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Economics of Contempt 
Thoughts on, inter alia, economics, law, and politics.
Post Frequency: 3.9/day Last Entry: November 19, 2009 at 23:25:00 Recent Entries: 344
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Connie Voldstad to head ISDA
Posted on November 19, 2009Per the WSJ:The International Swaps and Derivatives Association, Inc., the trade group representing the global derivatives markets, appointed Conrad Voldstad as chief executive officer.Mr. Voldstad will replace Robert Pickel effective Nov. 30. Mr. Pickel, who held the position for the past nine years, will take on the new role of Executive Vice-Chairman...
1998 vs. 2009
Posted on November 19, 2009A few weeks ago James Kwak noted that Goldman had only $270 billion of assets in 1998, and asked, half-rhetorically, whether that was big enough, since Goldman was "probably doing a perfectly good job of serving their clients at the time." I thought the answer to this question was obvious, but I guess it's not, since this meme has apparently persisted...
The View from the Ivory Tower
Posted on November 18, 2009Paul Krugman disagrees with my "legal argument" on the AIG counterparties issue because, according to Krugman, "Wall Street doesn?t work like that, and never has." Oh Paul, won't you please tell us more about how Wall Street works? Seriously though, I'm flattered that Krugman, who's practically a hero of mine, actually read my post...
Geithner Vindicated in TARP Watchdog Report
Posted on November 17, 2009That's right, vindicated. Read the whole report. It makes clear that the NY Fed did try to negotiation haircuts with AIG's counterparties, but not at all surprisingly, the counterparties (and the French regulators) refused, and the NY Fed was left with no choice but to pay par value...
Saying We Need Big Banks Isn't the Same Thing as Defending Citigroup
Posted on November 16, 2009In the responses to my post on why we need market-makers with big balance sheets, one thing I've noticed is that a lot of people are completely unable to distinguish between the argument that we need big banks, and the argument that we need the big banks that exist today...
Yes, We Need Big Banks
Posted on November 13, 2009As I've said before, I think the idea that "too big to fail, too big to exist" idea is just silly?it betrays a fundamental lack of knowledge about the way modern financial markets work. The pundits who push this idea love to argue that banks don't need to have huge balance sheets, and that there's no benefit to having banks with balance sheets of over, say, $400 billion or so...
Sorkin's "Too Big to Fail"
Posted on November 08, 2009I've been meaning to pass along my thoughts on Andrew Ross Sorkin's Too Big to Fail. Overall, I thought it was an excellent book. It'll be extremely hard, if not impossible, for anyone to top TBTF as the definitive blow-by-blow account of the September '08 market panic...
Should resolving large financial firms be a political decision?
Posted on November 07, 2009I'm not sure I buy this argument from Yves Smith:Treasury has asked for open-ended authority to resolve large financial institutions, which is pretty much a blank check. That?s a breathtaking power grab by the Executive and should not be acceptable in a democracy...
Janet Tavakoli: All Bark, No Bite
Posted on October 29, 2009Janet Tavakoli has always been more bark than bite. Being provocative is part of her shtick.In her latest commentary, she accuses Goldman CFO David Viniar of lying about Goldman's exposure to AIG on a September 16, 2008 earnings call (the AIG bailout was negotiated later that day)...
Initial Analysis of New Resolution Authority and QFCs
Posted on October 28, 2009Treasury and Barney Frank have released their draft legislation on "too big to fail" (TBTF), which includes a special resolution authority, a council of regulators that will monitor systemic risk, heightened prudential standards for systematically important financial institutions ("Tier 1 FHCs"), and a "prompt corrective action" regime for Tier 1 FHCs...
Oh, the Irony
Posted on October 26, 2009Does anyone else find it ironic that serial acquirer Sandy Weill wrote an op-ed that says:It is vital that one regulator be able to see the entire balance sheet of the country's largest financial institutions, and this regulator needs to cut across artificial institutional lines...
Pay Cuts
Posted on October 21, 2009Hahaha. Get 'em, Ken:Executives at seven bailed-out companies including Citigroup Inc. and Bank of America Corp. will have their pay cut about 50 percent after negotiations with Kenneth R. Feinberg, the Treasury Department?s special master on compensation, two people familiar with the matter said...
"Too Big to Fail" Policy (Warning: Long)
Posted on October 20, 2009One thing I've been noticing is that many commentators on "too big to fail" (TBTF) policy have clearly never read the Obama administration's financial reform proposals, or at least have an extremely poor understanding of what the administration is proposing to do...
Citi and BofA
Posted on October 16, 2009Paul Krugman is clearly confused. Regarding Citi and BofA, he writes:Um, weren?t we being assured that recapitalization by the government ? which would probably require temporary nationalization ? was unnecessary, because the banks could earn their way back to adequate capital ratios?Just saying...
House OTC Derivatives Bill Amendments
Posted on October 15, 2009Markup of Barney Frank's OTC derivatives bill is now up. Manager's Amendment is here. Frank's exchange-trading amendment is here. Revised definition of "major swap participant" is here.Frank really sandbagged the dealers with his exchange-trading amendment...
R.I.P. Bruce Wasserstein
Posted on October 14, 2009In addition to being a true investment banking legend, the Lazard CEO and former First Boston dealmaker also had my all-time favorite Wall Street nickname: "Bid 'em up Bruce."Bruce was only 61.
"At Times Skeptical Coverage"
Posted on October 13, 2009This has to be the early front-runner for Euphemism of the Century, from the NYT:Paul Rittenberg, who oversees ad sales for Fox, said the channel existed in a climate where viewers choose cable news channels based on affinity. His channel, he said, stresses in its pitch to advertisers that ?people who watch Fox News believe it?s the home team...
Rough year for Ed Herlihy about to get worse?
Posted on October 12, 2009Bank of America is waiving attorney-client privilege and will reveal the legal advice it received in the Merrill Lynch acquisition to federal and state officials. Per the WSJ:[This] will likely result in the bank handing over troves of documents -- including emails and memos between BofA and its outside law firms -- to the federal, state and congressional officials who are investigating the Merrill purchase, according to people familiar with the matter...
Friendly Reminder
Posted on October 11, 2009Now that OTC derivatives reform is back in the news, with all manner of hysterical claims about derivatives sure to follow, I just want to throw out this friendly reminder: Collateralized debt obligations (CDOs) are not derivatives.That is all.
Cohan Snubbed
Posted on October 11, 2009I'm sorry, but how does William Cohan's House of Cards not even make the shortlist for the Financial Times/Goldman Sachs Business Book of the Year 2009 prize? With apologies to Liaquat Ahamed and David Wessel, Cohan's book was hands-down the best business/finance book published in the past year...
The Greatest Program Ever?
Posted on October 10, 2009One of my colleagues recently sent me a new program called OfficeTab, which could be the greatest program ever created. It adds tabs (à la Firefox) to Microsoft Word, Excel, and PowerPoint! I constantly have 5+ Word and Excel documents open at once when I'm in work mode, so for someone like me, this is a godsend...
A Short Answer For Simon Johnson
Posted on October 04, 2009No one is better than our good friend Simon Johnson at being so smug and yet so completely, embarrassingly wrong. In a post titled, "A Short Question For Senior Officials Of The New York Fed," Johnson writes:At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve...
Newspaper front pages during the financial crisis
Posted on October 04, 2009Recently I was talking to someone about the mainstream press's coverage of last September's earth-shaking events, and that got me thinking about what the major newspapers were highlighting on their front pages. I thought it would be interesting to see, with the benefit of hindsight, what they were highlighting and how important they thought it was...
CIT Exchange Offer Docs
Posted on October 02, 2009Offering memorandum here. (Summary starts ~20 pages down.) Press release here.I haven't had time to look at it yet, but it had better be damn good. Getting enough CIT bondholders to tender is gonna be like trying to thread a needle with a rope. Exchange offer expires on October 29th...
AIGFP's Mistakes
Posted on September 29, 2009I want to expand on something I said in the comments to my last post. In discussing AIGFP's excuse for not understanding the risk they held, I said that it was broadly a combination of three factors:AIGFP not understanding or particularly caring about the declining underwriting standards in the subprime market (a mortgage was a mortgage to them);AIGFP not fully understanding how the (somewhat new) collateral posting process on these trades worked; andOld-fashioned excessive optimism...
Risk held at AIGFP was not a surprise
Posted on September 25, 2009Gillian Tett is going way out of her way to avoid admitting that she (or any financial journalist, really) could have and should have known that AIG Financial Products was holding a substantial portion of the risk in the credit derivatives market. In today's FT, she argues that the opacity of the CDS market prevented anyone from knowing about the huge risk concentration at AIGFP in advance...
Memories (Casey Mulligan edition)
Posted on September 24, 2009Remember this NYT op-ed by the University of Chicago's Casey Mulligan last October? Well, as bad as it was then, it's even worse now. (Keep in mind that this is a full professor of economics in the #1 ranked economics department in the country):The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated...
Commentator or Fiction Writer?
Posted on September 13, 2009Simon Johnson has another barely-coherent article in The New Republic about financial crises past, present, and future. Johnson has never been interested in making serious, fact-based arguments, but this article has to be his worst.I think this part amused me the most:During the heady days of summer 1927, the Fed had done something else that would contribute to the Great Depression: It lowered interest rates...
How to waste 6,500 words
Posted on September 12, 2009As demonstrated by Donald Barlett and James Steele of Vanity Fair. They devote 6,500 words to the (shocking!) revelation that no one knows exactly what each bank did with its TARP money, because Treasury hasn't been "tracing" TARP funds. Apparently no one pulled Barlett and Steele aside and explained to them that money is fungible?once TARP money is credited to a bank's Federal Reserve account, it becomes indistinguishable from the rest of the money the bank has in that account...
MTNs and Zeros: Beneficial Financial Innovations
Posted on September 10, 2009At the end of my initial post on financial innovation, I listed a handful of financial innovations that I considered beneficial. (I didn't mean to list both zero-coupon bonds and Treasury STRIPS, since STRIPS are obviously zeros?the most important zeros, in fact...
Financial Innovation, Continued
Posted on September 10, 2009My post on the quality of discussions of financial innovation generated a much larger response than I was anticipating (some pro, some less-than-pro). Now people apparently expect me to follow through on my promise to write a follow-up post on financial innovation...
Good and bad discussions of financial innovation
Posted on August 29, 2009It looks like it's time for everyone's favorite whipping boy, "financial innovation," to come in for another round of mockery in the blogosphere. Simon Johnson and James Kwak make all the familiar arguments about CDS and CDOs, neither of which they seem to understand in the slightest...
Bernanke's Reappointment
Posted on August 28, 2009Bernanke's reappointment seems to be the topic of the day, so I suppose I'll weigh in as well. I think Bernanke absolutely deserves a second term. He reacted early and aggressively when strains in the funding markets first appeared back in the fall of 2007, after the two Bear Stearns hedge funds failed and the ABCP market shut down, and he's kept his foot on the gas ever since...
Mortgage delinquencies: Still a big problem
Posted on August 26, 2009This, from Fitch, is pretty depressing:While the number of U.S. prime RMBS loans rolling into a delinquency status has recently slowed, this improvement is being overwhelmed by the dramatic decrease in delinquency cure rates that has occurred since 2006, according to Fitch Ratings...
Must-Read
Posted on August 24, 2009Via Greg Mankiw, this essay by Prof. Rick Trebino is one of the funniest things I've read in a long time. Absolutely classic.And in case you're wondering, the journal in question is Optics Letters. The offending article is here, Prof. Trebino's Comment is here, and the Reply is here.
The decline of Gillian Tett continues
Posted on August 23, 2009Sadly, as Gillian Tett's prominence has risen, the quality of her columns has plummeted. Take this paragraph from her latest column, which is pure gibberish:[S]ecuritisation has produced a particularly curious ? or absurd ? paradox. A few years ago, it was widely assumed that the process of slicing and dicing credit would create a more ?complete?, free-market financial system...
Did the administration tweak its position on derivatives regulation?
Posted on August 22, 2009I?m back from a very nice, (mostly) Blackberry-free, family vacation. My wife permitted me only 20 minutes in the morning and 20 minutes at the market close to scan Bloomberg headlines and read news/commentary, so I?m really far behind right now.That's why I just got around to reading Jonathan Weisman and Neil King's article about President Obama's tendency to get down into the details of economic policy in his daily briefings/discussions with his economic advisers...
Hank Paulson, Goldman, and AIG (For Journalists)
Posted on August 09, 2009I see that Gretchen Morgenson has another ridiculous article about Goldman's (mythical) involvement in the AIG bailout. The article focuses on the fact that Hank Paulson talked to Lloyd Blankfein more times than he talked to other CEOs in the week after Lehman failed...
Should CDS be regulated as insurance?
Posted on July 10, 2009Locrian asks in the comments to my previous post on CDS and insurance:I guess it just seems to me that you didn't answer (and didn't intend to answer) a much more interesting question: Should CDS be made to fit the definition of insurance, and then be regulated as such?Locrian is right that I didn't intend to address the normative question in my previous post, but I suppose I should...
CDS Are Not Insurance Contracts
Posted on July 06, 2009Felix Salmon is right: CDS should not be regulated by insurance commissioners, primarily because CDS are not insurance contracts. Felix does a good job of explaining why CDS shouldn't be regulated by insurance commissioners, so I won't repeat him. I can, however, provide the legal reasoning...
I'm on Twitter finally. My Twitter name is EconOfContempt.I'm not sure how I feel about Twitter yet. I'm definitely still learning. For a long time, I thought Twitter was a new kind of portable Instant Messenger that you had to have some sort of special cell phone service to use...
Well, at least Palin isn't boring
Posted on July 04, 2009Like everyone else, I'm completely baffled by Sarah Palin's decision to step down as governor of Alaska. Not only did it come as a total shock to everyone, but she still hasn't offered any sort of realistic explanation. (I even signed up for a Twitter account just so I can follow her, because Twitter is where she said she's going to provide "info on decision to not seek re-election...
Michael Lewis article on AIG Financial Products
Posted on July 01, 2009Michael Lewis has a new article in the latest Vanity Fair on AIG Financial Products. It's titled, The Man Who Crashed the World, and it's nominally about former AIGFP chief Joe Cassano, but it's really about AIGFP in general. (Cassano plays a big role in AIGFP's story, of course...
Great Charts from the BIS
Posted on June 30, 2009The BIS has released its always-excellent Annual Report, and it doesn't disappoint. I highly recommend the Report's account of the financial panic last September and October (pp. 23-31). It's easy to forget how truly terrifying it was, and the unimaginable pressure that policymakers?especially the Federal Reserve?were under to solve new systemic threats pretty much every day...
TARP Warrants: Pricing procedures set in original contracts
Posted on June 30, 2009Simon Johnson reaches new levels of cluelessness, criticizing "Treasury's scheme" for pricing TARP warrants, which he claims was "[b]uried in the late wire news on Friday":This is a mistake.The only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part ? e...
Amherst's Laurie Goodman on Cleanup Calls
Posted on June 27, 2009Amherst Holdings, if you'll remember, is the Texas brokerage that duped the big Wall Street banks by (somehow) arranging for the servicer on several subprime MBS to exercise its "cleanup call" provisions, much to the banks' surprise. Exercising the cleanup calls essentially made the CDS contracts on the subprime MBS that the banks had bought from Amherst worthless...
Bespoke Derivatives
Posted on June 27, 2009Apparently commentators are upset because the administration's financial reform proposal only requires "standardized" derivatives to be cleared through central counterparties (CCPs), and not bespoke derivatives. James Kwak even questions "why we need customized derivatives in the first place...
CDS, Restructuring, and Bankruptcy: A History
Posted on June 24, 2009Floyd Norris praises the SEC for hiring University of Texas law professor Henry Hu. Norris likes this hire because Hu "was the first one [he] saw to point out that credit [default] swaps could be used to leave a creditor hoping that a company would go into bankruptcy...
AIG Internal Memo on Collateral Calls
Posted on June 24, 2009CBS News somehow obtained a fascinating AIG internal memo from November 2007 detailing the status of the collateral calls on AIG's CDS portfolio. The memo was evidently written by AIG Financial Products VP Andrew Forster, and it provides tremendous data on AIG's CDS portfolio?it's easily the most and best data in the public domain...
Two-Year Auction
Posted on June 23, 2009This morning Bloomberg was reporting that today's $40bn auction of 2YR Treasury notes was expected to go well, and they weren't lying. The auction drew a yield of 1.15 percent (5 bps lower than the consensus estimate), and 2YR yields closed at 1.10 percent...
I'm Back
Posted on June 23, 2009Sorry for the lack of posting over the past couple of weeks. I've been insanely, mind-bogglingly busy recently. But things are starting to let up, so I plan to resume posting forthwith.
No SEC-CFTC Merger ? Shad-Johnson 2?
Posted on June 11, 2009It appears settled that the Obama administration's overhaul of financial regulations will not include a CFTC-SEC merger. This is disappointing, especially because the administration is apparently foregoing this no-brainer reform just to avoid the inevitable turf wars in Congress...
The Amherst Trade
Posted on June 11, 2009The WSJ article about Texas brokerage Amherst Holdings duping the big Wall Street banks is a hot topic today. Based solely on the WSJ article, it appears that Amherst sold CDS on $335 million of subprime MBS to various Wall Street banks over the past year, including J...
On Judge Sotomayor
Posted on June 10, 2009I don't plan to discuss Judge Sotomayor's nomination on a regular basis?debates over Supreme Court nominees are purely political, and have absolutely nothing to do with jurisprudence. I don't think it's possible to accurately predict what kind of Supreme Court justice a federal judge will be based on her record as a circuit and district judge...
Memories
Posted on June 06, 2009Remember when the stress tests had been "downgraded to irrelevance," and the PPIP was the only aspect of the Geithner plan that really mattered?Whoops.Turns out the stress tests were rather important, spurring the major banks to raise $65 billion in new capital in less than a month, with more capital raises on the way...
Against a "Systemic Risk Council"
Posted on June 06, 2009Sheila Bair has publicly opposed the creation of a single systemic risk regulator, and has instead been pushing for a "systemic risk council" that would include the Treasury, the Fed, the SEC, and (surprise!) the FDIC.This is a bad idea. The primary benefit of a single systemic risk regulator is its ability to see how the different areas of the financial markets interact with each other...
First Impression of Gensler's OTC Derivatives Proposal
Posted on June 05, 2009New CFTC chair Gary Gensler provided a much more detailed description of the administration's OTC derivatives reform proposal on Thursday. While we still don't have nearly enough information to render judgment on the proposal, let me just say that I'm extremely impressed so far...
Yes, the SEC Regulates Derivatives
Posted on June 04, 2009Felix Salmon apparently thinks the SEC is "charged with regulating securities but not derivatives." Ezra Klein is quick to offer a me-too post, mocking the SEC for saying "derivatives" when it should have said "securities." Klein says that "[i]t's all the worse because the SEC doesn't have the authority to regulate derivatives, even though that appears to be what some of its employees think the agency is doing...
Martin Wolf Takedown of Niall Ferguson
Posted on June 03, 2009I started writing a post the other day about how Niall Ferguson was just embarrassing himself by claiming victory in his dispute with Paul Krugman, but I never got around to finishing it. Luckily, Martin Wolf was not so easily distracted, and has delivered an epic takedown of Ferguson...
The Effectiveness of Tim Geithner
Posted on June 03, 2009Back in September 2005, Tim Geithner summoned the so-called Fourteen Families (i.e., the fourteen major dealer banks) to the New York Fed to discuss the horrendous state of the infrastructure in the credit derivatives market. In particular, Geithner was concerned about the enormous backlog of unexecuted confirmations?essentially, backlogs of CDS trades that banks hadn't gotten around to formally completing yet...
Elizabeth Warren and Securitization
Posted on June 03, 2009Speaking of takedowns, don't miss ABS and MBS veteran Linda Lowell's long takedown of COP chair Elizabeth Warren over at HousingWire.Short version: Warren doesn't know the first thing about securitization markets, and it shows.
The Most (and Least) Timely and/or Prescient Books on the Financial Crisis
Posted on June 01, 2009I read an inhuman number of books (partly due to the amount of time I spend on planes and in airports), and one of the things I like to do is to informally keep track of the most (and least) timely and/or prescient books I come across. For the dot-com bubble, for example, one of the most timely/prescient books was Bob Shiller's Irrational Exuberance (published in March 2000), and the least timely/prescient book was, obviously, Kevin Hassett and James Glassman's Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (published in October 1999)...
The Fed's Emergency Powers Are Not New
Posted on May 31, 2009Washington Post reporters by Binyamin Appelbaum and Neil Irwin have a very strange article about the Fed's emergency powers. Well, I guess it's not so much strange as it is completely wrong. They write:On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve...
Brooksley Born
Posted on May 26, 2009Tomorrow's Washington Post contains a big profile of former CFTC chair Brooksley Born. The Post dubs her "the Cassandra of the credit crisis" because of her infamous showdown with Alan Greenspan and Bob Rubin over the OTC derivatives markets in 1998.So was she, in fact, the Cassandra of the credit crisis?Yes and no...
Did Treasury Adopt Part of Wall Street's OTC Derivatives Plan?
Posted on May 24, 2009One of the headlines on Bloomberg's front page is, "Geithner Adopts Part of Goldman, JPMorgan Plan for Trading in Derivatives" (when you click through to the article, the headline is "Geithner Adopts Part of Wall Street Derivatives Plan"). Bloomberg reporter Matthew Leising got his hands on a plan for regulating OTC derivatives that Goldman, JPMorgan, Credit Suisse, and Barclays sent to Treasury a few months ago...
Regulatory Turf Wars
Posted on May 20, 2009The SEC may be going down (good riddance), but apparently not without a fight:The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said...
New Housing Price Trusts
Posted on May 19, 2009The new MacroShares Major Metro Housing Trusts will start trading soon, and I'm interested to see how they do. The trusts were created by Yale economist Robert Shiller's company, MarcoMarkets LLC. Two trusts will be issued?the Major Metro Housing Up Trust (fact sheet here) and the Major Metro Housing Down Trust (fact sheet here)...
TALF Expanded to Include Legacy CMBS
Posted on May 19, 2009So sayeth the Fed:The Federal Reserve Board on Tuesday announced that, starting in July, certain high-quality commercial mortgage-backed securities issued before January 1, 2009 (legacy CMBS) will become eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF)...
New CDS Data
Posted on May 18, 2009The BIS released its much-anticipated semiannual report on OTC derivatives today. It measures notional amounts and gross market values outstanding of OTC derivatives as of December 31, 2008.For the credit default swap (CDS) market, the gross market value?which measures "the cost of replacing all existing contracts and [is] thus a better measure of market risk than notional amounts outstanding?is $5...
Grandstanding
Posted on May 12, 2009The video of Rep. Alan Grayson grilling the Inspector General of the Fed Board of Governors, Elizabeth Coleman, has been making the rounds. Grayson says that there's a Bloomberg article which says that the Fed has entered into $9 trillion of off-balance sheet transactions, and asks Coleman if she has investigated those transactions at all...
2 + 2 = CDS Are Evil!
Posted on May 12, 2009I love the logic of the anti-CDS crowd.First, they claimed CDS were evil because protection buyers weren't required to own the underlying bond?they were mostly used for pure "speculation" rather than hedging. The anti-CDS crowd frequently cited Eric Dinallo's claim that 80% of CDS are held by investors who don't own the underlying bond ("naked CDS") as proof that CDS are evil...
Bank Holding Companies (Again)
Posted on May 08, 2009Serial bloviator Simon Johnson writes:In most countries, the course of action would be clear. The government would take over banks, remove ?bad assets? from their balance sheets, inject fresh capital, and put them bank into the private sector. This is essentially what the FDIC does when it takes over a bank...
Chrysler Holdouts Own No CDS on Chrysler
Posted on May 07, 2009A group of dissident Chrysler bondholders opposing the Obama administration's restructuring plan?which refers to itself as the Chrysler Non-TARP Lenders?disclosed this interesting fact in a court filing yesterday:4. None of the Chrysler Non-TARP Lenders hold any credit default swaps or hedges with respect to their holdings of Senior Debt...
BofA Stress Test Result: $35 Billion Shortfall
Posted on May 06, 2009So reports the Wall Street Journal:Regulators have told Bank of America Corp. that the company needs to take steps to address a roughly $35 billion capital shortfall based on results of the government's stress tests, according to people familiar with the situation...
Information Flows Up
Posted on May 06, 2009It's amusing that Nouriel Roubini and Matthew Richardson dismiss the (leaked) forecasts in the stress test as not credible because they're not as dire as forecasts from the IMF and Roubini's RGE Monitor.Treasury and the Fed had access to more information about banks' balance sheets in conducting the stress tests than the IMF or RGE Monitor could ever dream of...
Sonia Sotomayor
Posted on May 06, 2009Like Glenn Greenwald, I'm puzzled by the attacks on Judge Sonia Sotomayor's intellectual abilities in Jeffrey Rosen's TNR profile. I've appeared in front of Judge Sotomayor twice (admittedly many years ago) and I've practiced in her jurisdiction for many years, and "not that bright" is the last way I would describe her...
"Too Big to Fail" Experts on "Make Them Smaller" Idea
Posted on May 04, 2009Gary Stern and Ron Feldman, Minneapolis Fed President and Senior Vice President, respectively, are without question the leading experts on the "too big to fail" (TBTF) issue. In 2004, they published an excellent book called, Too Big to Fail: The Hazards of Bank Bailouts...
KC Fed President Hoenig on Nationalization
Posted on May 04, 2009Ezra Klein is right that Kansas City Fed President Thomas Hoenig "can't be dismissed as an idealist unaware of the government's workings or an armchair observer with an insufficient grasp of the complexity of the American banking system." Hoenig has always struck me as an extremely thoughtful observer of the financial system, and he's been an active participant in the "too big to fail" debate for many years...
MBIA not screwing around in suit against Merrill
Posted on May 01, 2009MBIA is suing Merrill Lynch over four CDS written on super-senior CDO tranches. MBIA is alleging, inter alia, fraudulent inducement and breach of contract, and is seeking rescission of the CDS contracts as well as compensatory and punitive damages. MBIA has retained Quinn Emanuel, a prominent litigation firm...
Failed SIV's "toxic assets" sold in auction, fetching almost 70%
Posted on May 01, 2009The much-anticipated auction of Whistlejacket's $6bn portfolio of so-called "toxic assets" went very well, fetching an average price of 67 cents on the dollar. Whistlejacket was a large structured investment vehicle (SIV) that failed in February 2008 when its sponsor, Standard Charter, stopped providing liquidity...
Quote of the Day
Posted on April 29, 2009"[O]ne dollar held by a particular bank at the beginning of the day changes hands around one hundred times during the course of the day."From: Afonso & Shin, Systemic Risk and Liquidity in Payment Systems, New York Fed Staff Reports (March 2009).
Government Loan Guarantees Are Not New
Posted on April 29, 2009When Goldman announced that it was raising capital to pay back its TARP money, there was a palpable outrage in the blogosphere. The main theme was that TARP money wasn't the only form of government aid Goldman received, so paying it back shouldn't free Goldman from the TARP restrictions (e...
Fed: Ideal Taylor-rule interest rate is -5%
Posted on April 27, 2009From the FT:The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve?s last policy meeting.The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation...
Treasury and "Least Cost Resolution"
Posted on April 27, 2009It shouldn't surprise you to learn that I was not a fan of Gretchen Morgenson and Jo Becker's big profile of Tim Geithner in the NYT. As the late Tanta demonstrated time and again, Morgenson is an atrocious financial journalist. But I have neither the time nor the energy to highlight all of the errors and wildly misleading statements in the article...
John Carney's Weak Defense of Elizabeth Warren
Posted on April 25, 2009Clusterstock's Joe Weisenthal wrote a post a few days ago highlighting the recent criticism?from Megan McArdle, Eric Falkenstein, and Thomas Cooley?of Congressional Oversight Panel (COP) chair Elizabeth Warren. I've been critical of Warren's attempt to use the COP to address issues well outside the panel's mandate, so I'm glad she's coming in for some criticism...
Securitization is important to consumer lending
Posted on April 24, 2009Gillian Tett has an excellent column in today's FT on the implosion of the securitization markets:What is imploding though is the securitisation world. If you exclude agency-backed bonds, in 2006 banks issued about $1,800bn of securities backed by mortgages, credit cards and other debts...
Since when is Treasury under a "wait and see" policy?
Posted on April 23, 2009I'll give Simon Johnson one thing: he's great at knocking down straw man arguments.Today's straw man is Treasury's alleged "wait and see" policy on the banks. Johnson and Peter Boone claim on the NYT's Economix blog that Treasury's plan is to "look the other way on big banks' problems and hope an economic recovery brings them back to sustained profits...
Wall Street Pay
Posted on April 22, 2009Like Justin Fox, I was struck by this passage in Gabriel Sherman's New York magazine piece about Wall Street pay (but for an entirely different reason):A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers...
William K. Black is an Idiot
Posted on April 18, 2009William K. Black has been making the rounds lately, and has been drawing a lot of attention (from people who want to hate the Geithner plan) by claiming that the Obama administration is "refusing to obey the law" by not seizing the major banks. On Bill Moyers' show, Black stated:I think, first, the policies are substantively bad...
"Too Big to Fail" Again
Posted on April 18, 2009I wrote a long post for The Atlantic's business blog the other day about the idiocy of the whole "too big to fail, too big to exist" idea, which is sadly catching on in the blogosphere. And it's showing no signs of slowing down. Matt Yglesias wrote this about Goldman Sachs:So instead of [the issue] being "if they want taxpayers to save them, then they have to take fewer risks and become smaller" it's given that taxpayers will save them, then have to take fewer risks and become smaller...
The Purpose of the CAP
Posted on April 09, 2009Matt Yglesias badly misunderstands the purpose of the Treasury's Capital Assistance Program (CAP):I thought the point of the [stress] tests was to open up the possibility that a minority of banks would be shut-down, while the others would be proclaimed healthy (as in actually healthy rather than "healthy given a government guarantee") and we could shift out of the implicit guarantee phase...
More AIG Counterparty Nonsense
Posted on April 08, 2009ProPublica has ridiculous article titled, Does AIG Really Need to Pay Its Counterparties in Full?Yes, AIG really has to pay its counterparties in full. The whole point of rescuing AIG was to keep it out of bankruptcy, and short of bankruptcy, there's no mechanism for forcing AIG's counterparties to take a haircut...
PIMCO: Just lucky, I guess
Posted on April 07, 2009One of the most important aspects of the ISDA's recent overhaul of the credit default swaps (CDS) market ? known in the market as the "Big Bang" ? is the creation of a Credit Derivatives Determinations Committee. Starting tomorrow, the Determinations Committee will make binding decisions on a range of issues, the most important of which include whether a "credit event" has occurred, and which obligations will constitute "deliverable obligations" in a settlement auction...
Non-Toxic Assets Priced Properly. Therefore, Toxic Assets Priced Properly
Posted on April 06, 2009That seems to be the argument in this paper by Harvard's Joshua Coval and Erik Stafford and Princeton's Jakub Jurek, which is being touted as evidence that Treasury is wrong to believe that the toxic assets are underpriced.The introduction states:On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products...
"Gaming" the PPIP
Posted on April 06, 2009Paul Krugman says that Jeff Sachs's worries "need to be taken seriously." I think people need to stop taking academics seriously on the bank rescue.Sachs claims that banks like Citi can game the PPIP by partnering with the government to buy their own toxic securities at inflated prices...
Martin Feldstein on the Geithner Plan
Posted on April 04, 2009Martin Feldstein is generally supportive of the Geithner plan, but he says it needs to be expanded in three ways to ultimately succeed. The odd thing is, the Treasury has already announced two of his three proposed expansions.Feldstein writes:First, the Treasury must be prepared to inject capital into the banks that agree to sell mortgages...
Tyler Cowen Is Very Wrong
Posted on April 04, 2009Tyler Cowen has a truly bizarre column in this morning's New York Times. He argues that there's "a big hole" in the Obama administration's proposals to reform financial regulation: "the new proposals immunize the creditors and counterparties of [firms like AIG] by protecting them from their own lending and trading mistakes...
As long as we're capping things...
Posted on April 04, 2009Along with executive pay and bank size, I propose that we cap the number of adjectives Glenn Greenwald is allowed to use in a given post. Substantive issues aside, his writing is atrocious. It's a legitimate public health issue at this point.
A behind-the-scenes account of the financial crisis
Posted on April 03, 2009This behind-the-scenes account of the financial crisis by Phillip Swagel, the former Assistant Secretary for Economic Policy at Treasury, makes for absolutely fascinating reading.Swagel takes academic economists to task for their failure to understand the very real legal constraints on policymaking...
"Stress Test" Scenarios
Posted on April 02, 2009The Obama administration has taken a good deal of heat for the less-than-catastrophic assumptions in its bank stress tests. In the "more adverse" scenario, average unemployment is 8.9% in 2009 and 10.3% in 2010, while housing prices fall 14% in 2009 and 4% in 2010...
Joe Stiglitz, Mainstream?
Posted on April 01, 2009In his op-ed in this morning's NYT, Joe Stiglitz ends up just regurgitating all the superficial mainstream arguments about the Geithner plan: it's a backdoor bailout for banks, Treasury wants investors to "overpay" for toxic assets, nationalization is the solution, yada, yada, yada...
On Mark-to-Market
Posted on April 01, 2009I've actually changed my mind somewhat on mark-to-market (MTM) accounting during the financial crisis. At first I was strongly against relaxing MTM?the banks' complaints about MTM sounded way too much like the bogus complaints I had grown accustomed to hearing from banks over the past 15 years...
Is the Financial Sector Too Big?
Posted on March 31, 2009Probably.But a lot of the recent arguments for why the financial sector is too big don't make the case. For example, Simon Johnson cites the financial industry's share of domestic corporate profits:From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits...
Debating the Optimal Bank Size
Posted on March 31, 2009Everyone seems to agree that financial regulations should strive to prevent banks from ever becoming "too big to fail" in the first place. First, you have to identify the point at which a bank becomes "too big to fail." Felix Salmon proposes limits based on bank assets:To get specific, I think that maybe $300 billion in assets would be a reasonable cap on bank size -- there's very little evidence that banks get any economies of scale beyond that in any case...
The CDS market is useful, but not perfect
Posted on March 31, 2009I've defended the credit default swaps (CDS) market many times before, but even I wouldn't endorse this proposal from Harvard's Oliver Hart and the University of Chicago's Luigi Zingales. Under their proposal, capital requirements at large financial institutions (LFIs) would be subject to a sort of "margin call" on equity holders in LFIs, which would be triggered when the CDS spread on a given LFI rises above a predetermined threshold...
Oh My God, Nationalization Is NOT Possible
Posted on March 31, 2009I'm sorry, Simon Johnson's argument that the government should seize the worst banks (e.g., Citi, BofA), force a debt-for-equity swap over the weekend, and re-open them as well-capitalized entities on Monday, is really detached from reality. This is, in effect, the "temporary nationalization," or "managed receivership" argument that has become so popular among commentators...
Listen to Roman Frydman
Posted on March 30, 2009I'm very glad that Roman Frydman's work is getting some much-deserved attention. Frydman and Michael Goldberg's work on "Imperfect Knowledge Economics" is first rate?the kind of stuff Nobels are made of. I've recommended Frydman and Goldberg's work before, but I only knew of their work because Frydman and his wife were both professors of mine way back in the day at NYU...
Nationalization Again
Posted on March 27, 2009Responding to my earlier post on the insurmountable obstacles to nationalization, one of the bloggers at The Economist's Free Exchange writes:Given the fragility of the current global economy and the real economy impact of financial market spasms (remember, remember that week last September), it's difficult to imagine the Obama administration contemplating nationalisation in the absence of a very clear, legally sound, internationally accepted procedure for taking control of the banks...
Krugman Jumps the Shark
Posted on March 27, 2009It pains me to say that, as Paul Krugman has been my favorite commentator for about 15 years. But, sadly, it's true.In his latest column, Krugman takes aim at securitization:But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks...
Blinded by Rage
Posted on March 27, 2009What do you get when you combine insecurity, a massive inferiority complex, and unbridled populist rage? Matt Taibbi.Taibbi, whose recent Rolling Stone piece is one of the most unintentionally hilarious articles I've ever read, now unleashes a semi-coherent attack on Jake DeSantis, the former AIGFP executive whose resignation letter appeared on the NYT's op-ed page this week...
Nationalization is Not a Viable Option
Posted on March 25, 2009Kevin Drum asks:What would it take to nationalize an outfit like Citigroup? What are the likely legal, financial, diplomatic, and operational issues that would have to be resolved? It would be a real public service if someone with a credible background in this stuff could lay out the details in a way that's understandable for all the rest of us...
Geithner Plan: Still not enough information
Posted on March 23, 2009We still don't have nearly enough information about the various aspects of the Geithner plan for anyone to offer an informed analysis.This isn't just obsessive lawyering on my part. Material terms relating to the financing, fund structure, asset eligibility, etc...
Krugman: For non-recourse before he was against it
Posted on March 23, 2009Back when Geithner originally outlined the administration's bank rescue plan, Krugman wrote:What is in it, in reverse order:1. Super-TALF: a big expansion of the Fed?s quantitative easing, with Treasury backing. I?m OK with that.What's the TALF? A Fed program that provides -- wait for it -- non-recourse loans to private investors to buy certain ABS...
CDS Market Reaction to Geithner Plan
Posted on March 23, 2009The Geithner plan gets rave reviews from the CDS market, with serious spread tightening across the board. The CDX IG12 index closed 14bps lower, at 185bps.Here are today's CDS spread changes for the major U.S. banks:BofA: 21 bps tighterCiti: 27 bps tighterGoldman: 16 bps tighterJPMorgan: 5 bps tighterMerrill: 18 bps tighterMorgan Stanley: 16 bps tighterWachovia: 13 bps tighterWells Fargo: 10 bps tighterOther U...
Premature Punditry
Posted on March 22, 2009When the broad outlines of the Geithner plan first leaked yesterday, I noted that "it's impossible to offer an informed opinion based on the extremely sketchy details in these articles." The descriptions of the Geithner plan in the WSJ and NYT are so broad and so vague that they can't serve as the basis for any remotely serious analysis...
Some Details of the New Bank Rescue
Posted on March 21, 2009The WSJ and the NYT both have front-page stories with preliminary details of the new bank rescue plan, which will be unveiled in the coming week. It's impossible to offer an informed opinion based on the extremely sketchy details in these articles (and I think the NYT article is getting the details of the FDIC plan wrong)...
The Government and AIG
Posted on March 20, 2009Josh Marshall unleashes a very strange rant against AIG:The problem is what appears to be the president's mortifying impotence in the face of bankers and financiers who created the problem. The president speaks and acts for the federal government, which is to say, the American people, who have mobilized more than a trillion dollars and all powers of the state to repair the damage emerging out of the financial sector...
Saving Major Banks
Posted on March 20, 2009Matt Yglesias tries to be too clever for his own good:I, for one, don?t think that "saving" the too-big-to-fail financial institutions is or was among the legitimate purposes of our financial policy. The idea is?or at least ought to be?that we?re trying to prevent them from failing in a way that causes everyone else?s business to go under...
The FSA Deserves Some Blame for Lehman Too
Posted on March 20, 2009ECB official Lorenzo Bini Smaghi responded to Paul Krugman's recent contention that Europe's response to the financial crisis has been inadequate. One of Smaghi's arguments, though, unfairly places all the blame for allowing Lehman to fail on the US:[Krugman's argument] doesn?t explain how the most fateful decision of all ? the decision to allow a systemically important bank to fail in the midst of a financial crisis ? was taken by a single decision-maker, while the 16 euro area governments have managed to avoid making such a large mistake...
Goldman Finally Sets the Record Straight on AIG
Posted on March 20, 2009Goldman Sachs finally held a conference call to dispel two widespread myths about its relationship with AIG, both of which originated in a horribly dishonest article by the NYT's Gretchen Morgenson. I've harped on this several times before, and I'm glad Goldman is finally addressing this directly...
Why AIG Was Rescued
Posted on March 19, 2009Felix Salmon argues that AIG was rescued because if it had failed, no one would have known who was ultimately bearing the losses, which would have caused financial markets to freeze virtually overnight:[T]he web of connections between the thousands of counterparties in the CDS market is so complex that no one really has a clue who would have ended up holding the multi-billion-dollar bag...
Elizabeth Warren again overstepping her mandate
Posted on March 18, 2009I've criticized the Elizabeth Warren-led TARP Oversight Panel for overstepping its mandate before, but this is just ridiculous: the Oversight Panel has invited, among others, Sweden's minister for fiscal and financial affairs during its 1992 banking crisis, Bo Lundgren, to testify at a hearing on past government responses to banking crises...
Outlaw Ratings Downgrade Triggers
Posted on March 18, 2009One of the biggest contributors to the financial crisis has been ratings downgrade triggers, sometimes known as ratings-based collateral calls. These are provisions in financial instruments (especially derivatives) that automatically trigger collateral calls when a counterparty has its credit rating downgraded...
Goldman vs. NYT
Posted on March 17, 2009It's now official: the NYT editorial board has no clue how financial markets work. Its ignorance is truly embarrassing.I've been following the back-and-forth between the NYT and Goldman Sachs pretty closely, mostly because I think the NYT's outrageous claims about Goldman were patently untrue...
AIG discloses counterparties
Posted on March 15, 2009AIG has bowed to public pressure and disclosed its largest counterparties. Full list here.The loudest (and most self-righteous) critics will probably be surprised by a couple things. First, $12.1 billion went to states and municipalities.Second, like I said, a huge chunk of the bailout money ($43...
All Bailouts Are Counterparty Bailouts
Posted on March 14, 2009The recent uproar over the government's refusal to reveal AIG's counterparties on its CDS trades is silly, and reflects a basic misunderstanding of how financial markets work.With regard to AIG specifically: yes, AIG used some of the bailout money to post collateral it owed to counterparties on CDS trades...
The Swedes Didn't Use Receivership
Posted on March 11, 2009Paul Krugman has been pushing the Swedish model hard, so it's more than a little troubling that to discover that he doesn't understand what Sweden actually did:I was not saying ?nationalize all the banks?; I was saying do what the Swedes did ? in tandem with a guarantee on bank liabilities, take the banks with zero or negative capital into receivership...
Default risk vs. Spread risk
Posted on March 11, 2009Paul Krugman comments on the rising CDS spreads on US government debt:Has the risk of a US government default risen? Probably. Nonetheless, the people buying these contracts are crazy. A world in which the US government defaults would be a world in chaos; how likely is it that these contracts would be honored?Oh my god, repeat after me: CDS on U...
Special treatment of derivatives in bankruptcy
Posted on March 10, 2009I'm puzzled by all the recent hyperventilating over the 2005 bankruptcy bill and the special treatment of derivatives in bankruptcy proceedings. Derivatives and certain other financial contracts are exempt from the automatic stay in bankruptcy, which essentially gives derivatives counterparties priority over all other claimants...
CNBC ? Financial Industry
Posted on March 10, 2009Ever since the financial panic that followed Lehman's failure, people has been paying a lot more attention to financial markets than they usually do. This has led to CNBC coming in for a lot of criticism, almost all of which seems to be justified. But there seems to be this idea out there that CNBC represents the mindset of the financial industry?because, you know, it's about finance, and therefore everyone in the financial industry must watch CNBC...
Advice you can safely ignore
Posted on March 09, 2009Nobel prize-winner and serial wealth-destroyer Myron Scholes thinks we should "blow up" the over-the-counter (OTC) derivatives market and start all over:Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to "blow up or burn" over-the-counter derivative trading markets to help solve the financial crisis...
Financial Journalism
Posted on March 07, 2009Robert Teitelman of The Deal has a magnificent post on financial journalism in the credit crisis. It's long, but well worth it. Here's a taste:Finance is a complex, nonlinear system, full of noise, chaos, complexity and ambiguity. It's defined by all the waywardness of human psychology...
TALF 2.0: Here There Be Dragons
Posted on March 07, 2009In a speech at the Council on Foreign Relations yesterday, the new President of the New York Fed, William Dudley, provided important insights on the likely future of the TALF. Dudley hinted that the terms of the TALF might eventually be relaxed to include below-AAA tranches of ABS, as well as legacy (as opposed to newly-issued) ABS...
Rodge Cohen as Deputy Treasury Secretary?
Posted on March 06, 2009Now that Annette Nazareth has withdrawn her name from consideration for Deputy Treasury Secretary, Treasury is reportedly considering Rodge Cohen, the legendary banking lawyer and chairman of Sullivan & Cromwell. Cohen would be a fantastic choice for any top government position, and Treasury would be lucky to have him...
ICE to start clearing CDS on Monday
Posted on March 06, 2009ICE Trust?the CDS clearinghouse backed by the major dealer banks?has cleared the final regulatory hurdle (SEC approval), and will start clearing credit default swaps (CDS) on Monday. SEC exemptive order here; Reuters article here; Bloomberg article here...
$750 More for Banks in Obama's Proposed Budget
Posted on February 26, 2009So reports Bloomberg:President Barack Obama?s first budget request would provide as much as $750 billion in new aid to the financial industry, as well as overhaul the U.S. health-care system and launch a program to cut carbon-dioxide emissions....The official, speaking on condition of anonymity, said the White House hasn?t decided whether the $750 billion in additional aid to the financial industry will be needed...
Stress Test and House Prices
Posted on February 25, 2009Paul Krugman is unhappy with the house price assumptions in the "adverse scenario" of the Treasury and FDIC's stress test:And color me baffled at what they consider an adverse case for housing prices. They consider a fall of housing prices, as measured by the Case-Shiller 10-city index, of 27 percent from 4th-quarter 2008 levels to be as bad as it could get...
Good Questions From An Unlikely Source
Posted on February 24, 2009Am I crazy, or did the most articulate and useful questions for Bernanke in the Senate Banking Committee hearing really come from Bob Corker? Questions in committee hearings are usually irrelevant and often barely coherent, but Corker's questions about the details of the Fed's "stress tests" of the major banks were actually quite good, and made him look reasonably well-informed...
Elizabeth Duke Defends the CRA
Posted on February 24, 2009Fed Governor Elizabeth Duke gave a speech on the Community Reinvestment Act (CRA) today, and had some harsh words for the crazy right-wingers who claim that the CRA caused the subprime crisis:The most recent misperception promulgated by many who either do not know much about the law or don't like it, is that the CRA caused the subprime mortgage meltdown...
Citi's CDS
Posted on February 24, 2009This is kind of humiliating for Citi. Credit defaults swaps on Citi's subordinated debt are now trading on a points-upfront basis?that is, in addition to fixed quarterly premiums of 500bps, protection sellers are demanding substantial upfront payments to insure Citi's sub debt...
Technology!
Posted on February 22, 2009Tom Friedman wants the government to focus on "real innovators," and to that end, he has a suggestion:As we invest taxpayer money, let?s do it with an eye to starting a new generation of biotech, info-tech, nanotech and clean-tech companies, with real innovators, real 21st-century jobs and potentially real profits for taxpayers...
Maureen Dowd: Obama's election absolved us of racism
Posted on February 22, 2009Maureen Dowd apparently thinks Obama's election ended racism in America:Obama is oozing empathy compared with his attorney general, who last week called us ?a nation of cowards? about race.Eric Holder, who showed precious little bravery in standing up to Clinton on a pardon for the scoundrel Marc Rich, is wrong...
What good reporting on the CDS market looks like
Posted on February 22, 2009Given how atrocious the reporting on credit default swaps has been during the financial crisis, it's refreshing to see this paragraph in a Bloomberg article by Shannon Harrington and John Rega about CDS clearinghouse developments:Bets made through credit-defaults swaps helped push American International Group Inc...
The Recession and Economic Geography
Posted on February 22, 2009Richard Florida's big article in The Atlantic about the recession's impact on economic geography is decent enough, though not terribly original. If you're already familiar with Florida's work, you won't find anything new.One frustrating aspect of the article is that Florida constantly conflates the changes he wants to happen with the changes that will happen...
Stupid Republican Arguments
Posted on February 22, 2009I'm not even sure what this means:Like Mr. Sanford, Republican Gov. Haley Barbour of Mississippi said Sunday that he would also reject some of the stimulus funds."There is some [money] we will not take in Mississippi," he said on CNN's "State of the Union...
Law for law's sake
Posted on February 21, 2009Megan McArdle notes that the "mania for rules" in the public sector is different than in the private sector: in the private sector, "companies that become too encrusted eventually succumb to competition from nimbler firms," whereas in the public sector "[t]he feedback to discipline ...
How Quickly Things Change
Posted on February 21, 2009With its endowment down an estimated 30%, Harvard is evidently "short on cash":The school relies on its endowment to generate a third of the money for its operations, and the endowment is on the verge of posting its biggest loss in 40 years. With much of its money tied up for the long term, it is scrambling to meet some obligations...
The Purpose of TARP
Posted on February 21, 2009I'm continually amazed by how quickly commentators have forgotten that the primary purpose of TARP was to prevent the complete collapse of the U.S. (and global) financial system, and not just to increase bank lending to consumers and businesses. We were in the middle of an epic financial panic, complete with a classic run on key parts of the shadow banking system, and a devastating margin spiral that had engulfed the entire financial system...
Better Than Nothing
Posted on February 20, 2009Beating a credit rating agency ($) in rating tranches of synthetic CDOs isn't something to write home about, but it's better than nothing:In this paper, we demonstrate how CDS-implied ratings for corporate reference names, together with an analytic CDO ratings model, can be used to derive CDS-implied tranche ratings for corporate synthetic CDOs (CSOs)...
Yes, Fire John Yoo
Posted on February 20, 2009I agree with Brad DeLong: John Yoo should be fired.I am not a constitutional lawyer. I think most non-lawyers would be surprised to find that a vast majority of U.S. constitutional law is mind-numbingly boring.But a good friend from law school who is a bona fide constitutional law expert has repeatedly assured me that Yoo's so-called "Torture Memo" is undeniably false, and that Yoo is effectively guilty of professional misconduct...
Optimism?
Posted on February 20, 2009I can't remember the last time Paul Krugman was optimistic about the economy (and his pessimism was, obviously, entirely warranted). So I was caught off-guard by this little ray of optimism in his column this morning:So will our slump go on forever? No...
Ex-Bankers
Posted on February 14, 2009I want to take issue with something Simon Johnson of MIT said on Bill Moyers' show tonight, because I think it was very insulting. From the transcript:BILL MOYERS: Geithner has hired as his chief-of-staff, the lobbyist from Goldman Sachs. The new deputy secretary of state was, until last year, a CEO of Citigroup...
Cato in 2007: Emulate Iceland!
Posted on February 13, 2009Brad DeLong flags a series of horrendous articles by Cato Institute "scholar" Daniel Mitchell, but the best one is the article exhorting advanced economies to emulate Iceland:March 21, 2007: Iceland Comes in From the Cold With Flat Tax Revolution: Listen up, Gordon Brown and George Osborne...
The Venturesome Economy
Posted on February 13, 2009I want to second Reihan Salam's recommendation of The Venturesome Economy, by Amar Bhidé. It's a tremendous book; I probably learned more from Bhidé's book than any book I've read in several years (save possibly for Power and Plenty). Bhidé examines in detail how innovation actually occurs in modern economies, and demonstrates how little successful innovation has to do with high-level scientific research...
Index CDS Craziness
Posted on February 13, 2009Tyler at Zero Hedge has an excellent post about index basis trades?arbitraging the differences in pricing between CDS indices and their single-name constituents?and how the IG11 index basis (or "skew") has exploded negative ever since Lehman. As Tyler notes, three IG11 constituents are trading on a points upfront basis, and considering that the IG11 is trading 46bps wide to the deal spread, that makes it pretty expensive to put on an index basis trade...
Reach Conclusion, Conduct Research, Produce Documentary
Posted on February 13, 2009I like how Michael Moore has already concluded that the financial crisis is "the biggest swindle in American history" and "the greatest crime story ever told," even though he's obviously still in the research stage. That sounds like a recipe for a fact-based, impartial analysis best-selling documentary.
Amended Derivatives Bill Voted Out of Committee, Killed by Frank
Posted on February 12, 2009An amended version of Batshit McCrazy's Rep. Collin Peterson's derivatives bill was voted out of the House Agriculture Committee today [update: post-markup information available here; main revisions in the Manager's amendment and the Boswell amendment]...
Strange Complaints
Posted on February 11, 2009Tim Geithner is taking a lot of criticism for his lack of specificity yesterday, but some of the criticism, like this from the WSJ, is just absurb:Some investors said the program, called the Public-Private Investment Fund, likely will be too small to spur purchases of battered mortgages and other assets...
John Taylor: Giving Banks Money Hurts Banks
Posted on February 11, 2009John Taylor undoubtedly made some great contributions to monetary economics?foremost among them being the famous Taylor Rule. But an astute observer of financial markets he is most certainly not. His diagnosis of the financial crisis is comical at best...
CMBS Fact of the Day
Posted on February 11, 2009From 1995 to 2007, the average subordination level for AAA-rated CMBS tranches fell from 34.1% to 12.3%. (Data from Wachovia Capital.)I just thought you should know that, since the government has decided to get in the CMBS game. I hope you like risk....
Will Wilkinson's strange theory about Krugman
Posted on February 11, 2009Will Wilkinson mocks Paul Krugman for not including political factors in his economic thinking:Perhaps more than any economist of his caliber, Krugman understands that policy is largely determined by the outcome of the public opinion shoutfest. Yet this recognition seems to have no effect on Krugman?s ideas...
Here We Go Again: Peterson's New CDS Bill
Posted on February 11, 2009Rep. Collin Peterson, Chairman of the House Agriculture Committe, has introduced the final version of the Derivatives Markets Transparency and Accountability Act of 2009 (H.R. 977). The draft bill included an absurb attempt to ban so-called "naked" credit default swaps (though the bill was so incompetently drafted that it wouldn't actually have banned naked CDS)...
A Structured Finance Bailout?
Posted on February 10, 2009One of the things to watch for tomorrow when Geithner unveils the new bank bailout is whether the range of asset-backed securities (ABS) eligible for some form of government help is broadened. The Fed already announced a significant expansion of the Term Asset Backed Securities Lending Facility (TALF), with eligible collateral now including triple-A rated ABS backed by student loans, auto loans, credit card loans, and SBA-guaranteed 7(a) and 504 small business loans...
Update on CDS Clearinghouse
Posted on February 10, 2009ICE Trust?which will presumably be the dominant CDS clearinghouse, since it has the backing of the major dealer banks? is struggling with the issue of how to price less liquid bespoke CDS contracts. From Bloomberg:Intercontinental Exchange Inc.?s planned clearinghouse for the $28 trillion credit-default swap market is stalled over pricing on less frequently traded contracts, Chief Executive Officer Jeff Sprecher said...
Via Matt Yglesias, here's "centrist"
Posted on February 09, 2009Via Matt Yglesias, here's "centrist" Sen. Claire McCaskill's lame defense of her demands to cut the stimulus bill:She Tweets ?Just saw Krugman?s comments on reduction in recov act. Question for him. Would no stimulus act be better than one thats 800 B instead of 900...
Executive Pay
Posted on February 08, 2009Outrage over exhorbitant executive pay at companies receiving TARP funds is entirely justified. But realistically, the government will never be able to restrict executive pay, and anyone who thinks otherwise is delusional. There are entire companies, not to mention entire legal departments, dedicated to structuring compensation packages that circumvent U...
Breaking News: Male Traders Like To Take Risk
Posted on February 08, 2009It's always amusing when journalists discover that male traders?get this!?like to take on risk. Yes, and in other news, a new study says that bears tend to shit in the woods. Nick Krstoff (who I actually think is one of the best columnists around) takes his turn on this subject in his latest column:[A recent] study also suggested that elevated testosterone levels could lead to greater assumption of risk; high testosterone levels ?may shift risk preferences and even affect a trader?s ability to engage in rational choice...
Michael Steele: Government Jobs Aren't Really "Jobs"
Posted on February 08, 2009Am I crazy, or did newly-elected RNC chair Michael Steele actually argue on ABC this morning that government jobs aren't really jobs?I'm paraphrasing, but Steele basically argued that the stimulus bill won't create any jobs because the government would only be hiring people for a couple years, and jobs with a "fixed period" of time don't count as real jobs...
Waldmann on CDS
Posted on February 07, 2009Robert Waldmann responds to my comments on CDS (which were a continuation of an exchange in the comments section).I must admit, though, I'm a bit puzzled by some of his responses. This, for instance:In particular I think the pricing of debt implied by the CDS market was totally wrong...
Battleship and Rating Agencies
Posted on February 07, 2009Last summer, the SEC proposed new rules for credit rating agencies, and last week it published the final rules. The new rules are aimed at, among other things, conflicts of interests in the rating process. Specifically, the new rules prohibit rating agencies from issuing or maintaining a credit rating where the rating agency (or a person associated with the rating agency):"made recommendations to the obligor or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security...
London
Posted on February 06, 2009I'm still stranded in London, unfortunately, but my three extra days here have taught me two important lessons:1. Even in miserable weather, British people are still extremely polite.2. British TV is terrible. I'm sorry, but it's true.
WSJ on Boaz Weinstein
Posted on February 06, 2009The WSJ has a long piece on Boaz Weinstein's tenure at Deutsche Bank. Weinstein was DB's "star trader" for a few years?right up until he managed to lose $1.8 billion.So how did Weinstein lose $1.8 billion? The same way every "star trader" loses a boatload of money: they make a lot of money exploiting arbitrage opportunities in good times, and then lose it all when their market goes berserk in a crisis...
Bipartisanship!
Posted on February 06, 2009Newspapers have been quick to note the bipartisan makeup of Obama's new Economic Recovery Advisory Board, emphasizing that the Board includes even well-known Republican economist Martin Feldstein.What other board does Feldstein sit on? AIG.But does he sit on any of AIG's board committees? Yep, the Finance Committee...
Worst Sales Pitch Ever
Posted on February 05, 2009A friend sends along what has to be the least attractive description of an investment firm's strategy ever:We invest in what we believe to be the premier asset-backed securities in the world - U.S. residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae...
False Dilemma
Posted on February 05, 2009Dick Cheney is still the master of the false dilemma, as his recent interview with The Politico demonstrates:?When we get people who are more concerned about reading the rights to an Al Qaeda terrorist than they are with protecting the United States against people who are absolutely committed to do anything they can to kill Americans, then I worry,? Cheney said...
Eric Cantor: Douchebag Extraordinaire
Posted on February 05, 2009Last week, when the House was debating the stimulus bill, Marc Ambinder conducted an interview with Rep. Eric Cantor, the Republican Whip. Cantor's response (or lack thereof) to a simple question about government transfers is very telling:[Ambinder:] Another plank in your proposal is to get rid of the tax on unemployment benefits...
House Bill Limiting CDS Speculation
Posted on February 05, 2009I was working on other things this week, so I didn't get a chance to comment on Rep. Collin Peterson's draft bill aimed at limiting speculation in credit default swaps (CDS). The bill is poorly drafted, to say the least. The operative language appears in Section 16, entitled "Limitation on Eligibility to Purchase A Credit Default Swap":It shall be unlawful for any person to enter into a credit default swap unless the person would experience financial loss if an event that is the subject of the credit default swap occurs...
Random Thought
Posted on February 02, 2009Is there any way Heathrow isn't the worst airport in the history of the world?I mean, O'Hare was in the running for a while there, but it seems to me that over the past 5 years, Heathrow has really pulled out all the stops. Its lead is pretty much insurmountable now.
Ed Glaeser on Bob Ellickson
Posted on February 02, 2009Kudos to The New Republic for letting one giant in urban economics (Glaeser) review a book by another giant in urban economics (Ellickson). Not surprisingly, Glaeser is a fan of Ellickson's latest.With regard to the current foreclosure crisis, Glaeser advocates using a form of shared appreciation mortgages (SAM):The best that can be done, I think, is to create an as-if situation that gets servicers to act like local banks...
Soros is wrong
Posted on January 30, 2009Unless I'm misreading him, George Soros is just plain wrong about this:Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks...
Tax Rebates as Stimulus
Posted on January 30, 2009It's very difficult to get truly objective, nonpartisan analysis of stimulus issues. Most people look to the CBO for authoritative, unbiased analysis. While I respect the CBO and think it's reputation or honesty is well deserved, I also know that bills are often drafted with the CBO's scoring methodology specifically in mind...
Is the CDS market the root of problems in other markets?
Posted on January 30, 2009No, according to this article in the most recent Journal of Fixed Income:This article investigates volatility transmission among the credit default swap (CDS), equity, and bond markets, using a multivariate GARCH model. The authors hypothesise that volatility in the bond and equity markets can originate from the CDS market where there is potential insider trading and increased trading activity due to private credit information...
Upfront CDS: Live in March
Posted on January 30, 2009"Overhaul" of the CDS market, including upfront CDS (which I discussed at length the other day) and a formal Determinations Committee, to come in March. From Bloomberg:Dealers plan to overhaul credit- default swaps in March to curb risks in the $28 trillion market, making the derivatives more like bonds and creating a committee that will arbitrate disputes...
The EU blinks
Posted on January 28, 2009Last week, after the major CDS dealers refused to commit to a firm mid-year deadline for the introduction of a European clearinghouse, the EU threatened to introduce legislation mandating central clearing for CDS:Barring a last minute change of heart by dealers, EU Internal Market Commissioner Charlie McCreevy will propose that a provision for mandatory clearing be inserted into the reform of EU bank capital rules the European Parliament and EU states are now adoptingThe dealers, however, were not impressed:"It's a certainty the market will move without a mandate but the dealers will do it on their own terms and their own timetable," one dealing company said...
FDIC May Run the "Bad Bank"
Posted on January 28, 2009The FDIC wants to run the "bad bank" the government might set up:The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said...
Upfront CDS with Fixed Coupons
Posted on January 28, 2009I must admit, I never thought it would actually happen. But the most liquid single-name CDS are now expected to move to fixed coupons with upfront payments in the not-too-distant future. The fixed coupons will supposedly be set at 100bps and 500bps (depending on credit quality)...
Real Estate Derivatives
Posted on January 27, 2009Nice piece by Zachary Karabell in Newsweek about Robert Shiller's push to establish a liquid market in real estate derivatives. Shiller has long been a leading proponent of real estate derivatives. I've plugged real estate derivatives before, and I still think it's important that homeowners have a way to reduce their exposure to fluctuations in the local housing market...
The truth about the CDS market
Posted on January 27, 2009I'm not wild about Peter Wallison's piece, "Everything You Wanted to Know about Credit Default Swaps?but Were Never Told." I may write a separate post on Wallison's piece. But for now, if you want to know the truth about the CDS market, read these two pieces by Satyajit Das:Surreal Realities of the CDS Markets - Part 1Surreal Realities of the CDS Markets - Part 2Das' views on the CDS market closely mirror my own...
My GOD Gretchen Morgenson Is Stupid
Posted on January 26, 2009Sadly, Tanta is no longer around to shred the idiocy that Gretchen Morgenson produces. That's too bad, because Morgenson's column on credit default swaps yesterday was a doozy.It's hard to know what to say about a column that's so detached from reality...
Thank the Lord
Posted on January 26, 2009This is the best sentence on the New York Times op-ed page today:This is William Kristol?s last columnDon't let the door hit you on the way out.
WSJ: Dudley likely to be NY Fed President
Posted on January 26, 2009Now that the Senate has confirmed Geithner, we'll find out who the new President of the New York Fed will be (an extremely powerful position). The WSJ says it's likely to be William Dudley, who currently runs the NY Fed's markets desk:Mr. Geithner's confirmation will free the Federal Reserve Bank of New York to announce his successor as president of the regional Fed bank...
Why why shouldn't force banks to lend
Posted on January 26, 2009A surprisingly common criticism of the TARP is that it didn't require banks receiving bailout money to lend to small businesses and consumers. Joe Nocera of the NYT penned a whole column about "the dirty little secret of the banking industry," which was that "it has no intention of using the money to make new loans...
Merrill and the Basis Trade
Posted on January 25, 2009Felix Salmon is wondering, after reading this WSJ article, if the main source of Merrill Lynch's staggering $15bn loss in Q4 was the infamous "basis trade."In a basis trade, an investor buys a corporate bond and simultaneously buys CDS protection on the bond...
Obama Administration on Credit Default Swaps
Posted on January 24, 2009At least the Obama administration (Tim Geithner really) recognizes that a CDS clearinghouse won't magically heal the financial markets, and won't even touch a huge segment of the CDS market. Contemporary politics being the three-ring circus that it is, I suppose that's all you can really hope for...
Outrageous
Posted on January 22, 2009I suspect there's more to the story, but suffice it to say that if true, then this is an outrageous stunt:Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America...
Ken Lewis to meet with Thain on "his future"
Posted on January 22, 2009In addition to this morning's revelations in the FT regarding Merrill's bonus payments stunt, CNBC is now reporting that John Thain spent $1.2m to redecorate his office.Apparently Ken Lewis has had enough. I don't blame him. From Bloomberg:Bank of America Corp...
Financial Market Bobbleheads
Posted on January 22, 2009Christopher Whalen, the managing director of a firm called Institutional Risk Analytics, is a ubiquitous commentator on financial markets. This is despite the fact that, from everything I've seen, he's totally crazy. Par for the course when it comes to financial market bobbleheads, I suppose...
Quote of the Day
Posted on January 21, 2009From Frank Partnoy, writing in the FT:When a company pays out more in compensation than its market capitalisation, as Citigroup did, the end is near.Hard to argue with that.
S&P Launches Three CDS Indexes
Posted on January 21, 2009Now you can compare (most of) the S&P 100 equity index with a corresponding index based on CDS market prices. From the WSJ:Ratings agency Standard & Poor's Wednesday launched a new index to help investors compare the performance of the US equity- and credit derivatives markets...
Suspend State Sales Taxes!
Posted on January 21, 2009The main point of a fiscal stimulus package is to offset the decline in consumer spending, which accounts for over 70% of GDP. We need to avoid the Paradox of Thrift, and all that. As Paul Krugman put it:[W]hat the economy needs now is something to take the place of retrenching consumers...
Keeping a CDS clearinghouse in perspective
Posted on January 17, 2009A central clearinghouse for credit default swaps (CDS) will undoubtedly provide benefits to the CDS market: increased transparency, a reduction in counterparty risk, efficient multilateral netting, a uniform valuation method, etc.But commentators seem to believe that a CDS clearinghouse is a "solution" to the problems in the CDS market...
Sheila Bair Hearts Derivatives
Posted on January 16, 2009Sheila Bair has become something of a hero to some progressives, supposedly because she's "a principled regulator who stood up against the good ole boys club." Apparently all you have to do to become a "principled regulator" is spit out a bunch of vague platitudes to naïve journalists about how we should help "ordinary Americans" instead of Evil Wall Street Banks...
Bloomberg on CDS clearinghouses
Posted on January 15, 2009Bloomberg has a story headlined, "ICE Emerges as Credit-Default Swap Clearinghouse Frontrunner":Intercontinental Exchange Inc., the second-largest U.S. futures market, is emerging as the leading candidate to run a clearinghouse for the $29 trillion market for credit-default swaps...
Getting the Signals Crossed
Posted on January 14, 2009Now we know why the Obama administration asked President Bush to go ahead and request the remaining $350 billion of TARP funds: Bank of America needs another bailout. No details are available yet, but everyone's assuming that the BofA deal will be roughly similar to the deal Treasury struck with Citi in November...
The Price of Restructuring: CDS Market vs. BIS
Posted on January 14, 2009Relating to my discussion yesterday of whether the BIS should reduce the penalty for excluding the "modified restructuring" (Mod-R) credit event from CDS contracts, which is currently a 40% reduction in capital relief, a friend at a dealer bank has informed me that the spread between contracts with Mod-R and contracts with no restructuring credit event (known as "No-R") is roughly 9 basis points...
Yglegias on Affordable Housing
Posted on January 13, 2009Matt Yglesias is on the right track regarding affordable housing, but he still makes a couple important mistakes:At the margin, adding new market-rate housing units reduces the cost of housing, making housing more affordable. In other words, given a choice between a project with 20 affordable units and 20 market-rate ones or a project with 40 market-rate units the former is more desirable from an affordability standpoint...
Ah, Politics
Posted on January 13, 2009Every time you forget how cartoonishly unserious the world of politics is, something like this comes along to remind you:Sen. Charles E. Grassley, ranking Republican on the Senate Finance Committee, is raising questions about a housekeeper who worked briefly for Treasury Secretary-nominee Timothy Geithner without proper immigration papers, and multiple years when Mr...
Important changes afoot in the CDS market
Posted on January 13, 2009Continuing my recent credit default swap theme, I'm going to discuss a couple of important changes in the CDS market that are now imminent.First, after talking about it for years, market participants in the US have agreed to drop the "restructuring" credit event ? which is actually called "modified restructuring," and is commonly known as Mod-R ? for standard US single name CDS...
Et tu, Smithsonian?
Posted on January 12, 2009TPM flags a whopper in the caption beneath the Smithsonian's new portrait of George W. Bush (which is fortunately being disputed by Sen. Bernie Sanders):The current wording of the caption states that Bush's term was marked by "the attacks on September 11, 2001, that led to wars in Afghanistan and Iraq...
Regulating the CDS market
Posted on January 11, 2009I've received a few requests for my thoughts on various forms of regulation for the CDS market. When I was working on credit default swaps in the first half of this decade, during the big push to standardize CDS contracts, I never in my wildest dreams thought that CDS would become a popular topic of discussion, or that anyone outside the world of structured finance law would ever willingly ask me to discuss CDS!First of all, I think it's very clear that the current regulatory posture?that is, an unregulated dealer-driven OTC market?is not a viable option anymore...
Rodge Cohen as New York Fed President?
Posted on January 10, 2009The WSJ reports a few more names on the list of candidates interviewing for the powerful position of New York Fed President.The most intruiging one is Rodge Cohen, the legendary Sullivan & Cromwell chairman. If they could get him, Cohen would be a fantasic choice...
NYT Graphics
Posted on January 03, 2009I like to beat up on NYT reporters as much as anyone?they haven't had a good financial reporter since Peter Truell, and Gretchen Morgenson is awful.But let's not kid ourselves: the NYT can put together some amazing graphics. I wish there was a page on the NYT's website for just graphics (or as Barry Ritholtz would say, "chart porn")...
Booyah
Posted on January 03, 2009Linklaters?the first firm I ever worked for, all those years ago?comes in at #1 in M&A for 2008.Believe it or not, league tables are actually a big deal in the high-pressure, surprisingly high school-ish, thoroughly miserable world of Wall Street law firms.
Give Hank Greenberg Some Credit
Posted on December 30, 2008The Washington Post's series on AIG Financial Products is actually quite good so far (see Part I here, Part II here).But in its history of AIGFP, I think the Post gives short shrift to Hank Greenberg. I'm dating myself a bit with this story, but here goes: Back in the early 1990s, when AIGFP was being run by former Drexel Burnham executive Howard Sosin, Greenberg had to set up a shadow group to infiltrate AIGFP (his own subsidiary!), which the Post article refers to in passing...
New Derivatives Data
Posted on December 29, 2008The OCC released its Q3 report on trading and derivatives activity today. There appears to be minimal data on Morgan Stanley, and no data on Goldman Sachs, the two newest bank holding companies. That's only fair, I guess, since MS and GS only became bank holding companies in the very last days of Q3...
Was the LTCM Bail-In a Mistake?
Posted on December 29, 2008Tyler Cowen, in his Sunday New York Times column, says yes. His reasoning, however, leaves much to be desired.Tyler argues that by saving Long-Term Capital Management (LTCM), regulators missed a golden opportunity to teach the markets a much-needed lesson in moral hazard:With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed ? as long as the collapse of those institutions would threaten the global credit system...
CDS News
Posted on December 23, 2008Well, a href="http://online.wsj.com/article/BT-CO-20081222-712075.html?mod=wsjcrmain"this/a is surprising:blockquoteCME Group Inc. (CME) is in advanced discussions with six dealers to take equity stakes in its credit-default swap trading and clearing platform, as it lines up against a rival backed by nine of the market's largest participants...
You Can't Make This Stuff Up
Posted on December 19, 2008An a href="http://blog.mises.org/archives/009122.asp"article/a from the Mises Institute:blockquoteMadoff is a perfect case study showing that the SEC is incapable of protecting investors as well as free market institutions are, writes Briggs Armstrong...
Temporarily Suspend the Sales Tax
Posted on December 19, 2008With the near-constant a href="http://economix.blogs.nytimes.com/2008/12/16/the-ideal-stimulus-package/"discussion/a of what should go into Obama's a href="http://www.washingtonpost.com/wp-dyn/content/article/2008/12/18/AR2008121804204.html?wprss=rss_business"stimulus package/a (tax cuts? infrastructure spending?), it's disappointing that a href="http://blogs...
Are Asset Bubbles Inevitable?
Posted on December 19, 2008Virginia Postrel a href="http://www.theatlantic.com/doc/print/200812/financial-bubbles"thinks/a they are, because bubbles occur even in controlled experiments. This, Postrel argues, casts doubt on the idea that regulations can curb asset bubbles:blockquoteThese lab results should give pause not only to people who believe in efficient markets, but also to those who think we can banish bubbles simply by curbing corruption and imposing more regulation...
In Praise of Shaun Donovan
Posted on December 18, 2008I didn't get a chance to comment on this last week, but I wanted to mention that Obama couldn't have a href="http://www.nytimes.com/2008/12/13/us/politics/13appoint.html"picked/a a better nominee for HUD Secretary. a href="http://www.nyc.gov/html/hpd/html/about/bio-shaun-donovan...
NYT Editorial Board Repeats Morgenson Idiocy
Posted on December 16, 2008The span style="font-style: italic;"NYT/span editorial board a href="http://www.nytimes.com/2008/12/15/opinion/15mon1.html?pagewanted=all"recycles/a a thoroughly discredited accusation about the Fed's decision to save AIG (h/t a href="http://www.portfolio...
Brad DeLong Assumes a Can Opener
Posted on December 15, 2008Brad DeLong aruges for lowering mortgage interest rates to 4% to boost the housing market. I think Brad needs to re-check his assumptions:The mortgage interest rate is made up of four things. Compensation for inflation--call it 2% per year. Real time preference--the fact that because we will be richer in the future we value future goods at less than par in terms of present ones--call it 2% per year...
The TARP Oversight Panel's Mandate
Posted on December 15, 2008Comparing the way the Elizabeth Warren-led TARP Oversight Panel describes its mandate with the Panel's actual mandate (see Section 125) is incredibly telling.(For the record, I like Elizabeth Warren. I think she's a great consumer advocate. But there's a time and place for advocacy...
Oh God: Krugman Insults Intelligence of Merkel/Steinbruck
Posted on December 13, 2008Oh God, Paul, say it ain't so:Nobel laureate for economics Paul Krugman has slammed the German government?s handing of the economic crisis, saying Chancellor Angela Merkel and Finance Minister Peer Steinbrück have completely failed to understand the situation...
David Brooks and Risk Tolerance
Posted on December 12, 2008David Brooks writes:When investors in New York become gripped by fear, they pull inward. When Washingtonians are gripped by fear, they rush outward, with bigger and more daring plans. The risk tolerance in the financial world has shrunk to zero, but the risk tolerance in the political world has risen to infinity...
Which One Does Not Belong?
Posted on December 11, 2008It's always amusing to watch Marc Ambinder talk about policy. In this post, Ambinder reports that Obama's economic advisers are worried about "the complete economic collapse of a large, unstable nation":To be sure, Pakistan is nearly broke, and U.S. policy makers seem to be aware of that; but a worldwide demand crisis could lead to social unrest in countries like Indonesia and Malaysia, Singapore, the Ukraine, Japan, Turkey or Egypt (which is facing an internal political crisis of epic proportions already)...
Howard Husock making late push for Dishonest Hack of the Year
Posted on December 10, 2008Just 8 days after Fed Governor Randall Kroszner gave a speech completely eviscerating the argument that the Community Reinvestment Act (CRA) had anything to do with the subprime crisis, the NYT decides to publish an op-ed by Howard Husock aruing that the CRA deserves a significant portion of the blame for the subprime crisis...
Two Absolute Must-Reads
Posted on December 09, 20081. A 2005 internal Fannie Mae presentation, titled "Facing Strategic Crossroads"The presentation is the smoking gun in the debate over whether Fannie and Freddie entered the subprime and Alt-A markets in order to satisfy government mandated affordable housing goals, or for market-related reasons...
Uh-oh: Mortgage Modification Programs are Terribly Ineffective
Posted on December 08, 2008This is bad news:Most U.S. mortgages modified by lenders to help keep struggling borrowers in their homes fell back into delinquency within six months, the chief regulator of national banks said.Almost 53 percent of borrowers whose loans were modified in the first quarter of this year re-defaulted by being more than 30 days overdue, John Dugan, head of the Treasury Department?s Office of the Comptroller of the Currency, said today at a housing conference in Washington...
Financing Lawsuits with Bailout Money
Posted on December 07, 2008The WSJ reports that one of the sticking points in the negotiations over an auto bailout between the Dem leadership and the White House is:A demand by senior Democrats that funds under the bailout not be used by the automakers to finance lawsuits challenging state car-emission limits...
It's ICE
Posted on December 05, 2008Not that it was totally unexpected, but in the race between IntercontinentalExchange (ICE) and CME Group to get the first CDS clearinghouse up and running, ICE is going to win. ICE just won approval for a New York trust charter from the New York Banking Department...
The Business Judgment Rule Wins Again
Posted on December 05, 2008New York Supreme Court rejects shareholder challenge to fairness of JPM's rescue of Bear Stearns. A huge win for the business judgment rule.
Two Observations on the Financial Crisis
Posted on November 24, 2008Having spent the past two months at hedge funds and money center banks, let me offer a couple broad observations about the financial crisis.First, Wall Street and Greenwich were absolutely convinced that the government would save Lehman. They interpreted the Bear Stearns rescue as a signal that no major financial institution would be allowed to fail...
Citi Bailout: An "Extremely Unusual" Deal
Posted on November 23, 2008The government and Citi have (finally) agreed on a bailout, and the structure of the deal is a bit of a shocker. From the WSJ:Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp...
Regulators push for disclosure of bespoke CDS
Posted on November 19, 2008Regulators want to get a peak at the world of non-standard CDSs:The Federal Reserve Bank of New York, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission want information about credit-default swaps that don't conform to standard terms to be disclosed in a central warehouse that would make sure all trades get recorded, said the person, who declined to be identified because the discussions are private...
Auto Bailout
Posted on November 16, 2008I'm undecided on the auto bailout. At first I was opposed to it, because if there's anyone who has ever needed Chapter 11 bankruptcy, it's the Big Three. Their business model and their capital structure are both clearly unsustainable; they badly need to restructure, and that's what Chapter 11 is for...
The Importance of the New York Fed
Posted on November 14, 2008Ben Bernanke thinks losing the President of the New York Fed in 1928 left policymakers rudderless when the markets crashed in 1929:In the run-up to the Depression, Bernanke argued, better leadership could have made a difference. In a November 2002 speech honoring the economist Milton Friedman, Bernanke, already serving on the Fed's board of governors, recounted the tale of Benjamin Strong...
Good News on CDS Clearinghouse
Posted on November 12, 2008This is good news:The Federal Reserve is working on a plan that would give it authority to regulate the clearing of trades for the $33 trillion credit-default swap market, according to people with knowledge of the proposal.The Fed, the U.S. Securities and Exchange Commission, the Treasury Department and the Commodity Futures Trading Commission are discussing a memorandum of understanding that lays out oversight of clearinghouses that would become the central counterparty to credit-default swap trades, said the people who asked not to be named because the discussions are private...
The Myth of Wall Street's Genius
Posted on November 11, 2008Michael Lewis has a long piece in Portfolio called "The End of Wall Street's Boom" that I highly recommend. A recurring theme in the piece is that Wall Street financiers just aren't as smart as everyone thinks they are.I couldn't agree more.Virtually no press account of the financial crisis is complete without paying homage to how smart the financiers who got us into this mess are...
Appointing New Treasury Secretary Doesn't Require Political Capital
Posted on November 08, 2008Ben Stein offers a bizarre piece of advice to President-elect Obama:HAVE REALISTIC EXPECTATIONS Plan what must be done to effect the minimum amount of change you?ll be happy with. All politicians basically promise the moon and the stars to their supporters...
DTCC: $33.6 Trillion in CDS Registry
Posted on November 04, 2008DTCC: Gross notional total of credit default swaps in DTCC registry is $33.6 trillion. $15.4 trillion in single-name CDS, and $14.8 trillion in CDS linked to indexes. DTCC claims that its registry captures about 90% of the CDS market.That's actually larger than I was expecting, but still much smaller than the numbers constantly cited by the media.
Great Day in the Markets. No, Really.
Posted on November 04, 2008Tremendous day in the markets, virtually across the board.In the equity markets, the S&P closed up 4.08% (and over 1000 again!), the Nikkei surged 6.27%, and the FTSE 100 was up over 4% as well. Almost equally as important, the equity markets traded in a narrow range all day...
Electoral projection
Posted on November 04, 2008With the first round of exit polls on the horizon, I should get my electoral projection on the record. Here it is:As for the Senate, I see the Democrats picking up 7 seats, bringing their total to 58. Democrats will pick up Virginia, Colorado, New Hampshire, Alaska, New Mexico, North Carolina, and Georgia; however, they'll lose Minnesota and Kentucky...
Oh, the irony
Posted on November 01, 2008From Helen Avery?s article (via Felix Salmon) about the failure of Lehman Brothers Europe, and the devastating consequences for its prime brokerage clients:?US hedge funds maintain the UK law is archaic and should be changed to protect prime brokers? clients, and some have complained to the Bank of England...
Why Are Credit Markets Taking So Long To Turn Around?
Posted on October 31, 2008The U.S. government, along with governments around the world, have taken extraordinary steps to unfreeze the credit markets. The government has, among other actions, recapitalized 25 banks to the tune of roughly $158 billion, guaranteed all senior debt issued by banks over the next 3 years, and extended unlimited swap lines to several other central banks...
"The Obama Premium"
Posted on October 31, 2008It's been amusing, if increasingly grating, to watch people like James Pethokoukis push the bonecrushingly stupid argument that Obama's rise in the polls is the real reason the markets have been crashing.John Authers of the FT points out that even if you accept the dubious premise that politics has been driving the markets, Pethokoukis and company are still wrong:[O]ther global stock markets have suffered worse than the US in the past two months, and funds have flowed to the dollar...
Steve Chapman: Unconstrained by Intelligence or Facts
Posted on October 30, 2008Chicago Tribune columnist Steve Chapman is a hack. Everyone knows this. But this is bad even for someone as cartoonishly ignorant as Chapman. In this morning's column, he wrote:For nearly a year, we've been told that the economy is on the verge, if not the thick, of a painful recession...
WSJ Catches On
Posted on October 28, 2008Today's WSJ has an article that finally puts the "volatility spiral" I discussed in the previous post at the center of the post-Lehman rout:Brokers and exchanges calculate the level of collateral required to trade securities on margin based on potential losses in stress tests, determined by historical volatility...
The Importance of Volatility
Posted on October 27, 2008The most important financial market indicator right now is not the Dow, not swap spreads, and defintely not the TED spread. It's not even Libor (though Libor is still important, for obvious reasons).It's volatility.The most widely-used measure of volatility is the VIX, which measures the implied volatility of options on the S&P 500 index for the next 30 days...
Thomas Friedman: Not A "Details" Guy
Posted on October 26, 2008Thomas Friedman warns his readers that having the government as a shareholder in banks might stifle innovation because the government might force banks to become overly cautious.If Friedman had taken the time to look at the details of the recapitalization plan, pesky though they are, he'd see that the government is only getting nonvoting shares...
CDS as Insurance
Posted on October 25, 2008New York Governor David Paterson's announcement that the state of New York will begin regulating certain credit default swaps (CDS) as insurance sent shockwaves through the CDS market. Insurers are closely regulated at the state level?they must be licensed to write insurance policies, adhere to strict minimum capital requirements, etc...
Not All Economists Are Created Equal
Posted on October 25, 2008I very much agree with Ezra Klein:One sidenote of the past few months is that folks turned to economists when what they needed were finance experts. But there are relatively few finance experts who aren't affiliated with financial institutions, and so much of their commentary is tainted...
EconomPic Data
Posted on October 20, 2008I neglected to mention in my last post that the one blog I actually did start reading last week is EconomPic Data. I'm one of those people who likes to visualize data, so the daily charts and graphs of relevant economic data is perfect for me. Highly recommended.
Volcker Supported Recapitalization?
Posted on October 20, 2008The Wall Street Journal article on Paul Volcker becoming a key economic adviser to Obama says:Like other prominent economists, Mr. Volcker also advocated early on for the recapitalization of banks. On this advice, Sen. Obama proposed direct-equity infusions in banks in his frequent conference calls with Treasury Secretary Henry Paulson...
Financial Crisis Coverage
Posted on October 19, 2008Brad DeLong mocks the Washington Post for thinking that it has the ability to provide "authoritative" coverage of an event like the financial crisis:[W]hen an episode like the financial crisis hits, nobody even half-informed with even half a brain looks to the Post for "authoritative" coverage...
Another Great Keynes Quote
Posted on October 19, 2008Via Robert Skidelsky, the foremost authority on all things Keynes:"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."
Recommended Links
Posted on October 18, 20081. Paul Krugman: A Fateful Election (New York Review of Books)2. Myron Scholes: Re-Regulate Leverage, But Not Much Else (The Economist)3. Malcom Gladwell: Late Bloomers (New Yorker)4. Anna Schwartz: Bernanke Is Fighting the Last War (WSJ)5. Benjamin Friedman: A Challenge to the Free Market (New York Review of Books)6...
Regulating Finance: The "Now We Know" Factor
Posted on October 16, 2008There's little doubt that the financial sector is about to be re-regulated in a serious way. This is sorely needed, and the conservatives and libertarians who say that increased regulation of Wall Street is a bad idea because regulation can't solve every problem, forever and ever, quite simply have no idea what they're talking about...
To Each His Own Regulator
Posted on October 15, 2008Peter Boone, Simon Johnson, and James Kwak have an op-ed in today's WaPo, titled, "How to Manage the Banks." What's their proposal? Here it is, the sum total of the proposal that merited a place on the Post's op-ed page:Congress should create a consolidated and powerful regulator that can stand up to the banks...
Recommended Readings
Posted on October 15, 20081. Kenneth Arrow argues that a main cause of the financial crisis is asymmetric information. A new NBER working paper by Gary Gorton makes the same argument.2. Brad Setser sees little evidence of the nightmare scenario I mentioned last night (i.e., China broadly redirecting its monetary policy away from foreign exchange interventions):China?s trade surplus remains very large ? and that it is still adding to its reserves at a fast clip...
Speaking Without Knowing
Posted on October 14, 2008An unfortunate consequence of the financial crisis taking center stage in the news is the barrage of commentary and opinion-pieces on the financial crisis from people who know absolutely nothing about financial markets. The offending commentary has come predominantly from the political arena?amateur political commentators (a category that includes political journalists and columnists, despite their claims of expertise) know even less about finance than they do about politics, and that's saying something...
The Recapitalization Phase
Posted on October 14, 2008So far, here's what we know about the U.S. recapitalization plan (with my commentary sprinkled in):Preferred Stock: The government will buy $250 billion of perpetual preferred stock in U.S. banks. $125 billion has already been committed to 8 large banks?$25 billion to BofA/Merrill, Citi, JPMorgan, and Wells Fargo, $10 billion to Goldman and MS, $3 billion to Bank of NY Mellon, and $2 billion to State Street...
V-Shaped Recovery in Financial Markets?
Posted on October 14, 2008The Nikkei closed up 14.15%, the DJ Euro Stoxx 50 is currently up 10.7%, and futures indicate a 174-point gain in the Dow tomorrow morning.Technicians assured me that we would see modest gains, followed by a retesting of lows, and would crawl our way back to more reasonable levels in fits and starts...
"Idiots and Liars"
Posted on October 14, 2008Barry Ritholtz lays down the law on the Fannie/Freddie/CRA line:Those who continue to blame the CRA, Fannie Mae, etc. reveal their fundamental misunderstanding of how credit operates in general, what the financing process was like from 2002-07, and how this situation came to pass...
Simpson Thacher
Posted on October 14, 2008The Treasury taps Simpson Thacher to serve as legal adviser for the recapitalization plan. Good firm with a top-notch PE practice (they represent KKR), so it definitely has the necessary expertise to advise on the recapitalization portion of the bailout...
What Scares Me
Posted on October 14, 2008What could still cause a complete meltdown of the global financial system? Economic growth in Asia slowing so much that the Asian central banks -- particularly the People's Bank of China -- decide that monetary policy should be focused on fighting possible recessions rather than intervening in the foreign exchange market (i...
Financial Crisis Jokes
Posted on October 12, 2008My favorite joke floating around right now:The financial crisis is worse than a divorce: I have half my money, but I still have my wife.
Chris Cox
Posted on October 07, 2008It was obviously a political stunt, but John McCain was right. Fire Chris Cox. Right now.From Bloomberg:An unedited version of the 137-page study [by the Inspector General of the SEC] posted to the Iowa Republican's Web site Sept. 26 showed that Bear Stearns traders used pricing models for mortgage securities that ``rarely mentioned'' default risk...
Prescient
Posted on October 06, 2008William Poole, writing in 1991:[A]ny policymaker who is unwilling to play chicken with the markets on the issues will be conceding a lot in Washington infighting over policy. This is another reason why it is so important to change the incentive structure in private markets to promote stability...
Still Alive
Posted on October 06, 2008I apologize for the lack of posting. As I'm sure you can imagine, things have been beyond crazy for the past 3 weeks. My firm represents a large hedge fund, and I've been at the fund's headquarters in Connecticut for about 2 weeks now (I'm still in CT)...
Beware of Hackery
Posted on October 02, 2008I see that Columbia Business School professor Chris Mayer is making the rounds on the op-ed pages (last week in the New York Times, and today in the Wall Street Journal). It's worth reminding people that at the height of the housing bubble, Mayer was prominently denying that a bubble existed at all...
I Guess We Live In Fantasy Land
Posted on October 01, 2008Not to pick on Thomas Friedman too much, but this is just a perfect example of why his columns should never be taken seriously. Ever.Here's Friedman:We're all connected. "Decoupling" is pure fantasy.And here's the IMF:There is evidence of business cycle convergence within [both industrial countries and emerging economies], but divergence (or decoupling) between them...
How Not To Write
Posted on October 01, 2008Thomas Friedman has never been the most eloquent writer, and he's not exactly known for his scholarly intellect, but no professional columnist should ever write something like this:The story cannot end here. If it does, assume the fetal position.If the story cannot end here, then why advise people on what to do if the story does end here? Ah, logic.
TARP + Tobin Tax = Successful Bailout Bill
Posted on September 30, 2008There have been so many alternative bailout plans proposed in the past 2 weeks that I can't even keep up. Some, obviously, have been better than others, and most are either bad policy or bad politics. Jeff Frankel's suggestion that Congress add a small tax on securities transactions to the existing version of TARP is definitely good politics, and it might be good policy too?it's at least better than TARP standing alone...
Treasury Conference Call: On Equity Warrants
Posted on September 29, 2008I was on the conference call with the Treasury officials tonight, and listening to the official who opened the call (I didn't catch his name) talk about the warrants, I got the distinct sense that the Treasury isn't planning to take significant warrants from institutions that voluntarily participate in the "market mechanisms" (i...
NYT Has Text of Bailout Bill Online
Posted on September 28, 2008Can't get on the House Financial Services website to look at the text of the bailout bill? Neither can anyone else; it looks like the website has crashed. Luckily, the New York Times obtained a copy of the bill and posted it on its own website, available here...
Adam Putnam, Please Stop Talking
Posted on September 26, 2008Either Adam Putnam has been in a coma for the past few weeks, or he's a first-rate idiot:One of the top party leaders in the House, Republican Conference Chairman Adam H. Putnam of Florida, charged that the administration has been following an ?ad hoc strategy? that it hasn?t explained to the public or even to lawmakers...
Thank God McCain Rushed Back to the Hill
Posted on September 25, 2008Obama shows that, contrary to popular belief, it's possible for the candidates to talk to their Senate colleagues without suspending their campaign first. From the WSJ:After a three-hour meeting, lawmakers agreed to legislative principles that would approve Treasury's request for the funds...
Designing the TARP Auction
Posted on September 25, 2008Now that the broad terms of the bailout bill are more or less set, attention will shift to the design of the auction(s) the Treasury will use to buy troubled assets. An article in yesterday's NYT briefly discussed the difficulty of designing the best auction, and the WSJ ran a full article this morning on potential auction designs...
Match-up to watch
Posted on September 24, 2008Ben Bernanke and Hank Paulson are testifying in a hearing of the House Financial Services Committee tomorrow (2:30 pm). And you know who's on House Financial Services? Ron Paul, the longtime opponent of the Federal Reserve, and certified economic nut-job...
Oh My God, the CRA Didn't Cause the Housing Bubble
Posted on September 24, 2008Now that the financial crisis has become a political issue, there has been a surge of commentary on the financial markets from political commentators. Let's just say that they haven't raised the quality of the discourse. The sooner they're back to fighting about the outrage-du-jour on the campaign trail, the better, as far as I'm concerned...
Odd Leonhardt Column
Posted on September 24, 2008Yesterday I praised David Leonhardt of the New York Times (who has finally been given a blog of the Times' website), but I have to agree with Ken Houghton's analysis: Leonhardt's column today is bad. That's uncharacteristic, and I hope Leonhardt gets back to writing insightful and nuanced (for the mainstream media, that is) columns again soon.
NYT Expands Business and Economics Coverage
Posted on September 23, 2008The New York Times has apparently taken Barry Ritholtz's advice and is expanding its business and economics coverage. To which I say: good for them. Throughout the credit crisis (by which I mean the last 15 or so months), the NYT has provided surprisingly good coverage...
Central Bank Independence
Posted on September 20, 2008Dean Baker, in an otherwise excellent post describing his preferred conditions for a bailout, writes:The structure of the Fed should be changed so that all the officials with a direct say in monetary policy are appointed by the president and approved by Congress...
Overworked
Posted on September 20, 2008Wall Street Journal: "Work Grows for Wall Street Lawyers"True story. I'm in my office right now, waiting for a colleague who flew up to Connecticut to fax me some documents.Damn you, financial sector. You owe me a total of 22 hours of sleep this week.
Roundup of Bailout Ideas
Posted on September 20, 2008Here's a quick roundup of the various bailout ideas/proposals that have been floated in the past few days. I'm sure there are plenty that I've missed. What's interesting to me is the surprising heterogeneity. When people have to quickly come up with their own proposal, and can't take their queue from other people's proposals, there's less time for groupthink to take hold...
Insurers Have Asked for Discount Window Access Before
Posted on September 17, 2008This passage from a 1999 article by Bert Ely claims (somewhat cryptically) that insurance companies approached the Fed about emergency loans in the '70s and '80s, which suggests that an emergency loan to a large insurance company like AIG might have been what Congress had in mind when it amended the "unusual and exigent circumstances" clause in 1991 (via Westlaw):While banks pay for the entire cost of their federal safety net, ...
Is The AIG Bailout Legal?
Posted on September 17, 2008As might be expected, I've had to come out of securities-law retirement this week to help the Securities/Structured Finance department out (in exchange for their calling my return "Jordan-esque"). It's been a crazy week for a lot of lawyers, too.One big question following the Fed's bailout of AIG will surely be: Does the Fed have the authority to do that? It looks like the answer is probably yes...
There Will Be Blood
Posted on September 15, 2008This was truly one of the most incredible days in Wall Street's history (and despite what Felix Salmon says, this isn't hyperbole).Once the news started coming fast-and-furious, it was a chore just to keep up. "Barclays pulls out! Lehman to file bankruptcy! BofA is buying Merrill! The Fed is turning the PDCF into a shadow repo market! Ten biggest banks pool $70 billion for private liquidity fund! Oh my God: AIG is collapsing, and asking the Fed for help!"Tomorrow will be chaos...
Paging Brad DeLong
Posted on September 14, 2008This is tailor-made for Brad DeLong. As I noted yesterday, Gregg Easterbrook made this patently false assertion in a recent Slate article:Wind-turbine application went nowhere in the 1970s and 1980s when federally subsidized; actual use has come since the 1990s, when the government bowed out and the private sector took over...
The Battle of the Journalist-Pundits
Posted on September 13, 2008It's Gregg Easterbrook vs. Thomas Friedman, in a clash between two of the most prominent journalists-turned-"experts." Friedman is, of course, the most famous globalization cheerleader in the world, and in his new book, Hot, Flat, and Crowded: Why We Need a Green Revolution?and How It Can Renew America, he takes on energy policy, climate change, and globalization (again)...
9/11
Posted on September 11, 2008Having experienced the terrorist attacks on 9/11 up close, this day always bring back haunting memories.My wife and I were both working at a firm that was about 5 blocks away from 2 World Trade Center. Our whole firm went outside after the first plane hit the WTC to see what was going on...
Media Bias Again
Posted on September 08, 2008My post on media bias generated some good debate (especially in the comments to Megan McArdle's post). It also generated one utterly unhinged (and comically stupid) response by a guy named Brad at the Fire Megan McArdle blog.Before I get to Brad's response, I want to clear a couple things up...
Thoughts on the Frannie Bailout
Posted on September 07, 2008It's too early to tell how successful the Frannie bailout will be. Its ultimate success or failure will largely hinge on how many small and regional banks become insolvent as a result of having to write down their preferred shares in Frannie. The fact that Paulson said they looked at this issue and decided to essentially wipe out preferred shareholders anyway makes me think that a significant wave of regional bank failures is quite unlikely...
Charles Wheelan's "Naked Economics"
Posted on September 06, 2008With the dominant issue in the election being the economy, my nephew, who is a freshman in college, has decided that he wants to start studying economics in the spring semester. Wanting a slight head start, he asked me what books (not textbooks) he should read on his own this semester...
Take a load off, Fannie Mae
Posted on September 06, 2008This seems appropriate right about now (h/t CalculatedRisk):And put the load right on me, indeed.
Fannie and Freddie to go into Conservatorship?
Posted on September 05, 2008The WSJ is reporting that Fannie and Freddie will be put into a conservatorship, with the Federal Housing Finance Authority as conservator. So the plan is to put two gigantic and vital companies into a conservatorship that's unprecedented in both nature and size, and to appoint as conservator an agency that's been in existence for just over 5 weeks? And this is supposed to calm the markets?If we're going to nationalize the GSEs, just come out and nationalize them already.
Is There a "Liberal Media Bias"?
Posted on September 04, 2008Glenn Greenwald, in a predictably grating bit of rhetorical overkill, says no:The very notion of the "Liberal Media" is one of the most inane myths in American politics -- something spat out and repeated in the lowest right-wing sewers for so long that it has become conventional wisdom...
First Impressions
Posted on September 02, 2008I can't resist pointing this out. It's too perfect.Here's me, right after the press confirmed that Palin was the VP pick:[W]ith Palin, there's [a] danger that the press quickly settles on a "too inexperienced to be president" narrative, and spends the next few days talking about what a bad choice McCain made...
Assorted Links/Thoughts
Posted on September 01, 20081. How Good Are Experienced Presidents? Examines the historical data on governmental experience vs. presidential greatness. If the Obama campaign takes the bait on Palin and focuses on her extreme inexperience, we'll be hearing even more about the importance of "experience" to being a good president...
The Dangers of a "Surprise Pick"
Posted on August 29, 2008Palin is definitely a "surprise pick" by McCain. The McCain campaign is clearly hoping that such an outside-the-box pick will generate a huge amount of media attention, as the press starts to inform viewers about Palin's background for the first time...
Price Tag for National Version of MA Health Care
Posted on August 28, 2008$130 billion per year, according to MIT health economist Jonathan Gruber.
Why I'M not a fan of Cass Sunstein
Posted on August 25, 2008Before taking issue with Kathy G's specific attack on Cass Sunstein, I noted that I'm also not a fan of Sunstein. I guess I should explain why. Sunstein is an excellent administrative law scholar (which is where he made his name), and a decent, if somewhat inconsistent, constitutional law scholar...
The Drunkard's Walk
Posted on August 24, 2008I just finished Leonard Mlodinow's new book The Drunkard's Walk: How Randomness Rules Our Lives. It was very interesting, though not really what I expected. I expected a sort of Freakonomics for probability and statistics, and to a certain extent it was...
Choking on the Condescension
Posted on August 24, 2008Larry Summers writes in the FT:It is now recognised that meaningful efforts to address climate change require a framework that induces China and other emerging markets to co-operate.No, what's recognized is that addressing climate change requires a framework that induces the U...
Thoughts on Obama's Law Review Article
Posted on August 23, 2008So Politico finally managed to find Obama's law review case comment, and the Obama campaign has confirmed his authorship. It's a six-page summary of Stallman v. Youngquist, an Illinois Supreme Court case holding that a fetus does not have the right to sue its mother for unintentional infliction of prenatal injuries...
Obama-Biden
Posted on August 23, 2008I'm perfectly content with an Obama-Biden ticket. The best take on the Biden choice is this one by the TPM crew. However, as I've indicated, I'm worried that Biden's foreign policy credentials, which are taken as a given by the DC pundit class, won't impress voters much...
"The Global Refunding System"
Posted on August 23, 2008Hans Gersbach has an interesting proposal ($) for how to overcome the international collective action problems of the Kyoto accord:Imagine that the twenty largest industrial countries would be able to coordinate and agree to put a significant, though not extraordinary, amount of money into a fund, the Global Climate Fund...
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