Author Archives: James Kwak

Larry Summers and Finance

By James Kwak

I think some people didn’t understand the point I was making about the question of whether the government made money on TARP in my earlier post. Summers said, “The government got back substantially more money than it invested.” This is true, at least if you give him some slack on the word “substantially.” The money repaid, including interest on preferred stock and sales of common stock, exceeded the money invested.

My point begins with the observation that, as of late last year, the government had earned an annual return of less than 0.5%. My point itself is that it is silly to evaluate an investment by whether or not it has a positive return in nominal terms. You can only meaningfully evaluate an investment by comparing it to some benchmark. Saying that a nominal return of 0.5% is greater than 0% is meaningless, since the 0% benchmark is meaningless. Most obviously, it doesn’t account for inflation; since inflation has been about 1–2%, the government lost money in real terms.

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Larry Summers Should Keep His Mouth Shut

By James Kwak

Larry Summers is well on his way to rehabilitating his public image as a brilliant intellectual, moving on from his checkered record as president of Harvard University and as President Obama’s chief economic adviser during the first years of the administration. Unfortunately, he can’t resist taking on his critics—and he can’t do it without letting his debating instincts take over.

I was reading his review of House of Debt by Mian and Sufi. Everything seemed reasonable until I got to this passage justifying the steps taken to bail out the financial system:

“The government got back substantially more money than it invested. All of the senior executives who created these big messes were out of their jobs within a year. And stockholders lost 90 per cent or more of their investments in all the institutions that required special treatment by the government.”

I have no doubt that every word in this passage is true in some meaninglessly narrow sense or other. But on the whole it is simply false.

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Worse Than We Even Imagined

By James Kwak

I’m giving a talk at the UConn Law School reunions tomorrow, and one of my closing points is about the plethora of banking crimes/scandals/whoopsies that we’ve seen in the past few years—even those having nothing to do with the financial crisis. This is the slide I created to illustrate the point:

Screen Shot 2014-06-06 at 3.01.01 PM

 

I know I’m forgetting a few, but I figured that was enough. It does really take your breath away.

My Daughter’s Wish

By James Kwak

Today my daughter’s combined first and second grade class wrote down their individual wishes for the world. The wishes are part of a wish tree. Here they are:

I wish people could always be happy.
I wish the world was more fair.
I wish for a world of peace and a world of kindness.
I wish everyone would care about each other and never fight.
I wish everybody could have have food.
I wish they would tax the rich and help the poor.
I wish, I wish, I wish there were more trees, I still wish that, so remember.
I wish there was no poaching and there was friendship for all animals and people.
I wish the land was fair and everyone had a friend.
I wish I could have money to donate to orphans and the world would have no guns and people could be in peace.
I wish that big arguments didn’t turn into wars and people didn’t get hurt.
I wish everybody will have shelter.
I wish everybody will not get sick.
I wish there were no guns.
I wish everybody would have food and water.
I wish everybody had time to finish their coffee every morning.
I wish that I had a million dollars so that I could help people who needed help.
I wish everyone could never die and never get sick.
I wish that everyone was kind to old mother nature.

I think I know which one was my daughter’s (although it could also have been the one about coffee).

Czars, Kings, and Presidents

By James Kwak

Over the years, Tim Geithner has come in for a lot of well-deserved criticism: for putting banks before homeowners, for lobbying for Citigroup when it wanted to buy Wachovia, for denying even the possibility of taking over failed banks, and so on. The release of his book, whatever it’s called, has revived these various debates. Geithner is certainly not the man I would want making crucial decisions for our country. But it’s also important to remember that he was only an upper manager. The man who called the shots was his boss: Barack Obama.

That’s the theme of Jesse Eisinger’s column this week. I’m on Eisinger’s email list, and he described the tendency to focus on Tim Geithner—while ignoring the role of the president—as “If only the Tsar knew what the Cossacks are doing!” I wasn’t familiar with the Russian version, but I’ve always been fond of the seventeenth-century French version. In September 2009, for example, Simon and I wrote this about the financial reform debate: 

“During the reign of Louis XIV, when the common people complained of some oppressive government policy, they would say, ‘If only the king knew . . . .’ Occasionally people will make similar statements about Barack Obama, blaming the policies they don’t like on his lieutenants.

“But Barack Obama, like Louis XIV before him, knows exactly what is going on.”

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Why Regulation Goes Astray

By James Kwak

The Harvard Law Review recently published a multi-book review by Adam Levitin, the go-to guy for congressional testimony on toxic mortgages, illegal foreclosures, and homeowner relief (or, rather, the failure of the administration to provide any). It’s a tough genre: Levitin had to write something coherent about six very different books by Bernanke, Bair, Barofsky, Blinder, Connaughton, and Admati and Hellwig, whose sole point of commonality is that they all had something to do with the financial crisis. I don’t agree with all the aspects of his discussions of each individual book, but I think Levitin did a good job using the books as a starting point for a discussion of the incentives problem in financial regulation: the problem that regulators have stronger incentives to favor the industry than to defend the public interest.

HLR asked me to write an online “response,” which in some ways is an even less appetizing prospect—writing something interesting about something someone else (whom I generally agree with) wrote about six other things by different people. On the other hand, they only wanted 2,000 words, so I said yes.

My response focuses on a separate reason that regulation can be captured by industry: ideology. This is something that Levitin does discuss in the body of his article, but I think is not directly addressed by his proposed solutions. If you want to read more, you can download it from SSRN or read it at the HLR site.

Is Credit Suisse Really in Jail?

By James Kwak

Credit Suisse’s guilty plea to a charge of tax fraud seems to be a major step forward for a Justice Department that was satisfied both before and after the financial crisis with toothless deferred prosecution agreements and large-sounding fines that were easily absorbed as a cost of doing business. A criminal conviction certainly sounds good, and I agree that it’s better than not a criminal conviction. But what does it mean at the end of the day?

Most obviously, no one will go to jail because of the conviction (although several Credit Suisse individuals are separately being investigated or prosecuted). And for Credit Suisse, business will go on as usual, minus some tax fraud—that’s what the CEO said. A criminal conviction can be devastating to an individual. But when public officials go out of their way to ensure that a conviction has as little impact as possible on a corporation, it’s not clear how this is better than a deferred prosecution agreement.

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