Lunchtime Links 1-31

January 31, 2010

Paulson says Russia urged China to dump Fannie/Freddie holdings (McKee/Nicholson, Bloomberg)

Avatar breaks $2 billion worldwide box office mark (Box Office Mojo) Very impressive of course, though on an inflation-adjusted basis, Avatar ranks just 25th all time. Nothing will ever beat Gone with the Wind.

Volcker Op-Ed: How to reform the financial system (NYT) Unfortunately not a lot of additional detail over his proposed reform plan. But for those not already familiar with it, this does offer a helpful articulation of Volcker’s reform philosophy. Yves is happy Volcker has entered the fray, but believes he needs to go beyond his current thinking.

Frank says banks “recognize reality” by throwing support behind wind-down fund (Howell, Reuters) Am I alone in my fear that a wind-down fund will make matters worse? The idea that new “resolution authority” must be accompanied by a pool of funds to bail out systemic failures compounds moral hazard greatly. Even assuming that banks will be charged high enough insurance premiums to give the fund sufficient financial heft — how well has that worked with the Deposit Insurance Fund? — the very existence of this fund will provide an implicit guarantee to the creditors of the firms’ backed by it. The DIF already creates major moral hazard by removing all depositor incentives to worry about the health of their banks. Now an even larger slice of creditors would be insulated from risk.

PDF — TARP inspector general says program will cost less than expected, warns that little has changed (SIGTARP) In his latest quarterly report, Neil Barofsky acknowledges that TARP won’t cost as much as once expected. But he also warns that “even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.” Section 3 of the report emphasizes that present government policy risks re-flating the housing bubble.

PDF – Treasury releases first quarterly PPIP report (Treasury) A breakdown of the the legacy securities program, which combined public and private capital in order to support the price of toxic assets. The use of non-recourse government leverage, plus Treasury’s equity investment, shifted principal risk on these assets to the public’s balance sheet. It took a while to get off the ground, and the program isn’t very large — less than $25 billion of investments. So far the funds are breaking even.

Justice, medieval style (Leeson, Boston.com) Interesting article, though the author offers little evidence to support his claim that trials by “ordeal” worked. (e.g. judging innocence/guilt based on whether the accused sank/floated when tied up and thrown in water.) ht reader Paul M.

New amateur video of Challenger disaster (LiveLeak)

Your brain on football (Time) Is brain trauma the rule more than the exception?

Awesome impressions (Funny Ordie) Comedian does DeNiro, Ahnold, Stallone and Morgan Freeman

Actor Rip Torn arrested drunk, armed in bank (Michaud, Reuters)

2 comments

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Cage match between Volcker and Frank?

I think Frank is missing the point: its not so much the cost of addressing a TBTF that we need to prepare for, it is the complexity of such a wind down and the complexity that can not be prepared for that is the problem.

These companies have regiments of dedicated finance staff to maintain operations and distill the overwhelming flow of data into a product consumable by the executive management… but the finance people have no experience handling a wind down of the magnitude we’d be talking about. And outside people, even if alleged experts in their field, would not have the familiarity to execute a wind down with the speed and quality that would be needed to keep financial markets from going S* storm.

The best way to address the problem is to try to limit the potential of the problem, not to try to accrue a fund to pay for it again.

Posted by Andrew | Report as abusive

To my mind the whole Too Big To Fail issue is way too vague. We need to get specific about particular financial products, and specifically derivatives, that are the source of big danger.

It is tragic that derivatives have lost their biggest critic now that Goldman has purchased Buffett’s silence.

The big catastrophe ahead now involves interest rate swaps. The value of interest rate swaps is orders of magnitude bigger than credit default swaps and they have grown as tender towers to the sky in the gentlest of interest rate environments. Interest rates worldwide are forcibly held down by central banks while governments strain an the edge of the fiscal precipice. What will happen to with these massive towers if there is a real earthquake of upward moving interest rates?

What is worse, this earthquake is quite certainly coming. With the demographic shift across the developed world where aging boomers are followed by a much smaller generation in almost every developed nation, massive sources of the world’s savings will become massive sinks and interest rates will be forced upward. In short, there will be much fiercer claims for much more limited global savings. Interest rates, reflecting the supply and demand dynamics of savings, will be forced upward.

The tens of trillions or hundreds of trillions in interest rate swaps are predicated upon the idea that the inevitable can not happen.

Will we find that 2008 and 2009 were a walk in the park?

Posted by Dan Hess | Report as abusive