Why not Baby Banks?

Jan 25, 2010 20:01 UTC

The President is right to target firm size if he wants to insure no financial firm can cause a system failure. Yet despite clear evidence that banks are already too big, Obama’s proposal won’t cut them down. It would only limit future growth by acquisition.

Specifics are being worked out, but what is clear is that Paul Volcker’s “size” proposal will limit future growth by acquisition only. It won’t force existing firms to shrink nor limit their ability to grow organically.

But if Obama wants to end the too-big-to-fail paradigm, if he wants to eliminate the possibility that one firm’s failure could cause a cascading financial collapse, he needs to engineer a system with more circuit breakers. Shrinking banks is crucial.

Like the power grid, the financial system is huge, dynamically complex and interconnected. A single point of failure can cause a cascading collapse. In 2003, some overgrown trees in Ohio were enough to cause a blackout that hit 55 million from Ontario to New York. In 2008, the failure of any one of a handful of financial firms could have plunged the economy into Depression.

True, size isn’t the only factor contributing to systemic risk. Yet despite thousands of bank failures during the savings and loan crisis, there was never a risk of systemic collapse because no bank was large enough to crash the system.

Another counter-argument is that gross balance sheet size isn’t by itself an indicator of risk. Certainly some balance sheets are riskier than others, but there remain 10 to 20 in the United States, of varying risk profiles, that are systemically dangerous.

Some argue that shrinking big banks would eliminate efficiencies. While size may have first order benefits, recent events show these are outweighed by second order bailout costs.

Nor do we need large banks to finance large deals. Big loans can be handled via syndication.

No doubt it would be tough to break up big banks, but we’ve done something similar before. Standard Oil and AT&T were split into Baby Oils and Baby Bells. Why not figure out a way to split too-big-to-fail financials into Baby Banks?

COMMENT

too sensible and simple ! and for added measure , lets just establish a naational limit on leverage at all banks to say 10×1 . Then they can’t start growing on steroids again .

but then Obama can’t whip up anti-bank sentiment among the looney left and there is no way that Congress gets to milk this idea for money ( ie no new taxes ) so it’ll never see the light of day .

Posted by divvy trader | Report as abusive

Existing home sales plunge

Jan 25, 2010 15:36 UTC

When it looked like the First Time Homebuyer Tax Credit was going to expire, folks rushed to buy. The result was merely to pull forward demand, similar to the dynamic that played out with Cash4Clunkers.

From Reuters’ Stephen Culp:

ruz55h

Here’s the report from the National Association of Realtors. They try to put a positive spin on the plunge by noting that prices rose. First American CoreLogic reported last week, however, that prices are again heading down.

COMMENT

Look, the “First Time Homebuyer Tax Credit” has never gone down nation wide. Ever expanding “First Time Homebuyer Tax Credit” will increase the wealth effect, and fund, through rising home equity, greater consumer consumption, therby causing ever increasing asset values. This massive liquidlity increase makes us all RICH, RICH, RICH! As I have often noted, debt is wealth, and borrowing is income. Dow 36,000 billion trillion.

Posted by fresno dan | Report as abusive

Morning Links 1-25

Jan 25, 2010 14:25 UTC

Tishman gives up Stuyvesant Town (Wei/Spector, WSJ) Way underwater was this deal: the price tag was $5.4 billion, but the property is thought to be worth only $1.8 billion now. Tishman put up only $112 million of equity. Lenders and investors get wiped out. Good. By the way, if underwater investors can walk away, there’s little reason underwater homeowners should feel a moral obligation to keep paying their own overpriced mortgages….

SEC mulled national security status for AIG details (Goldstein, Reuters) “U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security…”

Avatar to surpass Titanic as top box office draw of all time (Box Office Mojo) Inflation in the price of movie tickets plus the fact that many are paying $16 to watch Avatar in 3D, mean the comparison isn’t totally fair. But whatever. James Cameron has directed the two best grossing movies of all time. And Avatar is poised to go well over $2 billion…in less than two months!

BOJ open to extending loans, bond buying (Hidaka/Otsuma, Bloomberg) The Japanese central bank has engaged in various rounds of quantitative easing since the late ’90s I believe. Yet they’re still unable to keep deflation at bay. There are those that say this is proof that QE doesn’t necessarily lead to inflation. The bet being made by guys like David Einhorn is that eventually the debt load overwhelms the Japanese economy causing the yen to collapse. Indeed, the inflation that people fear here in the U.S. isn’t so much the old wage-push variety. Rather it’s a sudden loss of confidence in the dollar when it becomes clear the U.S. can’t pay its bills.

Bernanke confirmation looks set (Gelsi, Marketwatch) When Barbara Boxer and Russ Feingold pulled their support last Friday, it appeared Ben Bernanke might not get Senate confirmation for a second term. Now he look safe.

Fannie, Freddie should be eliminated, Frank says (Timiraos/Crittenden, WSJ) Unlikely this means Barney Frank will stop rolling the dice to subsidize housing with the public purse.

Leviathan stirs again (Economist) The return of big government the world over. This is not a good thing. Federal government is probably the least efficient allocator of resources in the economy. Not that we need smaller government overall, we just need smaller federal government. States and localities govern more efficiently. The federal government should be shrunk dramatically and the power/tax base of state and local gov’ts should expand.

Right-wing flame war (Dee, NYT) The story of Charles Johnson and his blog Little Green Footballs.

Newspapers are failing because their articles are too long (Kinsley, Atlantic) Shameless self-promotion: Reuters BreakingViews tells you what you need to know about financial news in 350 words or less!

2010: The year of the renter? (Toy, NYT) This story is NY specific. But I must say it’s good to live in the Hudson Yards area of Manhattan. Some of the best deals on apts in NYC at the moment as there’s way too much inventory around here….

Will NY soda tax drive some to drink? (CityRoom) This is a pretty stupid argument from soda bottlers who are opposed to new taxes on their product. Beer and soda aren’t exactly perfect substitutes…

Cat vs. Bear

Bank failure Friday

Jan 23, 2010 00:11 UTC

Two billion-plus failures tonight….

By the way….Adam from BearishNews reminds us that the FDIC opened a temporary midwest satellite office to help with asset sales and bank closings.

#5

  • Failed bank: Premier American Bank, Miami FL
  • Acquiring bank: Premier American Bank Natl Assoc., Miami FL
  • Vitals: as of 9/30/09, assets of $350.9 million, deposits of $326.3 million
  • Estimated DIF damage: $85 million

#6

  • Failed bank: Bank of Leeton, Leeton MO
  • Acquiring bank: Sunflower Bank Natl Assoc., Salina KS
  • Vitals: as of 12/31/09, assets of $20.1m, deposits of $20.4m
  • Estimated DIF damage: $8.1 million

#7

  • Failed bank: Charter Bank, Santa Fe NM
  • Acquiring bank: Charter Bank, Albuquerque NM
  • Vitals: as of 9/30/09, assets of $1.2 billion, deposits of $851.5m
  • Estimated DIF damage: $201.9 million

#8

  • Failed bank: Evergreen Bank, Seattle WA
  • Acquiring bank: Umpqua Bank, Roseburg OR
  • Vitals: as of 9/30/09, assets of $488.5m, deposits of $439.4m
  • Estimated DIF damage: $64.2m

#9

  • Failed bank: Columbia River Bank, The Dalles OR
  • Acquiring bank: Columbia State Bank, Tacoma WA
  • Vitals: as of 9/30/09, assets of $1.1 billion, deposits of $1.0 billion
  • Estimated DIF damage: $172.5 million
COMMENT

I guess Obama’s policy of reining in on banks is just on time. Time to have some controls to avoid anymore dangers of systemic failures.

Morning Links 1-22

Jan 22, 2010 15:19 UTC

Geithner has reservations on US banks (Wutkowski/Eder, Reuters) More evidence that Geithner is a goner. Will Volcker replace him? Sheila Bair could be a dark horse. She has lots of Democratic fans on the Hill despite being appointed by a Republican. In any case, Geithner was on PBS last night defending the plan.

A closer look at the Volcker rule (Felix) Capitol Hill may not be taking Obama’s rule very seriously. They think it was just a way to spin the news cycle away from the fact that healthcare will fail now that the Dems have lost their 60th vote in the Senate. Moreover, they don’t think Obama’s actually going to wage the fight against Wall Street that he claims he’s ready for.

Bernanke faces tougher vote in Senate (Reddy/Paletta, WSJ)

Fed secrecy claims bogus redacted AIG details already public (Adams, Naked Capitalism) More detail in a second post here.

FDIC and Bank of England to cooperate on resolution of troubled cross-border financials (FDIC) Next time a big financial blows itself up, Sheila Bair and Mervyn King want to make sure they’re prepared to deal with it in tandem.

NYC will move (a little bit) of its money (Traub, HuffPo) Bloomberg puts a little bit of support behind the Move Your Money campaign.

Chavez accuses U.S. of using weapon to cause Haiti quake (Moran, Digital Journal) “Venezuelan President Hugo Chavez has accused the United States of causing the devastating 7.0 magnitude earthquake in Haiti, which killed possibly 200,000 people. Chavez believes the U.S. was testing a tectonic weapon to produce eco-type devastations.”

National Enquirer eyes Pulitzer (Kurtz, WaPo) …for breaking the John Edwards affair/love child story. Incidentally, he admitted paternity in a press release yesterday. Where was he when the release went out? Haiti, helping earthquake victims. I’m not going to criticize anyone for going to help Haitians, but it’s not hard to see that Edwards isn’t doing this because he’s the charitable type….

Quote of the Day, from Behind the Numbers:

A trend we are noticing is that many companies are reporting their results and comparing them to last year, or the last two years, and claiming that they have returned to margin and revenue growth. However, when compared to two or three years ago (i.e. pre-meltdown), the companies are reporting lower margins and lower growth rates (revenue, stores, etc.). Yet, these companies have now returned to pre-meltdown valuations. In other words, the companies are trading at “historic” valuations, but with lower margins and much lower prospects for future revenue growth than was true when those historic valuations were set.

Smart Bottlenose Dolphins….

COMMENT

Dolphins – so smart. It’s easy to imagine that given a million years or so (if we weren’t around to mess things up for them) they might well advance to the point of, who knows, NOT having a fractional reserve banking system!

There, fixed it for ya!

Posted by fresno dan | Report as abusive

The Ascent of Volcker

Jan 21, 2010 20:30 UTC

So, wow, the Obama administration has reacted very quickly — perhaps too quickly — post the Massachusetts Senate election. After proposing a tax on bank liabilities, Obama is taking an even tougher line, adopting recommendations from Paul Volcker that banks be limited in their size and scope.

Before getting to specifics, it’s worth noting how Geithner and Summers appear to have lost favor. In the preamble to the proposal, Obama mentions neither of them. And when he announced the plan he did so with Volcker and Bill Donaldson standing behind him…Geithner and Summers were off to the side. Could the duo be headed for the exit?

But back to the proposals themselves. Unfortunately they are very vague:

1. Limit the Scope – The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

In his prepared remarks, Obama called this first proposal the “Volcker Rule,”

2. Limit the Size – The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

These are good ideas, but until we see the details it’s hard to offer unconditional support.

The idea behind the first proposal is that since government insures bank liabilities, it must control bank assets. Bank liabilities are insured explicitly via deposit insurance and implicitly, for the biggest banks, via a general too-big-to-fail guarantee. Deposit insurance is the only one of those two that is defensible and its purpose is to protect the integrity of the payments system. Currently banks use this insurance to obtain cheap funding that supports risky side businesses, like proprietary trading.

But how will prop trading be defined? Will banks actually have to split up? Will they merely have to tweak their corporate structure?

As for the proposal regarding bank size, it doesn’t appear that there will be much to it. Banks won’t have to get smaller or even stop growing. Instead the new rules will just prevent bigger banks from making (any?) acquisitions. They’ll be able to continue growing organically. This probably isn’t enough to reduce systemic risk, unless other reforms can successfully reduce risk-taking. (Personally I think we should break up the banks into baby banks the way we busted AT&T into baby bells….so that none is so large as to be impossible to resolve in a crisis.)

It looks a little clumsy, putting out a plan this short on detail. That said, it seems to mark a clean break with the ridiculous policy that somehow protecting the banks protects America.

The real test for Obama’s leadership, by the way, will probably come if a substantive plan like this passes. Forcing banks to make big changes to their balance sheets will surely crimp the economy in the short-run as it makes it more difficult for banks to extend credit.

That’s not a bad thing. Either we do it proactively in order to contain risk, or we let the system blow itself up again. The latter course will lead to more credit destruction of course. But asking people to voluntarily subject to economic pain will be tough. Hopefully Obama sticks to his guns.

COMMENT

The markets resposne is a good sign…it says that this is going to change the way banks make their profit.

The present system stinks. Investment banks getting bank status to get a credit line from the fed then hyper-leveraging their free money to make big bucks. Not a lot of skill to that!

Soros and Volcker are right. You need the right regulation that takes out the moral hazard. Investment banks should get their money from the Private sector and Commercial banks should get their money from the Fed(public). This way the Commercial Banks serve as a firewall between riskless funds and Investment bank speculation. And it forces IBs to speculate carefully because they have to invest a lot of capital and energy to convince investors in their magic. What could be wrong with that? This could be the first good policy from Obama.

As Winkler notes, the sacred cow theory of the financial markets is a lot of bull. A false belief. Because the financial system is not a free market, it is structured by government policy and regulation. That regulation needs to be changed. Adjust leverage margins to reasonable levels and pull the Fed’s capital subsidies from IBs.

This crisis was created by overleverage and the inversion of risk. So, put a cap on leverage and get the IBs back in the business of managing real risk. Simple, eh?

Posted by DrSavage | Report as abusive

Buffett lets public down…again

Jan 21, 2010 18:29 UTC

The public has always seen in Warren Buffett a different kind of capitalist, an honest observer providing sound financial advice regardless of his personal interests. But is he?

When it comes to his own holdings Buffett seems to use a carefully cultivated reputation for financial rectitude to feather his own nest.

On Wednesday he came out against Obama’s proposed bank tax, but his comments were inconsistent. On one hand he’s always maintained banks needed to be bailed out, yet he opposes ways to make them pay for it. At this point, financial giants in which Buffett has large stakes — Wells Fargo, Goldman Sachs and General Electric — all benefit from an implicit too-big-to-fail government insurance policy. How can Mr. Buffett, an insurance executive, argue that it’s inappropriate to charge them for it?

This is just the latest example of Buffett talking his book.

Buffett also lobbied for and profited greatly from the bailouts. He invested in Goldman, he said, with the expectation that Congress would “do the right thing” by passing the Troubled Asset Relief Program. In other words, it was a bet on a bailout.

Later he mocked the stress test, which forced over-leveraged banks to raise needed capital. This was bad for Buffett because it diluted his stakes in banks.

Less well-known is that Buffett was the first to propose a private-public partnership structure in order to rescue troubled banks. In a letter to Hank Paulson in the fall of ’08, cited in Andrew Ross Sorkin’s recent book, Buffett pitched his idea for a “public-private partnership fund” that would use public debt to finance private bets on toxic assets. When Tim Geithner rolled out a similar plan a few months later, it was widely panned as a giveaway to banks.

Buffett later complained about bailouts in his annual letter to Berkshire investors, saying that government subsidized funding put firms like Berkshire at a disadvantage. He failed to note that public subsidies — in particular FDIC’s Temporary Liquidity Guarantee Program — helped to keep afloat the eight banks in which Berkshire had a stake.  From the end of ’08 through July of ’09, 75 percent of the debt sold by these eight banks came with the explicit government guarantee offered by TLGP. Without it, many might have failed, wiping out Berkshire’s equity stake.

It takes chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Those who follow him closely are well aware that he talks his own book, but the wider public still believes him to be a trustworthy broker of unbiased financial advice and commentary. They shouldn’t.

Buffett didn’t respond to requests for comment.

COMMENT

Ignacio Couce: What could possibly be rational about “cheap money, corporate subsidies, tax breaks and incentives (read loopholes), and yes, bailouts for all”? These create short-run gains with untold long-run costs. What Buffett’s doing may be legal, but it is not rational. Unless, of course, you’d prefer to live in a USA that has an economy like Russia’s — which is what you’ll get if we stay on this path. Read your economics a little deeper and you’ll see that the rhetoric of the rational economic player is based on a straw man model designed for training school children not for making policy. Platitudes are for Marx — not Mises.

Posted by NYUphd | Report as abusive

New off-balance sheet rule: Little impact on Wells

Jan 21, 2010 00:21 UTC

The new accounting standard requiring banks to bring assets back on balance sheet had a negligible impact on Wells Fargo. Despite having over $2.0 trillion of off-balance sheet assets, Wells consolidated just $10 billion of risk-weighted assets when the new standard took effect January 1. (See slide 17 in the bank’s supplemental earnings release)

wells 166 better

The idea behind the new accounting standard is to bring hidden assets back into the light of day so that regulators can insure proper levels of capital are held against them. With Wells, this appears not to be happening.

Last summer, the bank estimated the new standard would raise risk-weighted assets by $46 billion.* In its last quarterly filing, it revised the estimate down to $25 billion.** When the standard finally went into effect, the figure was just $10 billion.

Total off balance sheet assets, meanwhile, were over $2.0 trillion at the end of September. (see page 31)

One reason for the giant difference is that “conforming” mortgages comprise a bit over half of Wells’ off balance sheet assets. These are eligible for a government guarantee via Fannie Mae, Freddie Mac, or Ginnie Mae, argues the bank, so it needn’t consolidate them since they pose no risk to its balance sheet.

Chris Whalen of Institutional Risk Analytics has argued this may be inappropriate. Some of these mortgages may be rejected by government guarantors — a more likely prospect it would seem with FHA beefing up standards. That could force Wells to take loan loss reserves against them.

A bigger question is the $900 billion worth of off-balance sheet assets that don’t qualify for a government guarantee. If indeed it’s fair for Wells to say it has so little exposure here, the bank should explain why to investors.

Ironically, the ultimate off balance sheet vehicles are the GSEs themselves: Fannie, Freddie and Ginnie Mae (which securitizes FHA loans). Though backed by taxpayers, the nearly $5.0 trillion worth of mortgages they guarantee aren’t included on Uncle Sam’s balance sheet.

With mortgage lending almost wholly dependent on GSE guarantees at this point, more of the nation’s housing stock disappears off-balance sheet every day…

——

*See page 13 of the Q2 10-Q.

**See page 14 of the Q3 10-Q.

COMMENT

I wonder how much for Bank of America, JPMorgan Chase, etc.. Sum-up everything-I think huge money will disappear.

Posted by Titus | Report as abusive

Afternoon Links 1-20

Jan 20, 2010 21:25 UTC

Must Read – Short sale fraud + follow-up (Olick, CNBC) Great sleuthing from Diana Olick. Sounds like outright fraud being committed by big banks. One follow up question: In many cases, the second-lien holder is also the first lien holder. How is that impacting short-sales?

Buffett opposes bank fee (CNBC) See 2/3rds down the page. Obfuscation worthy of a banker. This should come as no surprise as Buffett is Wells’ top shareholder. He previously opposed the bank stress tests because it diluted his shareholdings. Nevermind that the stress test forced the bank to raise desperately needed capital. It’s a shame, really. As his career winds down, he’s sacrificed his reputation as a financial straight-shooter to protect his wealth.

In other Buffett news: He’s opposed to Kraft’s bid for Cadbury (he’s a big Kraft shareholder) and he split his shares, something he never wanted to do. So not a great day for the Oracle.

FT as shameless Fed booster (NakedCapitalism) Yves takes down the FT piece that said the Fed has made a killing on its AIG holdings.

CRE prices up 1.0% in November, not expected to continue (CR) Moody’s released its data for CRE prices for November today. They showed a month over month uptick for the first time in a while. That said, this is not a super reliable index due to the few number of data points available. And Moody’s says to expect prices to head back down.

Scott Brown successfully capitalized on bank bailout blues (Bottari, CMD) Walker Todd sent a missive over this morning noting, too, that while the healthcare bill’s unpopularity certainly played a role in Brown’s surprise win, anger over Obama’s kowtowing to banks may have pushed him over the edge. Unfortunately, Republicans are equally captured by the bank/homeowner lobby.

Foreclosure efforts failing b/c don’t reduce principal (Nasiripour, HuffPo) Helpful confirmation of a fact that is well-known.

Obama/Dems reach deal on debt, pay-go, fiscal commission (Alarkon, The Hill) A good start, but doesn’t sound like the kind of fiscal commission we really want….i.e. something like the base-closing commission that made recommendations that Congress was forced to vote on without amending.

China asks some banks to limit lending on insufficient capital (Jun/Dingmin, Bloomberg)

NY governor adds soda tax, raises cigarette tax, sanctions cage fighting in proposed budget (Kramer, WCBS)

Multitasking (imgur)

ht CSQT….

fish

Rickards: You can’t print your way out of debt

Jan 20, 2010 15:07 UTC

Reader note: This is Jim’s second piece in an ongoing debate with Warren Mosler about the economy. Here are links to previous posts in the series: Writer biographies / Mosler #1 / Rickards #1 / Mosler #2.  There will be one more post from each writer.

by James Rickards

Before I lay siege to Warren Mosler’s remedies, let me say he’s a brilliant guy I’ve admired for 25 years going back to his days at AVM.  I got reacquainted in 2004 when I lived in St. Croix and Warren ran for Congress from the Virgin Islands.  His campaign ads were 5-minute infomercials; tutorials on economics and gems of sound fiscal advice.  But this is a debate, so let’s begin.

Warren makes eleven points and I agree with two – the elimination of payroll taxes and converting banks into utilities.  Payroll tax elimination spurs consumption and stimulates job creation. As for banks, we need them, we just don’t need casinos that call themselves banks.  Bring back Glass-Steagall, separate deposit and loan functions from proprietary trading and banish the latter to hedge funds.  Speculation should survive on its own dime.

I don’t need to take the rest point-by-point because they’re the same thing – an unlimited belief in the Fed’s power to print money.  Warren calls for a $500 per capita state rebate, a federal job for all takers, direct Treasury funding of housing, unlimited deposit insurance, no debt ceiling, Treasury overdrafts at the Fed and federal purchase of foreclosed homes. He doesn’t propose free ice cream for children but I don’t see why not; just print some money and go for it!

Warren’s program would work if the world had as much faith in the dollar as he does.  But it doesn’t, and neither do the American people. If we were all captives of a government dollar monopoly with no alternative, then maybe his plan would work for awhile.  But we do have alternatives in land, art, commodities and the oldest form of money – gold.  It’s no coincidence that when FDR debased the dollar in 1934 he simultaneously banned private ownership of gold.  He knew citizens would hoard gold when he trashed the dollar so he made that illegal.  One of Reagan’s lasting gifts to the American people was a law in 1985 which made U.S. mint gold coins available to average citizens.  Now when the Fed cranks up the printing presses, citizens have a choice.  Foreign central banks have the same choice in terms of gold bullion and commodities such as oil and copper which serve as stores of value and industrial inputs.

Here’s where complexity theory comes in.   Each citizen, company and central bank is an interdependent agent with a threshold for dollar rejection based on the thresholds of others.  Some will not flee the dollar unless many others go first.  But some have already bought gold and others are on a hair trigger.  What does the complete system look like? Are we in the critical state where a small shift brings the entire edifice crashing down – the tipping point? It’s impossible to say, but we’re certainly closer than ever.  Warren’s cavalier approach to printing money as the cure for all ills guarantees the greatest disease of all – destruction of the dollar.

James G. Rickards is a writer, lawyer and economist. Twitter.com/JamesGRickards.

COMMENT

[...] by Happypixel on January 20th, 2010 at 07:19pm Rickards: You can’t print your way out of debt | Analysis … I don’t need to take the rest point-by-point because they’re the same thing %26ndash; [...]

Is Conan O’Brien a $40 million bailout recipient?

Jan 20, 2010 00:22 UTC

Conan O’Brien is expected to receive some $40 million for leaving NBC, the media unit of General Electric, itself among the largest recipients of taxpayer help. While it would be a stretch to compare the late-night talk show host to a Goldman Sachs or Citigroup banker, he’s arguably only a few steps removed.

Though the conglomerate wasn’t a recipient of direct equity aid from the Troubled Asset Relief Program, GE availed itself of perhaps an equally important bailout facility, the Temporary Liquidity Guarantee Program overseen by the Federal Deposit Insurance Corp.

Participants in this scheme were able to issue debt with a government guarantee, receiving explicit taxpayer backing in the event of default. Though GE was just one of 88 firms with outstanding Uncle Sam backed debt as of October 31, its $60 billion of issuance accounted for nearly a fifth of the total.

Unlike some of the banks that received direct equity injections from the government, GE can argue it does not deserve the same scrutiny over compensation that has bedeviled financial companies including Citigroup, Goldman and American International Group.

But without the FDIC’s largess, the group’s troubled financial arm, GE Capital, would have struggled to fund its $650 billion balance sheet. That, in turn, could have forced its parent to liquidate assets, starting with NBC. In a truly worst-case scenario, GE might have even had to seek protection from its creditors.

Had GE been forced to dump NBC in a fire-sale, new owners could have demanded changes to contracts like Mr. O’Brien’s. True, that’s not the same as, say, a Citi banker fighting for a bonus after the government clearly bailed out the bank. But it’s only a few steps removed. So a bit of thanks to taxpayers from Mr. O’Brien may be in order.

Lunchtime Links 1-19

Jan 19, 2010 19:18 UTC

MUST READSouring mortgages, weak market put FHA on tightrope (Timiraos, WSJ) Good article, though Timiraos doesn’t address the absurd circularity perpetuated by FHA Chief David Stevens when Stevens says, on the one hand, that more gov’t lending protects the housing market from further declines, while simultaneously arguing that such lending isn’t sustainable. That said, Timiraos has worked lots of interesting stuff into this piece, especially towards the end. For instance, in late ’07 investors were refinancing at-risk borrowers into FHA loans in order to shift risk to taxpayers. Barney Frank defends permanently raising FHA maximum loans for certain geographies to $729k. Also lots of data about how badly FHA loans are performing.

Citi’s Q4 earnings: Not terrible but not great (Wilchins, Reuters) Trading revenues in the investment bank were much weaker compared to last quarter. Citi also benefited from a tax break, without which they wouldn’t have met consensus estimates for the quarter. Here’s a helpful chart.

(Click here to enlarge in new window)

tyt44h

How the French outplayed AIG and the Fed (Berman, WSJ…subscription req’d) Great column. Goldman gets all the bad press, but it was far from the only bank that got 100¢ on the dollar for derivative contracts with AIG…

Too big to fail is here to stay (Salmon, Reuters) Felix does a great takedown of Andrew Ross Sorkin’s latest column.

Record cash means S&P 500 at half 2007 valuation (Xydias/Nazareth, Bloomberg) A very interesting idea, though lots of bones to pick with the way this piece was written. In nearly 1,300 words the writers never manage to provide a solid definition of how they’re computing valuation. What is price to cash flow? Do they mean price to free cash flow? Do they mean price to EBITDA? There’s a line about cash flow being earnings plus depreciation and asset writedowns. That may be a very relevant metric. But it’s not one that investors know or understand and the authors fail to explain it.

The bidding war for failed banks (Mathews/Fisher, SNL) Interesting data on competitive bids for failed banks. (Until FDIC stopped releasing it)

In defense of a 4-day workweek (Hari, Independent)

Google at war in China, now postpones handset launches (BBC)

Another Swiss bank whistleblower (Browning, NYT)

AT&T/Verizon cut prices (Furchgott, Gadgetwise) The price cuts are just for some voice plans, not data plans. You can call the carriers and get the new lower prices without having to extend your contract…

COMMENT

No, Ron, they didn’t. It happens for balance sheet periods beginning on 1/1/10. So the Q1 release will be the first to include it.

Posted by Rolfe Winkler | Report as abusive

Mosler: The wrong standard

Jan 19, 2010 15:22 UTC

Reader Note: This is the second entry from Warren Mosler in a debate with Jim Rickards about how to fix the economy. More on the authors here. This is a response to Rickards first piece. Mosler’s first piece is here.

by Warren Mosler

Jim’s recommendations are “sound money, lower taxes, and light regulation.”

We do agree on lower taxes. My proposals include a full payroll tax holiday to support demand. And while Jim suggests a return to Glass-Steagall, my banking proposals are even more narrow and dramatically reduce the need for regulation.  I also support price stability.

We also agree that the Monetarist concept of “velocity” is flawed, but our reasons differ. Jim’s derive from the long-dead gold standard where velocity is a calculation of how many times the given amount of money (gold) is used to buy and sell goods and services. Today, however, monetary expansion has nothing to do with money supply like it used to under the gold standard. The reason banks aren’t lending isn’t because they don’t have money to lend. Lending is constrained only by bank capital and the creditworthiness of willing borrowers, not by gold or any other concept of bank reserves. That’s why quantitative easing – i.e. the Fed printing money to buy securities – has no effect on bank lending.

Interest rate cuts transfer income from savers to banks, reducing overall spending. So while interest on savings dropped from over 5% to near 0%, borrower’s rates fell little if any. The wide yield spread means banks’ profit margins widened.

New Keynesian thought is also flawed, because it too presumes gold standard constraints. Today government never actually has nor doesn’t have dollars, and spends, taxes, and borrows simply by changing numbers in bank accounts at the Fed.

When it comes to the dollar, the US government is the scorekeeper. Unlike the gold standard days, the government can’t run out of money. Nor is it dependent on China to fund spending.

Under the old gold standard, taxes and borrowing did fund spending. Today taxes function only to regulate aggregate demand and to control prices.  The federal deficit is merely the difference between the numbers changed upward when the government spends, and the numbers changed downward when it taxes. Taxes therefore function to regulate aggregate demand, not to raise revenue, per se. Tax cuts increase our spending power, tax hikes lower it.  This is indisputable operational fact, not theory or philosophy.

Jim’s general warning is that too much spending or monetary stimulus might lead us to cross a “critical threshold where diverse actors reject dollars in a cascading collapse.” But this only applies to fixed exchange rate regimes such as the gold standard, where a weak currency results in gold outflows.

Today the dollar is a non-convertible currency.  The exchange rate continually adjusts, always representing indifference levels with no gain or loss of gold reserves. I would note too that the U.S. is actively seeking to weaken the dollar vis-à-vis the Chinese yuan. Would Jim want the reverse?

Jim’s arguments are as good as gold.  However, we are not on a gold standard, so they don’t apply. Today’s monetary arrangements call for my solutions to restore output, employment, and price stability.

COMMENT

I agree with Andrew’s comments regarding near zero interest rates not being as beneficial to banks balances sheets as popular federal monetary theory would have you believe. If the banks can offer ‘normal’ interest rates it increases the strength of their balance sheet as deposits initially increase and grow faster over time. A stronger US Dollar would also happen as foreign money would flow into treasuries and CDs. Finally, the baby boomer generation deserves the right to higher interest rates as they move toward retirement ie into less risky investments. Lets face it this age group has the highest net worth right now so higher interest rates would result in some serious stimulus via the trickle down effect.

Lunchtime Links MLK Day

Jan 18, 2010 19:59 UTC

McKinsey report on de-leveraging — pdf (McKinsey, ht Paul M) Lots of interesting charts. Conclusion is that debt reduction in the developed world has only begun. The Economist has a good summary too.

Why talking to yourself may be the highest form of intelligence (Just Seven Things) Smart post. I would add a related point, that the most effective study method is actually teaching. Students that must teach study partners a bit of material will engage it at a deeper level as they anticipate questions.

Wall St. weighs constitutional challenge to new tax (Dash, NYT)

New York Times ready to charge readers (Daily Intel) Felix has some thoughts on this, though he fails to defend his view that it’s “not smart business” to “cut users off from the website just for the sake of dealing with a nasty cashflow problem.” Explaining this particular point in detail would be helpful as “nasty cash flow problems” tend to, you know, put companies out of business. Still, Felix acknowledges that NYT needs to charge something in order to support content generation.

Bundles of cable (Surowiecki, New Yorker) Á la carte cable probably wouldn’t lead to lower bills for consumers. Instead, the channels that folks really watch –ESPN, e.g. — would end up taking a bigger piece of the pie.

Cruise ship docks at private Haiti beach for BBQ, water sports (BoingBoing)

Chavez nationalizes retailer (Crowe, DJN) The Venezuelan economy continues to rot from the inside out.

Elevated CO2 in school traced to students’ breath (WMUR) Apollo 13 anyone?

Why NBC breached Conan’s contract (Sklar, Mediaite)

Really fast roller coaster….(fast forward to 0:35)

COMMENT

Fast Forward the video to 53, not 35 ! :)
==RED

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Does Volcker give the Fed too much credit?

Jan 18, 2010 16:50 UTC

Paul Volcker’s speech to the Economic Club of NY last week (pdf) was generally reported as the latest example of the former Fed Chairman calling for more substantive financial system reform. He did repeat those points, but the focus of his speech was about the importance of the Fed maintaining its regulatory and supervisory authority over the banking system. At a certain point, this seems the stuff of absurdist theater. If the Fed never intends to use its regulatory authority, why insist the authority be maintained?

The problem with his speech is that while he acknowledges the Fed is badly staffed — mostly with economists/mathematicians, few from business/banking — he doesn’t address the clear failure on the part of the FOMC to 1) grapple with bubbles nor 2) to get serious about sensible reforms. He bemoans “reform light,” but that is precisely what the Fed is delivering.

Volcker wants tougher rules for derivatives trading, yet Pat Parkinson — the man Bernanke appointed as the Fed’s top bank regulator — has long favored a hands-off approach to derivatives. Volcker argues proprietary trading and other risky activities should be spun-off from commercial banks. It makes no sense for such risky activities to be backstopped by the financial system safety net — deposit insurance and last resort lending from the Fed. Yet Bernanke has done nothing to indicate he’ll separate the two.

Volcker is correct that the Fed should play a vital role in regulating the banking system. But this assumes the guys in charge actually use their regulatory power. Bernanke hasn’t done so. Instead he adopted his predecessor’s deregulatory zeal and penchant for bailing out the system.

Continuing the pattern of the last 25 years, the next financial market emergency is likely to be more disruptive than the last. The Fed has already lost so much credibility that when the next one hits, it’s not hard to envision it being neutered.

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