WSJ: Japan passes moratorium on loan repayments

Nov 30, 2009 20:35 UTC

Interesting item from Alison Tudor:

Japan passed into law Monday a conditional moratorium on loan repayments by small businesses and home owners, a move that opponents say may lead to an increase in bad loans on the books of the country’s banks.

The bill, which has been in the works since the Democratic Party of Japan came to power in September, was passed by the upper house of Japan’s parliament on Monday, according to a spokesman at the Japanese banking regulator the Financial Services Agency.

The law is designed to encourage financial institutions to change the terms of loans when asked, though lenders aren’t required to do so. Opponents believe it still could put public pressure on banks to forgive payments, leading to an increase in nonperforming loans on bank balance sheets.

While Treasury is pressuring banks to make trial mods permanent, Japan wants to help out the little guy by encouraging banks to forgive loan repayments. Just another reminder that after two decades, Japan’s zombie economy is still struggling to extricate itself from an ’80s credit bubble.

“Forgiveness” is another word for writeoff. And debt writeoffs (accompanied by proper bank recapitalizations) are necessary to reboot the credit system. But “encouraging” creditors to do so won’t do much good. They have little incentive to forgive principal so long as macroeconomic policy rolls over debt perpetually.

There’s an uncomfortable truth to grapple with for those of us who didn’t get caught up in the housing/consumption bubble but instead built up savings. Depending on where those savings ended up, WE are the shareholders/creditors that by right should lose when the system gets recapped.

Nothing gets fixed till everyone takes a haircut.

Part of the appeal of gold, silver, raw land and other tangible assets is that it gets investors “out of the system” before that happens.

COMMENT

Waiting for Japan to blow up is stressful. It looms, and it is impossible for me to see the economic future beyond that event.

Posted by Dan Hess | Report as abusive

Fed to test exit strategy

Nov 30, 2009 17:27 UTC

From the Fed: Statement regarding reverse repurchase agreements

…in the coming weeks, as an extension of this work, the Federal Reserve Bank of New York plans to conduct a series of small-scale, real-value transactions with primary dealers. Like the earlier rounds of testing, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.

These forthcoming operations are being conducted to ensure operational readiness at the Federal Reserve, the triparty repo clearing banks, and the primary dealers. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates.

Bernanke has said that the Fed has the power to mop up excess reserves. Reverse repo transactions, whereby the Fed sells securities in exchange for cash, are one of the arrows in his quiver. The question is whether he’ll actually use it. The rise in gold’s price is a bet he never will, not in any meaningful way. He can’t. He’s trapped: If he goes hawkish, he’ll hammer the economy.

But if he doesn’t, he’ll just reflate a larger credit bubble.

COMMENT

I have the perfect solution. Rather than use quantitative easing to buy long bonds, why doesn’t the Fed using quantitative easing to buy gold?This is would have the fun effect of causing the price of gold to skyrocket, which would be a big boost to the value of our own supply at Fort Knox.Better still, the Fed should buy a ton of commodities that can be had for a better price. Buy those and put them in a warehouse somewhere.The fed is pussyfooting around its desire for inflation. Please! Robert Mugabe could tell him inflation is not rocket science.

Posted by Dan Hess | Report as abusive

Lunchtime Links 11-30

Nov 30, 2009 17:02 UTC

Four years of calling the global financial crisis (Steve Keen) The latest from Steve. Lots of helpful charts. We’ve a long way to go till we successfully de-lever the economy.

Investors face huge losses as Dubai abandons company (Robertson, Times UK) Not that investors thought Dubai had the liquidity to rescue Dubai World. They’re hoping for a bailout from Daddy Abu Dhabi, which doesn’t seem to be in the works.

Could cap and trade cause another market meltdown? (Morris, Mother Jones) Interesting. Mother Jones is a very liberal publication and yet they’re arguing that cap & trade, which is the compromise designed to reduce carbon emissions, is a bad idea because it will enrich banks that make markets in carbon offsets. Matt Taibbi made the same point in his vampire squid piece. I confess to being a global warming doubter, only because I studied the subject in university and wondered, given the complexity of the models involved, how any reliable scientific conclusions could be drawn from them. But if we are going to reduce carbon emissions, it seems like a straight carbon tax would be a much better idea.

An empire at risk (Niall Ferguson, Newsweek) Ferguson quotes Krugman’s infamous 2003 column.

The right reform for the Fed (Merkel, Aleph blog) David tears apart Bernanke’s Saturday op-ed. Not that there’s much chance of it, but my hope is that the Senate decides not to confirm Bernanke for another term. (His confirmation hearing is scheduled for Thursday.) Support for him is based on the premise that he’s acquitted himself well cleaning up after the financial crisis. But Bernanke is merely repeating Greenspan’s mistakes which inflated the credit bubble in the first place. He’s not cleaning up the problem. He’s sweeping it under the rug.

Fed tries theater ads to burnish image (Puzzanghera, LA Times) Look for PSAs from Ben Bernanke in your local movie theater….

AIG may face $11 billion shortfall in insurance reserves (Carney, Clusterstock) JC quotes a Sanford Bernstein report.

Bad scrabble strategy, from Alaska (Marginal Revolution)

Man robbed of $2 million bank withdrawal in Taiwan (Jennings, Reuters)

Guatemala’s “skullmongers” (AP) A different kind of ambulance chaser.

Dogs may have trouble with doors, but 3-week old kittes, not so much…

COMMENT

Bring back your “must read” label. I would sure put Steve Keen’s piece in that category.There are always going to be those who have a handle on what is going on in the economy. The challenge is to be able to pull those out from the mass of voices, all sounding of great authority, who assail the public with their ideas.The reward is great – you can keep from losing your shirt, or at least as much of it as others – but it can be very difficult to tell who is giving the true account for the many who are not versed in economics.

Posted by CB | Report as abusive

Lunchtime Links 11-29

Nov 29, 2009 21:24 UTC

UAE moves to counter Dubai fallout but markets wary (Dokoupil/Kiwan, Reuters) “Case by case” help from Abu Dhabi probably isn’t what Dubai creditors were hoping for…

Dangers of an overheated China (Cowen, NYT) We’re mostly worried about Chinese economic strength these days, but the Chinese economic miracle looks a lot like a manufacturing bubble being propped up with stimulus and easy credit. If it pops, China may have to direct more of its reserves to domestic spending priorities, potentially driving up U.S. rates.

Mark Pittman, reporter who foresaw subprime crisis, dies at 52 (Ivry, Bloomberg) Pittman also led Bloomberg’s FOIA fight against the Fed.

Excerpt from The Buyout of America (NPR) Discussing another credit tsunami bearing down on the economy…

Video Professor is a scam (Arrington, TechCrunch)

Goldman’s profit is Citi’s pain (Adams, NakedCapitalism) The monolines were opposite Citi’s trades while AIG was opposite Goldman’s. Monoline counterparties were forced to take writedowns while AIG’s were made whole. So is Goldman really smarter than Citi? Or just luckier?

Chart suggestions (imgur)

The man who smuggled himself into Auschwitz (Broomby, BBC)

Twilight in one minute (YouTube) I like the showdown….

Dog struggles with screenless door….

Poole on fixing TBTF

Nov 29, 2009 14:43 UTC

William Poole, the last President of the St. Louis Fed and now with the Cato Institute, has a good piece on fixing the TBTF problem in a recent issue of the Financial Analysts Journal. Based on a speech given last April, it’s still highly relevant.

Poole doubts that new resolution authority will end TBTF. When push comes to shove, regulators are more likely to bail out the next AIG or Lehman rather than attempt an “orderly” wind down, even if they have expanded authority to resolve holding companies.

Poole says four problems must be solved:

First, many firms have too little capital relative to the risks they run. Unfortunately, capital inadequacy is often revealed only after the fact. We need arrangements that force banks to hold more capital than might seem necessary. Second, banks need long-maturity capital that cannot run. Third, we need to rely more on market discipline to deny funds to banks deemed risky. Fourth, when a bank needs to be restructured, the bank, rather than the federal government, should manage the restructuring.

Perhaps the best way to reduce leverage would be to get rid of the tax incentive to max it out, ending the deductibility of interest on business and personal tax returns. Easier said than done, of course. The lobbying effort to stop such a reform would be huge. So Poole proposes that the transition be “smoothed.”

…interest deductibility could be phased out over the next 10 years. Next year, 90 percent of interest would be deductible; the following year, 80 percent would be deductible, and so forth, until interest would no longer be deductible at all. The same reform would apply to all business entities; partnerships, for example, should not be able to deduct interest if corporations cannot.

With this simple change, the federal government would encourage businesses and households to become less leveraged. We have learned that leverage makes not only individual companies more vulnerable to failure but also the economy less stable. We use tax laws all the time to promote socially desirable behavior; eliminating the deductibility of interest would reduce the risk of failure of large companies—especially, large firms—and thereby reduce the collateral damage inflicted by such failures.

As for dealing with capital inadequacy and maturity mismatch, Poole says banks should be forced to hold “a substantial block of subordinated long-term debt in their capital structure.” To discourage growth of large firms, a bank with total assets over a certain threshold…

…would have to issue subordinated debt equal to 10 percent of its total liabilities. The debt would consist of 10-year uncollateralized notes that were subordinated to all other debt obligations of the bank. With 10-year notes equal to 10 percent of the bank’s total liabilities, the bank would have to refinance one-tenth of its subordinated debt every year, equal to 1 percent of its total liabilities. The subordinated debt would be in addition to existing requirements for equity capital.

Subordinated debt has several important advantages. We have seen that banks do not have an adequate cushion against losses under current capital requirements. If taxpayers are to be expected to stand behind our giant banks, they deserve a larger cushion against the banks’ mistakes. More importantly, because banks would have to go to the market every year to sell new subordinated debt, they would have to convince the market that they are safe. A bank that found selling new subordinated debt too expensive would have to shrink by 10 percent.

Restructuring a bank at an annual rate of 10 percent is perfectly feasible, and the restructuring would be managed by the bank and not by the government.

A subordinated debt requirement hasa significant advantage over a higher equity capital requirement, which is one of the regulatory changes being discussed. A subordinated debt requirement entails much more market discipline because a bank must either go to the market every year to replace maturing debt or shrink. If a bank’s prospects appear poor to investors, its stock price will decline and it may be unable to sell more equity. But it is not forced to shrink under these circumstances, nor will regulators necessarily force a bank to shrink. Market discipline through subordinated debt would be much more rigorous than any discipline regulators are likely to apply.

Poole is basically in Sheila Bair’s camp about forcing creditors to face losses. Bair is a supporter of the Miller-Moore amendment to the financial reform bill, which would give FDIC the power to impose a haircut on secured creditors of a large financial firm that ends up in receivership. That’s a good idea and I hope it’s signed into law.

But it’s still a reactive way to shrink big banks. What we need are pro-active solutions that force banks to shrink before they get into deep trouble. Poole says his idea would accomplish this. I invite reader comments on whether it would or not…

There’s more in the article.

COMMENT

I think, if banks are not able to deduct interest paid on deposits, that such a change would be equivalent to not allowing Nucor to deduct the expenses of purchasing raw materials.It would certainly making borrowing more expensive.

Posted by Andrew | Report as abusive

Happy Thanksgiving

Nov 26, 2009 20:43 UTC

From The Reformed Broker

thanksgiving-bailout

The family is spending Thanksgiving with my sister at Luke Air Force Base in Surprise, AZ. Guest housing on the base comes with a helpful instruction manual, including this:

(Click to enlarge in new window)

toaster

COMMENT

If ‘The Indians’ are Native American, then the turkey is off and you and the broker are stuffed.

Posted by Casper | Report as abusive

If banks can delay, pray

Nov 24, 2009 17:51 UTC

The “too-big-to-fail” amendment offered by Representative Paul Kanjorski has good intentions, but fatal flaws.

One I wrote about on Monday. Another is a section (see page 7) that gives systemically dangerous institutions (SDIs) the right to appeal regulatory orders in a federal district court. If they don’t like the corrective actions that regulators instruct them to take, they could delay them indefinitely.

With bank resolutions, the key issue is speed. We learned that the hard way during the savings and loan debacle. Allowing banks to deteriorate until they have no capital left is like waiting for an infection to turn gangrenous before treating it.

With most companies, that’s not a problem for anyone but shareholders and creditors. But banks aren’t like other firms. Society provides them a strong, and expensive, safety net. And that safety net has expanded significantly in the last year.

In exchange, we rightly subject them to more stringent regulations. We guarantee their liabilities, after all, so we’ve the responsibility to control their assets.

As Ed Kane of Boston College told me: “We support them the way parents support children. It’s our responsibility to discipline them.”

So that regulators have the power to act quickly against plain-vanilla banks, Congress established the Prompt Corrective Action doctrine in 1991. It gives bank regulators extraordinary power to put the screws to banks before they dig themselves too deep a hole.

Banks may consult with regulators on what needs to be done. But the only judicial review available to them is through the court of appeals, which must review the administrative record of corrective actions that regulators have already instructed banks to take. And it must do so in an expedited manner, typically 30 days.

A similar doctrine to break up SDIs proactively is what many had hoped Kanjorski would propose. But the judicial review process it envisions would turn corrective actions into the SDIs’ shield, rather than the regulator’s sword.

For one thing, it would allow SDIs to challenge their regulator in a district court, not the court of appeals. A district court’s review wouldn’t be limited to the administrative record; it would likely include a trial by jury. First of all, this would involve a lengthy discovery process. And systemically dangerous institutions typically have the best, most expensive lawyers in the world. While regulators are tied up, they would have an even stronger incentive to engage in morally hazardous behavior, to shift losses to the safety net while looting whatever value is left in the institution.

Just look at the billions in bonuses that Wall Streeters paid themselves last year after their balance sheets were rescued by taxpayers.

Professor Bill Black of the University of Missouri Kansas City worries Kanjorski’s judicial review process would effectively turn the district judge and jury into the regulator, a position for which they have no expertise. Would a North Carolina jury instruct Bank of America to take corrective actions that could lead to thousands of lost jobs in their area? Probably not.

Black says Kanjorski can improve his amendment by limiting SDIs’ judicial recourse to an expedited review of the administrative record in front of the court of appeals.

Kanjorski’s head is in the right place, even if his legislation is flawed. We need a new regime that encourages regulators to break up big banks before they threaten to bring down the system.

But his amendment makes the process too difficult. Already it erects a big roadblock by telling regulators they can only take action if an SDI “poses a grave threat to the (nation’s) financial stability or economy.”

By the time regulators realize a firm poses a grave threat, it’s probably too late to do much about it. And if the firm can delay action indefinitely by going to a district court, then what’s the point?

COMMENT

“And if the firm can delay action indefinitely by going to a district court, then what’s the point?’That’s the point. Believe it or not, Jacob Viner thought that the 1933 & 1935 Banking changes were just the beginning of more changes. Deposit Insurance, which FDR opposed and the Chicago Plan economists thought was a good temporary measure, was supported by many banks because they thought it would ease the support for more change. It was a good idea, but fell short of what many people believed was needed.It’s the same deal here. Things will be better for a time, but eventually worsen. I’ve got all my Narrow/Limited/Utility Banking sources ready for the next financial crisis.

FDIC’s problem bank list grows to 552, DIF now negative

Nov 24, 2009 16:27 UTC

I’m not good at taking vacations….

FDIC published its quarterly banking profile today. Here are the latest banking industry statistics at a glance. A few interesting takeaways I’d like to highlight. First, the problem bank list grew again. And it still understates total problem assets…both Citi and Bank of American should also be on this list.

The number of institutions on the FDIC’s “Problem List” rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the “Problem List,” up from 416 on June 30. This is the largest number of “problem” institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of “problem” institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

Also, what will get lots of headlines today is that the Deposit Insurance Fund went negative as of September 30th. We already knew this to be true, and it’s not totally fair to report the negative balance without noting that FDIC does have cash. That said, the DIF is still in a very precarious position.

As projected in September, the FDIC’s Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.

Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which stood at $23.3 billion of cash and marketable securities. To further bolster the DIF’s cash position, the FDIC Board approved a measure on November 12th to require insured institutions to prepay three years worth of deposit insurance premiums – about $45 billion – at the end of 2009. “This measure will provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010, but without accelerating the impact of assessments on the industry’s earnings and capital,” Chairman Bair said.

The DIF will continue to be negative after FDIC gets the additional $45 billion at the end of this year. That’s not a “special assessment,” it’s the next three years’ regular assessments being collected up front. The distinction is crucial. Because it’s a regular assessment, FDIC won’t count it as new reserves for the DIF. Instead it will be counted as deferred revenue on the DIF’s balance sheet.

Why is that important? Because unlike the $5.6 billion special assessment in Q2, banks don’t have to take a hit against their capital all at once for this assessment. They get to treat it as a prepaid expense.

More later….

COMMENT

If the general public would take actions on knowing their account balances the banks would not charge them. There would be no overdrafts… The American public seems to point blame on the banks and not take the responsibility of maintaining their own accounts. When was it decided that Americans can just overdraw their accounts and expect the banks to pay the check for free? I think the general public needs to get a grip on their spending and actually keep a register again to make sure they have money in their accounts. You know just because you have checks it doesn’t mean you have money in your account. TAKE RESPONSIBILIY and quit blaming the banking system for your lack of knowing your account. The banks are not telling you to write bad checks….you are doing that on your own. If you don’t have the money don’t make the purchase. It’s high time people started owning up to their actions and quit blaming the banks. Tell me would you rather the banks send back your rent/mortgage payment? That way you would have the collectors calling you stating you owe money, then that would in turn hit your credit report and lower your score so when you went to purchase a vehicle or applied for credit you would be denied.
So you tell me what the banks should do? Just pay your mistake and not charge you for it? It sounds like you want everything for free…The reason banks charge is because people yes that’s right live people (that know how to manage an account) have to touch the check or make a decision about whether or not to pay it. If you want to you can go to your bank and ask them not to pay any checks that would create an overdraft fee. The banks are willing to just return your bad check and have the business owner turn it over to the prosecuting attorney to track you down.

Posted by Steve | Report as abusive

Grist for Goldman conspiracy theorists

Nov 24, 2009 13:33 UTC

From Yves over at NakedCapitalism:

A former managing director at monolines Ambac and FGIC wonders why AIG was bailed out but the monolines weren’t. (He admits to bias, so take this with a grain of salt.)

…the [AIG] bailout was prompted by fear mongering and deliberate strategies and manipulation on the part of Goldman and a few select others, to make sure that AIG would be bailed out to protect their trades in shorting ABS CDOs.

I believe that John Paulson benefited from this bailout, on his $5 billon or so of ABS CDOs with AIG. But not as much as Goldman benefited themselves, via Abacus and, perhaps, other deals.

AIG, Goldman and ABS CDOs were tied together at the center of the crisis. From Goldman’s perspective, all of the other participants were secondary – they had no exposure to the monolines and they were probably hedged against the other banks. The only loose end was the collateral posted by AIG.

The final question that this raises for me: would it have been cheaper for the government and the taxpayer to have bailed out the bond insurers instead of AIG? The total amount of CDOs and credit default swaps that would have needed to be guaranteed would have been smaller. In the number of investors across the market that would have benefited would probably have been larger. The auction rate securities market, the muni market, the investors that held bond insurer exposure to MBS and ABS would have all benefited. None of these markets were aided by AIG’s bailout.

But a bond insurer bailout would not have helped Goldman much and the AIG bailout did.

There’s much more in the post. As chairman of the NY Fed, former Goldman CEO Stephen Friedman was in an opportune place to scare Tim Geithner into bailing out AIG to benefit Goldman.

The Paulson connection is intriguing. I’ve always wondered who, ultimately, was on the other side of his “trade of the century.” He bought CDS and the banks he traded with had to lay off that risk to someone. That someone was AIG, which couldn’t have paid up if not for the bailout….. (admittedely, this is supposition on my part, would be interested to hear reader thoughts…)

COMMENT

The average pay (including bonus and benefits) for GS staff is approximately $770,000 – almost doubles the salary of US President.

Lunchtime Links 11-23

Nov 23, 2009 17:31 UTC

Reader note: I’m taking the week off for Thanksgiving, so blogging will be light. Back next Monday.

Sewers at capacity, waste poisons waterways (Duhigg, NYT) Fascinating. Yet another example of how society is overgrown. Everywhere you look, there’s another piece of antiquated American infrastructure that is completely unable to handle capacity thrown at it by the modern economy. Sewers, the electric grid, air traffic control systems, the list goes on. But it’s just too expensive to build any of them out: “As much as $400 billion in extra spending is needed over the next decade to fix the nation’s sewer infrastructure, according to estimates by the E.P.A. and the [GAO].” $400 billion. Just for sewers. We don’t, nor will we ever, have the money for that. Not w/o sacrificing all the other stuff we want. Economists are trying to convince you that debt-financed “growth” is the only way to solve our economic problems. They’re wrong. Debt-financed consolidation is the best we can hope for.

Wave of debt payments facing U.S. government (Andrews, NYT) Is the NYT editorial board getting budget conscious? (See again their pitch for fiscal prudence in NY State). This front-pager doesn’t contain much new info, but it articulates clearly the debt problem we face. And they put it next to the article on sewers above. By the way, the quote from Bill Gross is interesting. Out of one side of his mouth he tells the government to borrow to “support asset prices,” out of the other he wants us to stock away nuts for the Winter. Which is it Bill?

Gold reaches $1,174 (kitco) What kills the gold rally? Action from the Federal Reserve to defend the dollar. But we’re getting the opposite. Yesterday St. Louis Fed President Bullard said the Fed should keep its QE program open after it finishes its planned purchase of $1.45 trillion of mortgage securities next March.

Buffalo’s slow-moving Katrina (Carey, Reuters) Route to recovery is a great series from the folks here at Reuters. Detroit gets all the press, but there are plenty of other post-industrial neighborhoods that are suffering.

Wells Fargo underestimating off balance sheet exposures (Whalen, ZeroHedge) If you look at Wells Fargo’s latest 10-Q (page 31), the company has over $2.0 trillion of off-balance sheet assets. But they only plan to consolidate $48 billion worth, according to their most recent estimate. Chris makes the point that, although $1.1 trillion of the OBS assets are “conforming” mortgages (and therefore eligible for government guarantees) it’s not fair for Wells to pretend these mortgages pose zero risk for their balance sheet.

Taking taxpayers for a ride (Niedermayer, NYT) Last week Fritz Henderson said GM would “repay” part of its bailout? LOL!

Existing home sales increase sharply in October (CalculatedRisk)  Plus more interesting charts from CR. Ultra-low rates, government financing and the homebuyer tax credit are successfully reflating the housing bubble….for the moment.

Man trapped in 23-year coma was conscious the whole time (Hall, Daily Mail) Wow. Stephen King has written horror stories using this story line….

Argument against cloning… (imgur)

Squirrel saves baby from dog (picheroic)

COMMENT

Trying to parse Bill Gross’s apparent schizophrenia…He wants asset prices propped up at present with a concrete plan of fiscal austerity upon exit maybe?El Erian talks of the need for exit strategy (presumably involving fiscal prudence) to make present levering up more palatible.The problem with this is that congress will never willingly cut entitlement spending on the elderly, which is the bulk of it. They are owned by the AARP even more than big business.We risk calcifying like Europe or Japan, where the young exist as indentured servants to the old, GDP has stagnated for 30 years and consequent low birthrates put national solvency at risk.

Posted by Dan | Report as abusive

SNL on the U.S./China economic relationship

Nov 23, 2009 16:08 UTC

“Why are you trying to do sex to me like I was Mrs. Obama!?!”

Small quibble: SNL doesn’t note that the Chinese are, uh, “doing sex” to themselves by manipulating the yuan.

Shock and awe the TBTF

Nov 23, 2009 15:39 UTC

For all the fear that bankers have expressed about Representative Paul Kanjorski’s amendment to end “too big to fail,” the final text shows that they don’t have much to fear. While the amendment gives regulators new power, it’s unlikely they’d actually use it.

The Pennsylvania Democrat neuters his own legislation with a single line, which stipulates that for regulators to take action against a systemically dangerous institution (SDI) it must “(pose) a grave threat to the financial stability or economy of the United States.”

But if the point is to break up systemically dangerous institutions pre-emptively, then we want regulators to tear them apart before they pose a grave threat. SDIs tend to fall into that category only after they’re in trouble. By that point it’s too late.

“There’s no political constituency for bank soundness regulation until it’s too late,” says Professor Richard Carnell of Fordham. “Regulators will tend to do what’s politically expedient. During good times that means carrying on business as usual.”

I don’t suspect any regulator today would say that Goldman Sachs poses a grave threat to financial stability. Yet the complexity of its operation and its interconnectedness with the rest of the financial system means that it clearly has the potential to. That may be a fine distinction, but in practice it’s one regulators will be likely to hide behind.

Another problem with Kanjorski’s amendment is that it pollutes bank regulation with politics. The Treasury secretary would have to sign off on resolutions over $10 billion and the president on resolutions over $100 billion.

Walker Todd, a bank expert at the American Institute for Economic Research recently told me: “It’s been my experience over the last 35 years that examiners in the trenches identify the problems in banks quickly. They dutifully pass their concerns up the line, but their criticisms often get wiped away or tamped down for political reasons.”

Examiners do their job well, but politicians get in their way.

I’m torn. At a visceral level, I like the idea of using TBTF status as a hammer to shatter SDIs into pieces. But if this is the best we can hope for, then perhaps it’s better to focus on other structural reforms that will make banks safer and less complex.

Putting OTC derivatives onto exchanges, strengthening capital (the Miller-Moore amendment is a good start), splitting commercial from investment banking, establishing some sort of exposure rules so that SDIs can’t have too much exposure to any single counterparty. But that’s a wish list that will never get done. In the end, I suspect the only way we’ll rebuild a sound financial system is after the one we have blows itself up.

COMMENT

Inertia. You would think that after what has happened with us teetering over the edge (and still just a step or two away from the edge) something significant would be done. Apparently not.

Then again, let a commander-in-chief raise a war cry, as GWB did, and Congress jumps to approve with a blank check.

How strange that national security is a proven winner with military deployment but it seems to pass everyone’s understanding that the financial world and national financing pose equal, if not even more dangerous threats than any armed foe.

Posted by CB | Report as abusive

Lunchtime Links 11-22

Nov 22, 2009 20:47 UTC

The talented Mr. Pang (Maremont, WSJ) Maremont uncovered the long and sordid history of Mr. Pang. The Journal also broke the Norman Hsu story. Both were high-flying con-artists before the Journal got on their case. Great stories.

The 70% discount on Goldman’s $500m gift (Ransom, SmartMoney) Really great work from Diana Ransom. Goldman will get a tax writeoff for much of its “gift.” Other parts of it are actually loans the company expects will be repaid with interest. BTW, people know that Warren Buffett isn’t actually contributing any money, right? He’s just lending his time. Hmmm. What’s he going to do? Get on the phone with a Denny’s franchisee to talk about the stock market?

Congresswoman passes leverage amendment (Grim, HuffPo) It’s hard to keep track of the House Financial Services Committee these days. The amendment would apparently limit leverage to 12x. I’m trying to get my hands on a copy to determine how it defines leverage. And in any case, all of this may be a dead issue. The Congressional Black Caucus canceled a vote on the package Thursday arguing that not enough is being done about unemployment. Ugh. There are lots of problems with the financial reform package, but now it’s looking like we may not get anything signed into law before 2011.

Millions may have to repay part of stimulus tax credit (

Tim Geithner, mad as hell and not going to take it anymore (Tech Ticker) This quote from Geithner, in response to criticism from a Republican congressman, is just another reason he has to go: “What I can’t take responsibility for is the legacy of the crises you’ve bequeathed this country.” But Geithner bears as much responsibility for the banking crisis as anyone. Recall that he was chief of the NY Fed before he joined the administration. In that role he was supposed to regulate banks. Clearly he wasn’t a very tough regulator if, when the CEO spot at Citigroup opened up two years ago, Geithner was Sandy Weill’s first choice.

The Louisiana Purchase redux (Milbank, WaPo)

Unburied bodies tell the tale of Detroit (Reid, Times Online)

Baby elephant sneezes…

COMMENT

Strange conclusion:
“Recall that he was chief of the NY Fed before he joined the administration. In that role he was supposed to regulate banks. Clearly he wasn’t a very tough regulator if, when the CEO spot at Citigroup opened up two years ago, Geithner was Sandy Weill’s first choice.”
Either you think Sandy Weill was very incapable so he would choose an easy push-over to replace himself, or, maybe, Geithner had shown himself a very capable chief of NY FED and regulator and therefore he was wanted by Weill? Clearly if he was not very good at his job he would not have been asked or even considered.

Posted by M | Report as abusive

Could England be headed for a “sudden stop?”

Nov 21, 2009 17:41 UTC

From Landon Thomas at NYT: In Britain, visions of Japan’s decade of stagnation

Britain may finally be emerging from recession, but many analysts warn that it is a false dawn. In fact, they argue, the economy here is so ravaged by growing debts and ruined banks that it could well be following in the steps of Japan’s lost decade of the 1990s.

I still don’t understand why we refer to Japan’s “lost decade,” singular. The country is now moving into its third consecutive lost decade.The Nikkei is still at 1984 levels.

But back to the UK: the NYT piece quotes the latest research from Variant Perception (no link). I got it in my inbox earlier this week and it’s a fascinating (though not pleasant) read. Notably, they talk about the outside possibility of a “sudden stop” event. As mentioned in this space before, a “sudden stop” is what happens to emerging economies when they lose access to capital markets. Confidence is lost in the government’s ability to pay back debt and everyone races to get out of the system. See Argentina.

The problem is acute for indebted emerging markets because they don’t borrow in a currency they can print. So, the argument goes, you can’t have a sudden stop in Britain, or the US, because we print the currency in which our debt is payable.

I’ll let the VP guys take it from here:

The UK’s fiscal situation is in its most precarious state for 30 years. The Bank of England has responded by cutting rates to historic lows. This has merely bought time. Debt in the household sector remains at its highs, and enormous relief has been provided to many overleveraged mortgage holders who hold tracker deals [i.e. teaser-rate mortgages]. They have been able to ride out the recession so far without defaulting. As their trackers expire and they reset to higher rates they will face acute problems.

Usually a government can quickly return to fiscal vitality after a cyclical upturn. The UK will find this difficult. Structural problems such as a heavy reliance on the business and finance sectors and a consumer that will eventually have to deleverage will provide strong headwinds to any sharp turnaround in revenues.

To pay for the shortfall in income, the UK government has stepped up bond issuance to generational highs. This is not sustainable and taxes will eventually have to rise. However, there is a belief that raising taxes will increase revenue. We believe the opposite is true, and the state will have to borrow more than is projected, for longer than is hoped.

The Bank of England has embarked upon a quantitative easing program to support the gilt market. The sheer size of the initiative raises the question of whether it will be able to reverse it in a stable and orderly manner. Any trip-ups in its unwind would raise yields considerably.

The structural problems in the domestic economy, and difficulties in other economies across the globe, will impede the prospects for sustainable growth in the UK. Debt will continue to grow, and the creditworthiness of the country will continue to weaken. Investors will be more and more reluctant to meet the borrowing needs of the UK.

If the situation continues to deteriorate there is a non-negligible possibility the UK could face a ‘sudden stop’ in capital inflows. A debt crisis would precipitate a currency crisis. This would not be especially unusual for the UK: during the postwar period, there has been one on average every 15 years. These have happened like clockwork.

The possibility of this course of events unfolding is small, but not negligible. If a new government is formed next year, perhaps they will be able to enact the policies that will reduce the deficit and restore confidence in the financers of the UK deficit. We believe, though, that to say the UK will not have a debt crisis is complacent and pays no heed to the past.

If Britain is laid low by a sudden stop event, if the BOE finds itself the only buyer of British government debt, the argument in favor of deficit spending whenever there’s an “output gap” will, in my view, suffer a fatal blow.

Also worth calling out, the VP guys note that household debt is still growing quickly in the UK:

screen-shot-2009-11-21-at-120707-pm

In order to return to health the UK, more than most countries, needs to deleverage. However, this process still seems to be in its early stages. UK consumers have so far not materially improved their balance sheets since the onset of the crisis. This is concerning: before the crisis, UK consumers were some of the most indebted in the world, and so have more urgency than most to reduce their indebtedness via deleveraging or default.

But …. household debt to GDP in the UK continues to rise. This is partly a denominator effect, as nominal GDP has fallen in the recession. However, even on a QoQ basis, household debt has barely contracted.

The US consumer, by comparison, is showing much clearer signs of reducing leverage. Over the last 2 years (to Q209), US household debt to GDP has risen by 0.7%-pts, while in the UK the same metric has risen by 4.4%-pts, more than 6 times as much.

COMMENT

One reason that the UK consumer has not begun to deleverage is that unemployment is not as high as in the US. Also, since the “safety net” has more and denser webing than in the US there is less incentive to do so.

Posted by Bob4232 | Report as abusive

Bank failure Friday

Nov 21, 2009 04:54 UTC

It was a slow night. One small bank failed.

#124

  • Failed bank: Commerce Bank of SW FL, Fort Myers FL
  • Acquiring bank: Central Bank, Stillwater MN
  • Vitals: at 8/28, assets of $79.7m, deposits of $76.7m
  • DIF damage: $23.6m

Central has been busy. They also acquired the assets of Riverview Community Bank and Jennings State Bank in October, as well as Mainstreet Bank in August.

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