Year: 2010

Brad Miller’s Challenge

Since the peak of the financial crisis, both the Bush and Obama administrations have been trying to rescue both large banks and homeowners, often announcing programs for both in the same press conference. The programs for large banks have gone well, from the beneficiaries’ perspective (but not for small banks); programs for homeowners, not so much. As more people walk away from underwater mortgages, Assistant Treasury Secretary Herb Allison recently said, “We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale.”

The failure of the Obama administration so far to come up with a working solution to the problem of mass defaults and foreclosures may be due to practical barriers, such as lack of capacity among mortgage servicers or legal uncertainties regarding securitization trusts. Alternatively, however, it may simply be that the administration doesn’t care that much. Perhaps the primary goal of homeowner assistance all along was to detoxify the toxic assets on large banks’ balance sheets; now that those banks are off of life support, maybe the mortgages themselves don’t matter that much.

Congressman Brad Miller’s proposal in The New Republic should put that question to the test.*

Continue reading “Brad Miller’s Challenge” →

The IMF Cannot Help Greece

This guest post is by Carlo Bastasin, a visiting fellow at the Peterson Institute for International Economics.  An economist and a journalist, Carlo is a leading commentator for the Italian daily Il Sole-24 Ore and for German newspapers.  He reacts here to recent proposals that Greece should bring in the IMF.

The Greek crisis has at least two different dimensions.  One is a fiscal deficit, aggravated by Athens’ mismanagement and deception; the other is the protracted loss of competitiveness, especially within the Eurozone, leading to a large current account deficit.

The IMF can be very effective in tackling the problems of solvency and liquidity arising from the fiscal emergency – and it has probably more expertise than the European Union (EU) or the European Central Bank (ECB) in this regard.  But the Fund is much less able to address the problem of restoring equilibrium in current account balances within the Eurozone. Continue reading “The IMF Cannot Help Greece” →

Volcker Rules?

By Simon Johnson

Bloomberg reports this morning that Treasury is gently letting the Volcker Rule (limiting proprietary trading for big banks) slip – Secretary Geithner would grant greater discretion to regulators which, in today’s context, most likely means not make the restriction effective.

This step is consistent with the broader assessment of the Volcker Rules that Peter Boone and I have in The New Republic (print and on-line): the underlying principles are sound, but the Rules have not been well-designed, and top people in the administration show little sign of wanting to make them effective.  This dimension of financial reform does not appear to be headed anywhere meaningful – and the main issues (bank size, capital, and derivatives) are not yet seriously on the table. Continue reading “Volcker Rules?” →

Banking Industry: Sicker, More Concentrated

By James Kwak

The rapid bounce-back of some of the big banks (notably Goldman and JPMorgan) has overshadowed (at least on the front pages of major newspapers) the continued plight of the banking sector as a whole. Calculated Risk highlights the FDIC’s Quarterly Banking Profile, which lists 702 problem banks with over $400 billion in assets — the highest year-end figures on both metrics since 1992, as the savings and loan crisis was tailing off.

Continue reading “Banking Industry: Sicker, More Concentrated” →

Everyone Was Doing It

By James Kwak

Gerald Corrigan, a Goldman Sachs executive and a former president of the New York Fed, had a curious defense of the Greece-Goldman interest rate swaps. Here are some direct quotations from the Bloomberg story:

“[The swaps] did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” Gerald Corrigan, chairman of Goldman Sachs’s regulated bank subsidiary, told a panel of U.K. lawmakers today. The swaps were “in conformity with existing rules and procedures.” . . .

“There was nothing inappropriate,” Corrigan told Parliament’s Treasury Committee. “With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher.” . . .

Goldman Sachs was “by no means the only bank involved” in arranging the contracts, Corrigan said. . . .

“Governments on a fairly generalized basis do go to some lengths to try to ‘manage’ their budgetary deficit positions and manage their public debt positions,” Corrigan said. “There is nothing terribly new about this, unfortunately. Certainly, those practices have been around for decades, if not centuries. We have to keep that perspective.”

Continue reading “Everyone Was Doing It” →

The PR War

By James Kwak

Every major bank other than Goldman Sachs must be ecstatically happy that Goldman exists, soaking up all the attention with its escapades in Greece and Italy. The other banks, by contrast, are trying to make themselves out to be white knights. See, for example, JPMorgan’s ad today in multiple major print newspapers describing its commitment to small business lending:

Like that picture of small-town America?

The main claim is in the second paragraph: a commitment to lend $10 billion to small businesses in 2010. These kinds of marketing claims are difficult to verify. But I gave it a shot.

Continue reading “The PR War” →

Prospects For Financial Reform

By Simon Johnson

The best opportunity for immediate reform of our financial sector was missed at the start of the Obama administration.  As Larry Summers and Tim Geithner know very well – e.g., from their extensive experience around the world during the 1990s (see Summers’s 2000 Ely lecture) – when a financial system is in deep crisis, you have an opportunity to fix the most egregious problems.  Major financial sector players are always good at blocking reform – except when they are on the ropes.  (Look again at Paul Blustein’s The Chastening for more detail on what Geithner-Summers, with David Lipton and others, got right when they sided with reformers in Korea.)

Congratulations to the Treasury PR people for placing such a warm and fuzzy article about Secretary Geithner in Vogue (not available on-line, but definitely worth finding; nice photos).  But what exactly was the point – unless Mr. Geithner is planning to run for the Senate in Massachusetts?  Mr. Geithner comes through as someone who, against much advice, decided to stick with exactly the financial sector that got us into such deep trouble – despite the fact that this is exactly what he and his colleagues (at Treasury, at the IMF, and at the NY Fed) have always, and with good reason, strongly urged other countries not to do. Continue reading “Prospects For Financial Reform” →

Happy CARD Act Day

By James Kwak

Most provisions of last year’s CARD Act restricting certain types of behavior by credit card issuers go into effect today. Card issuers, of course, are adapting by seeking out new ways to make money. One, pointed out by Felix Salmon, is expanding their usage of rewards cards, since (according to the Times) they get a higher interchange fee on rewards cards than on other cards. (This baffles me, but whatever.) Rewards programs, as it turns out, are subsidized by everyone in the form of higher prices for all goods bought at retail.

Put another way, this is the credit card industry (partially) shifting its sights from consumers, who benefit from (modest) legislative and regulatory protections, to the retailers, who don’t. It’s also what you would expect when you have extremely high concentration among card issuers (and transaction networks) and low concentration among retailers. Perhaps consumers aren’t the only constituency that needs a little protection.

Introduction to Legal Reasoning

By James Kwak

As many of you know, I am a law student. The law is a fascinating subject . . . if you are fascinated by the art of making fine distinctions that most people think are silly. So I thought that the subject of John Yoo and the torture memos might be good material for a good primer on how lawyers think.

The procedural facts are that the Justice Department’s Office of Professional Responsibility wrote a report severely criticizing John Yoo and Jay Bybee for various ethical lapses. Associate Deputy Attorney General David Margolis, however, decided not to take further action against Yoo and Bybee.

Continue reading “Introduction to Legal Reasoning” →

Lowering The Boom On Financial Leverage

This guest post is by David Moss, the John G. McLean Professor at Harvard Business School and the founder of the Tobin Project.  (See his previous guest post here.)

The struggle for financial regulatory reform in Washington will fail if the debate continues to focus mainly on the bookends of the crisis – the original subprime shock and the eventual federal bailout.  Although both were very serious problems, even more serious was the near collapse of the American financial system that came in between. 

A healthy financial system would have been able to absorb the subprime shock, like a well-conditioned fighter who’s able to take a punch and remain standing.  But our financial system, wildly overleveraged, crumpled after just one blow.  If we don’t fix the leverage problem, everything else will be for naught.   Continue reading “Lowering The Boom On Financial Leverage” →

Mark Thoma Lets Loose

By James Kwak

Yes, Mark Thoma is generally Democratic-leaning when it comes to policy. But his blog is justly popular because it presents a wide range of views through extensive quotations and relatively little editorial commentary. So I think it’s revealing that he provides the following postscript to an article by Jamie Galbraith:

“Every day that goes by with unemployment higher than it needs to be means that people are struggling needlessly. People need jobs. And not at some point in the future when Congress gets around to it (if they ever do), this can’t wait another day. It should have been done months and months ago.

“Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble. Collectively the unemployed are too big to remain jobless, and the millions of individual struggles among the unemployed shouldn’t be tolerated. But Congress doesn’t seem to be in much of a hurry to do anything about it, or give any sign that it much cares.”