Elizabeth Warren presents her chapter on consumer protection from the Make Markets Be Markets report, sponsored by the Roosevelt Institute.
Elizabeth Warren on Consumer Protection (MMBM) from Roosevelt Institute on Vimeo.
Video taken from the Make Markets Be Markets conference, March 3, 2010, New York City.
The TARP oversight committee is questioning the need for a bailout of GMAC, saying the company did not pose a systemic risk to the financial system. Elizabeth Warren, chair of the Congressional Oversight Panel, shares her insight.
Airtime: Thurs. Mar. 11 2010 | 7:14 AM ET
What is it about derivatives that makes otherwise rational humans become so damned stupid? There is no need to over-complicate this; a rather simple series of steps can be undertaken to bring the most dangerous of derivatives out of the shadows and into light of day.
Radical derivative deregulation had a bastard birth: On the eve of a holiday break, Texas Senator Phil Graham attached a budget bill rider titled the Commodity Futures Modernization Act of 2000. This was done at the behest of his wife Wendy, who was a member of the Board of Directors of Enron.
What the CFMA did was create a unique financial product. Derivatives and Swaps entered a world where they were treated very differently from all other financial products. Stocks, bonds, options, futures all follow specific rules. Securitized derivative products (collaterallized paper such as CDOs, CMOs, CLOs, etc.) and Credit Default Swaps (CDSs) do not.
Consider for example these characteristics of most financial instruments:
-They trade on an exchange;
-Participants have sufficient capital to engage in trading;
-Counter-parties disclosure is known (at the least to the exchange)
-Potential future payments require capital reserves to meet obligations;
-The full amount of traded instruments is transparently disclosed;
-There is a regulator in charge of insuring the above rules are followed.
Derivatives had none of those. Indeed, the CFMA specifically exempted derivatives not only from these items, but added they were exempt from state insurance regulators.
Let’s not over-complicate this: We need to do 3 things to rein in the worst aspects of derivatives, and dramatically reduce the systemic risk they present, while retaining their ability to be a valid financial instrument for hedging risk:
1. Repeal the Commodity Futures Act of 2000
2. Treat Derivatives like all other financial instruments: All of the above elements need to be derivative requirements;
3. Give the Commodity Futures Trading Commission full oversight and the teeth to enforce the rules.
Wall Street and the banks will fight this tooth and nail, as they are reaping billions in derivative trading profits. Never mind that whole 2008-09 meltdown thingie — that’s ancient history.
This is simple, folks: Derivatives should not receive special treatment — they need to be regulated the way most other financial products in the world are.
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See also:
Goldman Deal-Maker Now Advocates Regulation
GRAHAM BOWLEY
NYT, March 10, 2010
http://www.nytimes.com/2010/03/11/business/11cftc.html
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Preparing for a Smooth (Eventual) Exit
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| NY Fed | |
| Brian P. Sack, Executive Vice President
Remarks at the National Association for Business Economics Policy Conference, Arlington, Virginia Thank you for inviting me to speak today. In my remarks, I will provide an update on the progress that the Federal Reserve is making toward preparing for a smooth exit from the extraordinary policy actions that were taken in response to the financial crisis.1 When the time comes to tighten monetary policy, the Federal Reserve will be embarking on a tightening cycle like no other in its history. First, this tightening cycle will have two policy dimensions, in that the FOMC will have to decide on the path of its asset holdings in addition to the path of the short-term interest rate. Second, we will be using tools to drain reserves that are new and that will have to be implemented on a scale that the Fed has never before tried. And third, we will be operating in a framework of interest on reserves that has not been fully tested in U.S. markets. All of that may sound risky. However, I believe the Federal Reserve is positioned to minimize any risks involved. Most important, we have worked hard to ensure that we have all of the tools needed to exit, and FOMC members have begun to describe a strategy for using them that is cautious along several dimensions. In addition, if we communicate effectively, the markets should be clearly informed and well prepared ahead of the exit. These are the points that I will emphasize in more detail.
Liquidity Facilities: A Success Story As is well known, the Federal Reserve launched a number of liquidity facilities to provide short-term funding to the financial markets during the crisis, in order to meet the extraordinary demand for liquidity at that time. Here I am referring to those facilities that provided funding at maturities of up to three months to particular sets of firms, such as the primary dealers, money market mutual funds, commercial paper issuers, and depository institutions.2 Just today, we conducted the last operation associated with those facilities, meaning that all of the short-term liquidity facilities that were introduced during the crisis have now effectively been retired. The only special liquidity program that remains active is the Term Asset-Backed Securities Loan Facility, which I consider to differ from the short-term liquidity programs because it provides funding for up to five years. With the wind-down of these short-term liquidity facilities, it is a good time to look back and assess their performance. The bottom line here is simple: These programs were an unquestionable success. We have witnessed a remarkable improvement in the functioning of short-term credit markets and an impressive recovery in the stability of large financial firms. While a whole range of government actions contributed to this recovery, giving financial institutions greater confidence about their access to funding, and that of their counterparties, was most likely a crucial step toward achieving stability. Moreover, the exit from these facilities has been quite smooth. At their peak, these facilities provided more than $1.5 trillion of credit to the economy. Today, the remaining balance across them is around $20 billion. It is impressive that the Fed was able to remove itself from such a large amount of credit extension without creating any significant problems for financial markets or institutions. That success largely reflects the effective design of those programs, as most were structured to provide credit under terms that would be less and less appealing as markets renormalized. This design worked incredibly well, as activity in most of the facilities gradually declined to near zero, allowing the Fed to simply turn them off with no market disruption. The success of these facilities should be judged by the outcomes they produced for financial market functioning, and not by the financial returns they generated on the Federal Reserve’s books. However, there are several reasons why the Fed might be expected to profit from this type of lending under most circumstances. First, the Fed is providing funds in response to an extreme move in the price of liquidity—that is, it is in effect buying a cheap asset. Second, the programs themselves, if successful at returning market functioning, would help the performance of the Fed’s loans to be sound. And third, the lending under these facilities has to be adequately secured. Asset Holdings: A Policy Lever The Federal Reserve is approaching the scheduled end of its large-scale asset purchases. We have bought $169 billion of agency debt to date, nearly fulfilling our plan to purchase “about $175 billion.” For MBS, we have only about $30 billion of purchases remaining to reach our $1.25 trillion target. In addition, we completed $300 billion of purchases of Treasury securities late last year. Looking across these programs, we have now purchased $1.69 trillion of assets, bringing us 98 percent of the way through our scheduled purchases. To get to this point, the Trading Desk at the New York Fed has so far conducted 126 discrete operations to purchase Treasury and agency debt, and has managed 292 trading days on which either it or its investment managers have acquired MBS. My view is that the purchase programs have helped to hold down longer-term interest rates, thereby supporting economic activity. With the conclusion of the programs approaching, the Desk has been tapering the pace of its purchases of agency debt and MBS. However, even as the pace of our purchases has slowed, longer-term interest rates have remained low, and MBS spreads over Treasury yields have remained tight. This pattern suggests that the effects of the purchases have been primarily associated with the stock of the Fed’s holdings rather than with the flow of its purchases. In that case, the market effects of the purchase program will only slowly unwind as the balance sheet shrinks gradually over time.3 In my previous speech back in December, I discussed in detail the channels through which these market effects may arise. By removing large amounts of duration and prepayment risk from the market, the Fed’s asset purchases reduced the volume of risk that the market had to hold, which lowered the risk premia on those assets. Put differently, the purchases bid up the prices of those assets and hence lowered their yields. The lower levels of yields would be expected to boost other asset prices as investors substitute into alternative asset classes. These patterns describe what researchers often refer to as portfolio balance effects. Such effects are important to consider, because they have implications for monetary policy. If the Fed’s holdings of assets have produced lower long-term interest rates, the FOMC has to carefully take into consideration how it will manage the size of its balance sheet going forward. In particular, a rapid and substantial reduction in our holdings of assets would likely push up long-term interest rates that is, it would put upward pressure on those rates by unwinding the portfolio balance effect. That increase in long rates would, in turn, weigh on other asset prices, reversing the positive effects that had been associated with the expansion of the Fed’s balance sheet. Under this view, the size of the Fed’s asset holdings becomes a relevant policy lever. Accordingly, this will be the first tightening cycle for which there are two broad policy decisions in play, as the FOMC will have to set out not only the path of the short-term interest rate, but also the path of its asset holdings. The decisions on these two variables will have to be made in conjunction with one another to produce the desired outcome for economic activity and inflation. These considerations leave open a range of outcomes for how the two instruments will be used. In his February 10 testimony, Chairman Bernanke described a possible approach for managing the size of the balance sheet. In particular, he indicated that he does not currently anticipate that the Fed will sell any of its asset holdings until the economic recovery is more firmly established and policy tightening has gotten underway. Until that time, the portfolio would shrink only through asset redemptions. Chairman Bernanke noted that the Fed’s holdings of agency debt and MBS are being allowed to roll off the balance sheet, without reinvestment, as those securities mature or are prepaid, and that the FOMC may choose to redeem some of its holdings of Treasury securities in the future, as well. With this approach, the FOMC would be shrinking its balance sheet in a gradual and passive manner. That, in my view, is a crucial message for the markets. It should limit any reversal of the portfolio balance effects described earlier, effectively putting reductions in asset holdings in the background for now as a policy instrument. As long as this approach is maintained, it would leave the adjustment of short-term interest rates as the more active policy instrument—the one that would carry the bulk of the work in tightening financial conditions when appropriate. This approach is cautious in several dimensions. First, a decision to shrink the balance sheet more aggressively could be disruptive to market functioning. Second, a more aggressive approach would risk an immediate and substantial rise in longer-term yields that, at this time, would be counterproductive for achieving the FOMC’s objectives. Third, the effects of swings in the balance sheet on the economy are difficult to calibrate and subject to considerable uncertainty, given our limited history with this policy tool. And fourth, policymakers do not need to use this tool to tighten financial conditions. They can tighten financial conditions as much as needed by raising short-term interest rates, offsetting any lingering portfolio balance effects arising from the still-elevated portfolio. Even under this cautious strategy of relying only on redemptions, the Federal Reserve could achieve a considerable decline in the size of its balance sheet over time. From now to the end of 2011, we project that more than $200 billion of the agency debt and MBS held by the Federal Reserve will mature or be prepaid, though the actual total will depend on the path of long-term interest rates and the prepayment behavior of mortgage holders. Thus, the Fed’s asset holdings would shrink meaningfully if the FOMC maintains its current strategy of not reinvesting those proceeds. In addition, about $140 billion of Treasury securities mature between now and the end of 2011, giving the FOMC scope to reduce its asset holdings even further if it chooses to not replace some of those maturing securities. While the passive strategy of relying on redemptions may be appropriate for now, it might not be sufficient over the longer-term. One problem is that relying only on redemptions would still leave some MBS holdings on our balance sheet for several decades. As indicated in the minutes from the January meeting, the FOMC intends to return to a Treasuries-only portfolio over time. This consideration could motivate the FOMC to sell its agency debt and mortgage-backed securities at some point, once the economic recovery has progressed sufficiently. Draining Tools: Control of Short-Term Rates The primary vehicle for making adjustments to short-term interest rates in that environment is the ability to pay interest on reserves. We would expect changes in the interest rate on reserves to have a significant influence on other short-term interest rates. However, in order to ensure our ability to influence those other short-term interest rates, we have been developing two tools that can be used to reduce the large amount of excess reserves in the banking system—term deposits with banks and reverse repurchase agreements (reverse repos) with a broader universe of financial institutions. Let me first provide an update on the progress we have made in developing these tools. On term deposits, the Federal Reserve has received public comments on the proposed structure of the facility that was published in December, and we are working toward its final form. As described in the recent Monetary Policy Report, the Federal Reserve expects to be able to conduct test transactions in the spring and to have the facility fully ready, shortly thereafter, to conduct transactions when needed. On reverse repos, we have already successfully run small-scale operations using Treasury and agency debt as collateral with primary dealers. However, that leaves two significant steps still to take in preparing the tool. One is developing the capacity to use our MBS holdings as collateral. Work in that area is nearly complete, and we will likely conduct some small-scale operations with MBS collateral in a month or so to exercise that capability. The other step is expanding the set of counterparties that we use for such operations. Earlier today, we published criteria for money market mutual funds to become eligible to participate in reverse repo operations, which was a first and important step in that direction. We are currently working with other types of firms to assess their potential participation in the program, as well. Our expectation is to have arrangements in place and to be ready to transact with some non-dealer firms by the end of the second quarter. This expansion of counterparties is important for boosting the capacity of the program. The bottom line is that the preparation of both facilities is advancing very effectively. Looking across the two programs, we will have established the capacity to drain a significant portion of excess reserves by the second half of the year. Of course, achieving this capacity does not say anything about how and when the FOMC will decide to actually drain reserves. The actual timing and size of draining operations, and their relation to changes in the interest rate paid on reserves, will depend on how market and economic conditions evolve. Chairman Bernanke discussed one possible sequence in his February 10 testimony. He suggested that operations to drain reserves could be run on a limited basis well ahead of policy tightening, in order to give market participants time to become familiar with them, and then could be scaled up to more significant volume as we approach the time for policy tightening. Removing a portion of the excess reserves from the system ahead of increasing the rate paid on reserves is a cautious approach, as it should improve the Fed’s control of short-term interest rates when it comes time to tighten monetary policy.4 To be sure, even at today’s reserve levels, we would expect the interest rate paid on excess reserves to exert considerable pull on other short-term interest rates such as the federal funds rate or repo rates. However, we are unsure of the exact relationship between these rates and believe that it is likely to be tighter when the banking system is not as saturated with liquidity as it is today. Thus, it may be prudent to remove some portion of excess reserves before raising the interest rate on reserves. Note that the policy tightening in this scenario will still likely be taking place in an environment of large excess reserve balances, and the main workhorse of the tightening cycle will still be the interest paid on reserves. However, the draining tools can be used to best ensure the success of that framework. Market Conditions: At Risk on Exit? The first potential concern is that the exit strategy could simply cause confusion among market participants, prompting volatility in asset prices. As noted earlier, this tightening cycle, when it arrives, will be more complicated than past cycles, as there will be more decision points facing policymakers. With more decision points come more opportunities for the markets to be confused by our actions. The recent changes to the discount rate and the Treasury’s Supplementary Financing Program balances highlight this concern, as the amount of attention that those actions received was outsized relative to their significance for the economy or for the path of short-term interest rates. The burden is on the Fed to mitigate this risk by communicating clearly about its policy intentions and the purpose of any operational moves it might take. In this regard, the forward-looking policy language that the FOMC is currently using in its statement is important. I would argue that this language contains much more direct and valuable information about the likely path of the short-term interest rate target than does any decision about draining reserves. Indeed, it will be difficult for market participants to make precise inferences about the timing of increases in the target interest rate from the patterns of reserve draining alone, in part because the FOMC has not specified the path of reserves it intends to achieve before raising interest rates. The second potential concern that some may have is whether the markets have adequately priced in the exit strategy. However, a few considerations should limit this concern. Most important, the current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year. Thus, the markets seem prepared for the risks toward tighter policy. Moreover, looking out to longer maturities, the shape of the Treasury yield curve appears to incorporate not only expectations of policy tightening, but a decent-sized term premium on longer-term securities. Indeed, the term premium is well above the levels observed over most of the past several years, even though inflation is likely to be low and upside inflation risks are limited. This should help to diminish the chances of a sizable upward shift in yields. A related issue is whether the current levels of risky asset prices will prove robust in a rising rate environment. This may be a particular concern among those who argue that the current low policy rate environment has fueled an unsustainable rise in asset prices beyond their fundamental values. However, this is not clearly the case on a broad basis. Obviously, risky asset prices have undergone a historic rise from their trough in early 2009. But this rise began from an extreme starting point, one in which asset prices were being depressed by the baseline forecast of a deep recession, by the prospect of further downside risks to the economy, and by very elevated risk premiums. As the economy stabilized, asset prices benefitted from both the improving economic outlook and a significant renormalization of risk premiums—a pattern that was a desired outcome from the stance of monetary policy. Moreover, we do not see definitive signs that risk premiums have broadly become too low at this point. To be sure, a number of significant risks remain in the economic outlook, and those translate into financial market risks. Eventually, though, we expect to reach a period of sustained, above-trend growth to absorb the substantial slack in place, which is an environment that should be quite supportive of risky asset prices. Policy tightening will presumably occur as that happens, limiting the downside risk to markets associated with policy actions. Conclusion I began the speech by noting that we face an extraordinary challenge with this exit, given the historic steps that have been taken with the Fed’s balance sheet. This challenge, which involves operating in uncharted territory along several dimensions, will inherently involve some uncertainties and risks. However, as I hope is clear from my remarks, the Federal Reserve’s efforts to date should minimize those risks. Indeed, I believe the Fed’s efforts have been prudent along a number of dimensions. As a first step, we have been careful to make sure we have an adequate set of tools. To that end, we have developed multiple tools that can be used for draining reserves, in order to ensure our capability to do so. Moreover, we have been testing those tools and will continue to take steps to ensure that we and the markets are prepared to use them in more significant volumes when needed. Developing the tools is not enough, though. As a second step, policymakers will need to formulate a strategy for using them in an appropriate manner to avoid any undesired outcomes for financial markets and the economy. The FOMC is actively engaged in determining that strategy, as indicated in the FOMC minutes from the January meeting. The strategy to be employed has not been fully decided, but recent speeches by FOMC members and the recent FOMC minutes have begun to convey some of the possibilities. Many of the potential steps described seem to guard against the risks involved. For example, reducing the size of the Fed’s balance sheet through redemptions for now will produce a gradual adjustment that will be easier for the markets to digest. In addition, steps taken to drain reserves ahead of policy tightening may best ensure the success of interest on reserves at influencing other short-term interest rates. Overall, an approach along these lines should help to ensure a smooth exit from the current accommodative stance of monetary policy. Moreover, if the Fed’s intentions are well communicated to the financial market participants, they too should be fully prepared and in the best possible shape for navigating this exit. ______________________________________________________ |
There are a handful of good ideas in some of the latest proposals floating around: Consolidate all of the banking oversight into one super regulator to prevent forum shopping. Then give that regulator teeth. (I suggest the FDIC is the best office to do this in).
Here are some of the proposals under discussion:
“Strip the Federal Reserve of regulatory powers over all but the very largest banks, those with more than $100 billion in assets, people briefed on the negotiations said on Monday night.
The plan would remove Fed oversight from all but 23 of the 4,974 bank holding companies, which have a collective $16.7 trillion in assets, and from 874 state-chartered member banks that are members of the Fed system and that have a total of $1.7 trillion in assets.
The vast majority of the bank holding companies would be overseen by a regulatory agency formed from a merger of the Office of the Comptroller of the Currency, which oversees national banks, and the Office of Thrift Supervision, which regulates savings and loans, the individuals said. Regulation of the state banks would go to the Federal Deposit Insurance Corporation, which already oversees about 5,000 banks that are not part of the Fed system.”
Perhaps the rationale for the big banks staying under the jurisdiction of the Fed is that it somehow effects monetary policy through their primary dealers of US Treasuries.
But I don’t see why we want or need to keep the Fed overseeing even those 23 banks . . .
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Source:
Fed’s Reach May Be Curbed Under Plan
SEWELL CHAN
NYT: March 8, 2010
http://www.nytimes.com/2010/03/09/business/economy/09regulate.html
“We have the track record of them failing to take action when they should have and potentially could have averted this foreclosure crisis.”
-John Taylor, CEO of National Community Reinvestment Coalition
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I cannot figure out the thought process behind putting a consumer protection agency into the hands of the Fed. This is the same regulatory body that gave a total pass to the non-bank lenders at the heart of the sub-prime, APR, and exotic loan issues.
Bloomberg sums it up perfectly with their headline: Consumer Agency Within Fed Seen as Victory for Banks.
Here’s your excerpt:
“If the Fed doesn’t start to use that authority to roll out the rules, then we’ll give it to somebody who will,” Frank said.
The Fed drafted tougher mortgage lending rules in 2007 and completed them in 2008. The rules prevented mortgages for borrowers with no documented income, required lenders to write loans borrowers could repay and made escrow accounts mandatory for high-cost mortgages. The Fed also toughened restrictions on prepayment penalties.
Separately, the Fed has forced credit-card companies to improve disclosure and has increased its scrutiny of possible discrimination in lending. The central bank referred 17 cases to the Justice Department in the three-year period ending 2009, up from nine the prior three years.
The Fed’s actions came too late, consumer advocates say.”
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Source:
Consumer Agency Within Fed Seen as Victory for Banks
Craig Torres and Yalman Onaran
Bloomberg, March 3 2010
http://www.bloomberg.com/apps/news?pid=20601109&sid=ax0g_Lb2rqqo&
What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers.
The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would allow consumers to 1) Understand the amount of money the financing would cost them; 2) Determine if they could afford this product; 3) Allow them to shop competitively for the best rates.
Good idea, right? 
Considering that we people made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, perhaps a little impulse control is a good idea. More accurate cost disclosures of credit will also help. Americans need help figuring out exactly what all this stuff costs when you include finance charges. We are, after all, a country of math-phobic shopaholic shit junkies. Anything that can help us figure out whether we can afford our bigger purchases — like cars and houses — should be a no-brainer.
Unfortunately, the banking lobby, in conjunction with the auto dealers lobby, had other ideas. A simple mandate to have all mortgages shown compared to a plain vanilla 30 year fixed was thwarted. It was to be similar to the FDA nutrition disclosures on the side of your kid’s cereal box. Who, could possibly object to that?
That the banking lobby stopped this simple consumer disclosure in its tracks reveals they want nothing to stand in between themselves and any profit, no matter how ill-gotten. The less informed of a shopper, the better. That even this simple consumer disclosure was thwarted is testament to how corrupt Congress has become. They can’t even get something this modest — and needed — passed.
Think back to the boom times of yesteryear. How many Americans actually understand the mortgages they were applying for? Did they calculate the costs, obligations and risks of their loans? Did they understand the cost and differences between Refis, HELOCs, and piggyback loans? The answer for the vast majority of US citizens is an emphatic NO. If anyone needs better disclosure of financial costs, it is the mathematical illiterates — innumerates — here in the USA.
Over the years, I have had countless conversations with home buyers about their mortgages. From 2003 to 2008, a typical a cocktail party or a BBQ invariably went something like this:
Home-Buyer: We got a great deal on our new mortgage.
Me: Did you do a 30 year fixed or something more exotic?
HB: 30 year fixed — at 4.5% !
BR: Sorry, but that’s not 30 year fixed — rates are 6.5% today. That’s probably a 2/28, with a reset in 200X.
HB: No, we definitely asked for a 30 year fixed.
BR: Well, that’s not what you got — its impossible to get that loan at that rate today.
HB: We’re good negotiators.
BR: Mortgage rates are set by the bond market. Banks charge a mark up ABOVE the rates that they can borrow money. They can’t get 30 year money at 4.5%, so you can’t get 4.5%. There is only so much negotiating you can do with the bond market.
HB: Well, its definitely a 30 year fixed.
BR: Please make the pain stop . . .
And so on.
Huge swaths of people, did not understand what they were buying, what it cost them, what their other options were, whether they could afford it or not.
I am not saying this to exonerate their ignorance — it is inexcusable in my opinion. Adults must take responsibility for their decision making, regardless of how foolish it may have been. That home buyers cannot figure out a basic financing document is beyond my comprehension. However, that is the way it is. We must acknowledge the simple reality, if we wish to avoid this problem in the future. That’s why we need to insure consumers understand what they are purchasing.
Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.
The Fed is the wrong agency for this.
It does not need to be a giant bureaucracy, just a relatively simple set of disclosure laws to make sure consumers understand, in plain English, what they are buying. And the teeth to enforce them.
Americans have a hard time with complex math. And in Finance, we have a carnivorous sales force that eats its young, and sells their grandmothers near worthless CDS at par. Forcing this rapacious group of Ferengi to comply with fair cost disclosure is not asking too much.
If we are going to have an informed consumer class making intelligent financial decisions, a Consumer Protection Agency is a good place to start . . .
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via Tom Toles
As a stark counterpoint to How Goldman Sachs Bagged Clients, I recall ever so fondly how Merrill Lynch bagged itself: With a Sept. 2006, top-of-the-market, $1.3 billion acquisition of sub-prime originator First Franklin from National City:
First Franklin is one of the nation’s leading originators of non-prime residential mortgage loans through a wholesale network. [...]
“This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services.” — Dow Kim, president of Merrill Lynch’s Global Markets & Investment Banking Group
A close friend who was in the employ of seller National City told me at the time that they couldn’t believe their good fortune at having found a buyer for their turd factory. (National City itself was eventually picked up on the cheap by PNC.)
The operation was being wound down about one year later, representing what might be one of the all-time boneheaded acquisitions in corporate history.
The saddest part of all is that Merrill had a chief economist — David Rosenberg — who was screaming about an inflating housing market bubble [PDF]. Had they listened to their own economist — not an unreasonable thing to do — Merrill could have come out smelling like a rose. Instead, they chose to ignore Rosie and plough headlong into what would have undoubtedly been bankruptcy if not for B of A.
Good times!
I keep finding these gems I missed while out for the holiday week. Here’s another fascinating reads — its a nice takedown of Goldman Sachs via McClatchy.
The article implies that GS and others knew they were selling paper that was going to create a giant loss to the buyer.
McClatchy:
“When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.
McClatchy has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met “every definition of a Ponzi scheme.”
The documents include the offering circulars for 40 of Goldman’s estimated 148 deals in the Cayman Islands over a seven-year period, including a dozen of its more exotic transactions tied to mortgages and consumer loans that it marketed in 2006 and 2007, at the crest of the booming market for subprime mortgages to marginally qualified borrowers.
In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.”
Note that the implication in the full piece is not that these were possible losses, but rather, based upon what GS understood about the ways these papers were structured and then hedged (insured with the client), it was a sure loss. So rather than hold on to the money losing mortgage based securities, GS devised a way to sell it to clients!
The entire piece and accompanying video are worth spending time with on a Sunday afternoon…
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Source:
Goldman’s offshore deals deepened global financial crisis
Greg Gordon
McClatchy Newspapers, December 30, 2009
http://www.mcclatchydc.com/227/story/81465.html
Starting off this terrific article from Floyd Norris is this simply astounding statistic:
More than $1 in every $10 that American banks have outstanding in loans is lent to a troubled borrower, a ratio far higher than previously seen in the quarter-century that such numbers have been compiled.
The problems are greatest in construction loans for single-family homes, where nearly 40 percent of the loans either are delinquent or have been written off as uncollectible. But they are also high in mortgage loans for single-family homes, where $1 in every $8 of loans is troubled.
Amazing . . .
That is what happens when we elected to go Japanese rather than Swedish on the financial sector — We saved the Banks, but sacrificed the Banking System.
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Previously:
Time to Get Swedish (January 23rd, 2009)
http://www.ritholtz.com/blog/2009/01/time-to-get-swedish/
The New N Word: Nationalization (February 25th, 2009)
http://www.ritholtz.com/blog/2009/02/nationalization-the-new-n-word/
Why Aren’t Banks Lending? They Are Being Rational (December 23rd, 2009)
http://www.ritholtz.com/blog/2009/12/why-arent-banks-lending-they-are-being-rational/
Source:
Banks Out of the Woods? Maybe Not
FLOYD NORRIS
NYT, February 26, 2010
http://www.nytimes.com/2010/02/27/business/27charts.html
The FDIC is proposing a test program of principle reduction for negative equity homeowners.
But why is the FDIC required? An intriguing private sector solution would be a negotiated principle reduction between borrower and lender — no government intervention is needed.
Let’s begin exploring this idea by looking at a Washington Post article from today (FDIC to test principal reduction for underwater borrowers):
“The Federal Deposit Insurance Corp. is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure.
The program would be aimed at a growing population of homeowners who are underwater on their loans, estimated at more than 20 percent of borrowers, or 11 million homeowners. Economists consider these borrowers among the most vulnerable to foreclosure, and some industry officials worry that more of them will simply walk away from their mortgages, or “strategically default,” rather than spend a decade or more trying to regain positive equity.
Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. The performance of those borrowers would be compared with borrowers given more traditional mortgage relief packages, such as those that cut the interest rate on loans.”
It only requires basic math skills for all parties to recognize that it is in the banks interest to avoid foreclosures. Underwater borrower with this knowledge — and the cojones — should let the bank know they understand simple math: Foreclosures = 50% bank loss.
They can then “engage in an arm’s length, Wall Street style negotiation.” Not precisely a threat, but simply laying out clearly what the mortgagee’s options are.
Imagine if a negative equity home-ower said to their lender:
“The fact is you lose ~50% (40-60%) on a foreclosure sale of a 2004-08 vintage mortgage.Since Morgan Stanley and other who have defaulted and walked away from money losing commercial real estate transactions they could not renegotiate, I am going to do the same: Unless you cut a substantial percentage of the principal (~20-30%) owed, then I will choose to strategically default (walk-away).”
I suggest bypassing the FDIC and going straight to your lender. Where the FDIC could be of assistance would be to prod the lender to consider the alternative to foreclosure.
My guesstimate is that of the 5 million probable future foreclosures, this mod would be applicable to about 20% of them. Note that a recent report from the Office of the Comptroller of the Currency implies that banks have figured this out: In Q3 of 2009, 13% of loan mods included a principal reduction, up from 10% in Q2 ‘09.
Of course, if Congress didn’t force FASB tio eliminate mark-to-market on holdings, the banks wouldn’t be able to, Japanese style, wait the whole mess out over the next decade or two.
There are additional elements involved.
The HAMP approach (which isn’t working very well):
“Lenders have been reluctant to cut the principal balance owed by distressed borrowers, arguing that it would encourage homeowners to become delinquent even if they can afford their mortgage. Instead, the industry has focused on providing mortgage relief by lowering a borrower’s interest rate or extending the terms of a mortgage to 40 years.
We know borrowers do not benefit much from these mods – a 1% lower, 40 year mortgage still makes most of these homes too expensive. It does little for the ability of the underwater borrower to carry the property. And these HAMPS fall into default at a very high rate — 60-80%, depending upon circumstances.
Final point:
“In some cases, a portion of the principal balance is put into a second mortgage that does not have to be paid off until the borrower sells the home or refinances.”
That was my 30-20-10 proposal some time ago. That is a good fall back proposal — move 30% of my mortgage into a 10 year, interest free 2nd mortgage.
A straight up principle reduction is the way to go, with a balloon mod an alternative option.
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Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/
Strategic Defaults in Florida (October 28th, 2009)
http://www.ritholtz.com/blog/2009/10/strategic-defaults-in-florida/
Coming Soon: 5 Million More Foreclosures (February 16th, 2010)
http://www.ritholtz.com/blog/2010/02/coming-soon-more-foreclosures/
Source:
FDIC to test principal reduction for underwater borrowers
Renae Merle
Washington Post, February 26, 2010; A20
http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022505817.html
Where did all the people go from the collapsed financial institutions?
Via Linked In, we get the semblance of an answer:
One hypothesis is that many of the employees left the financial industry. According to the LinkedIn data set, that just isn’t true. There are a handful of people that did transition to other industries and start new careers, but most stayed in the financial space. To be specific, other than two acquiring companies (Bank of America acquired Merrill Lynch and Nomura acquired Lehman Brothers’ franchise in the Asia Pacific region), Barclays was by far the biggest beneficiary, scooping up 10% of the laid off talent, followed by Credit Suisse at 1.5% and Citigroup at 1.1 %.
Here’s a chart:
Hat tip Paul
How is it possible that the Financial Crisis Inquiry Commission has less than 400 people following them on Facebook?
Please do me a favor and add them to your friend list:
click to go to FCIC Facebook page
Hat tip Solanic
Too be filed under Doh!:
“With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.
Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens…
With so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.”
Surprisingly, the FDIC’s reserves are somewhat better than they appear:
“The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.”
Of allt he regulators who were thwarted by politicians or who missed the crisis, the FDIC did the best job heading into the crisis. And for the record, the FDIC fund, unlike TARP, is NOT taxpayer monies. Rather, its paid for with bank fees. Even if they deplete the fund, they are looking for a line of credit, not actual cash.
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Source:
At F.D.I.C. , Bracing for a Wave of Failures
ERIC DASH
NYT, February 23, 2010
http://www.nytimes.com/2010/02/24/business/24fdic.html
Wait, don’t tell me, let me guess . . .
The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.
I guess it isn’t much of a a surprise or a coincidence that the firm that underwrote the greatest amount of toxic CDOs also purchased the greatest amount of Credit Default Swaps on top of them.
What is a surprise is the lengths the NY Fed went to hide this little factoid:
“Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.
These were the deals that pushed the insurer to the brink of insolvency — and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released . . .
That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis . . . “
What was the specific non-disclosure? Recall that in November 2008, as AIG was preparing a regulatory filing, they had been planning to include all of their counter party payments. Bloomberg calls this doc “Schedule A,” and it was a full breakdown of the pass-thru payments:
Unfortunately, a lawyer for the Fed killed the disclosure, according to e-mails found via FOIA:
“The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.
These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman — for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”
To review: Tim Geithner’s NY Fed bailed out Goldman Sachs at 100 cents on the dollar, and then went through all manner of contortions to hide this fact from the public and members of Congress.
Read the Bloomberg piece — but not on a full stomach . . .
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Source:
Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs
Richard Teitelbaum
Bloomberg, Feb. 23 2010
http://www.bloomberg.com/apps/news?pid=20601109&sid=ax3yON_uNe7I&
For the past several months I have been hearing a lot of complaints about the FDIC giving away “taxpayer money” in the sale of IndyMac last year and how the agency was encouraging foreclosures and short sales because of loss sharing agreements with the buyers of dead banks. Now there is a video circulating in the matrix that purports to show that the FDIC gave away a lot of taxpayer money to George Soros and various other investors as part of the resolution and sale of IndyMac to OneWest.
The chief source of these reports is from TBWS, which supposedly reveals how Goldman Sachs worked an unreal deal with the FDIC. (Here http://www.thinkbigworksmall.com/mypage/player/tbws/23088/1559781)
Martin Andleman touched on this in his “Bringing Up the Rear” column highlighting George Soros back in October of 2009 (Bringing Up the Rear: Liberal Billionaire George Soros).
Unfortunately these reports are wrong. As is often the case with generalist writers, these people got most of their facts wrong or got no facts at all.
Last Friday, FDIC Director of Public Affairs Andrew Gray said:
“It is unfortunate but necessary to respond to blatantly false claims in a web video that is being circulated about the loss-sharing agreement between the FDIC and OneWest Bank. Here are the facts: OneWest has not been paid one penny by the FDIC in loss-share claims. The loss-share agreement is limited to 7% of the total assets that OneWest services, and OneWest must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets. In order to be paid through loss share, OneWest must have adhered to the Home Affordable Modification Program (HAMP).
The producers of this video perpetuate other falsehoods. The FDIC has not requested to borrow money from the Treasury Department. Indeed, we continue to be funded by the banking industry through assessments, not by taxpayers as claimed in the video.
This video has no credibility. Regardless of the personal or professional motivations behind its production, there is always a responsibility to be factually correct and transparent. The FDIC made available a fact sheet on the day that the sale of IndyMac was announced that details the terms of the contract. It’s too bad that the creators of this video opted to premise it on falsehoods.”
Today’s must read MSM piece is a fascinating front page WSJ article on Treasury Secretary Tim Geithner (Bailout Anger Undermines Geithner).
Ignore that misleading headline — the article itself is not so much about the anger over the bailouts, but instead details the policy decisions and political choices Geithner made as Treasury Secretary.
The litany is not pretty.
The headline misses the nuance of the story: That Geithner is very much a creature of the Banks he is supposed to regulate; that he continued the same ruinous bailout policies he was a part of when they began under Bush/Paulson; that he has stood as a speed bump preventing more aggressive regulation of the banks that caused the mess.
Perhaps the key sentence in the entire Journal article: “Interviews with dozens of government officials show that Mr. Geithner has acted as a brake on administration officials seeking punitive action against big financial firms.” No, we best not punish these banks, that would be terrible.
From the Journal article, here are a few of Geithner’s greatest faux pas:
• Resisted efforts to oust Citigroup Chief Executive Vikram Pandit as a condition for more government aid;
• Successfully argued against ripping up contracts that controversially allowed millions of dollars in bonuses to be paid to American International Group employees;
• Pushed for banks to repay government funds, thus freeing them from TARP regulation;
These factors are minor compared to the overall failure to enact any sort of comprehensive regulatory reform. That is what a stronger, less captured Treasury Secretary would have done. Only a year into his term, this failure to achieve any major reforms represents his biggest policy blunder.
Expect it to cost the Democrats dearly come November . . .
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graph courtesy of WSJ
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Source:
Bailout Anger Undermines Geithner
DEBORAH SOLOMON
WSJ, FEBRUARY 21, 2010
http://online.wsj.com/article/SB10001424052748703798904575069610953163620.html
The latest endorsers for the so-called Volcker Rule separating riskier trading activity form government insured depository banks have gone public. Five former U.S. Treasury secretaries have called upon Congress to implement rules limiting both the size and trading activity of these banks.
The Treasury secretaries are John Snow, Paul O’Neill, Nicholas Brady, George Shultz and W. Michael Blumenthal.
In a letter to the editor, published this morning in the WSJ, they wrote:
We who have served as secretary of the Treasury in both Republican and Democratic administrations write in support of the proposed legislation to prohibit certain proprietary activities of commercial banking organizations—the so-called Volcker rule, as part of needed financial reform (“It’s Time for Financial Reform Plan C,” by Alan Blinder, op-ed, Feb. 16).
The principle can be simply stated. Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services.
Hedge funds, private-equity funds, and trading for speculative gains are activities carried out by thousands of nonbanking firms. These firms and funds are and should also be free to compete and to innovate. They should, like other private businesses, also be free to fail without explicit or implicit taxpayer support. Those few nonbank firms that present systemic risk should be subject to reasonable restrictions on capital, leverage and liquidity.
We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform. It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.
We urge the United States to take the lead in the forthcoming G-20 meeting and other appropriate forums to achieve broad agreement on this principle among the leading financial centers.
W. Michael Blumenthal
Nicholas Brady
Paul O’Neill
George Shultz
John Snow
As we have noted in the past, this rule would not have prevented the current crisis; rather, it addresses new taxpayer risks created by the bailouts. Under the Volcker rule, the firms that engage in leveraged speculation should no longer expect Uncle Sam being there to backstop them.
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Source:
Congress Should Implement the Volcker Rule for Banks
WSJ, FEBRUARY 21, 2010
http://online.wsj.com/article/SB10001424052748703983004575074123680183534.html
Sundays are a good time to look at some of the academic literature out there. Reader Mike R. sends along this study from Q1 2009 — revised January 29, 2010 — that looked at the “asset-backed commercial paper conduits” a/k/a securitized paper.
Recall the basic idea behind securitization structured finance: It is supposed to distribute risk by aggregating various debt instruments into a large pool, which is then sliced and diced into various tranches of different risk quality (and yield). Risk is supposed to be spread amongst investors, who purchase the tranches they desire based on the degree of risk (relative to return) they want to undertake.
This assumes, however, that there is an honest attempt to structure these securities in order to spread the risk. It is quite possible to create a structure that willfully aims at more nefarious goals.
But that is precisely what occurred during the run up to the financial collapse: Securitization was used to accomplish the opposite goal — namely, to concentrate (rather than disperse) risk. These structures did so by lowering capital requirements.
That is the conclusion of several NYU and Federal Reserve Board researchers who studied the issue. According to Viral V. Acharya, Philipp Schnabl and Gustavo Suarez, that is precisely what occurred:
We analyze asset-backed commercial paper conduits which played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets while insuring the newly securitized assets using credit guarantees. The credit guarantees were structured to reduce bank capital requirements, while providing recourse to bank balance sheets for outside investors.
Consistent with such recourse, we find that banks with more exposure to conduits had lower stock returns at the start of the financial crisis; that during the first year of the crisis, asset-backed commercial paper spreads increased and issuance fell, especially for conduits with weaker credit guarantees and riskier banks; and that losses from conduits mostly remained with banks rather than outside investors.
These results suggest that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing their capital requirements.
A few interesting charts in the paper are worth exploring:
The first is a comparison of Modern Banking – with and without risk transfer during Securitization:
The second looks at what happened to Commercial Paper after new accounting rules (The Enron Capital Rule) for “liquidity enhancement provided to conduits” went into effect April 2004.
Quite fascinating.
You can download the full paper here.
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Source:
Securitization Without Risk Transfer
Viral V. Acharya (London Business School – Institute of Finance and Accounting; Stern School of Business; Centre for Economic Policy Research (CEPR))
Philipp Schnabl (New York University, Stern School of Business)
Gustavo Suarez (Federal Reserve Board)
Date originally posted: March 22, 2009
AFA 2010 Atlanta Meetings Paper
http://ssrn.com/abstract=1364525
http://ideas.repec.org/p/nbr/nberwo/15730.html
See also:
Recent Policy Issues Regarding Credit Risk Transfer
Federal Reserve Bank of San Francisco
Number 2005-34, December 2, 2005
http://www.frbsf.org/publications/economics/letter/2005/el2005-34.html
Andrew W. Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering, breaks down the hot debate over the current financial crisis and how math may have played a part. Explore the arguments for and against the claim that the mathematical models used to manage specific complex financial securities are responsible for the Great Recession. Was it systematically programmed or just human nature?
click for video
Runtime:00:44:55
Hat tip KH
Dean Baker of the Center for Economic Policy Research looked beyond the TARP to see how much Uncle Sam is subsizidizing the banks considered “too big to fail” — beyond TARP. Call it the Value of the “Too Big to Fail” Big Bank Subsidy.
His conclusions?
-The spread between big banks’ (1.15%) and smaller banks’ (1.93%) cost of funds is 0.78%:
-The annual boost to profits of 18 biggest banks from that funds-cost advantage: $33 billion;
-Pre-2008 spread in big and small banks’ funds-cost: 0.49%:
-Part of big banks’ profits from rate “subsidy” (1H09): 48%:
To give this some context, Dean compares it to the Temporary Assistance for Needy Families (TANF) and to US Foreign Aid Spending. Not including TARP, the “TBTF bank subsidy” was more than twice as large as the TANF grant for 2009; the bank subsidy is almost 20 percent larger than spending on foreign aid.
Here is something to think about: Even after the TARP has been fully paid back, the US Government is STILL bailing out TBTF banks more than we are giving bailouts to US families with hungry kids, and more than all of our overseas aid . . .
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Sources:
Value of the “Too Big to Fail” Big Bank Subsidy.
DEAN BAKER AND TRAVIS MCARTHUR
Center for Economic and Policy Research, September 202009
The Big Bank Theory
How government helps financial giants get richer
Dean Baker
Boston Review, JANUARY/FEBRUARY 2010
http://bostonreview.net/BR35.1/baker.php
Job-Creation Cacophony
BILL ALPERT
BARRONS FEBRUARY 22, 2010
http://online.barrons.com/article/review.html
See also:
The Cost of Saving These Whales
GRETCHEN MORGENSON
NYT, October 3, 2009
http://www.nytimes.com/2009/10/04/business/economy/04gret.html
I have a few quotes in Matt Taibbi’s no holds barred look at Wall Street’s profits and bonus culture.
It is classic Taibbi, full of righteous indignation and fury over the bailed out banks quick transformation from near bankruptcy to record profits. He details 7 scams the various TARP recipients have pulled.
Here’s a taste of the article:
“The nation’s six largest banks set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007.”
The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street’s eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its “performance” was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?
The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.”
Every now and again, you spend some time with a journalist, trying to push them down a particular path of discovery. Sometimes you influence a story a bit, end up with a quote or two, but otherwise are a minor factor.
I am thrilled with how much of our conversation ended up in this article. Regular TBP readers will see my fingerprints all over this one . . .
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Source:
Wall Street’s Bailout Hustle
MATT TAIBBI
Rolling Stone, Feb 17, 2010
http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle
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The Greek Crisis has become a major political crisis for Europe.
• Due to populace pressure against bailouts, politicians are proposing draconian cuts for Greece with vague promises of aid.
• It’s possible that Euro politicians keep increasing demands on Greece in order to dissuade Greece from accepting an EU bailout.
• Due to populace pressure, Greek politicians cannot make the EU-demanded socialism cuts.
• Euro opprobrium toward Greece and Goldman due to their scheme to conceal Greece’s true budget deficit might be manifested in sanctions against the deceitful duo.
The Greek Crisis highlights:
• The implosion of western socialism due to unserviceable sovereign debt, exacerbated by the massive transfer of wealth to Asia
• The impetuous creation of the Euro (a throttling condition for the reunification of Germany)
• The lack of an enforcement mechanism for Maastricht violations
• Greece as the guinea pig for future European crisis
• Sovereigns have been concealing the truth about their deficits, financial & economic conditions.
• Sovereigns will divert attention from their venality by conducting an inquisition of speculators.
Reuters: Eurozone gives Greece 30 days to show good on deficit … Greece had 30 days to prove its plans were off to a convincing start and he said that Athens could count on unspecified support if that was not the case and markets refused to give it breathing space…. Greece’s Socialist government is fighting an uphill struggle to get its finances in order, restore credibility in other capitals and financial markets alike, and prove that the data it publishes on its economy is no longer what Swedish finance minister Anders Borg described as “basically fraudulent.”…
http://www.reuters.com/article/idUSTRE61E3E920100215
The Strait Times: European Central Bank (ECB) president Jean-Claude Trichet castigated the Greek government for its accounting and said other European nations would strictly monitor the recovery plan put in place by the socialist government in Athens.
The ECB also wants finance ministers to demand greater budget cuts than those already offered by Greece, whose public deficit has hit 12.7 per cent of gross domestic product and debt of about 300 billion euros (S$577 billion) is now 113 per cent of GDP.
http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_490602.html
BN: Greece should lose voting privileges in the European Union if it gets a bailout from the 27-nation bloc, said the head of the business caucus of German Chancellor Angela Merkel’s Christian Democratic Union…
http://www.bloomberg.com/apps/news?pid=20601110&sid=ax9I0FD1YxgU
BN: Greece’s Goldman Sachs Swaps Spawn EU Dispute on Disclosure
A dispute is unfolding about how long European Union officials have known that Greece used derivatives to conceal its growing budget deficit…
http://www.bloomberg.com/apps/news?pid=20601110&sid=aZom2jvtHvWk
Economist Paul Krugman speaking recently at MIT about the financial crisis of the last few years:
In an earlier post titled “CDS rates, What Is The Thermometer Telling Us?” we said:
Sovereign default rates are moving higher across the globe. It underscores a concept we detailed in a recent Commentary and Conference Call, namely the credit crisis was never solved. It was transformed from a reckless private sector borrowing binge to a reckless public sector borrowing binge.
Let us explain:
In the wake of the credit crisis we often talk of deleveraging. But how much has really taken place? The latest Flow of Funds data can help shed some light on this.
The first chart shows total credit market debt in blue on the top and its four-quarter rate of change below. As of Q3 2009, total debt stood at $52.617 trillion, growing 1.05% from one year earlier.
<Click on chart for larger image>
Deleveraging requires negative debt growth. Since the chart above shows total debt growth of 1.05% over the last year, this is not deleveraging. To be fair, it is the lowest growth since this series began in 1952, but it shows no sign of deleveraging.
Breaking down the series above, the next chart shows private credit market debt in the same format. Private credit is the total credit measure shown above minus Treasury, municipal, agency (including GSE-guaranteed MBS) and foreign debt.
<Click on chart for larger image>
This chart shows that the private sector is deleveraging. The total level of private sector debt is 3.80% lower than a year ago and negative for the first time since this series started in 1952.
The next chart further breaks down private sector debt, showing financial and non-financial private debt. We find that virtually all the private sector deleveraging comes from the financial sector (blue lines), down 10.47% in the last year. The non-financial sector (red lines), which has borrowed more than 3 times times the financial sector, has barely deleveraged, down only 1.42% in the last year.
<Click on chart for larger image>
The final chart below shows total government debt. This includes Treasury, agency (including GSE-guaranteed MBS) and municipal debt. It is booming and currently stands 9.81% higher than it did 1 year ago. During the height of the crisis, Q3 2008, government debt levels were booming ahead at an 11.57% pace, a 20-year high. This is the opposite of deleveraging.
<Click on chart for larger image>
Conclusion
The “Great Recession” has essentially only resulted in deleveraging of the financial sector. The overall levels of debt are still rising, thanks to a very modest deleveraging of the non-financial sector and a big releveraging of the government sector.
Was the only problem that the financial sector was too leveraged? If so, the Great Recession returned the markets to sane debt levels. If not, then the government releveraging has prevented the correction and deleveraging needed to put the credit crisis firmly behind us. We fear the latter may be closer to the truth and the credit crisis is only partially complete. The next major deleveraging will occur in the government sector.
Is this what widening sovereign CDS rates are telling us?
No surprise here: The elder statesmen of Wall Street favor the Volcker rule:
“Put aside for a moment the populist pressure to regulate banking and trading. Ask the elder statesmen of these industries — giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle — where they stand on regulation, and they will bowl you over with their populism.
They certainly don’t think of themselves as angry Main Streeters. They grew quite wealthy in finance, typically making their fortunes in the ’70s and ’80s when banks and securities firms were considerably more regulated. And now, parting company with the current chieftains, they want more rules.”
When folks like these support something that current CEOs oppose, its easy to figure out the differences between the two groups: The senior players want to see Wall Street have a more robust infrastructure that handles risk better, and is more survivable in a crisis. The current CEOs are driven primarily by profits.
I am in the senior camp — the Volcker rule would not have prevented this crisis, but it would reduce taxpayer exposure to Wall Street speculation. It also might stop the next crisis.
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Source:
Elders of Wall St. Favor More Regulation
LOUIS UCHITELLE
NYT, February 16, 2010
http://www.nytimes.com/2010/02/17/business/17volcker.html
“If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it — not save it. It’s called euthanasia, not a rescue.”
-Paul Volcker said on CNN.
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Paul Volcker said in an interview with Fareed Zakaria that large financial institutions that engage in speculative activities for profit should be allowed to fail.
Volcker continues to argue for reinstating Glass Steagall — separating investment firms engaged in market speculation from commercial, deposit-taking banks.
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Source:
Volcker says must let big financial firms fail
Reuters, Feb 14, 2010 10:52am
http://www.reuters.com/article/idUSTRE61D1C620100214
