A crisis not wasted

Jun 10, 2010 11:50 UTC

White House Chief of Staff Rahm Emanuel famously said crises shouldn’t be wasted. Lucky for U.S. financial markets, the 80s savings and loan debacle wasn’t. Reforms passed in response meant U.S. regulators were better prepared than their European rivals to process the current crop of bank failures.

For months Spain has struggled to resolve troubled savings banks, resorting to a haphazard merger process. It’s not clear such combinations will bring stability, even if they can be completed. The collapse/bailout of CajaSur caused markets much consternation. Even now, Spain’s other savings banks are racing to merge before the June 30 expiration of the country’s temporary bailout law.

Meanwhile America’s FDIC closes a handful of institutions every Friday night without incident. The difference is strong rules to resolve collapsing banks, rules we got thanks to the S&L crisis.

During that episode the Federal Reserve routinely lent to insolvent institutions, funds that often ended up in the pockets of insiders and bank creditors, compounding taxpayer losses.

Such walking dead banks were christened “zombies” by Boston College Professor Edward Kane. Kane, along with other academics George Kaufman and George Bentson, helped lead reform efforts to stop Fed lending to insolvents and to empower bank regulators to seize them proactively, reducing costs. As a result, FDIC was well-prepared for the latest wave of bank failures. Over two hundred have been quickly and quietly closed since 2008.

Not having suffered similarly instructive bank crises in their own past, European nations were caught flat-footed coming into this one. Besides Spain’s troubles with savings banks, the UK was unprepared for Northern Rock’s collapse in 2007. Only afterward did the British adopt a special resolution regime modeled on the American one.

True, the European banking system is more concentrated than the American one. Most of FDIC’s takedowns are of small, systemically meaningless banks. But its regulatory toolkit proved adequate to shutter WaMu, a giant bank with $307 billion of assets, at no cost to anyone besides the bank’s shareholders and creditors. And since 2008, it has closed 53 banks with more than $1 billion of assets, 10 of which had assets over $10 billion.

The U.S. system is far from perfect. The original sin of the post-S&L rules was a “systemic risk exemption” granted regulators to lend to zombies determined too big to fail. That exemption was trotted out multiple times during the crisis, most infamously for FDIC’s debt guarantee program, which gave financials like Citi, Goldman, GE and many others explicit government backing.

The real problem, facing Americans and Europeans alike, is that the very biggest banks remain too large and complex to resolve. American regulators hope this problem will be solved with new “resolution authority” contained in legislation.

Still, most bank failures are, thankfully, remarkably boring affairs as insured depositor accounts are seamlessly transferred to healthy institutions or paid out. It goes to show that good regulation can indeed come out of crisis.


Those weak banks might not ever get large enough to cause a financial stir if the FDIC made some of their ratings public. After all we have to bare our financial souls to borrow a dime, why shouldn’t banks have to prove their solvency to their customers? Then consumers would shun weak banks before they got too big.

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Lunchtime Links 6-9

Jun 9, 2010 14:10 UTC

The blog prophet of euro zone doom (Thomas, NYT)

Hoenig wants a rate increase (Kelleher/Gillam, Reuters) He won’t get it. The Fed has trapped itself. The only way to keep the economy “growing,” is to pump ever more copious amounts of credit into it. If we’re not willing to put up with any recession whatsoever in order to pay-down/write-off debt, well, then, eventually we become Greece. Even central banks that print the currency in which their debt is payable can’t defy gravity forever. The Japanese have tried for the better part of a generation….hasn’t worked so well….

Here’s a chart to make the above point:

Fed trapped

All TruPSed up (Alloway, Alphaville) Great, clear post from Tracy. Bank capital is still just about the most important issue in financial markets; this is the latest fight…

CHART: Mortgage purchase applications keep dropping despite low rates (Culp, Reuters) There will be no sharp recovery for housing. Too much shadow inventory and too little demand. Rates may even decline to new lows on more flight to safety buying of U.S. government paper, but don’t expect housing to get much of a boost.

Legacy for one billionaire, death but no taxes (Kocieniewski, NYT) No clever tax dodge here, Duncan just happened to die in 2010, a year when the estate tax dropped to 0%.

Bubble Watch: $35k per night hotel room (Nassauer, WSJ) NY’s gilded age is surely returning post Lehman…

Whole new level of American laziness (reddit)

Weight-lifter goes for gold, projectile vomits on judge and passes out (windycitizen) He apparently went for a third attempt after this. Why? Just why?



Rolfe — You are wrong about Japan.

The Japanese have have not sincerely tried to print, c’mon. Japan was massively levered and they never printed anything on the scale of the delevering. Instead they engaged in 20 years of Keynesian nonsense, with the government levering up, and are back where they started, only far older and with the debt on the public balance sheet.

You went to the U. of Chicago, you should know the answer! A real Friedmanite solution in Japan would have been to let the private sector delever but *do not* lever up the public sector with senseless and *unproductive* Keynesian spending. Instead, stand back and if deflation starts to go too far, just provide raw money printing to the people as needed to avoid letting deflation get out of control.

The private sector wants to operate with less leverage these days. This would be steeply deflationary because money multipliers would shrink. The solution must be to increase the base money supply in the least distortionary way possible. Rather than have the government borrow and spend on unproductive things, it should just get printed cash into the hands of its citizens. They will be able to pay off debt and the financial sector will heal naturally.

Japan has solved nothing in 20(!!!!) years because there just wasn’t a way to pay back the huge debt. It was bad debt, unservicable in relation to the money supply. The debt needed to be destroyed one of two ways: Either
(1) Stand back and let everyone go bankrupt in a deflationary collapse. This is the classical solution. You could then reorganize and not have wasted 20 years. This is brief, terrible and politically untenable.
(2) Print new base money immediately. This will seemingly be inflationary but in reality you are only pulling the money supply along to keep up with the asset inflation that has *already* occurred. Some debt may be destroyed by inflation but it is much less disruptive if it is at low levels.

Bill Gross pushed this very well in March 2009.
http://www.pimco.com/LeftNav/Featured+Ma rket+Commentary/IO/2009/Investment+Outlo ok+Bill+Gross+March+2009+Hairy+Lips+Sink +Ships.htm

Gross said in order to deal with the debt load, we need a “return to nominal GDP growth levels of 5-6%, the majority of which might actually come in the form of higher prices as opposed to increased production. This Faustian bargain would be acceptable if only to stabilize what now appears to be an even more dangerous deflationary debt liquidation.”

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Evening Links 6-7

Jun 7, 2010 21:53 UTC

Betting on the bad guys (Adams, WSJ) From the cartoonist behind Dilbert.

Consumer credit increases slightly in April (CR) Credit excluding mortgage debt is back on the rise…ever so slowly…and probably not for long…

Fed paper: Effective homeownership rate much lower than official rate (NY Fed) The official rate from the Census Bureau was 67.2% at the end of ’09. But back out those with negative equity, and the rate is 5.6% lower. And that’s using optimistic house price indices from OFHEO and FHFA. Using Case-Shiller, the homeownership gap is much worse.

BofA settles Countrywide overbilling scams for $108 million (Wyatt, NYT) As mortgage bonds increasingly went bad, Countrywide’s servicing business had to find ways to squeeze out profits. This was a particularly slimy way to do that…

New iPhone presentation crashes on, you guessed it, network trouble (Gizmodo) The crowd laughs it off. iPhone users everywhere unsurprised.

Dow falls below “Flash Crash” low

20 years of growth in Shanghai (skyscrapercity)

Parenting Fail (Abrams, Asylum)

Funny: Calvin and Hobbes on capitalism (imgur)


uncompetitive? noncompetitive?

sigh… english, I hate thee.

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Bank Failure Friday

Jun 5, 2010 04:01 UTC

Three failures tonight…including one in Nebraska with assets/deposits over $2 bilsky.


—Failed bank: First National Bank, Rosedale MS
—Acquiring bank: The Jefferson Bank, Fayette MS
—Vitals: assets of $60.4 million deposits of $63.5 million
—Estimated DIF damage: $12.6 million


—Failed bank: Arcola Homestead Savings Bank, Arcola IL
—Acquiring bank: None. Insured deposits paid out.
—Vitals: assets of $17.0 million deposits of $18.1 million
—Estimated DIF damage: $3.2 million


—Failed bank: TierOne Bank, Lincoln NE
—Acquiring bank: Great Western Bank, Sioux Falls SD
—Vitals: assets of $2.8 billion deposits of $2.2 billion
—Estimated DIF damage: $297.8 million

Lunchtime Links 6-4

Jun 4, 2010 14:15 UTC

CHART: Census responsible for almost all job growth (Culp, Reuters) 411k census jobs added in May. 431k total jobs added.

Not for the forint-hearted (Alloway, Alphaville) There could be some political posturing behind these comments from Hungarian officials — who suggest, in effect, that Hungary is the next Greece. Still pretty unsettling.

Euro hits 4-year low on mistranslated French comment (Reuters)

CBO issues Fed-flattering propaganda (Naked Capitalism)

Global bank capital pact advances (Enrich/Paletta, WSJ) Article says the new Basel accords could require $1.2 trillion of additional capital and liquidity. Reminds me of Greenspan’s comment that U.S. banks should carry 15% TCE, which would force them to raise similarly huge sums. While everyone agrees banks need more capital, regulators aren’t actually going to force them to raise it while they’re trying to follow their faux dual mandate of not just keeping banks safe, but also encouraging them to “lend more to get the economy going.” The two goals directly conflict.

Happiness may come with age, study says (Bakalar, NYT)

Keanu Reaves gives £50 million of his Matrix residuals to movie’s behind-the-sceners (HelloMag)

Big Picture captures birds caught by the oil spill (Globe)


The Euro was worth about .87 just a few years ago. Why should it surprise anyone that it is headed back that way? The survival of the EU is itself in doubt.

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Free ride ending for U.S. wireless bandwidth hogs

Jun 2, 2010 21:52 UTC

By Rolfe Winkler

Bandwidth hogs are losing a big trough. AT&T on Wednesday became the first major U.S. mobile service provider to shift from an all-you-can-eat model to tiered pricing for email and Internet access.

The decision is likely to cut into sales at first, but could improve the company’s long-run profitability and end nightmarish network problems. Customers look to be the early winners, while conditioning them to pay for usage should provide a longer-term victory for carriers.

AT&T is shrewdly pricing the plans to keep customers happy. Most should actually see bills decline. Users who consume less than 200 megabytes a month, 65 percent of them according to AT&T, could pay $15 instead of the current $30 for the unlimited plan. Considering how unhappy many customers are with the service, widespread price increases wouldn’t have gone down well.

Even though the heaviest smartphone users will pay more, AT&T’s average revenue per user will probably dip. The company expects little impact on 2010 sales, but JPMorgan estimates service revenue could fall as much as 5 percent on an annualized basis.

Any hit to short-run revenue will be a price worth paying if customers can be convinced to pay for consumption. As things stand, the capital expenditure required to support iPhone users means they may be worth nothing to AT&T, according to research firm Sanford Bernstein, although the company disagrees.

Better network quality requires investment, and consumers are now being pushed to pay. Despite the competition, prices should rise over time, especially as bandwidth usage continues to swell. AT&T’s decision appears to rely on rivals also forcing those clogging the networks to shoulder most of the burden of improving the mobile plumbing. It seems a good bet, for if other providers don’t follow suit, they’re apt to attract the feasters who cause dropped calls and slow downloads for everyone.

Evening links 6-2

Jun 2, 2010 21:35 UTC

Quote of the Day: Absolving Moody’s for failing to see the housing bubble, Warren Buffett employed the “who-could’ve-known” defense when he told the Financial Crisis Inquiry Commission today that “rising prices are a narcotic” that corrupt the critical thinking of rational people. To that Chairman Phil Angelides responded that rising prices may be “a narcotic, but don’t we expect ratings agencies to avoid it? You don’t want [the credit] police trading crack.

BofA admits foreclosure can be appealing (CR) The bank acknowledges the obvious, that if you’re not concerned about a hit to your credit rating–or losing your house–you can live rent free for more than a year waiting for the repo guy to get to you. On a related note…

Owners stop paying mortgages, and stop fretting (Streitfeld, NYT)

CDS spreads for oil companies blow out (Alphaville) This matches the huge drop in the share prices of companies that are attached to the spewing Macondo well in the Gulf. If the spill can’t be contained, will the liability?

Buffett expects “terrible problem” for municipal debt (Frye/Selway, Bloomberg) The Oracle did offer some wisdom about municipal issuers…

“People become immune to coffee boost,” experts say (Roberts, BBC)

Visualizing the BP oil disaster (ifitwasmyhome)

Lego printer uses world’s cheapest ink cartridge…LOL!