Legal Commentary

The CDS market is useful, but not perfect

Posted on March 31, 2009
I'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, 2009
I'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, 2009
I'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, 2009
Responding 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...

To access this complete feed in the blog feed reader login or register for free.

Krugman Jumps the Shark

Posted on March 27, 2009
It 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, 2009
What 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, 2009
Kevin 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, 2009
We 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, 2009
Back 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, 2009
The 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, 2009
When 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, 2009
The 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, 2009
Josh 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, 2009
Matt 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, 2009
ECB 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, 2009
Goldman 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, 2009
Felix 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, 2009
I'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, 2009
One 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, 2009
It'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, 2009
AIG 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, 2009
The 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, 2009
Paul 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, 2009
Paul 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, 2009
I'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, 2009
Ever 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, 2009
Nobel 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, 2009
Robert 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, 2009
In 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, 2009
Now 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...

Bloggers, promote your law blog by nominating your blog for inclusion in USLaw.com's Law Blog Directory and RSS Reader. Benefits described.