Paul Volcker Picks Up A Bat

For most the past 12 months, Paul Volcker was sitting on the policy sidelines.  He had impressive sounding job titles – member of President Obama’s Transition Economic Advisory Board immediately after last November’s election, and quickly named to head the new Economic Recovery Board. 

But the Recovery Board, and Volcker himself, have seldom met with the President.  Economic and financial sector policy, by all accounts, has been made largely by Tim Geithner at Treasury and Larry Summers at the White House, with help from Peter Orszag at the Office of Management and Budget, and Christina Romer at the Council of Economic Advisers.

With characteristic wry humor, Volcker denied in late October that he had lost clout within the administration: “I did not have influence to start with.”

But that same front page interview in the New York Times contained a well placed shock to then prevailing policy consensus.  Continue reading “Paul Volcker Picks Up A Bat” →

Move Over, Bernanke

Ben Bernanke is Person of the Year. Matt Yglesias has criticism, although he does say it was an appropriate choice. Now, the Time award is meant to recognize newsworthiness, not necessarily exceptional conduct, and it’s hard to deny that Bernanke has been newsworthy. But I think that 2008 was Bernanke’s year, not 2009–that was the year of the real battle to prevent the collapse of the financial system. As far as the crisis is concerned, I would say the face of 2009 has been Tim Geithner–PPIP, stress tests (largely conducted by the Fed, but Geithner was the front man), Saturday Night Live, regulatory “reform,” and so on. But I can see why Time didn’t want to go there. Besides, I’m not sure that the financial crisis was the story of 2009; what about the recession? They’re related, obviously, but they’re not the same thing.

But in real news, Simon was named Public Intellectual of the Year by Prospect Magazine (UK). (This year they seem to have restricted themselves to financial crisis figures; David Petraeus won in 2008.) Over Ben Bernanke, among others. (Conversely, Simon didn’t make Time‘s list of “25 people who mattered”–but Jon and Kate Gosselin did, so that’s no surprise.) The article says that Simon “has also done more than any academic to popularise his case: writing articles, a must-read blog, and appearing tirelessly on television,” which sounds about right to me.

Prospect got one thing wrong, though. The article has a cartoon of Simon holding a sledgehammer and towering over a Citigroup in ruins. But no matter how many times you keep taking whacks at Citigroup, it refuses to die. One hundred years from now, maybe people will still be saying there are two common ingredients in all U.S. financial crisis: excess borrowing … and Citibank.

Update: I should have made clear that I prefer my award.

By James Kwak

The Myth of Dick Fuld

Wall Street critics often say that compensation should be in long-term restricted stock so that managers and employees do not have the incentive to take excessive risk, make big money in good years, deposit the cash in their bank account, and then escape to their private islands when their bets blow up the next year. Wall Street defenders like to point to Dick Fuld, who supposedly lost $1 billion by holding on to Lehman Brothers stock that eventually became worthless. You don’t get more of a long-term incentive than that, the argument goes.

Lucian Bebchuk, Alma Cohen, and Holger Spamann have exploded this myth in a Financial Times op-ed and a new paper. They look at the CEOs and the other top-five executives of Bear Stearns and Lehman Brothers. (All numbers are adjusted to January 2009 dollars.) From 2000 through 2008, these ten people received $491 million in cash bonuses (Table 1) and sold $1,966 million in stock (Table 2); on average, each person took out $246 million in cash. (Both Lehman and Bear had rules that prevented top executives from cashing out equity bonuses for five years from the award date–see p. 16 n. 33.)

Continue reading “The Myth of Dick Fuld” →

What’s Up with Citigroup?

On Monday, Citigroup received permission from its regulators to buy back the remaining $20 billion in preferred shares held by Treasury because of its investments under TARP. (Treasury invested $25 billion in October 2008 and another $20 billion November 2008; however, $25 billion worth of preferred shares were converted into common shares earlier this year, giving the government about a 34% ownership stake in the bank.) The stock then fell by 6%. What’s going on?

This is another example of a bank doing something stupid in order to say that it is no longer receiving TARP money, and probably more importantly so it can escape executive compensation restrictions. As Citigroup CEO Vikram Pandit himself said last October, TARP capital is really cheap (quoted in David Wessel, In Fed We Trust). Instead of paying an 8% interest rate* on $20 billion in preferred shares, Citigroup chose to issue $17 billion of new common shares while its share price is below $4/share. Citigroup’s cost of equity is certainly more than 8%, so it just increased its overall cost of capital. The stock price fell because existing shareholders are guessing that the dilution they suffered (because new shares were issued) will more than compensate for the fact that Citi no longer has to pay dividends to Treasury.

Continue reading “What’s Up with Citigroup?” →

Don’t Worry About Greece

The latest round of fretting in global debt markets is focused on Greece (WSJ; Greece).  This is misplaced.

To be sure, there will be a great deal of shouting before the matter is formally resolved, but the Abu Dhabi-Dubai affair shows you just where Greece is heading.

The global funding environment (thanks to Mr. Bernanke, Time’s Person of the Year) will remain easy for the foreseeable future.  This makes it very easy and appealing for a deep pocketed friend and ally (Abu Dhabi; the eurozone) to provide a financial lifeline as appropriate (a loan; continued access to the “repo window” at the European Central Bank, ECB).

Of course, there will be some conditions – and in this regard the Europeans have a big advantage: the Germans. Continue reading “Don’t Worry About Greece” →

“Wake Up, Gentlemen”

The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved.  Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth.  Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen.  I can only say that your response is inadequate.”

Volcker has three  main points, with which we whole-heartedly agree:

  1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
  2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”

and most important: Continue reading ““Wake Up, Gentlemen”” →

New Deal for U.S. Climate Policy?

This guest post was submitted by James K. Boyce, an economist at the University of Massachusetts, Amherst. He has been a proponent of a “cap-and-dividend” policy to curb global warming while protecting the incomes of American families.

Last Friday, Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) unveiled the CLEAR (Carbon Limits and Energy for America’s Renewal) Act, which could break the impasse in the debate over U.S. policy on climate change (McClatchy coverage is here.)

CLEAR has won a favorable reception from a broad swath of the political spectrum, ranging from ExxonMobil to Friends of the Earth. The scroll of supportive statements on Cantwell’s website includes praise from the AARP, the American Enterprise Institute, former U.S. Labor Secretary Robert Reich, Alaska’s Republican Senator Lisa Murkowski, and MoveOn.org.

Continue reading “New Deal for U.S. Climate Policy?” →

The Remarkable Ms. Warren

She’s probably already said this before, but I just saw this in an interview by Tim Fernholz, which I completely agree with:

“There are a lot of ways to regulate ‘too big to fail’ financial institutions: break them up, regulate them more closely, tax them more aggressively, insure them, and so on. And I’m totally in favor of increased regulatory scrutiny of these banks. But those are all regulatory tools. Regulations, over time, fail. I want to see Congress focus more on a credible system for liquidating the banks that are considered too big to fail.”

But what really caught my eye was this: “I’m teaching my classes, doing my research, and helping out where I can.” I always assumed she took a leave from Harvard Law School when she became chair of the TARP Congressional Oversight Panel. Now that is remarkable.

By James Kwak

Yet Another Loophole?

Read for yourself. Basically Ed Perlmutter and Barney Frank introduced a colloquy into the record that seems to say that the legislative intent of the reform bill is that the CFPA should delegate its examination powers over a given bank (which have already been limited to banks with over $10 billion in assets) to other regulatory agencies if those other agencies deem that the bank has a strong consumer compliance record. As loopholes go, I don’t think this is anywhere near the most toxic. (I guess the justification for this would be that it allows the CFPA to focus its resources on the largest banks, rather than banks with $11 billion in assets.)

But my favorite part of the article was this:

“[Perlmutter’s communications director Leslie] Oliver said there was no connection between the campaign contributions and Perlmutter’s actions. ‘He is campaigning. He accepts campaign contributions. Look at the totality of his campaign contributions,’ she said.”Of the $28,500 committees donated to his campaign in October, more than two-thirds came from the financial services industry.”

For the current election cycle, he has received the most money from the finance/insurance/real estate sector ($160,000), with lawyers and lobbyists second ($88,000). Labor is third at $75,000.

By James Kwak

A Few Words on Health Care Reform and Medicare Buy-In

From Ezra Klein:

“[Doctors] should be forced to work in a way that doesn’t hurt society. That, after all, is the guiding principle behind the insurance reforms: Insurers will have to live with a market that society can live with. Similarly, providers will have to live within a market that society can afford. That will mean a strict budget, at least within the federal programs (and over time, as the private programs become unaffordable, they will probably come on budget as well). …

“It’s that or national bankruptcy. And the problem, if left untreated, will only get worse, and the eventual correction, when it comes, will only be more severe. That, however, is exactly what they’re asking Snowe, and the rest of Congress, to permit. The fear with Medicare buy-in is that Medicare pays somewhat lower rates than private insurers because it tries to live within a budget, even if it fails. But like it or not, that’s the future, or one variant of it.”

Am I being hypocritical in allowing Ezra Klein to use the words “national bankruptcy?”

Continue reading “A Few Words on Health Care Reform and Medicare Buy-In” →

House Reform Bill Thread

As you already know if you read the news, the House version of the financial reform bill will probably come to a vote today, and it should have the votes to pass unless the Republicans/conservative Democrats manage to pass a poison pill amendment — like Walt Minnick’s amendment to kill off the CFPA and replace it with a council of regulators. (I’m not making this up.) The bank lobby moderate Democrats did manage to get federal preemption of state laws, which means that states can’t set higher standards than federal regulators and sounds like a bad thing (anyone remember the OTS?), but Mike Konczal says it might not be as bad as it sounds.

To be honest, I’m not sure what’s in this thing at the moment, and who knows how many little loopholes have managed to sneak in, especially when it comes to derivatives regulation. But if it has a meaningful CFPA (which I’m pretty sure it does), it’s a step forward. If it doesn’t break up big banks, it’s not enough.

By James Kwak

A Partisan Post, You Have Been Warned

Last night I read a post by Brad DeLong that made me so mad I had trouble falling asleep. (Not at DeLong, mind you.)  There’s really nothing unusual in there — hysteria about the deficit, people who voted for the Bush tax cuts and the unfunded Medicare prescription drug benefit but suddenly think the national debt is killing us, political pandering — but maybe it was the proverbial straw.

First, let me say that I largely agree with DeLong here:

“I am–in normal times–a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole.”

Now, let me tell you what I am sick of:

Continue reading “A Partisan Post, You Have Been Warned” →

Jamie Dimon Has Another Good Year

In May, Jamie Dimon, the head of JP Morgan Chase, told his shareholders that the bank just had probably “our finest year ever.”  Despite being close to the epicenter of the worst financial crisis since the Great Depression, Dimon’s bank was able to make a great deal of money, obtain government support when needed, and reduce that support level quickly when the overall situation stabilized – thus freeing the bank of constraints on its pay packages (and other activities).

It looks like the full year 2009 may turn out even better than Mr. Dimon expected in May.  Speaking at the Goldman Sachs US Financial Services Conference on Tuesday (December 8), Jamie Dimon presented JP Morgan Chase’s third quarter results (year-to-date).  His slides are informative, but if you want to pick up the nuances in his message, listen to the audio webcast (you have to register, but it’s free; here are back-up/alternative links). Continue reading “Jamie Dimon Has Another Good Year” →

The Funniest 750 Words of the Financial Crisis

Hat tips to Uncle Billy and Felix Salmon:

“A FORMER INVESTMENT BANKER ANALYST FALLS BACK ON PLAN B.

“1. Explain why you want to attend law school.

“I want to attend law school because I want to make a difference in the world. My desire to attend law school has nothing to do with the fact that I was recently fired from my job as an analyst at an investment bank, where I worked in the mergers and acquisitions group. Since January, I’ve worked on approximately one merger, zero acquisitions, have played Spider Solitaire 434 times and updated my Facebook status, on average, five times a day. …”

It only gets better.

(Unfortunately, I suspect it’s about nine months too late — I imagine most analysts at Goldman and Morgan Stanley are quite happy there these days, thank you.)

By James Kwak