tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6 2008-12-21T22:21:24Z Movable Type 3.33 tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15419 2008-12-22T22:15:23Z 2008-12-21T22:21:24Z

Banks Need More Capital -- Alan Greenspan, The Economist GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis. For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.” Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily (see chart). It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system. The three-month LIBOR/Overnight Index Swap (OIS) spread, a measure of market perceptions of potential bank insolvency and thus of extra capital needs, rose from a long-standing ten basis points in the summer of 2007 to 90 points by that autumn. Though elevated, the LIBOR/OIS spread appeared range-bound for about a year up to mid-September 2008. The Lehman default, however, drove LIBOR/OIS up markedly. It reached a riveting 364 basis points on October 10th. More

Brandon Greenspan Roundtable: Is $250 Billion Enough? -- Economists @ Free Exchange Luigi Zingales: Alan Greenspan is factually correct in his description of the current economic environment, but he is reticent in his analysis of the causes and wrong in his prescriptions. He is right that the global financial intermediation is broken because investors are concerned about the solvency of the banks. However, his analysis is incomplete because it does not explain why investors have become fearful. He seems to hint at irrational fear (“human nature being what it is”), but this is a convenient scapegoat. Investors are correctly fearful because they do not know the value of banks’ assets. When Lehman’s bond in bankruptcy fetches a little more than eight cents on the dollar and when Merrill Lynch sells its loans at 20 cents on the dollar, we do not have to revert to irrational fear to explain why investors require hefty premiums to lend to banks. Given that Citigroup had to be bailed out twice in less than 60 days, the problem is not that the market wants unrealistically high levels of capital: it wants reasonable levels of correctly measured capital. Brad DeLong: FOUR factors impose haircuts on the values of financial assets. The first is default: perhaps your counterparty simply will not be around when the financial asset you hold matures. The second is duration: even if you are certain that your counterparty will be around, and even if you are certain that you understand the situation, and even if you don't care about risk, you would still rather have your money now than at its maturity date in the future. The third factor is information: maybe you don't understand what you are buying, for if it is such a good deal for you to buy it at this price why is the seller so eager to sell the asset to you? The fourth is risk: even if your counterparty will be around and even if you don't care about getting your money now rather than later and even if you understand the security perfectly, you still are not sure how valuable the security will be to you in your particular situation when it matures. More ]]> Will Additional Bank Capital Cure All That Ills? : Alan Greenspan vs. Economists @ Free Exchange]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15375 2008-11-19T13:46:17Z 2008-11-20T13:53:25Z

Why GM Deserves Support -- Rick Wagoner, Wall St. Journal Much has been said about the impact of the credit crisis on U.S. auto makers, and whether or not the government should assist the industry during this extraordinary financial turmoil. In these discussions, many critics simply ignore the substantial changes that U.S. auto companies have already made -- changes much like those the critics are calling for as part of any aid package. At General Motors, we have been responding to fierce competition here and abroad by transforming our business. Over the past decade, we have taken tough actions to cut costs, at the same time investing billions in fuel-efficient vehicles and new generations of advanced propulsion technologies. On the cost-cutting side, we have been streamlining our U.S. operations while simultaneously improving quality and productivity. Since 2000, we have reduced our U.S. hourly workforce by 52%, from 133,000 to 64,000, through buyouts and other programs. During the same period, we have cut our U.S. salaried employment from 44,000 to fewer than 30,000, and reduced our U.S. executive ranks by 45%. However, we know we cannot just slash our way to prosperity. We have closed the quality and productivity gaps with the imports, as confirmed by J.D. Power and Associates (the consumer ratings firm) and the Harbour Report (which benchmarks North American plant-floor performance). New GM product programs launched earlier this decade have produced award-winning cars and crossovers like the Saturn Aura, Cadillac CTS and Buick Enclave. And that is just the beginning. More

Brandon Let Detroit Go Bankrupt -- Mitt Romney, NY Times IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed. Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check. I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers. First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers. More ]]> To Bail Out or Not To Bail Out : Rick Wagoner vs. Mitt Romney]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15374 2008-11-18T13:40:00Z 2008-11-20T13:44:24Z

Why The British May Decide To Love The Euro -- Wolfgang Münchau, FT Let me start with a disclaimer. I was never a strong advocate of British membership of Europe’s economic and monetary union, though I was, and still am, a big fan of Emu itself. I always felt the economic arguments made by euro advocates in the UK were vastly exaggerated and counterproductive. Judged from a narrow economic perspective, which is how the British looked at this, they were right to stay out during the euro’s first 10 years. The tangible economic benefits that came with an independent monetary policy outweighed the much less tangible economic benefits of membership. But that was then and this is now. A financial crisis, a house price crash and a recession later, the arguments are still fundamentally the same, but the cost-benefit analysis produces a different result. The advantage of monetary independence, while somewhat greater than zero, will be more than compensated by the following four factors. The first relates to long-term economic costs. In the good old times of financial exuberance, global real interest rates were low and successive bubbles kept the credit-devouring beast of the British economy going. Even assuming that financial balance sheets will be back in good shape in 2010 or 2011, I would not expect a return to the credit-binge era. We have probably entered a secular bear market in equities. There will be no immediate appetite for another housing bubble and the regulatory framework will be conservative, to put it mildly. More

Brandon Eurozone Membership Is Still No Answer for UK -- Martin Wolf, FT Is this the time for the British to swallow their pride, admit they made a mistake and beg to enter the eurozone? A growing number of people argue it is. They are wrong. The reason for having a floating exchange rate is that it should float. In an uncertain world, an economy needs mechanisms of adjustment. The exchange rate is the most powerful such mechanism. Only exceptionally flexible or exceptionally open economies cope well with big shocks without any exchange rate flexibility. The UK is now suffering relatively severely (and so “asymmetrically”) from six large negative shocks. First, the UK is experiencing a rapid fall in house prices that seems likely to continue for a long time. Second, UK households have high levels of indebtedness. According to the European Commission, only Denmark and Ireland have higher levels of indebtedness relative to gross household disposable income, inside the European Union, though Spain, Portugal and Sweden come close. Third, the credit crisis has damaged the financial sector and so credit supply extremely severely. Fourth, the UK relies heavily on the now contracting financial sector for supply of well-paid jobs. More ]]> Should The UK Adopt the Euro? : Wolfgang Münchau vs. Martin Wolf]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15373 2008-11-17T13:25:02Z 2008-11-20T13:34:29Z

How to Ground The Street -- Eliot Spitzer, Washington Post President-elect Barack Obama will soon face the extraordinary task of saving capitalism from its own excesses, much as Franklin D. Roosevelt had to do 76 years ago. Up until this point in the crisis, policymakers have appropriately applied the rules of triage -- Band-Aids and tourniquets, then radical surgery -- to keep the global financial system alive. Capital infusions, bailouts, mega-mergers, government guarantees of unimaginable proportions -- all have been sought and supported by officials and corporate chief executives who had until now opposed any government participation in the marketplace. But put aside for the moment the ideological cartwheel we have seen and look at the big picture: The rules of modern capitalism have been re-written before our eyes. The new president's team must soon get to the root causes of the mistakes that have brought us to the economic precipice. Yes, we have all derided the explosion of leverage, the failure to regulate derivatives, the flood of subprime lending that was bound to default and the excesses of CEO compensation. But these are all mere manifestations of three deeper structural problems that require greater attention: misconceptions about what a "free market" really is, a continuing breakdown in corporate governance and an antiquated and incoherent federal financial regulatory framework. More

Brandon Spitzer as Victim -- Editorial, WSJ Shame is fleeting in modern America, so it was probably inevitable that Eliot Spitzer would seek to return as an arbiter of everyone else's moral behavior. But even we have to admit to being a little surprised by the rapidity and audacity of his attempted self-rehabilitation, courtesy of an op-ed in Sunday's Washington Post. This guy makes Bill Lerach seem remorseful. APLittle more than a week has passed since federal prosecutors declined to bring charges against Mr. Spitzer for soliciting prostitutes while Governor and before that while the chief law enforcement officer (Attorney General) of New York. The U.S. Attorney thus exercised more prosecutorial restraint than Mr. Spitzer ever showed to his targets as he sought to build his political career. Spared a criminal charge, Mr. Spitzer is now re-emerging to offer advice on how to reregulate Wall Street and to assert that he was right all along about everything (save the call girls). The man who forced new management on Marsh & McLennan and AIG, to the great detriment of their shareholders, now points to AIG's failure as evidence of his success... More ]]> From Dear Abbey to Dear Eliot (Spitzer)? : Eliot Spitzer vs. WSJ Editorial Board]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15330 2008-10-29T17:49:33Z 2008-10-29T17:56:21Z

Bank Bailouts and the Loans Myth, Paul Kedrosky, Infectious Greed Since my friend Joe Nocera first wrote about it last weekend in the NY Times, I have seen a spate of other articles all saying that bank executives are bad people for taking money from the U.S. Treasury and not ramping up their lending. Trouble is, that’s wrong-headed. Recall, the intent of the bank capital infusion was to backstop banks so that insolvency fears would be reduced, or even eliminated. While solvent banks will eventually make loans, it is meddlesome and illogical to say that having made injections we should now be tapping our collective feet at bank unwillingness to extend more credit than they are. Banks are looking at a changed world, one with deleveraging everything, consolidation happening apace, and defaults almost certain to rise rapidly over the next 24 months. Imagine that despite all of this banks began “business as usual” lending. What would happen? Almost certainly the banks would see higher levels of non-performing loans and defaults on these new efforts, perhaps even to the point that they would require more capital to reduce solvency fears. And what would we say then? We’d say, “Idiots, why did you race out and loan the money that we gave you into this weakening economy?” More

Brandon Why Banks Should Lend Out Treasury's Funds, Felix Salmon, Market Movers Paul Kedrosky has a peculiar argument today, saying that banks shouldn't lend the money they're getting from Treasury: ... There are a couple of problems with this argument. The first is the idea that loans made now will have higher default rates than legacy loans: I can't for a minute see why that should be the case, given that everybody expects underwriting standards to have tighened up. But there's a big difference between tighter underwriting standards, on the one hand, and a credit freeze, on the other. The bigger problem is that if the banks don't lend out this new money, the argument for bailing them out in the first place is severely weakened. The reason to bail out banks is that they're systemically important and that now more than ever they are crucial intermediaries who keep credit moving in the economy. (Now more than ever because the primary bond markets have completely seized up.) More ]]> Should Banks Be Lending? : Paul Kedrosky vs. Felix Salmon]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15319 2008-10-23T18:04:01Z 2008-10-23T18:10:06Z

Struggling to Keep Up as the Crisis Raced On , J. Nocera & E. Andrews, NYT It was the weekend of Sept. 13, and the moment Treasury Secretary Henry M. Paulson Jr. had feared for months was finally upon him: Lehman Brothers was hurtling toward bankruptcy — fast. Knowing that Lehman had billions of dollars in bad investments on its books, Mr. Paulson had long urged Lehman’s chief executive, Richard S. Fuld Jr., to find a solution for his firm’s problems. “He was asked to aggressively look for a buyer,” Mr. Paulson recalled in an interview. But Lehman could not — despite what Mr. Paulson described as personal pleas to other firms to buy some of Lehman’s toxic assets and efforts to persuade another bank to acquire Lehman. With all options closed, he said, the government’s hands were tied. Although the Federal Reserve had helped bail out Bear Stearns — and was within days of bailing out the giant insurer American International Group — it could not help Lehman, even as its default threatened to wreak havoc on financial markets. “We didn’t have the powers,” Mr. Paulson insisted, explaining a decision that many have since criticized — to allow Lehman to go bankrupt. By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not. “If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, ‘No way,’ ” he said. But that is not the way that many who have scrutinized his actions see it. Bankers involved say they do not recall Mr. Paulson talking about Lehman’s impaired collateral. And they said that buyers walked away for one reason: because they could not get the same kind of government backing that facilitated the Bear Stearns deal. In retrospect, they added, it was emblematic of the miscalculations by the government in reacting to the crisis. The day after Lehman collapsed, the Fed saved A.I.G. with an emergency $85 billion loan, but the credit markets around the world began freezing up anyway. It was at this point that Mr. Paulson — feeling outgunned by pursuers, like Butch and Sundance — decided he had to find a systemic solution and stop lurching from crisis to crisis, fixing one company’s problems only to find several more right behind. “Ben said, ‘Will you go to Congress with me?’ ” said Mr. Paulson, referring to the Federal Reserve chairman, Ben S. Bernanke. “I said: ‘Fine, I’m your partner. I’ll go to Congress.’ ” More

Brandon Should Lehman Have Been Rescued?, John Carney (via Felix Salmon), Market Movers I have to get on plane to Chicago, so don't expect much more here any time soon. In the meantime, here's an IM I just had with John Carney of Clusterstock about whether Treasury was right to let Lehman fail. I thought it was the right decision at the time, but with hindsight I think it was clearly a mistake. Even Hank Paulson seems to think that it would have been a good idea to rescue Lehman, if only he'd been capable of doing so. But Carney still thinks that letting Lehman fail was the right thing to do. John Carney: I personally don't get what the problem with letting lehman go bankrupt is. Everyone keeps saying it was a disaster. Felix Salmon: well, it cost well over a trillion dollars in terms of the global bailouts needed as a result John Carney: How so. Post hoc, ergo propter hoc? Don't buy it Felix Salmon: What's the probability that bailouts of this magnitude wouldn't have been needed if the implicit Treasury TBTF backstop had been shown to exist? multiply that probability by the global cost of the bailouts, and you still get a number much bigger than the $60 billion or whatever that Treasury would have needed to bail out Lehman John Carney: First, I'm not sure $60 billion would have bailed out Lehman Felix Salmon: "Lehman officials said they believed the firm had not one but two potential buyers: Bank of America and Barclays, the big British bank. But both had conditions. Bank of America wanted the Fed to make a $65 billion loan to cover any exposure to Lehman's bad assets, according to one person privy to the discussions who did not want to be identified because of their sensitive nature." John Carney: Second, I just don't see why propping up Lehman would have avoided all the other bailouts. That is, we don't have a confidence crisis. We have a solvency one. Morgan Stanley would still have failed Felix Salmon: You can't say that MS would have failed in the wake of a Lehman bailout with any certainty John Carney: I have the facts on my side: it did fail. More ]]> Should We Have Saved Lehman Brothers? : Nocera and Andrews vs. Carney]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15316 2008-10-22T16:34:36Z 2008-10-23T16:42:35Z

Myths About the Financial Crisis of 2008, Minneapolis Fed Clearly, the United States and the world economy are undergoing a major …nancial crisis. Interbank borrowing and lending rates have risen to unprecedented levels relative to U.S. Treasury Bills. Several major …nancial institutions have failed. These real problems have also been associated with four widely-held myths about the nature of the …nancial crisis and the associated spillovers to the rest of the economy. The financial press and policymakers have made four claims about the nature of the crisis. 1. Bank lending to non…nancial corporations and individuals has declined sharply. 2. Interbank lending is essentially nonexistent. 3. Commercial paper issuance by non…nancial corporations has declined sharply and rates have risen to unprecedented levels. 4. Banks play a large role in channeling funds from savers to borrowers. Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false. More Where Is The Credit Crunch? III, Alex Tabarrok, Marginal Revolution Back in February I pointed out that despite all the talk of a credit crunch commercial and industrial loans were at an all-time high and increasing. In September I once again pointed to data showing that bank credit continued to be high (even if growth was slowing.) At that time I also discussed how bank loans were not the only source of funds for business investment and that many substitute bridges exist which transform and transmit savings into investment. I suggested that despite the panic the problems which exist in the financial industry may be relatively confined to that industry. Three economists at the Federal Reserve Bank of Minneapolis, Chari, Christiano and Kehoe, now further support my analysis pointing to Four Myths about the Financial Crisis of 2008. ... Each of these myths is refuted by widely available financial data from the Federal Reserve. It's a short paper, read the whole thing. None of this means that everything is cheery. Like most people I think that we are in a recession which is likely to get worse but we need to remind ourselves that recessions are normal. What is not normal is the current level of panic. The panic feels to me like an availability cascade. More

Brandon The Credit Crisis Isn't a Myth, Felix Salmon, Market Movers Joe Wiesenthal points to a new paper from the Minneapolis Fed which seems to show that bank lending's quite healthy. A lot of bank lending is going up, say the authors, and therefore the banking system can't be in as much trouble as people think. But surely it makes sense that at least at the beginning of a credit crunch, bank lending will go up. When bond markets shut down, companies are forced to draw down their lines of credit at the bank, since they can't roll over their bonded debt. And those aren't the only credit lines which banks have outstanding: there are also Helocs and credit cards, and the balances on all of those credit instruments are surely rising. What's more, the authors look at rates rather than spreads, thereby making the credit crunch seem much less bad than it really is. If nominal interest rates stay flat even as the risk-free rate plunges, that's a significant rise in credit spreads, and rate cuts aren't having their desired effect. More The Analysis!, Free Exchange Blog IF YOU have been paying attention to the news, to financial experts, to economists—basically to anyone paying attention to financial markets—then you may have heard that there have been some recent problems with interbank lending. In the wake of the Lehman Brothers failure, a number of money market funds broke the buck, and the commercial paper market began to show serious signs of stress. We faced the risk, the experts said, of a breakdown in the markets that helped regular, non-financial companies operate. Had we done nothing, to paraphrase Ben Bernanke, we might have woken up one day to find ourselves without an economy. Or so they would have you believe, says Alex Tabarrok! For some time now, he has been pushing the argument that we may face recession, but that the financial crisis never threatened the real economy, and so the big government bail-outs were unnecessary. And now he has proof. Three economists from the research department of the Federal Reserve Bank of Minneapolis have produced a working paper purporting to debunk four myths about the financial crisis. Those myths are: ... The authors of the paper next provide a damning analysis. In the best tradition of lazy undergraduates everywhere, they plot lines on graphs and draw wild conclusions. And on the basis of these conclusions, Mr Tabarrok writes his post, and credulous bloggers begin analogising the bail-out to the Bush administration's bogus claims about Iraq's weapons of mass destruction. There are a few problems with all of this. First of all, some of the conclusions drawn are simply false. While rates on the highest quality non-financial commercial paper have behaved fairly well in recent weeks, rates for lower quality stuff have soared. The spread between the two, actually, is one of Calculated Risk's credit market indicators. More ]]> Is The Credit Crisis a Myth? : Minneapolis Fed vs. Salmon & Economist]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15311 2008-10-20T17:36:09Z 2008-10-20T17:40:24Z

Sorry, Chicken Little,, Gene Epstein THESE ARE HARDLY THE BEST OF TIMES FOR THE U.S. ECONOMY. But they may not be as bad as you think. The credit crisis, stock-market crash and fall in home prices have raised legitimate fears of a nasty and protracted recession. Yet the economy has often proved more resilient than is commonly thought -- and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it's possible that the downturn could prove to be one of the briefest and mildest on record. The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum's recent slide. The wide swing in both the percentage and sheer dollar magnitude of prices has been unprecedented. Over the past 14 months, the bellwether price of crude oil has made a stunning round trip, rising from around $70 a barrel in mid-August 2007 to $147 by mid-July, and falling below $70 Thursday. Natural gas has also slid about 50% from its early-July peak. If oil's price averages around $80, consumers will get a big dose of relief. Soaring energy costs had body-slammed them in July, August and September. Hence the dismal performance of retail sales over that stretch. But beginning with the current month, the energy payback will be enormous. This economic shock absorber should help offset the cruel blows of the credit crunch and declining wealth from equities and homes. More

Brandon The Economy Is Just Fine..., Barry Ritholtz, Big Picture Nothing to see here, move along, everything's fine. That's what Gene Epstein, Barron's Economic Beat columnist, and author of the book Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers, is saying in this week's magazine. I was unsure as to where to begin in taking apart his column -- its not that it is so densely packed with errors (that's a given). Its that the author's worldview is, well, from a different world than ours. ... Where does one begin to fisk this? The Cavalry hasn't swept in? You mean to say that nationalizing the finance sector of the US, guaranteeing $2 trillion dollars in lending an deposits, and cutting rates to 1.5% rates -- thats not the cavalry? And most economists understand why Oil is down -- its called demand destruction. People stopped consuming it, because they cannot afford to. A global recession is deflating all manner of commodities. This is a bad thing, not a good thing. This is economic cheerleading way, way beyond the ordinary mindless spinning. Its an entirely different order of magnitude. This guy makes my boy Kudlow look like a depressive. More ]]> Are Things Really As Bad As They Seem? : Gene Epstein vs. Barry Ritholtz]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15306 2008-10-17T20:39:28Z 2008-10-17T21:01:39Z

A Better Way To Revive Credit Markets, Robert Aliber, FT The chatter that the American taxpayers will pay $700bn to save the banks is nonsense. I have a straightforward plan that should revive the market in mortgage-related securities (MRS), greatly enhance bank capital and earn several tens of billions of dollars for the US Treasury. The distress in the US credit market reflects that MRS are no longer priced on a rational basis. Rather, a few companies with a desperate need for cash have sold these securities for 25 cents on the dollar; the accounting conventions require that this price is used to value similar securities owned by other banks. There are 40m mortgages on residential real estate in the US. Ninety seven per cent or 98 per cent of homeowners make their mortgage payments on a timely basis. The median home price in the US is $250,000. Assume 1m homeowners are subject to foreclosure and that the lenders incur a loss of $100,000 each time a borrower defaults. The losses to the lenders then would total $100bn. If 4 per cent of the homeowners with mortgages default, the losses to the lenders would total about $150bn. The ownership of these MRS is concentrated; 20 US banks have 80 per cent of the mortgage-related securities that are not owned in Europe and Asia. More

Brandon Credit: No Easy Answers,, Felix Salmon, Market Movers Robert Aliber has a peculiar op-ed in the FT, presenting a TARP plan "that should revive the market in mortgage-related securities, greatly enhance bank capital and earn several tens of billions of dollars for the US Treasury". It's peculiar because just as the world and Hank Paulson is finally coming around to the fact that US banks are facing a solvency crisis rather than a liquidity crisis, Aliber still uses the kind of back-of-the-envelope calculations we saw a lot of in early 2007 to assert that there's no solvency crisis at all. ... Using this reasoning as a starting point, Aliber then proceeds to come up with a clever plan for essentially monetizing the difference between the $350 billion that banks have written off and the $150 billion that they will eventually lose. But if you really think that US banks will ultimately suffer no more than $150 billion in mortgage-related losses, I've got a triple-A-rated super-senior collateralized Brooklyn Bridge obligation to sell you. The reason banks aren't lending to each other is that they're convinced the final losses will be much bigger than the ones already taken, rather than much smaller. (Although, in a piece of good news, the TED spread is now back down to less than 400bp this morning. I doubt that means banks are lending to each other yet, but it's definitely a move in the right direction.) More ]]> Liquidity vs. Solvency Issues : Robert Aliber vs. Felix Salmon]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15307 2008-10-16T21:27:03Z 2008-10-17T21:44:51Z

Gods That Failed, Harold Meyerson, Washington Post In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled "The God That Failed." Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. The fall of the financial system has been so fast and far-reaching that there's been no time to fully consider its implications for the reigning economic theology of the past 30 years. But with the most right-wing administration in modern American history scurrying to nationalize the banks, the question cannot be elided indefinitely. What exactly do economic conservatives believe now that their god is dead? What's become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions? No wonder we've seen a disoriented John McCain wandering the moors howling about Bill Ayers. What's he supposed to do? Admit that the Reagan-Thatcher faith in unregulated capitalism, to which every GOP presidential candidate was pledging allegiance just last winter, has collapsed? The doctrine of laissez faire has been so dominant, so pervasive over the past three decades that hundreds of Democratic politicians can deliver a paean to the market at the drop of a hat, but not a single Republican pol can plausibly defend government as a check on capitalism run amok, even at the drop of thousands of points in the Dow. More

Brandon Gods That Fail...Where To Begin?, David Boaz, Cato@Liberty Harold Meyerson in the Washington Post has a column titled “Gods That Failed.” He’s referring to a famous book: ... And then he makes this analogy: “Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. ” Where to begin? Certainly we haven’t had any unregulated capitalism lately. As I put it the other day, the kind of capitalism that has encountered the current crisis is “the kind in which a central monetary authority manipulates money and credit, the central government taxes and redistributes $3 trillion a year, huge government-sponsored enterprises create a taxpayer-backed duopoly in the mortgage business, tax laws encourage excessive use of debt financing, and government pressures banks to make bad loans.” As for conservative intellectuals, some of them may wish for some form of “unregulated capitalism,” though plenty of them — from Russell Kirk to David Brooks and Michael Gerson and that Arkansas Aristotle, Mike Huckabee — have been pretty darn skeptical about capitalism. But whatever the more free-market conservatives may have dreamed of, they didn’t get laissez-faire. Nor did they ever make capitalism their deity, the way communists truly did make the workers’ state their god. But let’s think about the comparison that Meyerson is making. Some intellectuals once supported communism, and that failed. Some intellectuals, we’ll concede for the moment, were just as enraptured with capitalism; and that system, too, in Meyerson’s view, has failed. Are these equivalent failures? More ]]> Are We Witnessing Capitalism's Demise? : Harold Meyerson vs. David Boaz]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15301 2008-10-15T15:44:36Z 2008-10-15T15:50:00Z

To Regulate or Not?, Barry Ritholtz, Big Picture I am working on something for The Economist -- its an Oxford style debate on the current crisis. The proposition being discussed is: "This house believes that it would be a mistake to regulate the financial system heavily after the crisis." Any comments you may have on this would be appreciated -- my final version is due later today. My biggest problem is trying to cover a lot of ground in just 500 words . . . DRAFT: Over the past 30 years, the United States has moved from an environment of excessive regulation to excessive deregulation. This philosophical shift was taken to irrational extremes, and it is the heart of the current financial crisis. A brief history: Post War World II, the global economy expanded dramatically. By the late 1960s, the U.S. had an expansive bureaucracy. Regulatory oversight had become time-consuming, complex, and expensive. Eliminating this excess regulation started with President Jimmy Carter, and dramatically accelerated under Ronald Reagan. Originally, only the most expensive and onerous provisions were targeted. But eventually, deregulation became a religion, and effective and necessary safeguards were removed along with the costly ones. More

Brandon The Reregulation Mantra?, John Stossel, RealClearPolitics "It's deregulation's fault!" That's the conventional explanation for the economic mess. Barack Obama said, "This is a final verdict on the failed economic policies of the last eight years ... that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us". Is deregulation is the culprit? It can't be. There was no relevant deregulation in the last 25 years. Meanwhile, highly regulated institutions eagerly bought risky government-guaranteed mortgages, stimulating excessive housing construction and an unsustainable price bubble. Deregulation wasn't the problem, and reregulation isn't the solution. It's intuitive to assume that regulation prevents problems, but it's rarely true. First, how would regulators know what to do? Leaving aside the bias they might have and the brutal fact that regulation is physical force, how can a small group of people understand the workings of a market sufficiently to regulate sensibly? Markets, especially financial markets, are far more complicated than any mind can grasp. They consist of many millions of participants making countless decisions on the basis of unarticulated know-how and intuition. To attempt to regulate such activity requires knowledge no one can possess. More ]]> Was Deregulation The Problem? : Barry Ritholtz vs. John Stossel]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15300 2008-10-15T02:50:26Z 2008-10-15T03:02:44Z

Brandon An Obama Rally?, Barry Ritholtz, Big Picture My pal and occasional CNBC sparring partner Charlie Gasparino is a great investigative journalist. His book Blood on the Streets is required reading for those who want to understand the 1990s bubble market. Where Charlie and I disagree is often in his opinion pieces. We've clashed over CRA, Fannie and Freddie -- GOP talking points all. Our latest bone of contention is his OpEd column in today's NY Post, titled AN OBAMA PANIC? MARKETS FEAR HIS POLICIES. Charlie in part blames the market's recent selloff on Wall Street's fear of an Obama presidency. Note that headline and sub hed -- written by editors, not the writer -- is far more provocative than the acual text. It is a well trod, flawed argument we've analyzed in the past:
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CNBC's Gasparino Problem, Felix Salmon, Market Movers Charlie Gasparino has outdone himself today. He reasonably blames much of the current financial crisis on "a lack of leadership from Washington" -- but somehow manages to convince himself that it's Obama's leadership which is lacking, rather than Paulson's or Bush's. "An Obama Panic?" says the headline; the subhed is "Markets Fear His Policies". ... This is bensteinery of the first order: not only is it ill-argued, it's also utterly wrongheaded. Yes, it's a good idea for the government to spend money in a recession. Yes, it's a good idea to target that money at the poorest members of society, where it will do the most good and have the highest velocity. And no, with stocks down 40%, there really isn't an enormous number of people worried about capital gains taxes. Still, one could forgive the litany of GOP talking points on a right-wing op-ed page were it not for the fact that Gasparino styles himself a working reporter. The more you set down your opinions in black and white, the less open-minded you become; this is true of everyone, and especially of stubborn, bull-headed types like Gasparino. More ]]> Charlie Gasparino vs. Barack Obama : Gasparino vs. Ritholtz and Salmon]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.15292 2008-10-13T16:43:14Z 2008-10-13T22:02:21Z

Mark-to-Market Wrecks Banks, John Berry, Bloomberg The world's banking system is caught in a vicious trap, with a forced sale of assets at one institution wiping out capital at others holding similar assets. Think of it as extraordinarily high reverse leverage. You can blame mark-to-market accounting, the advent of new indexes that supposedly track values of a wide range of assets, or a market mind-set that assumes every asset is part of a bank's trading book. More

Brandon Problems with Suspending Mark-to-Market Accounting, Avinash Persaud, VoxEU The US Economic Emergency Act of 2008 allows the SEC to suspend mark-to-market accounting rules. But a blanket suspension would be counter-productive. Crises are times when uncertainty quickly turns to panic. Now is not the time to increase uncertainty by changing accounting standards. This column proposes an alternative: mark-to-funding. More ]]> Debating Mark-to-Market Accounting : John Berry vs. Avinash Persaud]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.14118 2008-08-05T18:00:07Z 2008-08-05T22:50:02Z

At Freddie Mac, Chief Discarded Warning Signs, Charles Duhigg, NYT The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others. That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health. Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations. In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.” Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document. But as they sat in a conference room, Mr. Syron refused to consider possibilities for reducing Freddie Mac’s risks, said Mr. Andrukonis, who left in 2005 to become a teacher. “He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans. More

Brandon NYT Hit Job on Freddie Mac, Tanta, Calculated Risk This has to be read to be believed. ... Actually, all but two of the "more than two dozen" were given anonymity to damage Richard Syron's career while protecting their own, by my reading of this. One former Freddie Mac executive and one industry consultant are named. Nobody else is. And we are given no idea how many of the "more than two dozen" are shareholders. (Who need to protect their careers?) Or how many of them were found on Yahoo! message boards. (Hey! We don't know that they weren't!) The Times reporter, Charles Duhigg, can't even bring himself to include Syron's full bio: ... I have to wonder why the Times leaves off the part about how Syron is a former deputy assistant Treasury Secretary, asssistant to Federal Reserve chairman Paul Volker, and president of the Federal Reserve Bank of Boston in the late 80s and 90s, which included being a member of the Open Market Committee. None of that makes him perfect or infallible or anything else, of course. But why does the Times leave it out? If Syron is as clueless as the Times wants us to believe, isn't it relevant that Syron had a very influential role in restructuring failed banks and the FSLIC during the last major banking crisis? I remember all that being quite relevant when Freddie hired him in 2003 after the accounting scandal. No, but a former employee wrote a memo in 2004 that apparently didn't impress Syron all that much. A lot of us wrote memos in 2004 that didn't impress a lot of people all that much. I can relate to the urge to say "I tolja so." I'm not sure I can relate to the claim that if this one memo had been taken seriously, all this "crisis" could have been averted. More ]]> Anonymous Sources & Freddie Mac : Charles Duhigg vs. Calculated Risk]]> tag:www.realclearmarkets.com,2008:/unconventional-wisdom//6.13311 2008-07-14T19:02:02Z 2008-07-14T22:28:27Z

Paulson Announces GSE Initiatives, Henry Paulson Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction. GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately. First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn. Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed. ... More

Brandon Parsing Paulson: The Fannie and Freddie Bailout, Felix Salmon Hank Paulson is a tough guy. He's no pushover: just look at that phone call to Jamie Dimon, telling him that anything over $2 a share was altogether far too much money to pay for Bear Stearns. So what are we to make of his statement regarding Fannie Mae and Freddie Mac? With apologies to Jack, here's the parse: Paulson: Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction. Translation: We can't afford for Fannie and Freddie to go bust, and we're Republicans, so there's no way we're going to nationalize them. And no one could conceivably afford to buy them. Which leaves only one option: somehow maintaining the status quo. Which is not going to be easy, seeing as how their trillions of dollars in assets are imploding daily in the biggest US housing crunch since the Great Depression. Paulson: GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. ... More ]]> Parsing The Secretary : Hank Paulson vs. Felix Salmon]]>