finance - Eric Hanneken on Diigo

05 Dec 09

A Financial Mirage in the Desert

Dubai begins to implode. No one changes their behavior, because they expect bailouts.

www.nytimes.com/...01sorkin.html - Preview

Dubai United Arab Emirates finance crisis Citigroup bailout

It’s a pretty good bet that a city with an average temperature of 90 degrees and an indoor ski slope is probably living a little too large.
Willem Buiter, a former Bank of England official who was hired as chief economist of Citigroup on Monday, says that Dubai’s credit crisis is just the natural progression of “the massive build-up of sovereign debt as a result of the financial crisis.” He wrote on his blog on The Financial Times’s Web site that the contraction of credit “makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral.”
1 more annotations...
- Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.
  That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds.

02 Dec 09

Report Cites Big Shortfall in Reserves at A.I.G.

www.nytimes.com/...01aig.html - Preview

AIG bailout finance politics

An independent analysis of whether the insurance industry has been setting aside enough money to pay its claims estimates that the American International Group has a shortfall of $11.9 billion in its property and casualty business.
Other researchers have raised doubts about A.I.G.’s total worth since it was bailed out last year, and even the federal government has acknowledged that the company might have difficulty repaying all the money it owed taxpayers, currently about $120 billion.

06 Nov 09

New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers

The Federal Reserve, after conferring in secret with investment banks, agreed to cover all of their losses with taxpayer money. This is how government works in the real world.

www.bloomberg.com/...news - Preview

AIG credit default swap CDO New York Federal Reserve Fed bank Goldman Sachs Timothy Geithner finance crisis government politics

Habayeb, 37, was chief financial officer for the AIG
division that oversaw AIG Financial Products, the unit that had
sold the swaps to the banks. One of his goals was to persuade
the banks to accept discounts of as much as 40 cents on the
dollar, according to people familiar with the matter.
After less than a week of private negotiations
with the banks, the New York Fed instructed AIG to pay them par,
or 100 cents on the dollar. The content of its deliberations has
never been made public.

The New York Fed’s decision to pay the banks in full cost
AIG -- and thus American taxpayers -- at least $13 billion.
That’s 40 percent of the $32.5 billion AIG paid to retire the
swaps. Under the agreement, the government and its taxpayers
became owners of the dubious CDOs, whose face value was $62
billion and for which AIG paid the market price of $29.6
billion. The CDOs were shunted into a Fed-run entity called
Maiden Lane III.
1 more annotations...
- The deal contributed to the more than $14 billion that over
  18 months was handed to Goldman Sachs, whose former chairman,
  Stephen Friedman, was chairman of the board of directors of the
  New York Fed when the decision was made.

Capitalism After the Crisis

www.nationalaffairs.com/...capitalism-after-the-crisis - Preview

capitalism finance crisis regulation United States Luigi Zingales

05 Nov 09

Financial Market Reform: Why new regulations must avoid moral hazards

reason.com/...financial-market-reform - Preview

finance crisis regulation moral hazard government politics Jeffrey Miron

According to perceived wisdom, the root cause
of the 2008 financial crisis was excessive risk-taking, and
proper regulation can detect and prevent such excess in the
future.
The Financial Crisis of 2008 did not occur because of
insufficient or ill-designed regulation. Rather, it resulted from
two misguided government policies.

The first was the attempt to promote homeownership.
7 more annotations...
- The pressure to expand risky credit was especially problematic
  because of the second misguided policy, the long-standing
  practice of bailing out failures from private risk-taking. This
  practice meant that financial markets expected the government to
  cushion any losses from a crash in mortgage debt. Thus, the
  historical tendency to bail out creditors created an enormous
  moral hazard.
- any mistakes made by a powerful,
  centralized authority have a magnified impact because they
  distort the behavior of the entire market.
- under the proposed system, bank holding
  companies would forever more regard themselves as explicitly, not
  just implicitly, backstopped by the full faith and credit of the
  U.S. Treasury. That is moral hazard in the extreme, and it will
  create an unprecedented incentive for excessive risk-taking by
  these institutions.
- The only way to limit financial panics is to eliminate
  government-induced moral hazard, and that means letting failed
  institutions fail.
- Rather than being a cause, Lehman’s failure was merely the signal
  that time had come for the U.S. economy to pay the price for all
  the distortions caused by the misguided policies toward housing
  and risk. Given those distortions, a massive unwinding and
  restructuring was necessary to make the economy healthy again.
- The announcement that the Treasury was considering a
  bailout scared markets and froze credit because bankers did not
  want to realize their losses if government was going to bail them
  out. The bailout introduced uncertainty because no one knew what
  the bailout meant.
- The third and perhaps most important way to reduce moral hazard
  is to eliminate the Federal Reserve. As long as the Fed exists,
  it will regard itself as, and be regarded as, the economic
  insurer of last resort.

13 Oct 09

Garrett Planning Network

A network of fee-only financial planners.

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finance plan money

The Garrett Planning Network Inc. is an international network of fee-only financial advisors and planners.

15 Sep 09

What I'm Saying

econlog.econlib.org/...what_im_saying.html - Preview

finance crisis regulation history Arnold Kling

today's proposals for financial reform are just a continuation of the self-defeating policy approaches that got is in trouble. We need to think differently if we want to create effective reforms.
Putting people in debt up to their eyeballs ultimately does not promote home ownership. What happened was that subsidized mortgage credit and lenient mortgage credit promoted speculation. In 1995, five percent of mortgage loans were backed by non-owner-occupied houses. By 2005, fifteen percent of mortgage loans were backed by non-owner-occupied houses. Speculation had tripled. Speculation drove up home prices, which made houses less affordable, which made the Hill call for more mortgage subsidies and more leniency, which fueled more speculation, and so on. It seemed like an endless cycle, except that it did end--with a crash.
2 more annotations...
- regulators outsourced bank capital regulation to the credit rating agencies. This set off a frenzy of innovations designed to manufacture AA and AAA rated securities out of junk mortgage loans.
  
  The net result was that bank capital regulations, which were supposed to promote safety and soundness, did the opposite. There was excessive leverage, because the banks were able to hold the same risk with less and less capital needed to comply with regulations.
- If we had a business continuity strategy, then allowing a bank to fail would be a credible and viable option for regulators. That in turn would change everyone's incentive to make them watch out for their own risks and watch out for their own exposures to counterparties. Instead, the more you try to make the system too regulated to fail, the more careless everyone becomes in their risk exposures. It is a self-defeating approach.

In Shift, Wall Street Goes to Washington

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crony capitalism lobbying finance politics

Rebuilding Wall Street: Suggestions for Reforming Financial Services Regulation

reason.org/...n_proposal_recommendations.pdf - Preview

finance regulation pdf

Not What They Had in Mind: A History of Policies that Produced the Financial Crisis of 2008

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financial crisis finance regulation Arnold Kling pdf

14 Sep 09

Where Politics Don't Belong

www.nytimes.com/...13econ.html - Preview

rent-seeking lobbying politics health care finance Tyler Cowen

FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy.
President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion.
2 more annotations...
- Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.
- In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of “too big to take a pay cut,” especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis, and we’re still moving in the wrong direction pretty much across the board.

31 Jul 09

Stop Subsidizing The Street

www.forbes.com/...a-sapienza-luigi-zingales.html - Preview

bailout bank finance financial crisis economics politics

While finance will remain a pillar of a well-functioning economy, it's unlikely that banking will survive for long in its current form. The current banking model is broken. Citigroup
(
C -

news
-

people
) has been on the verge of failing in three of the last four downturns: This is hardly a viable business model.
Luckily, starting anew is exactly what's happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It's too early to tell if these attempts will succeed, but it's vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.
1 more annotations...
- the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

20 Jul 09

The Obama Administration Proposals for Financial Regulatory Reform: A Critical Audit

www.finreg21.com/...latory-reform-a-critical-audit - Preview

regulation finance reform housing mortgage crisis bailout economics politics Arnold Kling

Unfortunately, the Obama Administration's proposals for regulatory reform are a product of the same sort of groupthink that helped produce the crisis. In fact, the group does not seem to have changed, with the Report largely a product of the community of regulators that failed to prevent the current crisis. There has been no effort to re-examine fundamental assumptions, or to consider the possible consequences if those assumptions are wrong. Once again, ideas and concerns from outside of the narrow consensus are being ignored.
One would think that if the goal of financial reform is to correct the weaknesses of the previous regulatory regime, then it would make sense to start with a thorough analysis of the causes of the current crisis. Instead, the Report merely makes vague allusions to “gaps and weaknesses in the supervision and regulation of financial firms.”
14 more annotations...
- The American housing market has long been the locus of political interference, lobbying, and subsidies. The thrust of policy has been to encourage home ownership and mortgage indebtedness. While a case can be made that home ownership is a public good, mortgage indebtedness and speculative home purchases are, if anything, public bads.
- These policies ultimately resulted in overbuilding, speculative home purchases financed almost entirely by debt, and unsustainable increases in house prices. However, the report ignores the role played by housing policy in fueling the bubble, and it makes no recommendations for changes in policy.
- Many of the financial practices that were at the heart of the crisis were motivated by regulatory capital arbitrage (RCA). RCA drove securitization, the use of credit tranches, the reliance on rating agencies, and the growth of the “shadow banking system.”
- RCA is the use of financial engineering to enable banks to reduce the regulatory capital needed to bear a given amount of risk.
- A mortgage security that was rated AA could receive a 20 percent risk weight. This compares with a traditional mortgage, which would receive a 50 percent risk weight.
- The Report is written as if mishaps necessarily result from under-regulation. However, in this instance, regulation is what steered firms to build the system for distributing mortgage credit risk that ultimately proved to be so fragile.
- If we do create a systemic risk regulator, presumably this agency or council will be populated by the sorts of officials who populate the Fed and the IMF. These officials will be no less fallible within a new agency than they are in their current positions.
- Would financial products that are popular today, such as money market funds and debit cards, have been banned by a risk-averse financial product safety commission? Keep in mind, also, that incumbent firms will have an incentive to “warn” the commission of the dangers of innovative products that compete with their own established offerings.
- There is a widespread view that the deterioration in mortgage quality resulted from the separation of the functions of mortgage origination and mortgage ownership. However, the proposed solution of requiring originators to retain a five percent interest is downright silly.
- What happened in recent years is not that mortgage originators became more ruthless in sneaking through loans that failed to meet guidelines. What happened is that the guidelines became much looser. Freddie Mac, Fannie Mae, and the buyers of private-label mortgage securities became willing to buy loans with higher loan-to-value ratios, lower credit scores, and reduced documentation. The originators gave the buyers of mortgages what they wanted.
- in the 1990s, Freddie Mac and Fannie Mae were each given a line of credit of $2.25 billion with the Treasury, which was supposed to be the limit of taxpayer obligations. However, when the crunch came, Treasury chose to effectively guarantee all of the GSEs' liabilities.
- The Report fails to highlight the time-inconsistency problem, which biases regulators in the direction of bailouts rather than following through with established methods of resolution.
- Many critics, on both ends of the political spectrum, believe that large banks and Wall Street firms wield too much political influence. The Report does not discuss the issue of regulatory “capture” and how to prevent it.
- A system with individual market actors pursuing a diverse set of strategies may be less prone to catastrophic failure than a system guided by a single strong regulatory framework.

18 Jul 09

The End of Financial Privacy: Why Switzerland, Luxembourg, and Austria caved on protecting its foreign investors.

www.reason.com/...132361.html - Preview

privacy banks finance Switzerland Luxembourg Austria United States

17 Jul 09

The Financial Regulation Problem

econlog.econlib.org/...the_financial_r.html - Preview

finance regulation financial crisis economics history Arnold Kling

My theory is that we always have an optimal financial regulatory structure--for the previous cycle's financial system.

28 May 09

Diminished Returns

www.nytimes.com/...17wwln-lede-t.html - Preview

finance crisis regulation Basel recession macroeconomics economics Niall Ferguson

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.
There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do.
5 more annotations...
- much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street.
- crises are more often caused by bad regulation than by deregulation.
- It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets
- The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.
- The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy.

11 May 09

One Part of the Financial Sector Is Still Growing

organizationsandmarkets.com/...ancial-sector-is-still-growing - Preview

lobbying politics bailouts finance

13 Nov 08

Lobbyists Swarm the Treasury for Piece of Bailout Pie

"The government shouldn’t be in the business of picking winners and losers among industries," says the Treasury Department's liaison to its supplicants. Unfortunately, there's no other way to make sense of the bailout. The government has decided that mo

www.nytimes.com/2008/11/12/business/economy/12lobbying.html?_r=3&hp=&oref=slogin&adxnnlx=1226502049-tTgVduQmPmTp sPcNen5RA&pagewanted=all - Preview

bailouts finance crisis Politics

When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls in memory, it suddenly looks like a dwindling pool.

31 Oct 08

Don?t Just Do Something. Stand There.

Government flailing creates uncertainty. Uncertainty causes investors to pull back.

online.wsj.com/...SB122541582835686689.html - Preview

bailout finance crisis Great Depression Business Politics History

By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next.

29 Oct 08

The Fantasy Testimony Continues

This is Arnold Kling's fantasy written remarks to accompany his fantasy testimony to Congress on what caused mortgage securitization, and how it caused a financial crisis.

econlog.econlib.org/...the_fantasy_tes.html - Preview

finance crisis mortgage securities derivatives Fannie Mae Freddie Mac Business Politics Economics History

The secondary mortgage market thus began as an accounting gimmick to hide liabilities. It has been the same ever since. The economic costs and benefits of securitization are beside the point. Over time, various accounting gimmicks and regulatory anomalies have driven securitization forward.

Eric Hanneken's Library tagged finance → View Popular

A Financial Mirage in the Desert

Report Cites Big Shortfall in Reserves at A.I.G.

New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers

Capitalism After the Crisis

Financial Market Reform: Why new regulations must avoid moral hazards

Garrett Planning Network

What I'm Saying

In Shift, Wall Street Goes to Washington

Rebuilding Wall Street: Suggestions for Reforming Financial Services Regulation

Not What They Had in Mind: A History of Policies that Produced the Financial Crisis of 2008

Where Politics Don't Belong

Stop Subsidizing The Street

The Obama Administration Proposals for Financial Regulatory Reform: A Critical Audit

The End of Financial Privacy: Why Switzerland, Luxembourg, and Austria caved on protecting its foreign investors.

The Financial Regulation Problem

Diminished Returns

One Part of the Financial Sector Is Still Growing

Lobbyists Swarm the Treasury for Piece of Bailout Pie

Don?t Just Do Something. Stand There.

The Fantasy Testimony Continues

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