Month: September 2009

Bank of America $4 Billion, Taxpayers $425 Million

I’m trying to figure out if I should be infuriated about the agreement allowing Bank of America to walk away from the asset guarantees it got as part of its January bailout in exchange for a payment of $425 million. I can piece together part of the story from The New York Times, Bloomberg, and NPR, but the complete story is a bit hazy.

The initial deal was that Treasury, the FDIC, and the Fed would guarantee losses on a $118 billion portfolio of assets; B of A would absorb the first $10 billion and 10% of any further losses, so the government’s maximum exposure would be about $97 billion. Part of that guarantee was a non-recourse loan commitment from the Fed, basically meaning that the Fed would loan money to B of A, take the assets as collateral, and agree to keep the assets in lieu of being paid back at B of A’s option. In exchange, the government would get:

(a) An annual fee of 20 basis points on the Fed’s loan commitment, even when undrawn (if B of A drew down the loan, which it didn’t, it would pay a real interest rate). The loan commitment could be interpreted to be only $97 billion, so this comes to $194 million per year.

(b) $4 billion of preferred stock with an 8% dividend. That’s a dividend of $320 million per year; B of A can buy back the preferred stock by paying $4 billion.

(c) Warrants on $400 million of B of A stock. B of A was at $7.18 the day the bailout was announced and yesterday it closed at $17.61, so if Treasury had gotten an exercise price of $7.18, those warrants would be worth about $580 million now.

Continue reading “Bank of America $4 Billion, Taxpayers $425 Million” →

The Good Part of the Baucus Bill

I’ve been generally critical of the Baucus Bill, primarily because of the reduced subsidies, which I see as an increased tax on the currently uninsured middle class. But luckily Ezra Klein has been providing detailed coverage of what’s good about it – notably, the proposed reforms to the health care delivery system. See his interview with Peter Orszag and his post about Chris Jennings and most of his other posts from yesterday. On my reading, the Baucus Bill will kick off a number of initiatives that will test different ways of reducing costs or improving quality, such as ways of linking payments to outcomes.

I think this is promising because, as I’ve said before, even though we have a general idea of what the problem is – economic incentives that are cut loose from outcomes – we’re not sure how to solve it. As a result, any master plan to reduce costs without sacrificing quality is easy to attack, and given the political dynamics people will be eager to attack it. The answer is that, in the medium term, we have to figure out what does work, and the way to do that is to try lots of different things. This is exactly what a smart business would do, so it’s good to see the government doing it.

By James Kwak

G20 Thinking: “In The Medium Run We Are All Retired”

It looks like the G20 on Friday will emphasize its new “framework” for curing macroeconomic imbalances, rather than any substantive measures to regulate banks, derivatives, or any other primary cause of the 2008-2009 financial crisis.

This is appealing to the G20 leaders because their call to “rebalance” global growth will involve no immediate action and no changes in policy – other than in the “medium run” (watch for this phrase in the communiqué).

When exactly is the medium run? Continue reading “G20 Thinking: “In The Medium Run We Are All Retired”” →

Health Care Reform and Fairness

Over at the Washington Post this week, it’s back to health care reform, and our topic is fairness. Specifically, somebody has to pay if we’re going to have near-universal coverage. Do you think it should be the people who benefit immediately (the uninsured middle class*) or do you think the payment mechanism should have nothing to do with the beneficiaries (like Medicare and, to an extent, Social Security)? I think this comes down to two concepts of what government programs are for. If the former, you probably want low (or zero) subsidies; if the latter, you probably want to tax the rich, tax gasoline, auction off emission permits, or something like that.

* This is a simplification, I know. But basically, the very poor have Medicaid and will still have Medicaid after reform; most of the insured middle class have employer-based coverage or Medicare, and that isn’t going anywhere in the short term. In the long term, as we’ve argued elsewhere, everyone benefits (except the super-rich) because of increased health care security.

By James Kwak

Financial Regulation, a Slightly Optimistic View

The big news on the regulatory front last week was the Wall Street Journal’s revelation that the Federal Reserve will give its regulators the ability to reject any pay package for any bank employee that encourages excessive risk-taking. The Fed is apparently claiming this authority on the grounds that as a safety-and-soundness regulator, it has the right to prohibit any bank practices that threaten the safety and soundness of the bank. Sounds good to me.

Now, there are certainly reasons to be skeptical, which Yves Smith abundantly outlines. This could be a ploy to gain some populist credentials and head off more Congressional oversight of the Fed. The Fed has been willing to trust banks to tell it what their risks are, so it is not equipped to identify compensation packages that create excessive risk. TheFed will be looking (according to the WSJ) for outliers among the group of the top 25 banks – so as long as all 25 banks are engaged in the same silly compensation practice, the Fed will let it go.

Continue reading “Financial Regulation, a Slightly Optimistic View” →

Financial Regulation, the Pessimistic View

Satyajit Das, who knows more about derivatives than I know about anything, has a guest post on naked capitalism about derivatives regulation. The quick summary? Don’t bet on it.

“‘Holy water’, ‘hosanna’s’ or other utterances (based on particular religious convictions) will be sprinkled or said in the form of initiatives to improve disclosure, increase capital and a new centralised counterparty (‘CCP’) to reduce the risk of a major dealer failing. Fundamental issues – the use for derivative for speculation, mis-selling of instruments to less sophisticated market participants, complexity, valuation problems – will not be substantively addressed.”

Continue reading “Financial Regulation, the Pessimistic View” →

The Fed, Regulation, And The Next Recession

This op ed appeared in the New York Times yesterday (9/20/2009).

SPEAKING at the Brookings Institution last week, the chairman of the Federal Reserve, Ben Bernanke, remarked that the recession in the United States is “very likely over.” He’s surely right that a recovery is under way; in fact, the short-term bounce back may actually turn out to be faster than he thinks — rapid growth is not uncommon right after a severe financial crisis.

Mr. Bernanke commands great respect because of his impressive efforts to head off financial collapse, but his speech was deeply worrisome on the bigger questions: what caused the financial crisis, and how can we prevent another such calamity? Continue reading “The Fed, Regulation, And The Next Recession” →

You Cannot Be Serious: US Strategy for the G20

According to the WSJ this morning (top of p.A1), the US is pushing hard for the G20 to adopt and implement a “Framework for Sustainable and Balanced Growth,” which would amount to the US saving more, China saving less, and Europe “making structural changes to boost business investment” (and presumably some homework for Japan and the oil exporters, although that is not stressed in the article).

This is pointless rhetoric, for three reasons. Continue reading “You Cannot Be Serious: US Strategy for the G20” →

Protect Consumers, Raise Capital, And Jam The Revolving Wall St-Washington Door

Ben Bernanke has a great opportunity to lead the reform of our financial system.  His standing in Washington and on Wall Street is at an all-time high, as a result of his bailout/rescue efforts.  He is about to be reappointed with acclaim for a second term as chairman of the Federal Reserve’s Board of Governors.  And he has a lot to answer for.

Look, for example, at his speech of May 17, 2007, which discusses some of the problems in the subprime market and contains the memorable line: “Importantly, we see no serious broader spillover to banks or thift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits” (full speech; marks in the margin are from an anonymous and careful correspondent.) Continue reading “Protect Consumers, Raise Capital, And Jam The Revolving Wall St-Washington Door” →

Regulatory Arbitrage 2.0

Gillian Tett has the latest perspective on a curious deal that Barclays did earlier this week (hat tip Brad DeLong). The deal goes something like this. Two former Barclays execs are starting a fund called Protium Finance. Protium has two equity investors who are putting in $450 million. Barclays is lending Protium $12.6 billion. Protium is using the cash to buy $12.3 billion in what we used to call toxic assets from Barclays. Protium’s 45 staff members get a management fee of $40 million per year (presumably from the equity investors, although that seems steep). Returns from the investments will be paid as follows, in this order (and this is important): (1) fund management fees; (2) a guaranteed 7% return to investors; (3) repayment of the Barclays loan; and (4) residual cash flows to the investors.

Barclays emphasized that it was not participating in regulatory arbitrage, because it is keeping the toxic assets on its balance sheet for regulatory purposes. That is, because it has a lot of exposure to those assets through its huge loan, it will continue to hold capital against those assets. So far so good.

Continue reading “Regulatory Arbitrage 2.0” →

Good for You, Barney

With the waves of criticism that come out of this website, I wanted to acknowledge someone for doing the right thing. Bloomberg reports that Barney Frank, chair of the House Financial Services Committee, barred Michael Paese, a former committee staff member and now Goldman Sachs lobbyist, from lobbying anyone on the Democratic side of the committee until the end of 2010. Paese was already barred from lobbying his old committee for one year after he left the staff in September 2008, so Frank is effectively extending the ban for another year and a bit.

The government-lobbyist revolving door has been around for a long time, and a one-year prohibition is just not long enough; it shifts the incentives too far to the side of using government service as a way to build friendly contacts in industry. Conceptually, I think the ban should be longer and pay for government employees should go up, in order to push the incentives the other way. But I’m not holding my breath.

By James Kwak

Why Didn’t The Major Bank CEOs Show Up On Monday?

Speaking on Wall Street at noon Monday, President Obama laid blame for the crisis and recession of 2008-09 squarely at the feet of the financial sector.  The diagnosis was sound but the rest of his speech was disappointing – the administration’s draft regulatory reforms look lame, banks are fully mobilized against the only proposal with any teeth (a consumer protection agency for financial products), and the President’s call to “please don’t do it again” surely fell on deaf ears.

In fact, were any of the most relevant ears even listening?  The real news from Monday was not the substance of the speech or the stony silence of the financial elite in the audience, but rather that not a single chief executive officer (CEO) of a major bank was in attendance. Continue reading “Why Didn’t The Major Bank CEOs Show Up On Monday?” →

Voodoo Cost Savings

If you really want to know about Max Baucus’s bill, head on over to Ezra Klein’s blog, which is all Baucus, all day. If you want to complain about fake cost-saving measures, stay here.

A major selling point of the Baucus bill (can’t really call it the Group of Six bill with zero Republican support; can’t call it the Democratic bill with questionable Democratic support), at least in the media, is its lower cost – $860 billion according to Baucus, $770 billion according to the CBO. This compares to the $1 trillion cost of the House bill. But this is a meaningless number, for two reasons.

Continue reading “Voodoo Cost Savings” →

The CFPA and Small Banks

To be clear, I favor the Consumer Financial Protection Agency. I favor it because I think it will be good for consumers. I also like to think that it will be good for small banks relative to big banks. My main argument for this is that should not harm the main competitive advantages of smaller banks, which should be customer service and local underwriting. But I’m still in favor of the CFPA even if it doesn’t help small banks.

John Pottow (hat tip Mike Konczal) agrees on the small bank point. His main argument is that the CFPA should lower fixed regulatory costs by making it easier to get approval for basic products. He also adds this point:

“The current credit market, with its indecipherable multi-page contracts, is not competitive. Actually, that’s not true: It’s perniciously competitive — the competition focuses on better hiding fees in small print. Burying terms in legal documents is an activity where larger banks again hold the advantage. By contrast, a true plain vanilla market would remove the obfuscation and refocus the competition on price. Once more, smaller lenders would benefit from this increased transparency and leveled playing field.”

Continue reading “The CFPA and Small Banks” →

No, Wait! This Is What I Really Want!

I try not to comment on purely political issues, but sometimes they are just too infuriating.

Over the last few days, Max Baucus has been leaking “his” health care proposal, which should be made public. Regular readers will know I’m no fan of Max Baucus, whose main goals seem to be killing the public option (I know, it’s not as big deal as it’s made out to be, but it isn’t irrelevant) and cutting subsidies to poor people. But supposedly, the whole point of the Baucus/Group of Six approach was that it would result in a bipartisan bill that could clear the Senate. The tradeoff was very simple; a plan that isn’t as good as it could be, but one that could pass.

Yesterday, The New York Times reported two of the three Republicans in the Group of Six, Charles Grassley and Michael Enzi, are against the Baucus proposal, and even Olympia Snowe wants changes.

Continue reading “No, Wait! This Is What I Really Want!” →