Month: March 2010

A Few Words on Lehman

I have a trip coming up at the end of this week, and in the meantime I have two articles to write, and a section of a legal thingy, and I’m sick, and my daughter’s sick, so I won’t be able to do justice to the Lehman report issued by the bankruptcy examiner on Thursday. So here are just some moderately quick thoughts.

The report is great reading (I’ve read some sections of it). You can get the whole thing here, in nine separate PDF files. If you want to get an overview of the report, Volume I has a comprehensive table of contents. Note that the TOC is thirty-eight pages long. Like many legal documents, some of the section heads are written as sentences, so you can sort of “read” the TOC. In particular, you can see from the TOC which parties might be the subject of legal causes of action. (Note that the “Volume” numbers have nothing to do with the logical organization of the report; they only reflect how it was chopped into nine PDFs.)
Continue reading “A Few Words on Lehman” →

Are Health Insurers Worth Bashing?

This guest post was contributed by Andrzej Kuhl, a colleague of mine from a former life. Andrzej is a management consultant based in Montclair, New Jersey. His company, Kuhl Solutions, helps improve the efficiency and effectiveness of operations in financial sector companies.

I am getting thoroughly frustrated with a facet of the health care debate – the singular focus on health insurers, with total disregard of other contributors to health care costs. Yes, I am in total agreement with the concept of providing health insurance to folks who currently cannot afford it, or who do not have access at any cost (because of pre-existing conditions). I also believe that the rate of increase of health spending needs to be significantly reduced. But, I do not believe that we can achieve any meaningful health spending reduction just by bashing or financially squeezing the health insurance companies.

Continue reading “Are Health Insurers Worth Bashing?” →

Does Meaningful Financial Reform Have Any Chance?

By Simon Johnson

Senator Dodd’s financial reform bill will be introduced in the Senate Banking Committee today. Unfortunately, on the major issue – too big to fail financial institutions that caused the 2008-09 crisis and that will likely trigger the next meltdown – there is nothing meaningful in the proposed legislation.

The lobbyists did their job a long time ago. Treasury sent up a weak set of proposals – Secretary Geithner apparently felt that to do otherwise would be just to seek “punishment” for past wrongdoings; there is too little concern at the top levels of this administration regarding what comes next. And Senator Dodd was pushed hard by various interests to weaken all potentially sensible proposals – including anything that would bring greater transparency and safety to the derivatives market. The Republicans have also demonstrated their mastery of delaying tactics; by emphasizing “procedural” issues, they have so far managed to conceal their fundamental opposition to real reform.

A few strong voices have emerged on the Democratic side – Senator Jeff Merkley (on the committee) stands out as someone who both understands the issues and can craft the right message. Let’s hope he has a good week – if he can bring Senator Sherrod Brown with him, there is a chance that the legislation could move in the right direction. With all 10 Republicans on the 23 member committee steadfastly opposed to anything at all, any two Democratic senators have some negotiating power – as they can potentially hold up a bill.

And there is something pro-reform forces can reasonably work for at this stage. Continue reading “Does Meaningful Financial Reform Have Any Chance?” →

Are Regulators Trying to Make Bank of America Smaller?

By James Kwak

Last week, Charlie Gasparino reported at Fox Business that “Executives at Bank of America are coming under increasing pressure to downsize the firm as federal regulators seek to prevent large, cumbersome financial institutions from once again tanking the financial system as they did in the fall of 2008.” Later, he writes, “people close to the bank and government officials say government regulators have made it clear to BofA executives, including its new CEO, Brian Moynihan, that they want the bank to become much smaller.” The article refers to officials at Treasury and the Federal Reserve.

This would be interesting for a couple of reasons. One is that the administration and its allies in Congress are insisting that breaking up large financial institutions is not the answer to the too big to fail problem. If regulators are pressuring BofA to get smaller, that would seem to imply the opposite.

Continue reading “Are Regulators Trying to Make Bank of America Smaller?” →

Underwater Second Liens

By James Kwak

Mike Konczal did some more great work earlier this week in two posts on the not-so-exciting topic of second liens. I don’t have much in the way of new insight or analysis to provide, so let me just summarize.

A second lien is a second mortgage on a house. The second lien is junior to the first mortgage, meaning that if the borrower defaults and the first lender forecloses, the proceeds from the sale go to pay off the first mortgage; the second lien only gets paid back if the sale proceeds exceed the amount due on the first mortgage. You can see where this is heading.

Konczal’s first point was that in the stress tests almost a year ago, the big four banks held $477 billion of second liens and estimated that these assets were worth 81-87 cents on the dollar, so they would take $68 billion in losses (under the “more adverse” scenario). Konczal estimated that they were instead worth 40-60 cents on the dollar, implying $191-286 billion in losses.

Continue reading “Underwater Second Liens” →

What’s Wrong with the Financial System in Eight Minutes

By James Kwak

Yesterday I was at a conference on “New Ideas for Limiting Bank Size,” hosted by the Fordham Law School Corporate Law Center. Simon gave the keynote speech over lunch. It’s actually the first time I’ve seen Simon give a presentation; we’re rarely in the same city at the same time.

I don’t have video of yesterday, but Mike Konczal linked to video of the presentations, including Simon’s, from last week’s all-star conference, “Make Markets Be Markets,” hosted by the Roosevelt Institute. You can see sneak previews of a few charts from 13 Bankers. You can also see eight-minute presentations by other luminaries such as Elizabeth Warren, Frank Partnoy, Joe Stiglitz, Rob Johnson, and Mike Greenberger.

Get Rid of Selection Sunday

By James Kwak

I have a lot to catch up on from this past week, like the Lehman report, but first I have more important business to attend to: the NCAA Division I men’s college basketball tournament. Tomorrow is Selection Sunday, the day when sixty-five teams are selected for the tournament. Thirty-one conference champions automatically make the tournament, leaving thirty-four at-large spots handed out by a committee.

Today, the general approach, uncontested by virtually everyone, is that the committee selects what it thinks are the best teams, based on things like record, strength of schedule, and Ratings Percentage Index. Invariably it leads to controversy at the margin. There are also many people who think the system is biased in favor of mediocre teams from major conferences and against good (though not champion) teams from “mid-major” conferences.

I think there are two things wrong with this system. The first is that decisions are arbitrary at the margin, since they are made subjectively by comparing teams that cannot be directly compared. The second is that the process selects for the wrong thing: it selects teams that a committee thinks are good teams, rather than teams that deserve to be there because they win games that matter. To make an analogy, it’s as if at the end of the baseball regular season a committee subjectively decided which were the best teams and let them into the playoffs, rather than taking the three division winners and the wild card team from each league. Yes, sometimes a team misses out on the playoffs despite having a better record than a team in the playoffs. But everyone knows what the rules are at the beginning of the year, and the point is to win your division (or the wild card), not simply to be a good team.

Continue reading “Get Rid of Selection Sunday” →

The German Finance Minister Needs To Confront Investment Banks

By Simon Johnson

Wolfgang Schauble, German finance minister, has a surprisingly sensible op ed in today’s Financial Times. As we suggested yesterday, first the relevant Europeans should decide if they want to keep the euro – more precisely, who stays in and who leaves the currency union – then policy must be adjusted accordingly.

Mr Schauble is obviously correct that existing economic self-policing mechanisms are badly broken; the eurozone can only survive if there are effective monitors and appropriate penalties for fiscal and financial transgression. He is also right to fear that involving the IMF in Greece would necessarily give the Fund greater rights to kibbitz on European Central Bank monetary policy. Given the fear and loathing expressed for the IMF’s “4 percent inflation solution” (or is it 6 percent?) in eurozone policy circles, you can see why this gives the Greek prime minister some bargaining power – the Germans will do whatever it takes to keep him away from the IMF in the short-term.

But Schauble misses (or holds back for now) on a potentially important point vis-a-vis investment banks. Continue reading “The German Finance Minister Needs To Confront Investment Banks” →

Delaying Tactics On Display

By Simon Johnson

Senator Richard Shelby, ranking Republican on the Senate Banking Committee, today issued the following statement,

“Republicans remain open to finding common ground with Chairman Dodd. If my Democrat colleagues are interested in enacting reforms that protect American taxpayers, promote economic growth, and preserve the competitiveness of our financial markets, there is no reason that we cannot reach an agreement. As long as we remain focused on policy and not politics, an agreement is still very possible. The Republican members of the Committee stand united and ready to work with Chairman Dodd toward that goal.”

This is not a correct or accurate statement with regard to Republican intentions and their work behind the scenes. At this point, leading Senate Republicans are trying hard to prevent any kind of bill from moving forward. Their thinking is that there is not a lot of legislative time remaining in 2010 – a week or two lost now can derail completely opportunity for reform along any dimension.

No doubt we will see an increase in contributions by the financial sector in return for actions and statements that prevent effective consumer protection and that push derivatives regulation towards being even less effective.

The Coming Greek Debt Bubble

By Peter Boone and Simon Johnson

Bubbles are back as a topic of serious discussion, as they were before the financial crisis. The questions are: (1) can you spot bubbles, (2) can policymakers do anything to deflate them gently, and (3) can anyone make money when bubbles get out of control?

Our answers are: Spotting pure equity bubbles may sometimes be hard, but we can always see unsustainable finances supported by cheap credit. But policymakers will not act because all great (and dangerous) bubbles build their own political support; bubbles are invincible, until they collapse. A few investors can do well by betting against such bubbles, but it’s harder than you might think because you have to get the timing right – and that’s much more about luck than skill. Continue reading “The Coming Greek Debt Bubble” →

Business Economists on the CFPA

By James Kwak

The National Association for Business Economics does a semi-annual Economic Policy Survey of its members, who are primarily private-sector economists. The March 2010 survey isn’t up on their site yet, but this is what it has to say about the Consumer Financial Protection Agency:

“A key point of discussion in Congressional deliberations on financial services regulatory reform has been the establishment of an independent agency focused on consumer financial protection. Fifty-four percent of survey respondents feel that creating such an agency would not impair safety and soundness regulation; 25 percent believed it would be detrimental. On a related issue, 43 percent of respondents indicate that a consumer financial protection agency would not impair access to credit while 39 percent believed it would.”

The financial sector has been demanding that any new consumer protection agency be made subservient to the traditional safety and soundness regulators, and has also been threatening that greater regulation will make credit harder to come by. Apparently the business community–a group that is pretty skeptical about government, judging by some of the other survey responses–isn’t buying it.

The Speech For Which We Have Been Waiting

By Simon Johnson

For nearly two years now we have waited for a speech. We need a simple speech and a direct speech – most of all a political speech – about what exactly happened to our financial system, and therefore to our economy, and what we must do to make sure it can never happen again.

President George W. Bush apparently did not consider giving such a speech, and Secretary Paulson could never talk in this way. President Obama seemed, at some moments, close to making things clear – when he talked on Wall Street in September and, most notably, when he launched the Volcker Rules in January. But President Obama has always come up short on the prescriptive part – i.e., what we need to do – and his implementation people still move as if there were lead weights in their shoes.

Without a definitive speech, there is no political reference point, there is no convergence in the debate, and there is not even any clarity regarding what we should be arguing about. Without the right kind of speech, there are just many lobbyists working the corridors and a lot of backroom deals that most people do not understand – by design.

Tomorrow, hopefully, we should finally get the speech. Not – sadly – from the White House, not from anyone in the executive branch, and not even from within the Senate Banking Committee (although Senators Merkley and Levin took a big step today), but rather on the floor of the Senate. Continue reading “The Speech For Which We Have Been Waiting” →

The Volcker Principles Move Closer To Practice

By Simon Johnson

Senators Merkley and Levin, with support from colleagues, are proposing legislation that would apply Paul Volcker’s financial reform principles – actually, much more effectively than would the Treasury’s specific proposals. (Link to the bill’s text.)

Volcker’s original idea, as you may recall, is that financial institutions with government guarantees (implicit or explicit) should not be allowed to engage in reckless risk-taking. At least in part, that risk-taking takes the form of big banks committing their own capital in various kinds of gambles – whether or not they call this proprietary trading.

At the Senate Banking Committee hearing on this issue in early February, John Reed – former head of Citi – was adamant that a restriction on proprietary trading not only made sense, but was also long overdue. Gerald Corrigan of Goldman Sachs and Barry Zubrow of JP Morgan Chase expressed strong opposition, which suggests that Paul Volcker is onto something.

Of course, Goldman – among others – may seek to turn in its (recently acquired) banking license and go back to being “just an investment bank”, not subject to Fed regulation. But raising this possibility is a feature, not a bug of the Volcker-Merkley-Levin approach. Continue reading “The Volcker Principles Move Closer To Practice” →

Good for Bank of America

I think. BofA is eliminating overdraft protection on debit card purchases. Most stories, like in the Times and the Journal, are headlining the elimination of overdraft fees, but it’s not like you’re getting overdrafts for free; actually they are eliminating overdrafts on debit card transactions altogether, starting this summer. (You will still be able to opt in to overdraft protection for debit card transactions, but only if you link your checking account to another account, so the money is being transferred from yourself. You will also be able to opt in to overdraft protection, with fees, for checks and automatic bill payments;* and you will be able to decide on the spot if you want to pay a fee to overdraw your account from an ATM.)

Continue reading “Good for Bank of America” →

Hank Paulson’s Memoir: The Inside Job

By Simon Johnson

If you’ve read, are reading, or plan to read Andrew Ross Sorkin’s Too Big To Fail, you also need to pick up a copy of Hank Paulson’s memoir, On The Brink. Sorkin has the bankers’ story, in sordid yet compelling detail, of how they received the most generous bailout in the world financial history during fall 2008 – and set us up for great problems to come. Paulson tells us why, when, and how exactly he let them get away with this.

Hank Paulson does not, of course, intend to be candid. As I review in detail on The New Republic’s The Book site this morning, On The Brink is actually a masterpiece of misdirection and disinformation.

But still, he gives it all away – and if any details remain obscure, check them in Sorkin. Paulson honestly believes that the financial sector as constructed is productive, makes sense, and should continue to operate in roughly its current form. Continue reading “Hank Paulson’s Memoir: The Inside Job” →