Author: Simon Johnson

Bloomberg Reviews “13 Bankers”

By Simon Johnson

Bloomberg’s reviewer, James Pressley, emphasizes our historical parallels between big banks today and big business more generally at the start of the twentieth century.  In 1900, the forces supporting the status quo seemed unassailable, yet real reform proved possible – making the economic system both fairer and more productive.  We can rein in huge banks today – but only if our political leadership is willing to take the most powerful people on the planet. 

“Though Jamie Dimon won’t like this (any more than John D. Rockefeller did), incremental regulatory changes and populist rhetoric about “banksters” are getting us nowhere. It’s time for practical solutions. This might be a place to start.”

The full review is here.

Volcker And Bernanke: So Close And Yet So Far

By Simon Johnson

In case you were wondering, Paul Volcker is still pressing hard for the Senate (and Congress, at the end of the day) to adopt some version of both “Volcker Rules”.  It’s an uphill struggle – the proposed ban on proprietary trading (i.e., excessive risk-taking by government-backed banks) is holding on by its fingernails in the Dodd bill and the prospective cap on bank size is completely missing.  But Mr. Volcker does not give up so easily – expect a firm yet polite diplomatic offensive from his side (although the extent of White House support remains unclear), including some hallmark tough public statements.  It’s all or nothing now for both Volcker and the rest of us.

But at the same time as the legislative prospects look bleak (although not impossible), we should recognize that Paul Volcker has already won important adherents to his general philosophy on big banks, including – most amazingly of late – Ben Bernanke, at least in part.  In a speech Saturday, Bernanke was blunt,

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation [like fall 2008].” Continue reading “Volcker And Bernanke: So Close And Yet So Far” →

Metternich With A Blackberry

By Simon Johnson

If watching the twists and turns in European politics – “should we bailout Greece?”, “should we bring in the IMF?”, “should the Greeks go directly to the IMF, cutting out the EU?”, etc – has your head spinning and reminds you of overly complicated and opaque episodes from the history books, then you have actually caught the main point.  European power structures and alliances webs are being remade before your eyes.

Is this all random – just the collision of disparate national interests with no coherent plans on any side?  Or are there some strong, deliberate, and very personal hands at work guiding key pieces into place?  

Prince Metternich worked long and hard to manoeuvre countries and people before and after 1815, cynically and cleverly building a system of interlocking interests that suited him – and his employer, the Austrian/Habsburg Emperor.  Is there a modern Metternich now at work?  Most definitely: Yes. Continue reading “Metternich With A Blackberry” →

Could The US Become Another Ireland?

By Peter Boone and Simon Johnson

As Greece acts in an intransigent manner, refusing to act decisively despite deep fiscal difficulties, the financial markets look on Ireland all the more favorably.  Ireland is seen as the poster child for prudent fiscal adjustment among the weaker eurozone countries. 

The Irish economy is in serious trouble.  Irish GDP declined 7.3% as of third quarter 2009 compared with third quarter 2008.  Exports were down 9% year-on-year in December.  House prices continue to fall.  While stuck in the eurozone, Ireland’s exchange rate cannot move relative to its major trading partners – it thus cannot improve competitiveness without drastic private sector wage cuts.  Yet investors are so pleased with the country that its bond yields imply just a one percent greater annual chance of default than Germany over the next five years.

Ireland’s perceived “success” is partly due to its draconian fiscal cuts.  The government has cut take home pay of public sector workers by roughly 20% since 2008 through lower wages, higher taxes, and increased pension payments.  As the head of the National Treasury Management Agency John Corrigan proudly advised the Greeks (and everyone else):  “You have to talk the talk and walk the walk”.

So is Ireland truly a model for Greece and other potential problems in Europe and elsewhere? Definitely not – but it does provide a cautionary tale regarding what could go wrong for all of us. Continue reading “Could The US Become Another Ireland?” →

Mario Draghi and Goldman Sachs, Again

By Simon Johnson

In its previous response to us, the the Bank of Italy pointed out that Mario Draghi (its current governor) did not join the management of Goldman Sachs until 2002 – hence he was not there when the controversial Greek “debt swaps” were arranged.

We agree that he joined Goldman only in January 2002 (this was in our original post).  But the latest revelations regarding the Goldman-Greece relationship (on the Senate floor, no less) clearly indicate that Goldman was a lead manager of Greek debt issues in spring 2002, i.e., when Mr. Draghi was on board.

This raises three entirely reasonable and straightforward questions. Continue reading “Mario Draghi and Goldman Sachs, Again” →

Enron and Merrill, Greece and Goldman

By Simon Johnson

Did big banks break the law during our recent global debt-fuelled boom?  The usual answer is: no – they just took advantage of loopholes and captured regulators.  The world’s biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.

But is this really true?  The new Valukas report on Lehman suggests there are grounds for civil action, i.e., people can sue for damages.  News reports give no indication of potential criminal charges, but this may change soon.  The hiding of Lehman’s true debt levels – through the so-called “Repo 105” structure – is strikingly reminiscent of how Enron’s balance sheet was disguised through fake asset “sales” (as Senator Kaufman now points out).

And, of course, the people who ended up facing criminal charges and – in some prominent cases – going to jail, included not only Enron executives, but also responsible bankers from Merrill Lynch (see The Smartest Guys in the Room, Chapter 13).  Arthur Anderson, Enron’s accountant, was also effectively broken by the scandal.  It is a serious crime for professional advisers and financiers to assist in securities fraud.

The failure of Lehman therefore opens a can of worms for close and potentially productive examination in coming weeks.  But so does the issue of Greek government debt in April 2002. Continue reading “Enron and Merrill, Greece and Goldman” →

Senator Kaufman: Fraud Still At The Heart Of Wall Street

By Simon Johnson

Last week, Senator Ted Kaufman (D., DE) gave a devastating speech in the Senate on “too big to fail” and all it entails.  A long public silence from our political class was broken – and to great effect.  Today’s Dodd reform proposals stand in pale comparison to the principles outlined by Senator Kaufman.  And yes, DE stands for Delaware – corporate America has finally decided that its largest financial offspring are way out of line and must be reined in.

Today, the Senator has gone one better, putting many private criticisms of the financial sector – the kind you hear whispered with conviction on the Upper East Side and in Midtown – firmly and articulately on the public record in a Senate floor speech to be delivered (this link is to the press release; the speech is in a pdf attached to that – update: direct link to speech, which will be given tomorrow).  He pulls no punches:

“fraud and potential criminal conduct were at the heart of the financial crisis”

He goes after Lehman – with its infamous Repo 105 – as well as the other entities potentially implicated in those transactions, including Ernst and Young (Lehman’s auditors).  This is the low hanging fruit – but have you heard even a squeak from the White House or anyone else in the country’s putative leadership on this issue?

And then he goes for the twin jugulars of Wall Street as it still stands: The idea that we saved something, at great expense in 2008-09, that was actually worth saving; and Goldman Sachs. Continue reading “Senator Kaufman: Fraud Still At The Heart Of Wall Street” →

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?” →

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” →

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” →

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” →

Way Too Big To Save

By Simon Johnson

Listening to US officials, talking to legal experts, and waiting for an intense Senate debate on financial reform to begin, you can easily form the impression that “too big to fail” adequately describes our most serious future systemic banking problems.  It does not.

In September 2008, the large banks and quasi-banks at the heart of our financial system faced failure – and they were saved in the most immediate sense through actions taken by the Federal Reserve, but TARP (passed by Congress and run Treasury) also played a significant supporting role. 

The Bush administration threw a small fiscal stimulus into the mix in early 2008, hoping to stave off recession; the Obama administration committed a much larger package at the start of 2009, aiming to prevent anything like a Second Great Depression.  This fiscal policy response was in direct reaction to problems caused by the overextension and near failure of the financial system

Do not make the mistake – for example of Secretary Geithner, talking to the New Yorker – of thinking (or implying) that “saving the financial system” did not involve spending a lot of taxpayer money to support the real economy.  Remember that if the economy crashes, asset prices fall, and banks’ problems become even more severe.

And try to avoid three further mistakes that are currently common. Continue reading “Way Too Big To Save” →