Month: March 2009

A Quick Note on Bank Liabilities

I want to pick up on a theme Simon discussed in his last two posts: the recent panic over bank debt, particularly subordinated bank debt. I’ll probably repeat some of what he said, but with a little more background.

Remember back to last September. What was the lesson of Lehman Brothers? The most important asset a bank has is confidence. If people are confident in a bank, it can continue to do business; if not, it can’t.

For the last six months, where has that confidence been coming from? Not from the banks’ balance sheets, certainly. And not, I would argue, from the dribs and drabs of capital and targeted asset guarantees provided by Treasury and the Fed. It has been coming from a widespread assumption that the U.S. government will not let the creditors of large banks lose money, out of fear of repeating the Lehman debacle.

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Whatever Did The CDS Market Mean By That?

The credit default swap market is a modern Delphic Oracle.  It speaks loudly and profoundly – these days at regular intervals – albeit using somewhat arcane terminology.  And after major statements such as yesterday (or perhaps this week in general), it’s worth pausing to reflect on, and argue about, what it really means.

Thursday’s statement, to me, was about US banks (graph).

The risk of default for US banks, according to this market, is rising back towards levels not seen since mid-October.  That is striking enough – but remember what has changed since then: (1) the G7 promised not to let any more systemic banks fail, (2) Treasury has provided repeated recapitalization funds on generous terms, and (3) the Fed offers massive, nontransparent funding to anyone in distress.  How can it be that the credit market still or again feels the risk of default rising so sharply and to such high levels? Continue reading “Whatever Did The CDS Market Mean By That?” →

We Cannot Afford To Wait To Recapitalise US Banks (Letter To The FT)

(The following is now available in the on-line edition of the Financial Times; link to original Martin Wolf article added here)

Sir, Martin Wolf’s excellent article on the pros and cons of nationalisation suggested, quoting Nouriel Roubini, that we could wait six months to determine how solvent US banks are before making decisions (“To nationalise or not to nationalise is the question“, March 4). This is possible but surely risky. Continue reading “We Cannot Afford To Wait To Recapitalise US Banks (Letter To The FT)” →

Confusion, Tunneling, And Looting

Emerging market crises are marked by an increase in tunneling – i.e., borderline legal/illegal smuggling of value out of businesses.  As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt.  Confusion helps the powerful, he argued.  When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms.  The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States. Continue reading “Confusion, Tunneling, And Looting” →

The Biggest Story of the Week

Or the year. Frightening.

I’ve been wondering why the impact of the financial crisis on the overall retirement “system” hasn’t gotten more attention in the media. We already knew the system was in bad shape before September 2008. According to the Fed’s Survey of Consumer Finances, in 2007, only 60.9% of households where the head of household was age 55-64 had retirement accounts . . . and their median retirement balance was $98,000. Given that the stock market has fallen by over 50% from its October 2007 peak – and that, for decades, the standard investment advice has been that stocks do better than any other asset class in the long term – we would be lucky if that median balance were more than $70,000 today.

The Bloomberg article linked to above describes the fragile state of state and local pension systems. These systems suffer from two major problems today. One is that even if they had been managed in a reasonable way, the fall in asset prices over the last year would have blown a huge hole in their long-term solvency.

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Did Goldman Sachs Just Win Big?

On p.A4 of today’s WSJ, Deborah Solomon and Jon Hilsenrath report more detail on the Treasury’s “Bad Bank” funding plan.  On first (and third) read I’m not impressed, but we’ll go through all the available details and report back later.

For now, I just have one question.  Isn’t this essentially the same plan that Goldman Sachs has been shopping around for the past month or so?  There’s nothing necessarily wrong with that, of course.  But it would be a huge win for Goldman and Lloyd Blankfein – explaining, for example, the confidence displayed in his recent FT article. 

And, whatever the reality of lobbying, pressure, and idea exchange here, the optics (as they say in the message spinning business) don’t look great.

The Line: Not My Fault (Gordon Brown On NPR’s Morning Edition Today)

In an extraordinary interview just now on NPR’s morning edition (at the top of the hour; to be rebroadcast in 2 hours, just after 9am Eastern; audio recoding should be available at around that time also), Steve Inskeep pushed Gordon Brown hard.

My favorite part is when Steve asked the Prime Minister whether, during his stewardship of the British economy over the past 10 years, he had worried about “too much debt” being taken on by consumers and firms and excessively risky lending.  Brown’s response, “our corporates did not borrow too much.”  Not answering on the other dimensions of the runaway lending boom says it all – Britain had an unassisted, unsustainable property and financial sector bubble.  Continue reading “The Line: Not My Fault (Gordon Brown On NPR’s Morning Edition Today)” →

What Should President Obama And Prime Minister Brown Discuss?

I’d like to imagine that President Obama and Prime Minister Brown will this week discuss how the global economy is worsening, and why all official forecasts need to be revised down substantially, again – with immediate implications for stress tests in the US and realistic bank recapitalization in the UK. 

But this is a stretch.  On the US side, too much public effort over the past week has gone into repainting a rosy baseline – e.g., in Chairman Bernanke’s testimony last Tuesday and the budget documents unveiled on Thursday.  No leader can back away so quickly – even in private – from this kind of thinking, no matter how much they now begin to worry about the latest haphazard rounds with Citi/AIG or the worsening of financial markets around the world.  Both Obama and Brown are unfortunately stuck, for the time being, with Wait And See approaches.

So, over on Forbes.com, Peter Boone and I suggest some more plausible topics for their conversation.  Naturally, I would start with the eurozone…

AIG in Review

Well, it’s done. AIG is getting another bailout.

I have to admit I don’t fully understand the ongoing AIG bailout saga, so I thought I would do a little research to try to figure out what is going on. I thought I would just look up all the term sheets, but I found it’s harder to get that kind of information from the Federal Reserve web site than from the Treasury web site. For example, the original September 16 press release doesn’t say what the terms of the 79.9% equity interest are, and I still haven’t been able to figure that out. If you know the details, let me know and I’ll update this post. In any case, I think this is the best single-page overview you’ll find on the web.

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