Category: Commentary

Buffett and Geithner

Andrew Ross Sorkin’s Too Big to Fail sure is a page-turner; even for events that I already knew about in general, it’s full of new details and juicy quotations.

For example, on page 508 it lays out the details of Warren Buffett’s October 2008 proposal for a “Public-Private Partnership Fund,” which would eventually become the PPIP announced by Tim Geithner in March 2009.  I knew that Buffett, Bill Gross, and Lloyd Blankfein had supported the idea, but I didn’t know the details. Buffett’s idea was slightly different from the eventual PPIP.

Continue reading “Buffett and Geithner” →

Some Questions For Mr. Bernanke

On Thursday, Ben Bernanke will appear before the Senate Banking Committee, to begin his reconfirmation process as chairman of the Federal Reserve Board.

Based on committee members’ public statements, Bernanke already appears to have enough votes on his side.  But Thursday’s hearing and the subsequent floor debate are an important opportunity for senators to raise important issues about how the Fed will operate moving forward.

This is more than a ritual.  Questioning (the monetary) authority and politely insisting on a coherent answer is an important part of our political governance structure – and something that was sorely lacking during the Greenspan era.

There are three possible lines of enquiry that could draw Mr. Bernanke out.  These questions could be separate or part of a sequence: Continue reading “Some Questions For Mr. Bernanke” →

Iron Cage for Nothing

When I gave away many of my old books a year ago, I kept my college copy of Max Weber’s The Protestant Ethic and the Spirit of Capitalism. Now Tyler Cowen cites a paper by Davide Cantoni demonstrating that Protestantism had nothing to do with economic development. (Cantoni also co-authored a paper with Simon and others on the impact of the French Revolution — via the Napoleonic conquests — on economic development.) He uses the “natural experiment” created by the division of the Holy Roman Empire (very roughly, modern-day Germany and Austria) into Protestant and Catholic states.

Continue reading “Iron Cage for Nothing” →

Never a Good Sign

The board of GM asked Fritz Henderson to resign as CEO. I don’t have an opinion on Fritz Henderson. But here’s the worrying bit, from the New York Times article:

“’Fritz was just not enough of a change agent,’ [a person with direct knowledge of the board’s deliberations] said. ‘The board wants a world-class C.E.O. and now they have enough breathing room to find one.'”

Having tried and rejected the inside option (Henderson was a longtime GM executive chosen to replace Rick Wagoner, who was forced out earlier this year), the board is certain to go looking for a superstar CEO from outside the company and probably outside the industry. The phrase “world-class CEO” is always a dead giveaway for delusion.

Continue reading “Never a Good Sign” →

Feudal Lords Of Finance

In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular.  After all, human societies have survived the presence of extremely wealthy individuals in the past – in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation.

This argument is deeply flawed along three dimensions.

  1. Such super-elites care very little for anyone other than themselves.  Certainly, there will be some charity – but remember that John D. Rockefeller’s greatest donations came after he had been dragged through the mud by some very persuasive rakers (Ida Tarbell). Continue reading “Feudal Lords Of Finance” →

Details

Now that the financial regulatory reform bills are progressing in both houses of Congress, it means that to really be on top of things, you not only have to read the bills, you have to read the amendments. One example is the Miller-Moore amendment (full text here), which passed the committee 34-32, only to run into criticism from Andrew Ross Sorkin and Yves Smith, among others, as well as defenses by Felix Salmon.

The amendment applies to cases where (a) a systemically important (TBTF) financial institution is taken over by the government and (b) the government has to take a loss on the transaction (that is, the assets cannot be liquidated for enough to cover the secured creditors and the insured depositors). In those cases, it says that the receiver can choose to treat up to 20% of a secured debt as unsecured. (A mortgage is an example of secured debt; if you can’t pay off your mortgage, the bank gets the house instead. For financial institutions, we are largely talking about repos — transactions where Bank A sells securities to Bank B and promises to buy them back later, which is effectively a secured loan from Bank B to Bank A — and collateral held provided by Bank A to Bank B when derivatives trades move against Bank A.)

Continue reading “Details” →

What’s Wrong with Our Health Care Debate

Uwe Reinhardt has a post on Economix that zeroes in on Senator Kay Bailey Hutchinson’s criticism of the new mammogram guidelines. Here’s the quote from Hutchinson:

“So this task force says all of a sudden we’re going to change the guidelines that we have had for all these years. And now the public option may not pay for those, and that means the insurance companies are going to follow. The key is that these are covered by insurance so women will not have to decide if they’re going to spend $250 to get a mammogram because they and their doctors believe it is right to do so.”

Basically, the critics of the mammogram guidelines* are bemoaning the fact that certain women may not be able to get mammograms paid for by insurance — without mentioning the fact that many women don’t have insurance to begin with.

Or, to paraphrase Reinhardt: If certain medical procedures are so important to people’s health — shouldn’t everyone get them regardless of income or insurability?

* On which, let me make clear, I have no opinion, nor any qualified basis on which to have an opinion.

By James Kwak

Coordinated Capital Controls: A Further Elaboration

This guest post is by Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics.  His recent proposal that countries consider coordinated capital controls has stimulated a great deal of discussion, and here he explains how discouraging capital flows relates to arguments about the attractiveness of a Tobin-type tax. 

Paul Krugman, in his Friday column for the New York Times, endorsed a tax on financial transactions, proposed recently by Adair Turner, Britain’s top financial regulator.  It is important to distinguish this Turner proposal from the original Tobin tax on international flows and these two taxes in turn from the kind of coordinated capital controls I proposed in this blog post two weeks ago.

Tobin’s original idea was to discourage speculation by taxing flows of international capital.  The Turner variant is to tax all financial transactions, domestic and international.  What they have in common is that both are seen as structural measures to be applied regardless of the state of the macroeconomic cycle.

In contrast, the capital controls that are now being proposed are more in the spirit of “macroprudential” measures, to be taken in response to surges in international capital flows (and not to steady and permanent flows) to emerging markets that have the potential of creating bubbles in asset prices, including exchange rates.  Such measures are therefore intended to be taken during the upswing of the cycle and not at all times. Continue reading “Coordinated Capital Controls: A Further Elaboration” →

Does Dubai Matter? Ask Ireland

Presumably the rulers of Dubai and Abu Dhabi are currently locked in negotiations regarding the exact terms that will be attached to a “bailout” for Dubai World.  We’ll never know the details but if, as seems likely, the final deal involves creditors taking some sort of hit (perhaps getting 75 cents in the dollar, at the end of the day), does that matter?

Dubai probably has around $100bn in total liabilities, if we include off-balance sheet transactions, so total credit losses of $30-50bn need to be assigned.  The direct effects so far seem small.  HSBC leads the pack, in terms of exposure,  but our baseline estimate is a 3 percent loss relative to its equity – not good, but manageable (and the stock already fell 5 percent on the news).  The impact among other financial institutions that lent to Dubai seems fairly spread out and mostly within continental Europe.

Korean construction companies and Ukrainian/Russian steelmakers are also affected by the likely fall off in construction activity, but the broader boom in emerging markets is unlikely to be disrupted.  The repricing of risk so far does not apply significantly to East Asia or Latin America.

However, there is a worrying impact on Ireland. Continue reading “Does Dubai Matter? Ask Ireland” →

How Big Is Too Big?

As legislation on restructuring the banking industry moves forward, attention on Capitol Hill is increasingly drawn to the issue of bank size. Should our biggest banks be made smaller?

Senator Bernard Sanders, an independent from Vermont, introduced the “Too Big To Fail Is Too Big to Exist” bill in early November; this helped focus attention. Since then, in the legislative trenches where the detailed crafting takes place, Representative Paul E. Kanjorski — the Pennsylvania Democrat who is chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises — proposed an amendment to the Financial Stability Improvement Act (currently before the House Financial Services Committee) that

would empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy.

In a major step forward, this passed the committee on Nov. 18. Continue reading “How Big Is Too Big?” →

Is It 1999 All Over Again?

The New York Times’ Bits blog has a post on Trefis, a Web 2.0 startup that apparently makes it easy for you to create your own valuation model for public companies. They give you starter models using public information, and you can then tweak the assumptions to come up with your own valuation. The pitch is that this puts the tools used by research analysts and professional investors in the hands of the retail investor. “Perhaps these new tools will put some added pressure on the sell-side professionals – many of whom are notorious for creating overly optimistic takes on the companies they follow.”

Or maybe they will make retail investors think they have an advantage that they really don’t. Advantages in stock valuation have to be based on superior information, which you can get by doing lots of market research (like some old-fashioned hedge funds do) or by having privileged access to company insiders. Superior information can include superior forecasting ability, so if you have some ability to predict the market size for routers better than anyone else, you can make money from it. But neither of these are things you get from models; they are things you plug into models. I’m sure the founders of Trefis don’t see it this way, but this feels to me like a great way to lure people into individual stock-picking, and thereby a boon to stock brokers everywhere.

Continue reading “Is It 1999 All Over Again?” →

More on Goldman and AIG

Thomas Adams, a lawyer and former bond insurer executive, wrote a guest post for naked capitalism on the question of why AIG was bailed out and the monoline bond insurers were not (wow, is it really almost two years since the monoline insurer crisis?). He estimates that the monolines together had roughly the same amount of exposure to CDOs that AIG did; in addition, since the monolines also insured trillions of dollars of municipal debt, there were potential spillover effects. (AIG, by contrast, insured tens of trillions of non-financial stuff — people’s lives, houses, cars, commercial liability, etc. — but that was in separately capitalized subsidiaries.)

The difference between the monolines and AIG, Adams posits, was Goldman Sachs.

Continue reading “More on Goldman and AIG” →

Data on the Debt

So far, my foray into the world of the national debt has consisted of this:

One of the curious things about the debt scare that is building in the media is that it is happening at a moment when long-term interest rates are very low. In other words, it’s based on a theory that the market is wrong in its collective assessment of the debt situation. I’ve heard this blamed on “non-economic actors” (that is, foreign governments that buy U.S. Treasuries not as a good investment, but for political reasons), or on a “carry trade” where investors are exploiting the steep yield curve (free short-term money, positive long-term interest rates), as Paul Krugman discusses here.

Menzie Chinn crunches some numbers. He takes a model that he and Jeff Frankel created several years ago to estimate the impact on interest rates of inflation, the future projected national debt, the output gap (economic output relative to potential), and foreign purchases of Treasuries. That last term is important, because the oft-heard fear is that foreign governments will suddenly stop buying our debt.

Continue reading “Data on the Debt” →

What’s on TV

Frontline has a program on tonight about the credit card industry, which may be a useful accompaniment to the regulatory reform debate. They include this juicy paragraph in their press release:

“They’re lower-income people-bad credits, bankrupts, young credits, no credits,” Mehta [former CEO of Providian] says. Providian also innovated by offering “free” credit cards that carried heavy hidden fees. “I used to use the word ‘penalty pricing’ or ‘stealth pricing,'” Mehta tells FRONTLINE. “When people make the buying decision, they don’t look at the penalty fees because they never believe they’ll be late. They never believe they’ll be over limit, right? … Our business took off. … We were making a billion dollars a year.”

Rings true to me.

By James Kwak

Morgan Stanley Speaks: Against Relying On Capital Requirements

Just when momentum was starting to build for increased capital requirements as the core element of an approach that will reign in reckless risk-taking, Morgan Stanley effectively demolishes the idea.

In “Banking – Large & Midcap Banks: Bid for Growth Caps Capital Ask,” (no public link available) Betsy Graseck, Ken Zorbo, Justin Kwon, and John Dunn of Morgan Stanley Research North America dissect the coming demands for more bank capital. 

“In short, we think the demand for growth and access to credit will trump desire for unprofitable capital levels…

For the large cap and midcap banks, we expect normalized median common tier-1 ratios to come in at 8.4% and 10.0% respectively.”

That’s less capital than Lehman had just before it failed – 11 percent.  (If you doubt this, read the transcript of the final Lehman conference call – link is in this NYT.com piece or try this direct link; see p.7, for example) Continue reading “Morgan Stanley Speaks: Against Relying On Capital Requirements” →