This brouhaha over the Boston Fed's rationalization for missing the housing bubble reminds me of a conversation I overheard a few weeks ago between a former Federal Reserve bank supervisor and his counterpart at the New York Fed.
I can't give you their names since they were conversing privately a few feet away from me before the start of a conference on financial regulation (nor can I give you the name of the confab since that would give their identities away), and I just manag [...]
Banks' arguments against stricter capital reserve requirements seem to be getting a hearing from regulators such as Tim Geithner and the Basel Committee, but a recent paper suggests they should not.
This was alluded to in a blog today by Simon Johnson over at the Baseline Scenario, but the relevant passages are worth reading.
The paper isn't authored by lightweights but by Samuel Hanson and Jeremy Stein of Harvard and Anil Kashyap of the University of Chicago.
Here& [...]
A column published on Tuesday by Project Syndicate sums up the world's flailing (if not downright cynical) response to the financial crisis in particularly apt terms, I'd say.
The governments' efforts to restore confidence in the banking sector without really addressing the causes of its loss of confidence is akin to trying to tickle oneself, observed Paul Seabright of the University of Toulouse in the piece, entitled "Financial History's False Lessons."
Anyone who thinks the financial reform bill is all that was necessary to finish fixing the banking system needs to read a couple of pieces published in recent days.
As Simon Johnson points out over at Baseline Scenario, a new paper by several respected academics shows that the stiffer capital requirements that the Obama administration is focused are not only easily gamed, but can have major unintended consequences, and these can amount a repeat of the systemic crisis we saw two years ag [...]
Submitted by Caleb Newquist, republished from Going Concern, Accounting News for Accountants and CFOs.
Just last week we mentioned the American Bankers Association and its efforts to undermine the FASB's latest fair value proposal that, in the ABA's mind, could bring down civilization as we know it.
Because of this danger, the ABA encouraged "investors" through email and on its website to write individual letters to the FASB, expressing their [...]
During 2009 and the first quarter of 2010, 850 businesses and organizations spent $1.3 billion to lobby elected officials on Capitol Hill. While the disclosure forms don't show the exact amount allocated just to financial system reform, it's likely that the subject accounted for several hundred million dollars of the total, according to the Center for Public Integrity.
So it may come as a surprise to find that not all businesses are dead-set against all propo [...]
There's some additional recent work out there that's worth citing in connection with Karen's post on Tuesday.
In particular, I would point readers to the piece posted Monday on voxeu.org by Enrico Perotti, a finance professor at the Amsterdam Business School. Essentially, Perotti's piece explains why Kotlikoff's prescription is necessary. As it did the US Congress, the banking industry has fought off international attempts to get the so-called Basel Committee to force the indust [...]
The latest revelations concerning the dispute between AIG and Goldman over collateral show how weak the new financial reform package really is.
After all, Goldman's demands for collateral from AIG as it was failing ended up costing taxpayers billions of dollars. Yet according to the testimony today during the crisis panel's latest hearings, the whole question hinged on what constituted fair value.
To hear Goldman CFO David Viniar tell it, the Vampire Squid can [...]
While many critics claim the financial regulation bill that emerged from Congressional negotiations on Friday will do next to nothing to reduce the chances of another banking crisis, there are some limits on risk taking that could do just that.
The one that strikes me as the toughest and most critical is the so-called Lincoln amendment, which would require banks to separately capitalize their trading in credit default swaps, which were central to the recent crisis.
Whil [...]
Tim Geithner once again says taxpayers are getting a good return on the funds they provided banks through the Troubled Asset Relief Program.
And his line about 75 percent of the money being repaid may be true enough. It may even reflect this uncomfortable fact.
But 91 banks missing their dividend payments last month is hardly something to write home about.
I'll let Yves Smith go on about how bad the deal was for taxpayers from the go.
(But here's the mon [...]
A panel sponsored by the Securities Industry and Financial Markets Association on Monday on what banks can expect from financial reform warned that higher capital reserves and other limits Congress imposes on their profitability would hurt the economy as they curbed their ability to lend.
Several panelists, including Adam Gilbert, head of regulatory policy in the corporate risk management group of JP Morgan Chase, and Gary Mandelblatt, chief risk officer of Nomura, warned repeated [...]
The challenges of managing systemic risk became starkly apparent during a panel discussion held this morning by the Securities Industry and Financial Markets Association.
In fact, the panelists agreed that the challenges are so immense that it's difficult to see how financial reform can succeed without limits on the size as well as the interconnectedness of financial firms, though some were more reluctant to impose such limits than others.
Hal Scott, a professor of law at Har [...]
Anyone who thinks the Federal Reserve ought to oversee systemic risk ought to take a close look at this article.
By now, of course, it's no surprise that banks used yet another financing gimmick to make their capital look stronger than it really was. This one, involving Trust Preferred Securities known as TruPS, is doubly gimmicky, in so far as it involves both hybrid securities (i.e., a have your cake and eat it combination of debt and equity) and off-balance-sheet treatment. In te [...]
European regulators in countries throughout Europe are in the midst of proposing a wave of new regulations to resolve the current crisis and reduce the threat of future ones. So is the European Commission. But not all of the regulators’ proposals are complementary, which could lead to a wealth of difficulties should conflicting proposals go forward in different jurisdictions, especially if they contradict EC proposals.
As the WSJ reported [...]
The days seem numbered for banks' use of hybrid securities to raise capital.
The Senate version of the financial reform bill that was recently passed contains an amendment that would preclude bank holding companies from using trust preferred securities, the most common type of hybrids, as Tier 1 regulatory capital.
There's currently about $125 billion of trust preferreds outstanding from banks, both at their bank and holding company levels. Hybrids are securit [...]
The market's reaction yesterday to German Prime Minister Angela Merkel's decision to bow to public opinion and curb what she called "destructive" trading brings the issue of financial transaction taxes and the like front and center.
But the fact that investors hate the idea of taxes and similar limits on transactions may belie the main argument against such measures, which is that the cost will simply be passed along to the public. If that were true, then traders' [...]
I see that Ben Bernanke, Sheila Bair and even Paul Volcker are trying to convince Congress not to require big banks to spin off their derivatives operations, or make other fundamental changes besides getting out of proprietary trading, the so-called Volcker rule.
Bernanke, in particular, is defending the rest of the current set-up and insisting, in effect, that regulators can take care of all of the rest of the problems that banks that are too big to fail represent, with just a few tec [...]
The Morgan Stanley case may not go as far as the one involving Goldman. And it is way too early to know what exactly prosecutors would charge the firm with doing.
But it's possible to venture a guess based on Yves Smith's observations today at Naked Capitalism.
Again, it's not illegal for a bank to short securities that it sells to clients, so long as the conflict of interest between underwriting and trading them is properly managed and disclosed. That's why bank [...]
The argument going on in Congress over the virtues of naked swaps for corporate hedging, or their lack thereof, is being echoed in the blogosphere today.
There are two posts on the topic at Berkeley economist Brad DeLong's site, for example. And in this one, a defender of such swaps points out that he has testified in Congress that companies need them to hedge business risk. He cites the hypothetical case of John Deere selling tractors in Greece. While the company could not buy&nbs [...]
Gretchen Morgenson's piece in Sunday's Times points out how Fannie Mae and Freddie Mac are serving as a source of back-door bailouts for the banks.
And she quotes Dean Baker, co-director of the Center for Economic Policy Research in Washingto,n DC, to the effect that their continuing status as half governmental agency, half private enterprise creates an irreconcilable conflict between taxpayers and shareholders.
While Treasury secretary Tim Geithner acknowledges the proble [...]