Archive for December 2009
Jamie Dimon Has Another Good Year
In May, Jamie Dimon, the head of JP Morgan Chase, told his shareholders that the bank just had probably “our finest year ever.” Despite being close to the epicenter of the worst financial crisis since the Great Depression, Dimon’s bank was able to make a great deal of money, obtain government support when needed, and reduce that support level quickly when the overall situation stabilized – thus freeing the bank of constraints on its pay packages (and other activities).
It looks like the full year 2009 may turn out even better than Mr. Dimon expected in May. Speaking at the Goldman Sachs US Financial Services Conference on Tuesday (December 8), Jamie Dimon presented JP Morgan Chase’s third quarter results (year-to-date). His slides are informative, but if you want to pick up the nuances in his message, listen to the audio webcast (you have to register, but it’s free; here are back-up/alternative links). Read the rest of this entry »
The Funniest 750 Words of the Financial Crisis
Hat tips to Uncle Billy and Felix Salmon:
“A FORMER INVESTMENT BANKER ANALYST FALLS BACK ON PLAN B.
“1. Explain why you want to attend law school.
“I want to attend law school because I want to make a difference in the world. My desire to attend law school has nothing to do with the fact that I was recently fired from my job as an analyst at an investment bank, where I worked in the mergers and acquisitions group. Since January, I’ve worked on approximately one merger, zero acquisitions, have played Spider Solitaire 434 times and updated my Facebook status, on average, five times a day. …”
(Unfortunately, I suspect it’s about nine months too late — I imagine most analysts at Goldman and Morgan Stanley are quite happy there these days, thank you.)
By James Kwak
How To Kill OTC Derivatives Reform in Two Sentences
The post below, which looks like it could be extremely important, is by Mike Konczal, author of the popular (for those in the know) Rortybomb blog, a previous guest blogger on this site, and now a fellow at the Roosevelt Institute – James
Have lobbyists snuck another major loophole into the OTC Derivatives bill? This week the final touches are being put on Barney Frank’s financial regulation bill – H.R. 4173 – “Wall Street Reform and Consumer Protection Act of 2009.” One of the centerpieces of this reform is Title III: Over-the-Counter Derivatives Markets Act. And one of the goals of this reform would be to get as many derivatives as possible to trade on exchanges.
An initial hurdle for Barney Frank was what to do with an “end-user exemption.” This would exempt certain types of derivative buyers who use derivatives, say corporations hedging interest rate risk without speculating, from the extra scrutiny and regulation that comes with the exchange/clearing system. One of the narratives of financial reform so far has been that this initial end-user exemption was too large a loophole at first, and instead of just handling 10-20% of the market, it would let a large majority of the market sneak through, but ultimately Barney Frank was convinced by consumer groups and people pushing for stronger financial regulation and fixed this issue. See Noah Scheiber here in “Could Wall Street Actually Lose in Congress?” for this story, and it shows up as well in a recent profile of Barney Frank in Newsweek.
Gerry Corrigan’s Case For Large Integrated Financial Groups
Increasingly, leading bankers repeat versions of the argument made recently by E. Gerald Corrigan in his Dolan Lecture at Fairfield University. Corrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points.
- “Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided. The economy needs these Groups.
- Breaking up such Groups would be extremely complex and almost certainly very disruptive.
- An “Enhanced Resolution Authority” can mitigate the problems that are likely to occur in the future, when one or more Group fails.
These assertions are all completely wrong. Read the rest of this entry »
The Importance of Capital Requirements
Arnold Kling of EconLog has done the hard work of setting out his theory of the financial crisis and what we should learn from it in a fifty-page but highly readable paper available here. I have some quibbles but think it is worth a read.
Here are the causes of the crisis in one table:
Revolution and Reform
Many of us bloggers are better at criticizing than at proposing anything — especially when the world makes it so easy to be a critic. The Epicurean Dealmaker, who has sent the occasional volley of criticism my way (I’m not linking to examples because my ego is too fragile), recently decided to deal with this head-on and wrote a “reformist manifesto,” complete with an epigraph from The Communist Manifesto, with a list of specific proposals.
Basically these include cleaning up the regulatory structure, expanding the scope of regulation (consumer protection, hedge funds), moving “virtually all” OTC derivatives onto exchanges or clearinghouses (I believe that “virtually all” means the currently-proposed exemption for “end-user” hedges would be drastically reduced), and increasing Fed transparency. There is also this one: “Ban political campaign contributions by the financial industry.” I think that would be great, although there is at least one constitutional problem and possibly two there.
There’s nothing on the list that I disagree with.
Measuring The Fiscal Costs Of Not Fixing The Financial System
This post is a slightly edited version of remarks prepared for delivery at Unwinding Public Interventions in the Financial Sector: Preconditions and Practical Considerations, IMF High-Level Conference, Thursday, December 3, 2009, Washington D.C. I participated in Session 2: Managing Fiscal Risks—Public Finance Aspects of Unwinding.
The Problem
1) The underlying fiscal problems of the U.S. have significantly worsened as a direct result of how the financial crisis of 2008-09 was handled.
2) The U.S. economic system has evolved relatively efficient ways of handling the insolvency of nonfinancial firms and small or medium-sized financial institutions. A large number of these institutions have failed so far this year, without causing major disruption to the economy.
3) The U.S. does not yet have a similarly effective way to deal with the insolvency of large financial institutions. The dire implications of this gap in our system have become much clearer since fall 2008 and there is no immediate prospect that the underlying problems will be addressed by the regulatory reform proposals currently on the table. In fact, our underlying banking system problems are likely to become much worse. Read the rest of this entry »
Why Did Bank of America Pay Back the Money?
Everybody knows by now that Bank of America is buying back the $45 billion of preferred stock that the government currently owns. While the reason why they are doing this is obvious, I’m going to pretend it isn’t for a few paragraphs.
Buying back stock costs money — real cash money. Why would a company ever do such a thing? The textbook answer is that a company should do it if it doesn’t have investment opportunities that yield more than its cost of capital. The cash in its bank account, in some sense, belongs to its shareholders, who expect a certain return. If the bank can’t earn that return with the cash, it should return it to the shareholders. In this case, though, the interest rate on the preferred shares is only 5%, which is far lower than usual cost of equity. In fact, Bank of America just issued $19 billion of new stock in order to help buy back the government’s preferred stock. The cost of that new equity (in corporate finance terms) is certainly higher than 5%. In other words, Bank of America just threw money away.
Buffett and Geithner
Andrew Ross Sorkin’s Too Big to Fail sure is a page-turner; even for events that I already knew about in general, it’s full of new details and juicy quotations.
For example, on page 508 it lays out the details of Warren Buffett’s October 2008 proposal for a “Public-Private Partnership Fund,” which would eventually become the PPIP announced by Tim Geithner in March 2009. I knew that Buffett, Bill Gross, and Lloyd Blankfein had supported the idea, but I didn’t know the details. Buffett’s idea was slightly different from the eventual PPIP.
Some Questions For Mr. Bernanke
On Thursday, Ben Bernanke will appear before the Senate Banking Committee, to begin his reconfirmation process as chairman of the Federal Reserve Board.
Based on committee members’ public statements, Bernanke already appears to have enough votes on his side. But Thursday’s hearing and the subsequent floor debate are an important opportunity for senators to raise important issues about how the Fed will operate moving forward.
This is more than a ritual. Questioning (the monetary) authority and politely insisting on a coherent answer is an important part of our political governance structure – and something that was sorely lacking during the Greenspan era.
There are three possible lines of enquiry that could draw Mr. Bernanke out. These questions could be separate or part of a sequence: Read the rest of this entry »
Iron Cage for Nothing
When I gave away many of my old books a year ago, I kept my college copy of Max Weber’s The Protestant Ethic and the Spirit of Capitalism. Now Tyler Cowen cites a paper by Davide Cantoni demonstrating that Protestantism had nothing to do with economic development. (Cantoni also co-authored a paper with Simon and others on the impact of the French Revolution — via the Napoleonic conquests — on economic development.) He uses the “natural experiment” created by the division of the Holy Roman Empire (very roughly, modern-day Germany and Austria) into Protestant and Catholic states.
Never a Good Sign
The board of GM asked Fritz Henderson to resign as CEO. I don’t have an opinion on Fritz Henderson. But here’s the worrying bit, from the New York Times article:
“’Fritz was just not enough of a change agent,’ [a person with direct knowledge of the board's deliberations] said. ‘The board wants a world-class C.E.O. and now they have enough breathing room to find one.’”
Having tried and rejected the inside option (Henderson was a longtime GM executive chosen to replace Rick Wagoner, who was forced out earlier this year), the board is certain to go looking for a superstar CEO from outside the company and probably outside the industry. The phrase “world-class CEO” is always a dead giveaway for delusion.
Feudal Lords Of Finance
In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular. After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.
This argument is deeply flawed along three dimensions.
- Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell). Read the rest of this entry »
