Month: December 2010

More on the Tax Deal

By James Kwak

First, the comic relief. From the Times:

“Senator Jim DeMint, Republican of South Carolina, said that he still wanted the Bush-era rates extended permanently and that the cost of the package was worrisome.”

I got some valid criticisms for my last post on the tax cut deal. In particular, that post may make it seem as if my criticism of President Obama has to do with his negotiating ability. But if Obama really wanted the outcome he ended up with, then he is a master negotiator; where I really differ from him, then, would be in what policy should be.

Continue reading “More on the Tax Deal” →

Should Megabanks Be Broken Apart? (NYT Room For Debate)

By Simon Johnson. This material was prepared as part of the New York Times’ Room for Debate on “Should Mega-Banks Be Broken Apart“? I strongly recommend the post by Anat Admati.

Writing in the Washington Post, in November 2009, Jamie Dimon, chief executive of JP Morgan Chase, argued:

“Creating the structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur. Under such a system, a failed bank’s shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out. A regulator should be able to terminate management and boards and liquidate assets. Those who benefited from mismanaging risks or taking on inappropriate risk should feel the pain.”

But the Dodd-Frank financial reform legislation does not create a “resolution mechanism” that can deal with cross-border megabanks; this point is admitted by all involved. And there is nothing in the G20 process or underway with any other international forum that would make a difference in this regard. Continue reading “Should Megabanks Be Broken Apart? (NYT Room For Debate)” →

Tax Cut Ironies

By James Kwak

From The New York Times:

“Congressional Republicans in recent days have blocked efforts by Democrats to extend the jobless aid, saying they would insist on offsetting the $56 billion cost with spending cuts elsewhere.”

Instead, as it turns out, they agreed to offset the cost with tax cuts elsewhere.

Still, though, I place the blame for this one squarely on the White House. The Republicans are just doing what Republicans do: arguing for lower government spending and lower taxes. The fact that they justify the former by saying it will cut the deficit and the latter by saying it will stimulate the economy (when you could just as easily switch the arguments and make them point the other way) is just a detail.

Continue reading “Tax Cut Ironies” →

What Jamie Dimon Won’t Tell You: His Big Bank Would Be Dangerously Leveraged

By Anat Admati, Professor of Finance and Economics at Stanford Graduate School of Business. To see her explain these issues in person, watch this Bloomberg interview. This is a long post, about 3,500 words.

The debate is raging about banks and their size, financial regulation, and the international capital standards known as “Basel”. Jamie Dimon of JP Morgan Chase, in his New York Times magazine profile, expresses admiration for the Basel committee and says,

“… they are asking the questions that, in theory, bankers ask of themselves: how much capital do banks need to withstand the inevitable downturn, and what is an acceptable level of risk?”

There is one problem, however. Basel may have asked the right question, but it did not come up with the right answers, mainly because it allows banks to remain dangerously leveraged, setting equity requirements way too low. This fact is not understood because the debate on capital regulation has been mired with a cloud of confusion, and filled with un-substantiated assertions by bankers and others. As a result, the issues appear much more mysterious and complicated than they actually are.

After a massive and incredibly costly financial crisis, we seem to have financial system that is a more consolidated, more powerful, more profitable and, yes, as fragile and dangerous as we had before the crisis. How did this happen and what can we do?

Here are some questions on which the confusion is staggering. Continue reading “What Jamie Dimon Won’t Tell You: His Big Bank Would Be Dangerously Leveraged” →

Jamie Dimon: Becoming Too Big To Save – Creating Fiscal Disaster

By Simon Johnson

In Sunday’s New York Times magazine, Roger Lowenstein profiles Jamie Dimon, head of JP Morgan Chase. The piece, titled “Jamie Dimon: America’s Least-Hated Banker,” is generally sympathetic, but in every significant detail it confirms that Mr. Dimon is now – without question – our most dangerous banker.

Mr. Dimon is not dangerous because he is in any narrow sense incompetent. On the contrary, Mr. Dimon is very good at getting what he wants. And now he wants to run a bigger, more interconnected, and more global bank that – if it were to fail – would cause great chaos around the world. Lowenstein writes,

“Dimon has always been unusually blunt, and he told me that not only are big banks like JP Morgan (it has $2 trillion in assets) not too big, but that they should be allowed to grow bigger.” Continue reading “Jamie Dimon: Becoming Too Big To Save – Creating Fiscal Disaster” →

Imminent Eurozone Default: How Likely?

By Simon Johnson

The big question of the week in Europe is deceptively simple – will any countries that share the euro as their currency default on their government or bank debts in the foreseeable future? The answer to this question determines how you regard bonds from countries such as Portugal, Spain, Italy, and Belgium.

Answering this question is not as simple as it seems, however, because it involves taking a view on three intricate issues: What exactly is the eurozone policy now on bailouts, can big eurozone countries really be bailed out if needed, and what happens to the politics of these countries and of the eurozone has a whole as pressure from the financial markets mounts?

The prevailing consensus – and definite official spin – is that over the weekend European leaders backed away from the German proposal to impose losses on creditors as a condition of future bailouts, i.e., from 2013. The markets, in this view, should and likely will calm now; there is no immediate prospect of any kind of sovereign default or (more politely) “reprofiling” on debt, including the obligations of big banks.

But a close reading of the Eurogroup ministers’ statement from Sunday suggests quite a different interpretation. It’s a straightforward text, just 2 ½ pages long, but it has potentially momentous consequences – as it envisages dividing future eurozone crises into two kinds. Continue reading “Imminent Eurozone Default: How Likely?” →