Showing posts from February, 2010

Gary Gorton's Somewhat Flawed Take on Shadow Banking

When I saw this Feb. 20 .pdf on shadow banking, prepared for the U.S. Financial Crisis Inquiry Commission, I got kind of excited. Reading material for my one-hour stationary bike workout! And shadow banking no less, my latest pet obsession! Ah, Sunday morning nirvana for a finance wonk.

Then I started perusing the piece and, after turning over the bike pedals oh about 1,100 times (I try to spin at 90 rpm, and when I get involved in my reading, I'll hit the mid-90s), I grew a bit disenchanted.

Read it for yourself of course. If you want a better treatment of the material, Gorton is essentially cribbing off himself from an earlier paper -- "Slapped In the Face by the Invisible Hand" from May 9, 2009 -- which is a bit smarter, dares to be prescriptive and explores the subject in more depth. My nose de-wrinkled a little after reading "Slapped."

But please start with the crisis inquiry presentation because the writing is more accessible for people who aren't financ…

What's In a Name, You Ask. It Depends, I Say.

Bloomberg reported that Bernie Madoff’s daughter-in law, Stephanie, has filed a formal request to have her surname, and those of his two children, Audrey and Nicholas, legally changed to Morgan.

My compliments to Stephanie, not so much for the move itself but for the choice of the name. In preserving the family’s ties to finance, however indirectly, and keeping the children’s options open in the future, the name Morgan trumps Rockefeller or Carnegie any time.

But no matter how smart Stephanie is, she is the second best in the Madoff orbit as long as one Sonja Kohn is around. This latter woman even fooled me, and let me tell you, not as a boast, but as a tribute to her skills, that I am not easily fooled in matters of finance.

Yet, I was fooled, which is to say, completely, totally misled, upon reading that among Madoff’s “investors” were three Bank Medici funds.

Now, gentle reader, what would you have thought upon reading the same news?

If you knew anything about economics, finance, bankin…

The Complexities of Interconnectedness

The social problems are difficult to solve because they are social. Each problem is related to a slew of others that, combined, comprise the social system in its entirety.

Take the topical issue of health care in the U.S. Why are there about 50 million people without health insurance?

The answer is cost. People have no health insurance because they cannot afford it.

Why is health insurance so expensive? Anthem Blue Cross in California just sent a rate increase notice of about 39 percent to its customers. Can anything be done about these spiraling costs?

Well, many factors contribute to the high cost of health care in the U.S., the bureaucracy and dead weight of the private health insurance companies being one. One other factor is obesity. According to the Center for Disease Control, obesity costs the U.S. health care system about $150 billion a year, enough to cover the premiums for all the uninsured. To control healthcare costs, the epidemic of obesity must be controlled.

Why are people …

Where the Courage to Reform is Lacking

The "hey we're missing the shadow banking market in all these reforms" meme is spreading. I like that, after my Jan. 24 post where I bemoaned the lack of attention to the 900-lb. gorilla in the room (or however much that mythical gorilla weighs). Marginal Revolution weighs in here. Mike Konczal at Rortybomb did his usual excellent calmly reasoned and thorough analysis here. And we got a superb Venn diagram by Raj Date (never thought you'd see one of them again after eighth grade -- guess again; check out page 3!) that reveals shadow banking to be the poop that's left unscooped in the proposed financial reforms.

So where is the courage to reform lacking?

Simply: we don't like pain (our politicians, our mirror images of the worst of ourselves, have all along taken the pain-avoidance steps in dealing with the financial crisis). Shadow banking is a means of leveraging up the financial system. Leverage provides the palliative of easy money (along with that extra ris…

A Letter to Mr. Baxter

Dear Mr. Baxter,

I just read your testimony before the House committee investigating the financial crisis. You delivered a long, carefully prepared text to defend the Fed's bailout of AIG. As the executive VP and general counsel of the New York Fed, nothing less was expected from you.

Did I get your approach, your strategy, right?

Your strategy, I think, was to deliver a one-two punch wrapped around a coma-inducing narrative. One, you talked at length about the threat of a looming, apocalyptic crisis, which made the bailout necessary, almost a patriotic duty. Two, you said that it was all for the benefit of taxpayers. You used the word “taxpayer” 16 times, as in the Fed “protecting taxpayer interest”, or the Fed “securing both downside protection and upside participation for the U.S. taxpayer”.

Now, the Fed creating funds electronically from thin air and transmitting them here and there has nothing to do with taxpayers. But I am not writing to criticize you for using catch words that …

Money, Capital and Art

The Appeal of the Walking Man generated heavy email feedback. If this were a commercial site, responding to the “customer demand”, it would have to be renamed Dialectics of Art. But it is not. More to the point, the dialectics of finance is the starting point of making sense of art, so we are on the right track.

This touches upon a point I made to a friend who wanted more about the role of money in influencing art. I said that the role of money is too easy to discern, and gave the example of one Eli Broad, a disagreeable boor who has become the arbiter of art in LA by virtue of having money to throw around.

But the role of capital in shaping art is more complex. I discuss the point at some length in Vol. 4 of Speculative Capital. In A Brief Commentary On a Picture I quoted a passage from the manuscript on the importance of the visual. Here is more, by way of proof that Vol. 4 is in the works.
The rise of the visual is a new cultural phenomenon; it has no precedence in either the Eastern …

Imaginary Dialogue with a Fed-Secrecy Defender

The make-believe dialogue that follows was inspired by this New York Times story that recaps the events leading up to, and the arguments surrounding, Bloomberg LP vs. Board of Governors of the Federal Reserve. That's Bloomberg's court battle to get the details on a bank bailout that has reached a staggering $2 trillion (according to the Times and, depending on how you count, may be actually a trillion or two higher). Much of the bailout has been cleverly orchestrated by the Fed behind the scenes, so Americans know little of who got what. Bloomberg wants to pierce the veil of secrecy to find out which banks received money, how much, in exchange for what collateral, under what terms.

And the Fed is stonewalling like crazy, fighting this tooth and nail through the court system.

So here's my imaginary dialogue with a Fed-secrecy defender (abbreviated below as "FD"). The parts in bold are taken right from the Times article; other secrecy arguments I have extrapolated on…

Weekend Musings: The Appeal of The Walking Man

The sale of Giacometti’s Walking Man I for a record $104 million was the main “art” news of the past week. The picture of the sculpture made the front page of the major papers, including the Wall Street Journal. Tout le monde was talking about it. So many that I did not know the art appreciation bug had bitten so many.

There was no word on the buyer. Rumors that he was a financier, probably a hedge fund manager, made sense. Only the financiers have that kind of money to throw around. I know of some hedge fund managers who buy masterpieces wholesale.

But lest we forget, for the “hegdies” the acquisition of art is strictly a matter of investing and capital appreciation. Working hand in glove with the gallery owners and auction houses, these merry men of finance accumulate art based on venture capital or takeover model. They either buy the works of relatively unknown artists and then promote them so the works would automatically appreciate – that would be like investing in a start up and t…

5 Reasons Not to Expect the U.S. to Rein in Shadow Banking (or Pass Much Financial Reform)

When I was living in Hong Kong, I once saw a photo of the Chinese leadership that left a strong impression. China's political elite were having their annual conclave. The International Herald Tribune ran a photo of nine of the most powerful men in the country: all with hair dyed black, dark blue suits, red neckties -- except for one man wearing a blue one.

So, Sesame Street redux, one of these things was not like the others -- but the subtext was clear: not by a heck of a lot. Maybe he didn't get the "Red Necktie Memo." Or maybe he felt a little ornery that morning.

In the aftermath of the financial crisis, the U.S. government is the equivalent of the guy in the red necktie. He's different from those he regulates -- but not by much. That's a big reason the needle isn't likely to move much on financial regulation.

Just look at what was at the heart of the crisis: overly complex and leveraged products that sought to evade sensible (but inconvenient) accounting…

The [Permissible] Boundaries of Bank Regulation

If you have been following current events, you are familiar with President Obama’s plan to “take on” banks. His plan, inspired by Paul Volker, calls for, among other things, the banning of proprietary trading by banks.

If you have been following this blog, you know that proprietary or prop trading is arbitrage trading – taking simultaneous long and short positions in two “equivalent” trades. That is the modus operandi of speculative capital which still, two years into a protracted crisis, dominates the markets.

The Theory of Speculative Capital posits that speculative capital would not, short of being forcefully subdued, accept any restraints or limitations on itself. From Vol. 1:
Speculative capital abhors regulation. Regulations interfere with the cross-market arbitrage that is its lifeline. If speculative capital cannot freely operate, it cannot generate profits and must cease to exist. The opposition of speculative capital to regulation is thus not a matter of some technical or tacti…

Hank Paulson On the Brink

A while back I criticized the book by a financial correspondent of the New York Times about the financial crisis as gossipy, trashy and not at all informative. Then, in today’s Wall Street Journal, I read an excerpt from Hank Paulson’s new book, On the Brink.

There is no doubt: on the evidence of his writing, the man is a cretin. In the half-page excerpt, he describes nonsensical and random details that would alarm a mad painter: leaving the Waldorf=Astoria Hotel early in the morning, speeding down a deserted Park Ave, getting to the Fed before 7am, riding the elevator to the 13th floor, wondering whether or not to take sleeping pills that were given to him in Washington D.C. (Being a Christian Scientist, he decides against it).

These details might or might not have been added for drama. But these are the things that he remembers precisely because he does not understand the crisis that is unfolding around him. He knows he is grossly out of his depth, so he does not dare/bother to pause,…