Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Questions for Bernanke (Simon Johnson)There is somewhat suddenly some opposition to Ben Bernanke's reconfirmation as Fed chair, as reported at the New York Times, Roll Call, and elsewhere, with Barbara Boxer, Russ Feingold, and Bernie Sanders coming out against reconfirmation. On the economics blogs there's some turmoil regarding Bernanke, too, with Calculated Risk saying "we can do better," Brad DeLong saying "Don't Block Ben!" and Paul Krugman saying he's torn.One comment I liked was from Yves Smith at Naked Capitalism, who took issue with the Times article's references to "populist anger" (Krugman, in his blog, also connected Bernanke's changing fortunes with the Mass. special election): The real issue is that the Fed did a horrid job in the run-up to the crisis (although not Chairman at the time, Fed records show that Bernanke was a major architect of the super-low interest rates earlier in this decade that super-charged the credit bubbles, and has long been manifestly uninterested in regulation). So the issue is competence. The public's anger is warranted, and reflects lack of sufficient action on real, festering problems. Here's an interesting piece by Simon Johnson at HuffPo: Ben Bernanke's reconfirmation as chair of the Federal Reserve is in disarray. With President Obama having launched, on Thursday morning, a major new initiative to rein in the power of—and danger posed by—our leading banks, key Senators rightly begin to wonder: Where does Ben Bernanke stand on the central issue of the day? I can't remember whether I posted this piece by David Leonhardt from earlier this month, which counts against Ben, as does the article we ran back in July by Jerry Friedman, Bernanke's Bad Teachers. It will be interesting to see what happens. Labels: Ben Bernanke, Brad DeLong, Christopher Dodd, Paul Krugman, Simon Johnson, The Fed, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Financial Crisis Inquiry Commission HearingsThe hearings for the Financial Crisis Inquiry Commission are going on right now. Zachery Kouwe of the New York Times' blog Dealbook is "live-blogging" the hearing right now (how's that for an example of compound-transitive-verbing?!).Meanwhile, today's NYT op-ed section has a nice survey of questions some experts would like to ask the bankers in the hearings. My favorites are from Simon Johnson of MIT and Yves Smith of Naked Capitalism: 1. Describe in detail the three worst investments your bank made in 2007 and 2008—that is, those transactions on which you lost the most money. How much did the bank lose in each case?Read the full list of questions. Speaking of Yves Smith, she had some interesting things to say today about something that is looming behind today's hearings: the Obama administration's recent talk of levying some kind of tax/fine on the big banks--separate from the tax on transactions that many have been calling for, and from the idea of a special tax on bankers' bonuses. (A NYT editorial today (? or yesterday--I can't tell) came out in favor of the new tax/fine, but called for a tax on bonuses on top of that.) But according to Yves, the O. admin. will come out with a more concrete proposal today: Obama to Announce $120 Billion TARP Fee Read the rest of the post. We will be on the lookout for the best analyses of and commentaries on the testimony in today's hearings. If you find something particularly cogent, let us know. Labels: Financial Crisis Inquiry Commission, investment banks, Obama administration, Simon Johnson, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Who Really Saved The Global Economy?According to this Observer article, it was the global drugs lords: their money laundering activities provided the required marginal capital to keep flowing in the interbank markets at the height of the crisis, when more legitimate players were glued to the sidelines, so that the whole shebang didn't go down. Thanks to Yves Smith at Naked Capitalism for the link:Drug money saved banks in global crisis, claims UN advisor Drugs and crime chief says $352bn in criminal proceeds was effectively laundered by financial institutions Rajeev Syal The Observer, Sunday 13 December 2009 Drugs money worth billions of dollars kept the financial system afloat at the height of the global crisis, the United Nations' drugs and crime tsar has told the Observer. Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were "the only liquid investment capital" available to some banks on the brink of collapse last year. He said that a majority of the $352bn (216bn pounds) of drugs profits was absorbed into the economic system as a result. This will raise questions about crime's influence on the economic system at times of crisis. It will also prompt further examination of the banking sector as world leaders, including Barack Obama and Gordon Brown, call for new International Monetary Fund regulations. Speaking from his office in Vienna, Costa said evidence that illegal money was being absorbed into the financial system was first drawn to his attention by intelligence agencies and prosecutors around 18 months ago. "In many instances, the money from drugs was the only liquid investment capital. In the second half of 2008, liquidity was the banking system's main problem and hence liquid capital became an important factor," he said. Some of the evidence put before his office indicated that gang money was used to save some banks from collapse when lending seized up, he said. "Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities...There were signs that some banks were rescued that way." Costa declined to identify countries or banks that may have received any drugs money, saying that would be inappropriate because his office is supposed to address the problem, not apportion blame. But he said the money is now a part of the official system and had been effectively laundered. "That was the moment [last year] when the system was basically paralysed because of the unwillingness of banks to lend money to one another. The progressive liquidisation to the system and the progressive improvement by some banks of their share values [has meant that] the problem [of illegal money] has become much less serious than it was," he said. The IMF estimated that large US and European banks lost more than $1tn on toxic assets and from bad loans from January 2007 to September 2009 and more than 200 mortgage lenders went bankrupt. Many major institutions either failed, were acquired under duress, or were subject to government takeover. Gangs are now believed to make most of their profits from the drugs trade and are estimated to be worth 352bn pounds, the UN says. They have traditionally kept proceeds in cash or moved it offshore to hide it from the authorities. It is understood that evidence that drug money has flowed into banks came from officials in Britain, Switzerland, Italy and the US. British bankers would want to see any evidence that Costa has to back his claims. A British Bankers' Association spokesman said: "We have not been party to any regulatory dialogue that would support a theory of this kind. There was clearly a lack of liquidity in the system and to a large degree this was filled by the intervention of central banks." Labels: financial crisis, underground economy, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith on Krugman on JobsFrom the fantastic Yves Smith at Naked Capitalism:Krugman on the Need for Jobs Policies Paul Krugman has a good op-ed tonight on how Germany has fared versus the US in the global financial crisis. Recall that there was much hectoring of Germany early on, for its failure to enact stimulus programs. German readers were puzzled, since Germany has a lot of social safety nets that serve as automatic counter-cyclical programs. As an aside I visited a few cities in Germany on the Rhine and Danube in June (unfortunately in heavy book writing mode, and so did not get to see as much as I would have liked) and it was remarkable how there were no evident signs of the downturn: no shuttered retail stores, no signs of deterioration in public services, stores and restaurants looked reasonably busy (although I had no idea of what norms there might be). Krugman holds Germany up as an example of the merits of employment oriented policies (which had been the norm in America prior to the shift to "markets know best" posture (and more aggressive anti-union policies) inaugurated by Reagan: Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result—but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.Yves here. Krugman does Germany an injustice by failing to contest US prejudices about European (particularly German) labor practices. If German labor practices are so terrible, then how was Germany an export powerhouse, able to punch above its weight versus Japan and China, while the US, with our supposedly great advantage of more flexible (and therefore cheaper) labor, has run chronic and large current account deficits? And why is Germany a hotbed of successful entrepreneurial companies, its famed Mittelstand? If Germany was such a terrible place to do business, wouldn't they have hollowed out manufacturing just as the US has done? Might it be that there are unrecognized pluses of not being able to fire workers at will, that the company and the employees recognize that they are in the same boat, and the company has more reason to invest in its employees (ignore the US nonsense "employees are our asset," another line from the corporate Ministry of Truth). A different example. A US colleague was sent to Paris to turn around a medical database business (spanning 11 timezones). She succeeded. Now American managers don't know how to turn around businesses without firing people, which was not an option for her. I submit that no one is willing to consider that the vaunted US labor market flexibility has produced lower skilled managers, one who resort to the simple expedient of expanding or contracting the workforce (which is actually pretty disruptive and results in the loss of skills and know-how) rather than learning how to manage a business with more foresight and in a more organic fashion because the business is defined to a large degree around its employees. Read the original post. Labels: fiscal stimulus, Germany, jobs, Paul Krugman, unemployment, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Regulatory Revolving DoorThis is what Yves Smith said about this Counterpunch article:A reader who has first hand knowledge of some of the major US financial regulators flagged a CounterPunch article by Pam Martens as the best discussion of the "revolving door" problem that he had ever seen. The problem is, to wit The most important aspect of this is that the "revolving door" problem is most acute, not with the actual regulated firms, but with the professional firms that provide services to regulated entities, especially law firms (it is also a serious issue with compliance consulting firms, although that is something of a separate issue.) Will the IG Report Cover the Role of White Shoe Law Firms? Madoff and the SEC's Revolving Door By PAM MARTENS CounterpunchThe long-awaited investigative report by the Securities and Exchange Commission's (SEC) Inspector General on how the SEC bungled multiple investigations of Bernard Madoff is set for release this week. Unfortunately, according to media reports, the long suffering investing public will not receive the report until the SEC itself has had a chance to review it. The team that produced this report on one of the most long-running and convoluted frauds in the history of Wall Street included Inspector General H. David Kotz who came to the SEC-IG post in December 2007 after five years as Inspector General and Associate General Counsel for the Peace Corps. The Deputy Inspector General, Noelle Frangipane, also came to the SEC from the Peace Corps where she had served as Director of Policy and Public Information. This lack of Wall Street cronyism by the top two in the Inspector General's office might have been refreshing to some in Congress and compensated for their not knowing the difference between puts and calls and peaks and troughs and the intricacies of Mr. Madoff's split-strike conversion strategy (he splits with your money while converting you to a pauper). But the background of the member of the team heading up the Inspector General's Office of Investigations, J. David Fielder, should have rang serious alarm bells to Congressional investigators. For the ten years leading up to July 2007, J. David Fielder worked for the SEC as a Senior Counsel in the Division of Enforcement. In February 1999, he moved to the Division of Investment Management, first as Senior Counsel on the Task Force for Adviser Regulation, then as Advisor to the Director. In November 2000, SEC Chairman, Arthur Levitt, appointed Fielder Counsel to the Chairman. Read the rest of the article Labels: ADP private sector employment report, Bernard Madoff, lobbyists, Pam Martens, securities law, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On the Profitability of the TARPTwo views.First, Daniel Gross. Then, Yves Smith. I'm with Smith. Even if *some* pecuniary benefit eventually accrues to the government's balace sheet, huge losses still loom, and the system remains dependent on us bailing out those responsible for the crisis, in effect enabling them to screw us again. Labels: Daniel Gross, financial crisis bailout, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Is What We Get for All the Bailout MoneyTwo related posts here: Simon Johnson of Baseline Scenario looks at the shakeout in the banking system that he says is leading to the creation of a two-tier economy that benefits connected-insiders of virtually Naomi Klein proportions (that's him, not me). And here's also a FT piece from early July that goes into the matter in more detail.And Yves Smith discusses one way in which this is being done, via the use of forms of leverage that contributed to the blowup last year. Seems like we really saved the banking system only to increase the likelihood that we'll be hit by it again. I hope, if that happens, we don't repeat this mistake again next time. Labels: bailout, Baseline Scenario, financial crisis, Naked Capitalism, Naomi Klein, Simon Johnson, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Environmental Stuff (Not Pretty)Peak Water? Thanks to Naked CapitalismThe "Great Pacific Garbage Patch" pinpointed at last. Thanks again to Yves Smith. Ever-more bizarre geoengineering proposals. Why can't we just consume sustainably instead? Finally, speculators and oil markets. Thanks to Economist's View. Labels: Economist's View, energy, Environment, environmental crisis, geoengineering, Naked Capitalism, natural resources, oceans, pollution, water, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Labor Leader To Head New York FedYves Smith thinks it's a gimmick, but one that may have some unexpected consequences.Tuesday, August 25, 2009 Naked Capitalism Labor Leader Chosen to Head of New York Fed Board of Directors Joseph Stiglitz has said that labor should have a voice in the setting of interest rate policy. Is this change at the New York Fed, teh appointment of the AFL-CIO's Denis Hughes as the replacement to ex Goldman co-chairman Steve Friedman as chairman of the New York Fed, a step in that direction? If it proves to be, it will only be by dint of miscalculation. This is clearly an image-burnishing move by the Fed, throwing a bone to critics, But letting labor into the tent may have unexpected consequences, simply by allowing someone who has not drunk the financial services industry Kool-Aid more influence (Hughes was on the board, but as vice chairman). This appointment is only until year-end, but if the Fed continues to be under political pressure, it isn't hard to imagine this appointment being extended. The Journal's Deal Journal voices the opposite possibility, that labor is being co-opted. The branding of labor as monolithic and radical is a bit of a canard. In the 1930s, the old AFL, which was a craft union, was comparatively conservative and regarded more favorably than upstart and aggressive CIO, for instance. From the Wall Street Journal (hat tip reader LeeAnne): Denis Hughes, president of the New York state branch of the AFL-CIO, had been serving as acting chairman of the New York Fed board since May, when Stephen Friedman stepped down from the position. Mr. Friedman, a former Goldman Sachs Group Inc. chairman and adviser to President George W. Bush, had faced questions about his purchases of Goldman stock while serving on the New York Fed's board. The Fed decision formalizes Mr. Hughes's role as chairman through the end of 2009. The Fed board in Washington will announce in November or December who will serve as chairman in 2010. Columbia University President Lee Bollinger was named deputy chairman, a position that Mr. Hughes previously held. Mr. Bollinger has been a New York Fed director since January 2007. The New York Fed chairmanship typically has gone to prominent Wall Street executives or academics. The ascension of a labor leader is a new twist for the New York Fed and a sign of the public pressure the Fed has been under to loosen its close ties to Wall Street. Labels: AFL-CIO, Bureau of Labor Statistics, Denis Hughes, Federal Reserve, Monetary Policy, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith: Banks Sitting on Bad MortgagesMore reason to view Case-Shiller data with caution: increased buying activity is only one side of the problem.Naked Capitalism Tuesday, August 25, 2009 Banks Sitting on Bad Mortgages, And They Aren't Getting Any Better Fitch released an analysis that shows that mortgage cure rates, meaning the proportion of borrowers who manage to get current once they fall behind, have tanked. From the Wall Street Journal: The report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the "cure rate" for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren't bundled into securities. The cure rate is the portion of delinquent loans that return to current payment status each month. Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2. In the subprime category, the rate has declined to 5.3% from 19.4%. "The cure rates have really collapsed," said Roelof Slump, a managing director at Fitch. Because borrowers are less willing or able to catch up on payments, foreclosures are likely to remain a big problem. Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1. Ouch. On top of that, Greg Weston looked at the underlying New York Fed data for Fitch's comment, and found another sobering factiod, namely that banks are not foreclosing. The reason most often given is that the bank doesn't want to write the mortgage down even further (we've heard it bandied about for loss severities is 60% and Weston had a chart that shows it is worse for subprime, at 70%with Alt-As not as bad at 50%), so 60% is a representative level) but another reason is that if the bank does not take possession, the taxes are still the owner's responsibility. Read the rest of the post Labels: financial crisis, foreclosures, housing market, mortgage cure rates, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Chinese Sell-Off Sparks Global RoutStocks in China got hammered today, with the Shanghai Composite losing nearly 6%, and the Hang Seng in Hong Kong down by 755 points. Japan's Nikkei was a loser as well, even as Japan scored a positive GDP gain. We've spoken before on the recent slide in Chinese shares, which started as equities in other important countries were registering big gains. Here in the US, at noon EST, Reuters is reporting increased insider selling, and the S&P is down some 5%, falling below 1,000.Yves Smith of Naked Capitalism has these comments on the potential significance of this conjucnture. Labels: China, financial crisis, Japan, stock markets, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith on "Mortgage Armageddon"Yves Smith summarizes Frank Veneroso's views on why recovery in the mortgage market (and, presumably, for the rest of the economy) will be so very difficult.Sunday, August 16, 2009 Guest Post: Frank Veneroso on Mortgage Armageddon Frank Veneroso was kind enough to write as a result of seeing a guest post "Debtor's Revolt?" by his colleague Marshall Auerback. Veneroso also provided his latest newsletter and gave us permission to post it. It it pretty long (12 pages), I extracted the executive summary and other key bits. Be sure to read the final section, starting with the boldface heading "Why Resolving The Mortgage Armageddon Problem Will Be So Difficult:." (Enjoy!) From Frank Veneroso: 1. Deutsche Bank now predicts that 48% of all mortgaged American homeowners will be "under water" by 2011. 2. One might assume that means that the aggregate loan-to-value ratio of all mortgaged households will be a little less than 100%. 3. I have been focusing first and foremost on the aggregate loan-to-value ratio of all households with mortgages rather than the number of mortgaged homeowners who will eventually be underwater. 4. I calculated that, on mean reversion in house prices, this aggregate loan-to-value ratio would rise to 120% to 125%--a lot worse than what the Deutsche Bank analysis seems to imply. So I studied their analysis to ascertain why I went wrong or why they went wrong. 5. Though their analysis has a somewhat different objective and employs a different methodology, their analysis in fact comes to almost exactly the same conclusion as I have reached: when one focuses not on the share of all homeowners who will be underwater but the aggregate of mortgaged home values that will be under water, on mean reversion in home prices the aggregate loan-to-value ratio will probably be north of 120%. Here is why. 6. Deutsche Bank admits that their data on total mortgage debt is incomplete. Using more complete mortgage data the percent of homeowners under water would be higher and the implied aggregate LTV might be closer to 110% than 100%. 7. Also there is skewing. Those who are underwater have negative equities that exceed in value the positive equities of those who are not underwater 8 There is skewing on more than one account. Because the highest shares of those underwater are in the regions with the highest home values and the greatest percentage home price declines the overall skewing might be very great. And this skewing increases as home prices fall further to the Case Shiller mean. 9. When one factors in this skewing the aggregate loan-to-value ratio of all mortgaged homeowners based on the Deutsche Bank analysis probably rises to 120% or more Read the rest of the post Labels: Deutsche Bank, foreclosures, Frank Veneroso, mortgage banking, mortgage meltdown, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Overdraft Fees To Hit $38.5 bn This YearWith the brunt of the burden on the poorest. Thankfully the banks are doing this for our own good, because we want it! From The Financial Times, courtesy of Naked Capitalism (and with comments by Yves Smith):Monday, August 10, 2009 Banks Expected to Collect $38 Billion in Overdraft Fees in 2009 Today's Financial Times highlights a possible target of regulatory action: bank overdraft fees. And those fees are not distributed the proverbial 80/20 pattern, with 20% of the accounts contributing 80% of the activity, but 90/10. And that 10%, not surprisingly, is in consumers with the lowest credit scores. And the biggest banks are the ones with the most aggressive fees. What is disappointing is that this FT article failed to indicate what costs the banks incur in processing overdrafts. Although this activity is presumably very profitable, it would be nice to know by how much. From the Financial Times: US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s...The fees are nearly double those reported in 2000... The Federal Reserve is working on rules on overdraft fees, and rules on customer charges could be a priority of the Obama administration’s proposed Consumer Protection Agency if approved by Congress. Data from Moebs Services, a research company, show that the crisis has prompted many banks to lift charges on overdrafts and credit cards in order to boost profits. The median bank overdraft fee has this year rose from $25 to $26, according to Moebs, the first time it has gone up in a recession for more than 40 years..... Overdraft fees accounted for more than three-quarters of service fees charged on customer deposits... The most cash-strapped customers are the hardest hit by such fees, with 90 per cent of overdraft revenues coming from 10 per cent of the 130m checking accounts in the US.... Banks say that the fees compensate for the risk they incur when they pay on behalf of customers who do not have enough money in their accounts.... The highest overdraft fees were charged by the largest banks, said Mr Moebs. At banks with assets greater than $50bn--a group including Citigroup, Bank of America, JPMorgan Chase and Wells Fargo--the median overdraft fee is set at $33. At BofA, a customer overdrawn by as little as $6 could trigger a $35 penalty. If the customer does not realise they have a negative balance and continue spending, they could incur that fee as many as 10 times in a single day, for a total of $350. Failing to repay the overdraft within a few days results in an additional $35 penalty.... Chase has tiered overdraft fees--the first overdraft within a 12-month period is charged at $25, the second to fourth at $32 and the fifth at $35.... Consumer advocacy groups point to very low loss rates on overdrafts for all banks and argue that overdrafts are the least risky form of credit, while being the most expensive for consumers. Eric Halperin, director of the Center for Responsible Lending said: "The banks own your pay check before you do, so the only way you can default on your overdraft is if you choose to open another account and deposit your income elsewhere." Labels: bailout, bank fees, Bank of America, checking accounts, Citibank, financial crisis, JP Morgan Chase, Wells Fargo, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Sham' Bailouts Help SpeculatorsNaked Capitalism has a couple of nice posts about comments made by Michael Patterson, head of a private equity firm, to the Telegraph that reflect very poorly on TARP. Here is the story from the Telegraph (which has since been yanked from their site, apparently because Patterson objected to it; it is preserved at zerohedge.blogspot.com):US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson Here's what Yves Smith at Naked Capitalism had to say about the piece: The TARP elicited a firestorm of criticism at its inception, and at various points of its short existence, particularly the repeated injections into "too big to fail" Citigroup and Bank of America, plus the charade of Paulson forcing TARP funds onto banks who were eager to take them once the terms were revealed. Now, however, conventional wisdom on the program might be summarized as, "it's flawed, but still better than doing nothing." And this more recent post (from a larger project she has of showing how the business press airbrushes negative economic news): We posted last night on a Telegraph story, in which one Michael Patterson, head of a private equity firm that used TARP funds to buy a Michigan bank, said some less than positive things about it at an conference. —cs Labels: Naked Capitalism, private equity, TARP program, Telegraph, Timothy Geithner, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Berkeshire Hathaway Loses AAA RatingHat-tip to the guy I overheard at the next table at the internet cafe I'm hanging out in.Buffett's Berkshire Has AAA Debt Rating Cut by Fitch By Erik Holm | March 12 (Bloomberg) Billionaire Warren Buffett's Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses on the insurer’s equity and derivatives holdings. Buffett's role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA. The insurance and reinsurance units kept their AAA status, with a negative outlook for all entities, Fitch said. "Fitch views this risk as unrelated to Mr. Buffett's age, but rather Fitch's belief that Berkshire's record of outstanding long-term investment results and the company's ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett," Fitch said. Buffett is 78. Berkshire joins General Electric Co., which was downgraded by Standard & Poor's today and lost its status as one of the remaining AAA companies in the U.S. Berkshire stock fell 35 percent in 12 months on concern that Buffett's bets on derivatives—instruments he has called "financial weapons of mass destruction"—will crush profit at the firm. Read the rest of the article. If I'd been keeping up with Yves Smith at Naked Capitalism, I'd have found out sooner. Here's what she had to say:
Labels: 303 Cafe, Berkshire Hathaway, financial crisis, recession, Warren Buffet, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). TDCotE (viii): The Use and Abuse of TrustThe Dull Compulsion of the Economic (viii)A series of blog postings by D&S collective member Larry Peterson Links: (1) Scientists think sea level rise from global warming may be far greater than previously thought. (2) On the economics profession's adamant refusal to seriously engage with the crisis. (3) Yves Smith eviscerates former Fed governor Alan Blinder's arguments against nationalization of the banks. (4) How could the brutal job losses shape the future economy? Perhaps should be read in conjunction with this 2005 piece where manufacturing is concerned. (5) Nice piece on CDSs and AIG's collapse. Reminds one of the staggering sums involved. (6) Private Equity meltdown to turn into "the greatest transfer of ownership from equity owners to creditors in history?" (7) Will stimulus packages reverse green gains? (8) Another relatively recent (December) thought-provoking piece on the crisis, by David McNally (9) Michael Mandel on something of relevance to the last link, the striking developments in the relation of financial to nonfinancial profits in the economy over the last few years. (10) A bank run on a country: the UK. (11) Odds are very much against self employment as a means to escape the crisis. Commentary The Use and Abuse of Trust Last week I wrote a piece about the tendency of economists to speak of the crisis in overly psychological terms, or in a manner that suggests that the crisis is (still) primarily about the confidence of consumers, investors and employers. Accordingly, the implication seems to be that the economy is basically sound at best, once we--somehow--strip even historically high levels of abuse out of it, or that it needs perhaps a serious overhaul at worst, but that in all cases we cannot even think about the establishment of a fundamentally alternative economic system. This week I saw yet another Nobel-laureate economist weigh in along these lines. But Amartya Sen, in a piece in the New York Review of Books, seems to attempt to finesse this problematic out of existence altogether. Sen distinguishes himself by stating that looking at the present crisis as one peculiar to capitalism is misleading: capitalism and markets have always relied on independent legal, cultural and ideological supports, and, in this sense, to try to isolate "capitalism" out of the mix, especially in the context of today's hyper-complex societies, is bound to lead to confusion, particularly of an historical sort: Underlying this issue is a more basic question: whether capitalism is a term that is of particular use today. The idea of capitalism did in fact have an important role historically, but by now that usefulness may well be fairly exhausted. Sen then goes on to show how Adam Smith had a far more nuanced view of the role of the market mechanism even in the society of his time, in which markets played a far lesser role than they do today, and suggests that, precisely because of Smith's extraordinary institutional sensitivity, it behooves us to look to Smith in an attempt to rehabilitate our appreciation for the proper role of markets in society. But then he begins, to me, anyway, a very strange meditation. First he notes, once again, that capitalism did not emerge until new systems of law and so on, which solidified notions of private property, allowed for economic growth and capital accumulation. And he says, "Profit-oriented capitalism has always drawn upon support from other institutional values." But then he shifts gears: The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments. A subprime lender who misleads a borrower into taking unwise risks can now pass off the financial assets to third parties—-who are remote from the original transaction. Accountability has been badly undermined, and the need for supervision and regulation has become much stronger. Moreover, The insufficient regulation of financial activities has implications not only for illegitimate practices, but also for a tendency toward overspeculation that, as Adam Smith argued, tends to grip many human beings in their breathless search for profits. Smith called the promoters of excessive risk in search of profits "prodigals and projectors"--which is quite a good description of issuers of subprime mortgages over the past few years. So, even if you accept that the fundamental problematic surrounding the present crisis has more to do with some sort of unchanging psychology of investors (the tendency to get carried away with temptation of excess profits) than the real economic conditions under which investments are made (and which invariably appear in and influence relations between classes), there is a question here. Why was it that the institutional supports that allowed for the spectacular growth of postwar capitalism became so quickly and thoroughly undone from the 'seventies on? He says, as we have seen, that capitalism has always relied on institutional support from non-market entities and structures, but he fails to explain the extraordinary turn away from such entities and structures during the deregulatory period that followed and went more-or-less unchallenged until last year. So rather than explaining this development, he simply describes it: And yet the supervisory role of government in the United States in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance grew, the needed supervision shrank. There was, as a result, a disaster waiting to happen, which did eventually happen last year, and this has certainly contributed a great deal to the financial crisis that is plaguing the world today. But then he makes yet another transition: The present economic crisis is partly generated by a huge overestimation of the wisdom of market processes, and the crisis is now being exacerbated by anxiety and lack of trust in the financial market and in businesses in general--responses that have been evident in the market reactions to the sequence of stimulus plans, including the $787 billion plan signed into law in February by the new Obama administration. Here Sen touches upon something that has really been making the rounds in the financial press these days, namely, the role of trust in market interactions and in capitalist societies. Most commentators I have seen tend to focus, again, on the role of investors in this vein, in speaking of the present crisis. So, to explain things like the pronounced lack of willingness of banks to lend, or of investors to buy into government-sponsored bailout programs, writers focus on the idea that, having been burned so badly already, such people are naturally extremely reluctant to put more money down. But such a situation then leads, inexorably, to further contractions of economic activity. Investors know this. And governments are going to great lengths to make money available to combat this. But takers have been few. So the reason must be an essentially irrational lack of trust. Sen doesn't actually say this, but I sense in the progression of his argument that this is a key assumption. Sen, like Alan Blinder (see link 3 above), seems to believe that once we sober up, we can, with the aid of governments, sort the mess out and live happily ever after. And despite the huge damage done to the economy, we need more confidence in our leaders, and, presumably, in ourselves, to emerge from the mess. But the problem here is that Sen looks at trust in exactly the same way he does all the other psychological propensities that influence market behavior: as relatively unchanging constants in stable equations. But the type of trust engendered in the lead up to the crisis was a wholly peculiar one, which was influenced by all sorts of specific factors, many--perhaps to a peculiar degree--of which reflected intensified class dynamics. So, in the period before the crisis in the US, virtually no-one was prepared to imagine that the entire system could melt down with the speed it did. But many noted that the underlying dynamic, of hyper-consumption (as Stephen Roach has noted, US consumption still amounts to some 70% of the economy, down only a percentage point or two from the height of the bubble) aided by copious amounts of credit, but unaccompanied by rises in savings, or wages that came even close to tracking key outlays like those involving education, healthcare and pensions (not to mention lodging or home-finance, which is another story) that were rising out of sight, was dangerously unsustainable. But everyone trusted that, at the end of the day, someone else would take the fall if things fell apart. And this kind of thinking was encouraged by the incentive structures that proliferated from a governmental/business complex that was noteworthy for its venality and conspicuous corruption. And this, almost certainly, had much to do with the kind of degradation of social feeling that was a factor behind, and consequence of wider deregulatory dynamic. "Trust", under such conditions, far from being the strangely lacking factor behind a partially inexplicable collapse of the financial system, should perhaps be viewed, in the highly skewed from it took on as a result of the severely distorted economic conditions that came to become prevalent in the final years of neoliberalism and deregulation, the Bush years, as a key occasioning cause of it. After such a denouement, it's hardly surprising that "trust" is noticibly lacking; but it's even more unsettling to think that the authorities (many of whom, as we all know too well, like Summers, Geithner et al, were instrumental in conditioning us in the new variant of "trust") want to revive it. Labels: Adam Smith, AIG, Alan Blinder, Amartya Sen, bailout, CDSs, climate change, David Hale, David McNally, financial crisis, Larry Peterson, Michael Mandel, the dull compulsion of the economic, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Greenspan (!): Nationalize the BanksWe weren't so surprised when Noriel Roubini called for (temporary) bank nationalization in a Washington Post op-ed co-authored with Matthew Richardson this past Sunday. But now this bombshell from the Financial Times, via Naked Capitalism, with Yves Smith's excellent-as-usual commentary:Greenspan Predicts TARP Will Prove Insufficient, Supports Bank Nationalization Before readers start throwing brickbats at the mention of the name of Alan Greenspan, it's important to remember that he has become the poster boy of the policy errors that lead to our financial mess. And that isn't an accurate picture. This crisis had many parents, and even though Greenspan was one of the key actors, he was far from alone. Treasury Secretaries Robert Rubin and Larry Summers were also backers of the financialization of the economy, the permissive regulatory posture, and the strong dollar policy. Greenspan, to his credit, at least appears chastened by the mess helped create. As far as I can tell, very few of the other perps have questioned their decisions. Greenspan spoke this evening at the Economic Club of New York. Some of his comments show that he has made some considerable shifts from his libertarian, anti-regulation stance. But he hasn't had a Damascene moment; he seems to be changing his views incrementally. Nevertheless, it's remarkable that Greenspan has come out saying that nationalizing banks is the "least bad" policy option, as he did in a Financial Times interview. Now we are seeing role reversal: the loyal libertarian reluctantly admitting the need for regulation and the advantages of taking over dud banks, even big dud banks, while the Democrats tip toe around the idea of doing anything that might ruffle bankers feathers too much. Note that he stresses, as we have, the need to clean up the financial system for fiscal stimulus to be effective (as in kick the economy into a higher gear, rather than provide a temporary amphetamine hit that quickly wears off). He also sounded a warning similar to Willem Buiter's, that the US is fiscally constrained and cannot run deficits as large as we might otherwise like without incurring serious sdverse consequences. Buiter has warned of the danger of a collapse in dollar assets. Greenspan seems more concerned about immediate effects, namely, rising long term bond rates (the Fed in theory can suppress a rate rise by buying long-dated Treasuries, but I suspect in practice this policy would lead to private investors and other central banks abandoning the long end of the yield curve, knowing the Fed could not continue this strategy on an unlimited basis, and the Fed having qualms about ballooning its balance sheet to grotesque size. Even at this level, the Fed seems cautious about further balance sheet growth, even though some have argued the Fed would need to expand its balance sheet far more aggressively to combat deleveraging). From the Financial Times: The US administration will have to go back to Congress for additional funds to recapitalise the banking system to restore the normal flow of credit in the economy, Alan Greenspan, former chairman of the Federal Reserve, said yesterday.... As for the idea of increasing capital levels, it's a poor second best to rethinking what the financial system ought to look like. And it is truly sobering how little serious thought has been done on that front. As for Greenspan depicting Congress champing at the bit to reform the industry, that couldn't be further from the truth. Enacting strict limits on pay to TARP recipients is a far cry from meaningful regulatory reform. From the Financial Times interview:
However, he wimped out on cramming down bondholders (note Martin Wolf and Nouriel Roubini, among others, have advocated that step, although Wolf did warn that it would need to be done with ample preparation for temporary disruption): "You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks," he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt." Greenspan is a consultant to Pimco, and Pimco has consistently bet that the Feds would be nice to banks (I am told by someone in a position to know that they own a lot of junior bank debt). So this statement may be de facto an admission by Greenspan that he sees nationalization as inevitable and is trying to shape what form it takes. (This was the full post.) Labels: Alan Greenspan, bailout, bank nationalization, financial crisis, Nouriel Roubini, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Germany May Rescue Debt-Laden EU MembersFrom Ambrose Evans-Pritchard's column. Yves Smith has linked to this page, too. But I haven't seen anything about it in my brief perusal of German newspapers today.Germany may rescue debt-laden EU members Germany has acknowledged for the first time that it may have to rescue eurozone states in acute difficulties, marking a radical shift in policy by the anchor nation of Europe's monetary union. By Ambrose Evans-Pritchard Last Updated: 7:18PM GMT 17 Feb 2009 Finance minister Peer Steinbruck said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation. "The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty." Credit default swaps (CDS) measuring risk on Irish debt rose to 386 basis points yesterday despite Berlin's show of support, suggesting that the markets remain sceptical over hard-line German financier's change of heart. The CDS on Austrian debt surged to 180 on fears of banking contagion from Eastern Europe, while Greece, Belgium, Italy and Spain have all seen a surge in default costs. However, it is clearly Ireland that is now in the eye of the storm as Dublin struggles to prevent the budget deficit spiralling up to 12pc or even 13pc of GDP as the economy contracts. Fears are mounting that Ireland may not be able to cover the massive liabilities of its banking system. The Maastricht Treaty prohibits eurozone bail-outs by EU bodies but Article 100.2 allows for aid to countries facing "exceptional occurrences beyond its control". The European Investment Bank is already providing aid by steering project finance to regions in distress. This could be expanded subtly into short-term help. Read the rest of the article Labels: Ambrose Evans-Pritchard, bailout, Eastern Europe, financial crisis, Germany, Ireland, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bill Black on 'Stress Tests' (Yves Smith)Yves Smith of Naked Capitalism interviews Bill Black, who wrote this article for Dollars & Sense for our Nov/Dec 2007 issue (we've posted about him frequently on the blog; he's been quoted frequently in the NYT and elsewhere since the credit crisis really started getting bad, and also on topics like John McCain's role in the S&L crisis). Hat-tip to LP.By way of background, William Black is a former senior bank regulator, best known for his thwarted but later vindicated efforts to prosecute S&L crisis fraudster Charles Keating. He is currently an Associate Professor of Economics and Law at the University of Missouri—Kansas City. More germane for the purpose of this post, Black held a variety of senior regulatory positions during the S&L crisis.He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners. Via e-mail, he has confirmed our suspicions about the bank stress tests announced by Treasury Secretary Timothy Geithner: they simply cannot be adequate, given the number and experience of the staff, and perhaps as important, their relationship with the banks (see detailed comments below). I also asked him about the fact that bank examiners examine banks (duh) and would not have much (any?) experience in the capital markets operations or sophisticated products that the big investment bank, now banks, participated in. Goldman and Morgan Stanley ought to be subject to these exams; Citi, JP Morgan, and Bank of America have large capital markets operations. These firms are where the biggest risks and exposures lie. Do the examiners what to look for in a even the low-risk operations, like repo desks, much the less derivatives and proprietary trading books? He agreed (as presented below) that it was a near certainty that this was beyond their skill level. Read the rest of the post. Labels: banking regulation, credit crisis, financial crisis, stress tests, Timothy Geithner, William K. Black, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Strange Stirrings in Forex MarketsFrom Red Alert site, courtesy of Yves Smith. It may be related to Eastern Europe. Scary stuff....I do not know what is going on here, and I don't think I want to. Someone, apparently someone in Asia, wants dollars. A LOT of dollars. There is a forced-liquidation event underway that is massive, it is against all asset classes and it is spreading. It originated at approximately 7:15 CT this evening and originated out of Asia somewhere. All of the primary currency crosses got hit at once - Euro, Pound, Yen - all weakened dramatically against the dollar and it is still going on. The Asian stock markets got walloped at the same time in coordinated waves of forced selling. At the same time the US futures markets got nailed as well, down some six handles on the /ES in a near-vertical drop. While this sounds "not that big" to move these markets in a coordinated fashion like this is a trillion-dollar enterprise - this is not some small company that went bankrupt, or even a large company. There is no news coverage at the present time identifying the source of this but it is not small and contrary to some reports it is not "automatic selling"; this is forced liquidation. Folks, if this translates into Eastern Europe where there are severe instabilities already brewing literally everything in the financial world could come apart "all at once." The worse news is that if this happens Bernanke will have killed us (in the US) by extending those swap lines all over the planet during the last six months. These will become utterly uncollectable and they are massive, in the many hundreds of billions of dollars. To those who are reading this, I hope if you're in the markets you are prepared for extreme levels of violence. You must expect that the authorities will try to arrest the destruction if they are able, but you must also be prepared for the possibility that we have reached a "critical mass" point beyond which "duck and cover" is the only winning strategy. Unfortunately. I hope I'm wrong; this is going to be a long night. Labels: Eastern Europe, foreign exchange, Red Alert, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
