By Simon Johnson
Vikram Pandit heads Citigroup, one of the world’s largest and most powerful banks. Writing in the Financial Times Thursday morning, with regard to the higher capital standards proposed by the Basel III process, he claims
“There is a point beyond which more is not necessarily better. Hiking capital and liquidity requirements further could have significant negative impact on the banking system, on consumers and on the economy.”
Mr. Pandit is completely wrong. To understand this, look at the letter published in the Financial Times earlier this week by finance experts from top universities – the kind of people who trained Mr. Pandit and his generation of bank executives.
The professors write,
“Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15%, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any.”
The point is that “bank capital” just reflects the choice between debt and equity – to “have more capital” simply means to rely more on equity relative to finance. From the professors again, and remembering that these people also have a great deal of practical experience,
“High leverage encourages excessive risk taking and any guarantees exacerbate this problem. If banks use significantly more equity funding, there will be less risk taking at the expense of creditors or governments.”
“Bankers warn that increased equity requirements would restrict lending and impede growth. These warnings are misplaced. First, it is easier for better-capitalized banks, with fewer prior debt commitments hanging over them, to raise funds for new loans. Second, removing biases created by the current risk-weighting system that favor marketable securities would increase banks’ incentives to fund traditional loans. Third, the recent subprime-mortgage experience shows that some lending can be bad for welfare and growth. Lending decisions would be improved by higher and more appropriate equity requirements.”
Mr. Pandit is a smart individual and he knows all this – he has a Ph.D. in finance from Columbia University. Why then does he advance such obviously specious arguments in the pages of the Financial Times?
The answer is straightforward.
a) He can get away with it. Modern financial CEOs float in a cloud above the public discourse; they can spout nonsense without fear of being contradicted directly in the pages of a leading newspaper.
b) Officials listen to bank CEOs and an op ed gets their attention. Perhaps they think Mr. Pandit knows what he is talking about – or perhaps they know that these arguments are completely specious. In any case, they are deferential.
c) Mr. Pandit is communicating with other CEOs and, in this fashion, encouraging them to take recalcitrant positions. There is an important element of collusion in their attempts to capture the minds of regulators, politicians, and readers of the financial press.
Mr. Pandit is engaged in lobbying, pure and simple. Ask the people who invented modern finance theory and figured out how it should be applied (second to last paragraph),
“Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks’ shareholders and managers, with taxpayers picking up losses and economies suffering the fallout.”
The Baseline Scenario 
Yes, he’s completely wrong. And I agree with using the words of his own corrupt trainers against him, as long as we remember that corporate academia is a criminal organization as well.
But what’s most wrong of all is to think there can be any “compromise” with these criminals. Implicit in all this nitpicking over the details of bankster propaganda and wrangling over Basel is the long disproven notion that these rackets can be “reformed”.
But they cannot be. They are purely predatory, purely parasitic, and absolutely worthless and destructive. They have to be eradicated completely.
In a sense, the mode of argument is a kind of “trickle-down” in itself. One doesn’t start from first principles; formulate demand one: Smash the Rackets; and proceed aggressively from there.
Rather, one lets the banksters themselves and the status quo itself set the parameters for “debate” (including the implicit assumption that the banks should exist and deserve to exist at all), and then sets out to rationally prove them wrong on the details they allow to be part of the discussion at all.
Of course, one can and does “win the debate” on points, every time, but meanwhile the criminal walks free every time and continues to rob and destroy. Doesn’t that prove by now that winning the bankster-defined debate among an audience of wonks doesn’t accomplish anything?
Russ,
Start a fire with tinder; tend to it carefully and get a good hot foundation; then throw on the big stuff.
I think the better analogy for Vikram’s FT argument would have something to do with privatized bank profits, socialized bank losses and a pervert with nothing but a long overcoat, and a reporter with a small notepad standing nearby asking him if there’s anything he wants to communicate to the city.
You should have titled this post “Revenge of the clerks,” Simon.
Politico has a similar post:
HIGHER CAPITAL RULES HURTING ECONOMY? – That’s what Goldman Sachs analysts led by Richard Ramsden suggest in a report that could catch some regulatory and political eyes: “US banks are holding more capital in response to the tighter capital and balance sheet rules regulators have already put in place, and perhaps in anticipation of even greater capital requirements yet to come. Higher capital levels have raised the cost of making loans, which has … raised the costs faced by many bank customers and slowed loan growth.” Full report: http://politi.co/dcGjl8
The banks have assembled their greek chorus to guide us thru the implications of the dire consequences of Basel III, and to intone gloom and misery if they are forced to change their MO.
It is undoubtedly true the cost of lending is increasing as the banks’ leverage ratios are declining. There is no way these firms can legitimately earn 20+ roe or even 15% roe if their leverage is reduced. At their core, these banks and the people who run them perform a clerk’s function: funds come in to them for safekeeping on which the provider of the funds receives a small return; the bankers lend the funds out to people who actually make stuff, or provide real services, and, in return, the bankers charge the borrower a cost reflective of the risk of the loan (i.e., interest rate). The bankers are required to maintain detailed records on both sides of the transaction, and report on their own safety and soundness to their regulators, so they do incur a cost, which typically is covered by taking a sliver of the money wedge between the bid for and offer on investors’ funds.
Pandit and his co-evals are part of the greek chorus that is the modern-day banking sector. The GS “research” is the script from which they read. They intone increased regulation, greater oversight and reduced leverage will bring doom and destruction to the world. Behind them, the smoldering wreckage of the destruction they’ve already visited upon the world, from which their their mournful intoning is meant to divert attention. (If you’re having trouble imagining this particular chorus, imagine instead the funny masks and cloaks being replaced by a row of perfectly turned out clones at, say, the Buttonwood Gathering ( http://buttonwood.economist.com/ ), all wearing an appropriately grey Savile Row suit, a beautiful Neapolitan french-cuff dress shirt set off perfectly be a purple, yellor or royal blue Hermes tie, and a pair of Ferragamo alligator lace-ups and you’ve got the picture perfectly.)
What Pandit and GS, et al, are really saying is we’ve spent the last 30 years figuring out more and more subtle ways of increasing the clerks’ share of banking transactions with less and less of our own money at risk, and we’ve guaranteed all the people who buy our equity that we’ll be able to delivered 20+ percent roe from now till the end of time. If we are not allowed to continue to do this, we will stop performing the clerk’s function. So there.
This is all about protecting the gargantuan income the bankers dole out to themselves and their top clerks, and the great wealth they’ve managed to accumulate in the form of equity in their firms. If, one day, everyone wakes up to the fact that the clerks have lost their ability to dictate terms — which the GS analysis alludes to vis-a-vis increased issuance in the bond markets — the great wealth Pandit et al have amassed will shrink dramatically. If the actual return to the clerks becomes more in line with their actual utility to society they are all screwed.
They have been extraordinarly successful in keeping their own cost of funds at something slightly above zero, and yet still manage to find reasons why they cannot perform the clerk’s function on 300+ bp of risk-free profit borrowing from the Fed and lending back to the U.S. government at 3 percent. They don’t even have to look for stuff to do. If they get really creative, they can use this firehose of money to buy tankers, refineries, power plants, more MBS and just roll the dice to see what happens. It really doesn’t matter, since Uncle Sam’s bankrolling all of it with no risk of failure to any of these guys. And still they can bring out the greek chorus. Amazing.
As we come to the close of this year, and prepare for the $144 BILLION in bonuses that’ll be handed out this year to the clerks and their subalterns — a resplendent example of just how successful the clerks have been — one wonders why they continue to intone the end is near. Perhaps they see in Basel III and the recalcitrant regulators around the world that the future does indeed look grim. Maybe not Christmas-Carol grim, but grim nonetheless. Grim in the sense observed by Billy Ray Valentine in Trading Places:
… the clerk ” ‘ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain’t gonna f… my wife ain’t gonna make love to me if I got no money!’ So they’re panicking right now, they’re screaming ‘SELL! SELL!’ to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.”
This is another ‘primal scam’from the part of the I.I.F
, which understandably has something to celebrate.
Pandit’s arguments are the same ‘meme’that sprouted up
during the road to Basel III, debunked by the B.I.S
economists themselves ( on their website http://www.bis.orh )
Shame on the Financial Times for opening its pages to
the words of “financial terrorists”
Why not make it tax advantageous to hold more capital.
For example, republicans tend to not like taxes.
Both sides are worried about disadvantaging US banks against international competitors.
Both sides are concerned about future crises.
Both sides agree that higher capital ratios at least help.
A lot of Democrats want to force banks to hold more capital.
Why not compromise? Reduce taxes on capital that banks hold over a certain threshold. This will encourage them to hold more and won’t disadvantage them against their competitors. It might not require as much policing either.
I’m not arguing that lower taxes on capital in this manner would be fair – but what it might be is effective and it might be possible to get consensus around it.
Moreover, if banks don’t take it up it will quickly become clear how much they value and how much they are availing of their explicit and implicit guarantees.
You complain that republicans who don’t support reform of the financial sector are not serious about deficit reduction and they are really pushing a low tax agenda rather than a low deficit one I agree. However, the cloth cuts both ways.Reducing taxes on bank equity above a threshold would surely help achieve higher capital ratios. It ought to be considered. However, I think that as many of the critics of the financial system are left leaning they either ignore or do not consider what appears to be a very simple solution to the problem. If that is so, then it could be said that they are not serious about financial sector reform. They too are pushing an agenda.
It really depends what the meaning of ‘is’ is.
Mr. Pandit writes that these measures “could have significant negative impact on the banking system, on consumers and on the economy.”
What he actually means is “could have significant negative impact on my compensation.”
When the leader of a failed financial institution says that he is worried about his partners in crime, or concerned about the people who are his marks or distressed about the availability of assets to rob, you just have to understand that this is code for anxiety about his own share of the swag. And he is right to be anxious.
More capital means that to keep dividends, you (Pandit) have to reduce bonuses. That is the reason Mr. Pandit opposes highe4 capital requirements.
The rest of his reasoning is nosense.
If it is correct that Pandit’s Op-Ed is self-serving BS and everyone including Pandit knows it, then the Financial Times reduces itself to the level of Fox “News”, or the Drudge Report. No reputable publication would willingly print something that can easily be disproven.
How Pandit can get away with telling the world what will impede growth after what he and the rest of the oligarchs have done to the world economy is disturbing. These guys have no business telling anyone anything. They have no credibility.
FT would print someone’s strong rebuttal if they were honest about it.
Just another data point …
http://www.businessweek.com/magazine/content/10_47/b4204010295206.htm
Harvard University economist Benjamin M. Friedman asks the right question—”Is our financial system serving us well?”—in an essay in the fall 2010 issue of Daedalus, the journal of the American Academy of Arts and Sciences. Friedman points out that from the 1950s through the 1980s, profits earned by financial firms excluding insurance and real estate accounted for 10 percent of total U.S. profits. Finance’s share of profits grew to 22 percent in the 1990s and to an astonishing 34 percent from 2001 to 2005. Fantastically high salaries and bonuses attracted more than a quarter of Harvard’s graduating job seekers to investment banks, hedge funds, private equity firms, and the like. That, Friedman notes, was “just before the surge in borrowing, securitization, and derivatives finance began to transform itself into a world-class crisis.”
“There is a point beyond which more is not necessarily better”. Clearly Pandit is not referring to his income…Pardon me, I meant to say loot.
Pandit must have learned his trade back in the junk bond craze of the 1980’s. Back then, corporate raiders argued that their goal was to improve efficiency. In reality, their goal was to strip companies of their assets. Any cash (i.e., capital) sitting in the vaults was the first thing to go. No wonder that Pandit doesn’t want to hold capital.
Is it a fact that no bankster senior exec from Wall Street has been charged with a civil or criminal charge and summoned to court ? Why not ?
Awesome comment, and great link.
Yes, but we still have so many who want to tend the fire by throwing water on it.
Ah well, maybe it has to be done. If most people still need more of a demonstration of the futility of “reform”, then I suppose they must have it.
Modern finance is a criminal enterprise, owned and controlled by predatorclass individuals and oligarchs. The markets are criminally manipulated, the accounting fraudulent and deceptive, the regulatory apparatus purchased, the political system owned and controlled by the very same criminal predatorclass individuals, the socalled mastersoftheuniverse, commandeering the finance oligarchs. They are criminals, “a den of vipers and thieves” – and they are actively pursuing policies and implementing mechanics that damage and injure America’s poor and middleclass.
Riddle me this finance and economics experts. If these evil bastards, the predatorclass “den of vipers and thieves” on wallstreet do not, and will not abide by our existing laws, the spirit of the rule of law, and any conscience or moral compass, – why should I???
In a world where there are no laws, – there are no laws for anyone predatorclass biiiiiaaaatches!
Both Vikram Pandit and Simon Johnson stand naked.
Because neither of them understand that much worse than an erroneously set basic level of capital requirements for the banks, is the way these capital requirements differ and discriminate based on risk… like for instance forcing banks to have FIVE TIMES as much capital when lending to small businesses or entrepreneurs than when lending to triple-A rated clients.
By doing so the regulators increase dramatically the return on equity for what has a triple-A rating, as they allow banks to leverage their capital 62.5 to 1 compared to the 12.5 to 1 they are allowed to leverage when lending to “riskier” small businesses or entrepreneurs…
and by the way, Vikram Pandit’s function is to work for a bank and therefore maximize that bank’s return, while Simon Johnson’s function in the IMF was to speak out against regulatory madness… and there he said not a single word about these concoctions of the Basel Committee. (And in fact still does not!)
I think there’s a problem with executive and
trader total compensation. These are based
on performance in the past year or so. From
the start of a bubble till it bursts and later
losses get recognized, several years may pass.
It’s been suggested that compensation aligned
to long-term performance would make bankers
think twice before betting the Bank on
new-fangled “innovations”.
As an antidote to Mr. Pandit’s opinion piece,
I can think of Mervyn King’s Second
Bagehot Lecture given in New York. The
text is available from the Bank of England
website.
Simon:
I took your suggestion and read the letter. I received my MBA from a top school over 25 years ago when the rational market was taught almost as a religion.
I recognize all of the universities. Most particularly though, I recognize two of the “founding fathers” of modern financial theory: Eugene Fama and William Sharpe.
Never when I was going to school did I imagine a situation in which these two (and the others who are probably younger, maybe even much younger) would choose to sign a document so critical of modern financial institutions.
@ECON:
KEEP ASKING. Pass it on!
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=5860
TRNN COVERS CAPITAL CONTROLS & “HOT” MONEY / INFORMATIVE & CONCISE
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=5860
Professor Johnson was on Bloomberg TV recently, and he was highly critical of Basel. It’s not easy to go on a very pro-business venue and attack international banking laws as being weak. I think it shows a lot of courage and good character for Professor Johnson to do this. Professor JOhnson is one of the few academics getting out there and fighting for the small bank depositor and the individual taxpayers of this country.
http://www.bloomberg.com/video/64451118/
Although you have some valid points about those ratios and the way risk is measured, I think your criticism is way too harsh and unfair to Professor Johnson. I think you could find more suitable targets on this issue. Say for example, banking industry groups influencing the Basel process or corrupt politicians in Europe. Christine Lagarde, a French bureaucrat who has been kissing bondholders’ rear and coddling bondholders, would be a much more suitable target for your frustration.
http://www.bloomberg.com/news/2010-11-10/france-joins-germany-ganging-up-on-bondholders-to-share-pain-euro-credit.html
Kurowski, if your complaint is that the capital requirements are not high enough for banks (which is the real issue here) then no one is more on your side than Professor Johnson. It gets back to if banks are not properly capitalized, you’re funding investments with debt. Funding the majority of a nation’s investment projects with debt is not a healthy process.
Simon, regarding Vikram Pandit or (substitute Loyd Blankfein, Jamie Dimon, or ….), you are so right about the three things which allow him to speak as he does in respected media:
“a) He can get away with it. Modern financial CEOs float in a cloud above the public discourse; they can spout nonsense without fear of being contradicted directly in the pages of a leading newspaper.”
Of course, not only can he get away with it, but they are absolutely thrilled to have him muddying the waters, because they have bought into the modern concept that everyone has an opinion, and every opinion counts. But more so because the media is part of the oligarchic estate, where the haves simply give other haves whatever space they want to say whatever haves have to say. This is why the haves, have, and the have-nots don’t.
“b) Officials listen to bank CEOs and an op ed gets their attention. Perhaps they think Mr. Pandit knows what he is talking about – or perhaps they know that these arguments are completely specious. In any case, they are deferential.”
Officials don’t actually listen (as in with their ears), but rather heed (as in with their wallets). And what the officials want is RATIONALE. And, what the generic “haves” CEO gives them is just that. A talking point propounded by an “expert” that they can use for their policy making “rationale” to satisfy those “haves” who pay to keep them listening.
“c) Mr. Pandit is communicating with other CEOs and, in this fashion, encouraging them to take recalcitrant positions. There is an important element of collusion in their attempts to capture the minds of regulators, politicians, and readers of the financial press.”
I would actually disagree that the “collusion” as you call it, is concious. Rather the collusive activities of these oligarchic behemoths is simply a part of their plutocratic paradigm. I don’t think they communicate with each other to foist disinformation upon us, they just follow the time honored practices of disinformation and misinformation to claim credibility simply by position. As in the logic of “If I am a Master of the Universe, I have to be right (right = infallible) because it is my divine position which creates the absolute rectitude of me, my arguments, logic, statements, etc.”
I don’t believe that this is any kind of conspiracy in the normal sense. Oh, they are conspiratorial, but only by ethic, not by agreement. This is doing what comes naturally. There is so much distance between the world that they inhabit and the real world of the average person, they might as well be from somewhere else in the galaxy. They have absolutely no concept of appropriate human behavior. And, they are the worst of the dopamine addicts.
From the author’s note in the David Baldacci novel The Whole Truth,
“The term ‘perception management’ has entered the public lexicon. The Department of Defense even defines perception management in one of it’s manuals…
Many public relations firms now offer perception management, or’PM’ as one of their services….
PMs are not spin doctors because they don’t spin facts. They create facts and then sell them to the world as truth…
And that to quote the venerable Mark Twain…is the difference between the lightning bug and lightning.”
Ted K
I have been all over criticizing the regulations from the Basel Committee publicly, under my own name, since 1997. The reason why I especially mention Simon Johnson here is that this is a post written by Simon on a blog run by Simon Johnson, if you had not noticed it.
And you write “Kurowski, if your complaint is that the capital requirements are not high enough for banks (which is the real issue here)”
Well NO! just as Simon Johnson you do not want or even care to understand. Though of course not irrelevant, the real issue is NOT whether the core capital requirements are high or low enough, the real issue is the regressive, arbitrary and hugely discriminatory risk-weight by which the Basel Committee transforms basic capital requirements into real capital requirements and which create huge distortions and odiously discriminate against those perceived as riskier and who are already naturally discriminated against by the market by means of the higher risk-premiums they already have to pay.
On October 8 I publicly asked Dominique Strauss-Kahn the Managing Director of the IMF the following: “Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”
And Dominique Strauss-Kahn answered in no uncertain terms that “capital requirement discrimination has no reason to be”… which is no minor thing because he knows well that the only regulatory tool the Basel Committee actually possesses is the capital requirements weighted for risk. (By the way this is all on a video on the IMF website)
But read back Baseline over more than a year and you will find that Simon Johnson does not even touch upon that problem… much less dares to comment my hundreds of observations made on his blog by a former executive director of the World Bank.
And so do not tell me “Professor Johnson is one of the few academics getting out there and fighting for the small bank depositor and the individual taxpayers of this country”. He is not fighting for anything; he is solely fighting against the big banks… which of course makes him so likable to many.
Actually, the opposite is happening on a micro scale among the “class” of people who are left struggling to survive without any $$$ because that “class” has real skills for life maintenance – we’re talking about bankrupt civil engineers left holding the bag for casino builders and on across the spectrum to research scientists and doctors, agriculturists and genius craftsmen/women, etc…the MIDDLE CLASS was educated and COMPETANT, fer cryin’ out loud! It wasn’t the BANSKTERS who built a self-sustaining civilization. Can we all get a reality check about the CLASS war?
The penniless “middle class” is dealing fairly and ethically with each other – we’re not so stupid as to embrace the Nihilism of the banksters!
A “real” economy is on the way….REAL “LAW” is based on sanity. And not the comic’s version of sanity – Jon Stewart shot a “virtual” spit ball over to land on that “mother’s” head who early on was gaining “power” as a leader of the protest against the Iraq War – dig out the clip – Stewart dismissed her because she was ONLY a “mother”…
“Nietzsche characterized nihilism as emptying the world and especially human existence of meaning, purpose, comprehensible truth, or essential value.”
Money was always supposed to be just a convenient SYMBOL of the transactions of life-maintenance (a current, if you will) that goes along with the belief that human life has meaning, purpose and therefore it generates (another current) comprehensible truth and essential value – a “currency”.
Turning on the hose to suck it all out and up to a secret few chosen ones is NIHILISM.
I like all the new info on wiki about NIHILISM :-)
I remember that a similarly prestigious group of economists advised FDR not to sign Smoot-Hawley. I think the politico-financial complex is perfectly capable of ignoring this letter as well.
Also, I recall some time ago, maybe it was during the S&L crisis, that someone (sorry, I forget who) proposed a rule that large banks be required to sell subordinated debt of certain amounts to institutional investors. The idea was that it represented an additional cushion in the event of problems and institutional investors and the market would be much more demanding in their credit reviews of the banks and the market would give earlier warnings of problems than might otherwise be available. I thought it was rather a good idea at the time, but haven’t heard it since.
I’ve lost faith in financial engineering.
I studied pure math, probability and
statistics included.
From Mark Whitehouse, WSJ staff reported,
9/12/2005:
“To figure out the likelihood of defaults in a bond pool, the model uses
information about the way investors are treating each bond — how risky
they’re perceiving its issuer to be. The market’s assessment of the
default likelihood for each company, for each of the next 10 years, is
encapsulated in what’s called a credit curve.”
Let’s think about it: What does the market
know about the _real_ risk ? In the case
of housing, the Market thought that prices
would go up, and their risk perception was
skewed by this. These skewed CDS spreads
were the input to Gaussian copula models
on pools of several mortgage backed securities,
and determined the ratings of tranched-up
SIV issuings with names like Vetra, Zela, Sedna, Beta, Centauri, Dorada and Five.
This idea that “Market knows risk best” sould
be “exorcised” and repudiated. Until
then, I’ve lost the faith in
financial engineering.
Pandit isn’t arguing to use capital for new loans. In his specific case the argument is selfish. He wants to return capital to shareholders in the form of share buybacks and dividend hikes. Who could blame him or any bank executive? Their stocks have taken a beating and their shareholders have suffered enough.
Mike writes “This idea that “Market knows risk best” should be “exorcised” and repudiated. Until then, I’ve lost the faith in financial engineering:
Mike, which market are you talking about? That market of financial regulators who with Basel II (and III too) authorized banks to leverage to 62.5 to 1 if they invested or lent to anything that had a triple-A rating attached, like the securities collateralized with lousily awarded mortgages to the subprime sector; or to sovereigns like Greece rated A+ to A, then I totally agree… let us never trust that market again.
But, if you are talking about that unregulated market which rarely allows a hedge-fund to leverage more than 12 to 1, and that does not produce losses for the taxpayers… then I do not share completely in your loss of faith…. By the way one of the real principles of a truly working market is “caveat emptor” never trust and beware.
Right! I do not think we want bankers who do not serve their shareholders… the problem is precisely that frequently they have not served their shareholders, they have served themselves.
Re: @ Anonymous___This is without the funniest take on our sorry economy I’ve ever witnessed…Bravo!!! Keep em comin…
When I say that I’ve lost faith in financial engineering,
I need to qualify this. It’s more true for complex
securities such as mortgage-backed securities.
For hedge funds, I don’t know what there is to go
on, in terms of analysis.
Felix Salmon wrote an article for Wired Magazine:
“Recipe for Disaster: The Formula That Killed Wall Street” 02/23/2009
Felix Salmon:
“When the price of a credit default swap goes up, that indicates that default risk has risen. Li’s breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market.”
also
Felix Salmon:
“Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).”
I would argue that the price of credit default swaps in the CDS markets
for deriving default risk is a poor substitute for due diligence
and lots of study of the fundamentals of the housing market.
“I would argue that the price of credit default swaps in the CDS markets for deriving default risk is a poor substitute for due diligence and lots of study of the fundamentals of the housing market.”
Absolutely, as is relying on somne few credit rating agencies, as the regulators did.
About 10 months ago, Simon Johnson wrote on
this Blog a piece entitled:
“Paul Volcker Prevails”,
https://baselinescenario.com/2010/01/20/paul-volcker-prevails/
In the end, it sure seems little has changed.
More truth in this than is readily apparent. The inflation Ben wants, of course, is wage inflation, but the inflation he is creating will probably lower real wages.
I think that’s what we’re going to get. I’m pretty sure unemployment will still be around 9% in 2012, which means Obama is almost certainly toast. Whatever lunatic the Republicans foist on us, following the Republican ideology, such as it is, will lead to complete meltdown of the economy, producing a situation that will make the Great Depression into the Good Old Days. We didn’t suffer enough pain this time because some of the safety devices from the New Deal were still working, which allowed the banksters to persuade a lot of people that the unemployed somehow deserve it. The unemployed are still too small a portion of the total popultion. I’m sure the Republicans will fix that.
The only real doubt I have is which way thigs will go from there. I fear we may end up, twenty-five years from now with an appointed Senate (repeal 17th amendment), an ineffectual House populated by multi-millionaires who buy their elections, and a President, now known as the First Citizen, who rules by decree because (a) he can, and (b) the legislature is totally gridlocked and cannot pass even a budget resolution.
Pandit is saying this because lower capital requirements means more profit for banks, which means more compensation for him (and his shareholders, as ook notes above). And if things go wrong and Citi doesn’t have enough capital to absorb losses? The government will provide a bailout, and even if Pandit loses his job in the bailout (unlikely), he will already have banked his compensation.