Nine picks today are...
1) Robert Reich, at his blog, writes about too-big-to-fail and the politics involved.
2) Adam Levitin, at Credit Slips, writes about too-big-to-fail and the complexities involved, including politics. He says, So that means we're are going to have to learn to live with too-big-to-fail.
3) Martin Wolf, for FT, writes that safe banking will not happen because it would mean the end of banking.
4) Mike Shedlock, on his blog, writes about Citigroup being in solvency trouble. (again)
5) John Hussman writes this week to dispute rumors that claim the credit crisis is behind us.
6) Mark Fisher, for Bloomberg, writes what a poor deal-maker the U.S. government has been on behalf of the taxpayer.
7) Eugene Robinson, for the W-P, writes about derivatives, and the ongoing charade rewarded with profits, until something goes wrong at which time the taxpayer comes in.
8) Aldo Svaldi, for the Denver Post, interviews some regional economics experts on the banking crisis.
9) From the Denver Post, is Garrison Keilor changing his political tone this week?
--Kalpa
Too Big to Fail: Why The Big Banks Should Be Broken Up, But Why The White House and Congress Don't Want To
by Robert Reich
....But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the "too big to fail" problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.
There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks techniques. And the pending failure will already have rocked the entire financial sector.
Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all -- that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall.
The four of them -- Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.) Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.
Needless to say, Wall Street favors the Administration's approach -- which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the President, as well as the long-term financial stability of the system. Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.
The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done. Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.
Too-Big-To-Fail Resolution: Why One Size Can't Fit All
by Adam Levitin
....Thus in most failures of too-big-to-fail institutions, the government will have to provide funding for the resolution, and this makes the resolution a political issue. For this reason alone, I think we are kidding ourselves if we believe that we can regularize the resolution of systemically important institutions. It would be great if we could regularize too-big-to-fail resolution, but I don’t think it is possible to come up with any set of rules that we won’t break at the first sign of them creating distributional results that we do not like.
So where does this leave us? We could avoid the too-big-to-fail problem to some degree by splitting off riskier business lines (investment banking) from the systemically important ones (commercial banking--payments and deposits). There isn't a lot of political appetite for this fight, however; the administration has made clear it isn't going to get into this mother-of-all-banking-regulation-battles. So that means we're are going to have to learn to live with too-big-to-fail. The administration believes it can regulate its way to safety. I hope so, but worry that the nature of regulation in most cases is to play catch-up and it is often politically influenced.
Moreover, I'm not sure that all of the implications of too-big-to-fail have been thought through. Allowing too-big-to-fail institutions has profound consequences on housing finance for example (good-bye GSE funding advantage...). And having too-big-to-fail institutions means, at core, that the credit of these institutions is the credit of the national government. Thus BoA, Chase, Citi, and Wells will be extensions of the US government. UBS will be an extension of the Swiss government, Deutsche Bank of the German government, etc. I wonder if this points toward some sort of neo-mercantilism....
Why curbing finance is hard to do
by Martin Wolf
....This is not to argue that there is no way of making finance safe. There is. But it would be far more radical: deposits would be 100 per cent reserve backed; and the liabilities of other investment vehicles would be adjusted for the market value of their assets at all times. Banking would disappear.
Short of such radicalism, we must approach the task in a more subtle manner. First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.
If we did all this, the world of finance would be duller and safer. It would still not have the reliability of jet engines. So long as we allow people to make leveraged bets on the future, breakdowns will occur. The division of finance into utility and casino cannot solve this problem. Only the end of leverage would do so. Do we want that? I doubt it.
by Mike Shedlock
Citigroup is in serious trouble. It's easy to tell by what they are doing. Inquiring minds note that Citi Abruptly Shutting Down Gas-Linked Credit Cards......Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives! Ding! Ding! Ding! We have a winner.
Citigroup needs money, and needs money badly. Moreover, there is no reason to believe this is all credit card related. In fact, there is every reason to believe Citigroup (and other banks) are in trouble on multiple fronts. Citigroup is still stuck in $800 billion in off-balance-sheet SIVs of highly questionable value. That's exactly why it's Not Practical To Tell The Truth......
Rumors of the Death of the Credit Crisis Are Greatly Exaggerated
by John Hussman
In recent months, the rate of mortgage foreclosures has lagged the rate of delinquencies, indicating that banks have been reluctant to foreclose, and prompting some observers to assume that banks are now more lenient and the foreclosures will simply be averted. Indeed the FDIC has encouraged this sort of “forbearance” – which typically involves a deferral or small reduction in home payments, generally lasting about 6 months.
The problem is that the majority of these deferrals ultimately end in foreclosure. This is particularly likely to be true given prevailing weakness in employment conditions. Indeed, the Office of Thrift Supervision recently reported that more than 50% of mortgages modified in the first half of 2008 have already missed at least two months of payments so far in 2009.
Last week, I received several notes quoting the same analyst who suggested that the majority of Alt-A and Option-ARM loans have already been modified, that associated losses have already been taken, and that the “leading indicators” of foreclosure have improved. All of these assertions are fabrication. Indeed, Richard Posner recently highlighted a study by the Federal Reserve (also cited in the Economist), which found that in a very large sample of residential mortgages, only 3 percent of seriously delinquent borrowers received a modification of their mortgage "that reduced their monthly payments in the year after they got into trouble." Only 8 percent of those borrowers received any kind of modification.
Meanwhile, it is beyond reason to believe that homeowners would voluntarily modify Option-ARMs before the reset date, when those mortgages currently allow them to arbitrarily choose their payments or pay interest only until that date arrives. According to Fitch, nearly 90% of of Option-ARMs have yet to reset, and of those, about 94% of them have used the minimum monthly payments to allow the loans to “negatively amortize.” This does not seem very supportive of the idea that the problem is behind us.....
How the U.S. Blew Trillion-Dollar Trade of Century
by Mark Fisher
...The government had an opportunity to structure the following innovative investment solution: Uncle Sam could have demanded 25 percent to 30 percent of the underlying equity in the banks before agreeing to negotiate a bailout package with the weakened institutions. Had the government brokered a deal that tied bank earnings to taxpayer payback over time, the animosity between Wall Street and Main Street that exists today would have been eliminated, or mitigated at the very least.
...Instead, the government went ahead and lent hundreds of billions in capital to Wall Street, insured all the money-market funds, bailed out companies such as American International Group Inc. and allowed financial institutions to issue government- backed debt while exacting negligible profits in return.
And so I ask: What trader in his right mind decides to dump his money into a glorified black hole, taking on unlimited risk in the process, for minuscule returns? I’m no socialist, mind you. All I am saying is that the banks should have been made to drop off an envelope at the taxpayer’s doorstep every month. Obviously, no one in President Barack Obama’s administration has ever watched “The Godfather.”
...Had Uncle Sam been a student in my class, he would have gotten an “F” in Sensible Trading and an “Incomplete” in Bailout 101. To put this all in perspective, just consider for a minute how in the world Warren Buffett managed to negotiate a better deal with Goldman Sachs Group Inc. than the government did for the taxpayer. The policy wonks on Capitol Hill should have stuck to what they know best and called in someone like Buffett or bond guru Bill Gross when it came time to negotiate.
.....The jury is still out on the verdict for the bailout, but I would bet good money that the worst is yet to come for the economy. While some are speculating that the financial crisis is over, I’d say we’re still in Act I, with a great deal of financial drama left to unfold......
Wall Street on the lam
By Eugene Robinson
Slashing executive salaries, bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying, but it shouldn't be. It's like arresting jaywalkers while ignoring the bank robbery that's happening in broad daylight down the block.
....But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown -- and, if unaddressed, will lead inexorably to the next crisis.
Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy -- by allocating capital most efficiently to the companies that could put it to best use -- into an institution whose primary mission was to serve itself.
The vast over-the-counter trade in instruments known as derivatives, nominally worth a staggering $600 trillion worldwide, is largely an exercise in make-believe. Firms make highly leveraged investments in exotic securities whose true value is opaque. Then they hedge these investments by buying insurance against potential losses, although the insurer doesn't have a fraction of the money it would need to make good on all its promises.
All this investing and hedging generate huge transaction fees and big profits, which can be skimmed off the top each year. Everything's fine, until there's some disruption in the real economy -- a downturn in the housing market, say. If the disruption is severe enough, the web of make-believe deals starts to unravel. At which point the government steps in and bails everybody out.....
Finding a gatekeeper in world of finance
By Aldo Svaldi
Coffee with an old grumblerWhat role did regulation or the absence of regulation play in the financial crisis?
Bhagat: Earlier regulations required homeowners to make some kind of down payment. Mortgages were then issued without any sort of a down payment, the notion being that home ownership is a good idea. Well, home ownership is a good idea, but if you have only debt and zero equity, where's the ownership?....
Post: One of the key proposals is for a Consumer Financial Protection Agency, which would oversee payday loans, mortgages and many other consumer products. Are we overdue for that, or are we opening up a Pandora's box?
Waller: It's well-intentioned, but it absolutely misses the mark in that most of the abuses suffered by consumers were not created by regulated banking institutions. The last draft I saw exempts almost all of those non-bank entities. It's a very dangerous precedent to try and separate consumer protection from the safety and soundness of a lender. To have a viable long-term financial establishment, you have to have those two functions going hand in hand.....
Post: Many consumers don't realize they are in a financial trap until it is too late. Gary, how can regulators better manage how debt and delinquencies are handled in this country?
Merenstein: One of the biggest things these days are debt buyers. Some of these companies are publicly traded, and they'll go and buy millions of dollars' worth of outstanding debt from creditors for pennies on the dollar. And when they get these large portfolios of outstanding debt, they typically don't receive proof that the consumer owes the debt. They are taking up a large percentage of the dockets on county courts all over Colorado, seeking default judgments.....
Post: One of the criticisms of regulatory reforms are that they tend to deal with yesterday's problems, what already happened. What reforms are needed that aren't being addressed?
Bhagat: If you have an entity considered too large to fail, they need to have a living will or plan approved by regulators in all the countries they operate about getting through the bankruptcy process. Investment banks must have sufficient equity. They should have capital requirements.....
By Garrison Keillor
A gorgeous fall here on the upper Mississippi, but among the old grumblers I drink cheap coffee with, the mood these days is dark, due to low interest rates and the advance of the glaciers, which is why I, sunny optimist that I am, seek out the company of the young and ebullient and drink $4 coffee. But sometimes you get stuck next to some old guy in a plaid shirt who gives you an earful about Wall Street bonuses and how the game is rigged in favor of the custom-tailored suits, and you must be polite and listen.
"Look at this. A person saves his money like he was brought up to do and he salts it away in a safe CD or Treasury note or municipal bond and it pays him a measly 2 percent interest. Why? Because the Fed has decreed we gotta have low interest to save the high-flyers and speculators who almost brought the roof crashing down a year ago, and they pour money into Goldman Sachs and these killer sharks walk away with a hundred billion in bonuses, and meanwhile guys are losing their shirts in the dairy business. What's the deal there?"
"There is a lot of human nature involved in economics, so if you are an idealist, you should take up astronomy," I tell him. "I'm serious," he says. "You drive out west of here and you see headlights in the fields at midnight, guys putting in 16-hour days combining beans, and back east you've got people in offices with a phone in each hand, moving money around, not creating a damn thing, just playing a game, and the government can't do enough for them. Where's the fairness in that?"
"I saw your beautiful wife the other day and she looks 10 years younger," I say. "She said that you two can't keep your hands off each other. Good for you. And how about those Vikings and Brett Favre? Six and oh. Life is good. And how about those maple trees? Have you ever seen such colors?" "This country is skidding toward disaster and the guy you elected president has his foot on the gas."
....Among the young and ebullient, there's no worry about interest rates because they have no savings — they spend their weekly earnings and a little bit more on hair gel, iTunes, phone bills, $4 coffee and $100 jeans beautifully pre-ripped. They don't see the headlights in the soybean fields at midnight, only the lights in the bars where they go to be beautiful and cool and maintain text-message contact with friends from coast to coast and then have sex.....
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