrible. The Greenspan interventions he supported inflated the largest credit bubble in 80 years; the de-leveraging that needs to happen to correct the damage has been delayed indefinitely by Bernanke’s own interventions.

His supporters say he averted a second Great Depression. I disagree. He’s merely delayed it. The liabilities of the financial and consumer sectors haven’t gone away, they’ve merely been absorbed by the public balance sheet. This is as much Hank Paulson’s and Tim Geithner’s fault as it is Bernanke’s. I’m not thrilled with their leadership either.

Just my 2¢

COMMENT

William Black would be a good start.

Posted by Lim | Report as abusive

The infamous “disclosure schedule”

Aug 24, 2009 23:20 UTC

At the bottom is the SEC’s latest brief for Judge Rakoff.

Having gone through BofA’s, one finds –publicly disclosed for the first time — the “disclosure schedule” that outlined bonuses BofA had agreed Merrill could pay:

“Variable Incentive Compensation Program (‘VICP’) in respect of 2008 … may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date value of long-term incentive awards)…

It’s also on page 10 of the SEC’s brief.

Why does this matter?  Because this is the language that BofA conveniently forgot to include in the SEC filing detailing the merger before it was approved.

BofA’s argument is that even though the filing said Merrill couldn’t pay bonuses without its consent, the fact that the filing referenced the disclosure schedule means shareholders should have been aware Merrill would pay bonuses anyway.

You’d think shareholders would want to see something like that. So why wasn’t the schedule included in the SEC filing?

[BofA CEO Ken] Lewis, [fomer Merrill CEO John] Thain and [former Merrill COO Greg] Fleming were all asked by [SEC] staff why this information was set forth in a disclosure schedule as opposed to the text of the merger agreement itself, but none of them could provide an answer.

But of course they couldn’t.

There’s much more in the brief.

(For easier reading, click “toggle full screen” top-right and then “+” to zoom in)

SEC BRIEF – 8-24-09

COMMENT

What a tangled web we weave, when we endeavour to deceive.

Posted by TWM | Report as abusive
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