Author: James Kwak

The Fourteenth Banker

By James Kwak

I wanted to bring your attention to a new blog that could turn out to be very important. It’s called The Fourteenth Banker (here’s why) and it’s hosted and written by a current banker who wants to see real change in the industry. This is from the About page:

“Despite being with a big bank, I support reform legislation ending TBTF, separation of Commercial and Investment banking, an independent consumer protection agency and other meaningful reforms. Why? I have seen first hand the perversions that happen because of some who believe that the an institution exists for them and the stockholders primarily. Countless others have been hypnotized by this illusion as well. Free market idealism is conveniently permissive of unbridled self interest. I believe in the free market. In fact, this blog is a free market of ideas and is meant to lead to a free market in banking where institutions self police as a matter of competitiveness. I have hopes of a free market where being in community in a responsible and consistent way is the path to prosperity, a free market where we recognize that if we take care of the community, the community will take care of us. It takes a sort of faith. Or does it? Is not all successful business enterprise based on providing more value than is consumed?

“That is why we are here. I invite other bankers to engage in discussion about issues and excesses in our industry and possible solutions.”

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Now We Are “Ill-Informed and Under-Educated”

By James Kwak

A couple of weeks ago, Max Abelson got some investment bankers who used to work at Lehman to say what they really think about ordinary people:

“[Lehman]’s just not that big of an event. But that’s not what people want it to be, so they’ll make it not that way if they can. They just want to be mad and don’t know what they’re talking about and want to be outraged.”

“When I read this, I giggle a little bit. Because $50 billion is a s—load of money, but in the grand scheme of things, $50 billion is a drop in the ocean.”

“Yappers who don’t know anything.”

Well, the commercial bankers are not taking this lying down. They are out trying to prove that they can be just as offensive.

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Krugman on Financial Regulation

By James Kwak

Several people have asked us to comment on Paul Krugman’s op-ed yesterday (both by email and in our bookstore event yesterday), in which he contrasts the Paul Volcker school (“limiting the size and scope of the biggest banks”) with the other school (“the important thing is to regulate what banks do, not how big they get”). Krugman says he is in the latter group. But Mike Konczal* beat me to it:

“For me, it’s not an either/or but a both/and question. I think we should do both (a) and (b), impose a hard size cap of $400 billion to $500 billion and then expand regulation over all the broken-up shadow banks. If you look at the conclusion of 13 Bankers, I think Simon Johnson and James Kwak are in a similar boat.”

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“Break Up the Banks” – in the National Review

By James Kwak

“Big banks are bad for free markets,” economist Arnold Kling (who usually blogs at EconLog) begins in the conservative flagship National Review, and it only gets better from there. “There is a free-market case for breaking up large financial institutions: that our big banks are the product, not of economics, but of politics.”

Like other conservative economists, Kling uses Fannie Mae and Freddie Mac as an example of financial institutions that grew too large through a combination of lobbying expertise and government guarantees . . . and frankly I agree with him. But he is equally unsparing of other large banks that were supposedly “pure” private actors but turned out to have their own government guarantees.

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Barney Frank Does the Right Thing

By James Kwak

The revolving door between business and government is something that Simon and I have criticized, most recently in a book you may have heard us mention once or twice. Ryan Grim of the Huffington Post reports that Barney Frank, chair of the House Financial Services Committee, has sent a message that he is serious about blocking the revolving door.

Peter Roberson was a lobbyist for the Bond Market Association (now part of SIFMA, a big securities industry lobbying organization) from 2000 to 2006 before becoming a staff member for Frank’s committee, where he was recently working on derivatives legislation. When Frank found out he was in discussions with ICE (presumably, the exchange), it sounds like Frank fired him and blocked him from lobbying the committee so long as he is chair:

“Several people have expressed criticism of the move by Peter Roberson from the staff of the Financial Services Committee to ICE, after he worked on the legislation relevant to derivatives. I completely agree with that criticism. When Mr. Roberson was hired, it never occurred to me that he would jump so quickly from the Committee staff to an industry that was being affected by the Committee’s legislation. When he called me to tell me that he was in conversations with them, I told him that I was disappointed and that I insisted that he take no further action as a member of the Committee staff. I then called the Staff Director and instructed her to remove him from the payroll and provide him only such compensation as is already owed.”

Now, it is well understood that one of the main reasons to work for a committee like Financial Services is precisely because it enables you to get better paying jobs in industry later. So I don’t know if it’s possible to block the revolving door completely. But this seems like a step in the right direction.

We Were Wrong (About the Supreme Court)

By James Kwak

Last November, we criticized a decision by the Court of Appeals for the Seventh Circuit in Jones v. Harris Associates in which Judge Frank Easterbrook wrote that mutual fund companies can charge their mutual funds whatever they can get away with (assuming disclosure and absent fraud), because prices are set by The Market. The case was remarkable because of a dissent by Judge Richard Posner, part of his recent (partial) disavowal of his earlier free market views, arguing that markets could not be trusted to set mutual fund fees. However, we predicted that the Supreme Court would pass up the opportunity to strike a blow on behalf of mutual fund investors and against excessive mutual fund fees:

“It can take the easy way out and resolve the case on the sole question of what ‘fiduciary duty’ means. Or it could limit itself to deciding what standard should be used in reviewing mutual fund fees and then tell the 7th Circuit to hear the case again. Most likely it will either sign off on the efficient-markets myth or dodge the question in one of these ways.”

We were partially right; technically speaking, the Court (opinion here) simply clarified the standard to be used when assessing mutual fund fees. Substantively speaking, however, it went a bit further. As Jennifer Taub explains, not only did it strike down Easterbrook’s bit of outdated free market theory, it also held that courts should compare the fees that a mutual fund company charges its captive mutual funds and those it charges institutional clients who can negotiate fees directly. In Jones v. Harris Associates, Harris Associates was charging its captive mutual funds fees that were more than double those it charged institutional asset management clients.

It still doesn’t look that great for the plaintiffs–mutual fund investors who claim they were charged excessive fees. The district court that first heard the case found that, under the existing Gartenberg standard, the plaintiffs had no case. The Supreme Court in its opinion said that it was reaffirming Gartenberg, but as Taub and William Birdthistle have pointed out, it really was modifying Gartenberg slightly in a pro-plaintiff way. So what happens now is that the case goes back to the Seventh Circuit to deal with the case in a manner consistent with the Supreme Court ruling (and I think the Seventh Circuit could hand it back to the district court). But it’s still a small step.

The Ongoing Battle Against Error and Hypocrisy

By James Kwak

With the financial reform bill out of the Senate Banking Committee last week (another good thing that happened while I was away) and fresh off of victory in the health care war, the Obama administration is upping the rhetorical pressure to pass financial reform. This was most obvious in Deputy Treasury Secretary Neal Wolin’s speech at the U.S. Chamber of Commerce last week, in which he called out his hosts with fighting words: “the Chamber of Commerce – funded, no doubt, with a good deal of your money – has launched a lavish, aggressive and misleading campaign to defeat the proposed independent agency.”

Elizabeth Warren, who has never minced words when it comes to enemies of consumer protection, steps up today with an even more withering attack on the flip-flopping of the American Bankers Association, which was for the separation of consumer protection from prudential regulation before it was against it. As Warren says:

“ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability. Yet just a few years ago, they heatedly argued the opposite—that the functions should be distinct.

“In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for ‘combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.'”

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The Ballad of GM

By James Kwak

Once again proving that they do in-depth business reporting as well as anyone on the radio, This American Life did an episode this past weekend on NUMMI, the auto plant in Fremont, California that is jointly operated by Toyota and GM. Well, since the GM bankruptcy it’s been operated by Toyota. And Toyota is closing it this week — the first plant to be closed in the history of the company, according to TAL.

I listened to the episode this morning in my car, a 1999 Chevrolet Prizm that was built at NUMMI and that was the first car my wife and I bought. (It has 111,000 miles and has only required minor repairs, like a power steering pump and a muffler strap.) I’ve passed by the plant itself many times on 880, driving between the East Bay and the southern end of Silicon Valley. So it was a sad and poignant story for me.

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One Day to Go . . .

By James Kwak

Well, officially at least. There have been a bunch of copies on eBay for a while now, and apparently some bookstores have put them on the shelf already. You can now read excerpts from the introduction and the last chapter, courtesy of NPR and the WSJ, respectively. Besides the reviews that Simon has featured on this blog, there’s a new one from the Daily Kos. The events page now has some media highlights (Colbert!) in addition to in-person appearances.

And we have a page explaining what the title means.

I’m Back

By James Kwak

If I were Tyler Cowen or Paul Krugman, I would have original insights from my eight days in Bogota, Colombia. But I’m not. So here are just a few random observations:

Apparently there was a financial crisis about ten years ago because of faulty mortgage products that led to a high number of defaults. To clean up the financial system, the government nationalized about 70% of the banking industry (by assets), and then sold the assets back into the private sector over the next several years. Colombia now has restrictive banking regulations that prevent capital from subsidiaries from being taken out of the country (except for repatriation of profits). As a result, the Colombian subsidiaries of U.S. banks (Citibank, that is) and Spanish banks seem to be doing better than their overseas parents.
There was an indoor jungle gym in a mall a few blocks from our hotel that my daughter loved — trampolines, slides, climbing thingies, the works. Not only does the thing exist (we were wishing we had one where we live), but we didn’t even have to sign a release first.
Colombia — or at least the area around our hotel — is able to sustain several times the number of hamburger chains that the United States can sustain. And they look better, too. Maybe Barry Lynn is onto something in Cornered. (Or maybe all those chains are really subsidiaries of the same company.)

Most importantly, I did a little first-hand testing of various ways to pay for stuff. The first weekend I was there, the exchange rate was 1,907 Colombian pesos to the dollar. The rate for exchanging dollars on the street was 1850 (well, in the shopping mall — it might have been a little better on the street itself), or about a 3% fee. The net rate for using an American Express card (that is, the price in pesos divided by the number that showed up on my bill) was about 1840 — about 3.5% (although that is partially offset by my 1.25% cash back). But when I used the debit card from my local bank (PeoplesBank), I got a rate of 1906-1907 — that is, no fee whatsoever — whether I stuck it in an ATM to get cash or used it like a credit card to buy something.

I used to use my Bank of America debit card to get cash out of foreign ATMs, and I recall that every time I used it I would see three lines on my bank statement — one for the cash and two for the fees. So that’s yet another reason to ditch your big bank.

What’s Next for Health Care?

By James Kwak

I should leave the country more often: I go away and suddenly we have (near-)universal health care coverage! (Well, we’ll have to wait a few years for all of the health care reform provisions to kick in, but you know what I mean.) Not only that, but Ezra Klein reminds me that we even got rid of the pointless subsidy to the banking industry in the student loan program (where the government guaranteed the loans but let private lenders earn profits making the loans, even though the guarantee obviated the need for underwriting).

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Away Message

By James Kwak

I’ll be traveling and probably not blogging (hopefully not using a computer at all) until next weekend (March 27 or 28). Simon will be around, though. Bye.

A Little Book News

By James Kwak

So, we have a book that goes on sale a week from Tuesday (although you can pre-order it now). We created another blog for book-specific news, in order to avoid cluttering this blog with too much book stuff. But we are going to provide occasional updates (like this one) here with a few highlights.

In the last week, we got a friendly review by Arnold Kling, we learned that the books do actually exist, and we put up a page with some in-person events in case you’re wondering if we look like our photos. We also put up our first factual correction, having to do with the 10 percent cap on deposits. Note that we are interested in correcting errors of fact — we put a lot of effort into getting the facts right, including hiring our own professional fact-checkers (that’s another blog post for another time). If you think we made an error of interpretation (or an error of theory) . . . well, we’re happy to think about it, but don’t expect a correction.

Freefall

By James Kwak

I only recently finished reading Freefall,* Joseph Stiglitz’s book, so this review comes about two months late. It took me a while partly because I was busy, but partly because I didn’t feel a lot of dramatic tension . . . since I agreed with almost everything he said.

Unlike most crisis books, Freefall is relatively short on what caused the financial crisis. The historical background is mainly laid out in Chapter 1, “The Making of a Crisis,” although there is discussion of specific problems in later chapters, such as Chapter 4, “The Mortgage Scam.” Mainly this book is about the response to the crisis, what was wrong with it, and what needs to change in the future.

Reading the book gave me a familiar feeling. You see, our book (13 Bankers) is largely about historical and political background–our Chapter 1 begins with Thomas Jefferson and Alexander Hamilton, although most of the book is about the period since 1980–so there is relatively little topical overlap between the two. But where they do overlap, particularly in the discussion of government responses to the crisis, I had the sensation that we were saying much the same thing.

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We Are All “Yappers Who Don’t Know Anything”

By James Kwak

According to ex-Lehman executives interviewed by Max Abelson (hat tip Felix Salmon). To summarize, they say that using borderline-legal transactions to massage your balance sheet at the end of a quarter is completely normal, everyone does it, $50 billion is no big deal anyway, only “nonprofessionals” would even notice, and the only reason the bankruptcy examiner made so much noise about it was to justify the fee for his work. (Abelson does point out that, according to internal Lehman emails cited in the report, there were Lehman executives at the time who were worried about what they were doing and did not think it was standard practice.)

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