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Showing posts from March, 2010

Surmising Bernanke’s Personality

I was a taken aback when I read in the Wall Street Journal that the Federal Reserve Board had a “director of fine arts program”. It was like learning that the Islamic Republic of Iran had a chief sommelier. You don't quite know what to make of it.

Apparently, both the office and the title are real. A certain Ms. Goley who was in charge of the program for over 30 years had written to the Journal to offer a window into Bernanke’s character from his taste in art. She concluded that the chairman is “creative, innovative and flexible”.

Ms. Goley thinks that these are unconditionally positive adjectives.

But if I have said it once, I have said it a hundred times that nothing exists out of context. Think of corporations using “creative accounting” or politicians who are “ethically flexible”. As for “innovative”, it might be an admirable trait for an architect or a teacher, but what does it mean when applied to a central banker?

When applied in the context of what transpired in the past thre…

The Meaning of “System” in Systemic Risk – Part 2: Breakdown of the Law

In the Letter to Mr. Baxter, I touched upon the legality of the Fed's bailout of AIG. The bill currently stands at $182 billion.

Because AIG is a financial institution and the Fed, in the popular understanding of its function, “deals” with money and financial institutions, the matter, when noticed at all, has been given a short shrift. Baxter – recall he is the general counsel to the New York Fed – was not pushed on the subject in his testimony before a House Committee investigation of the crisis. And he used a lawyerly sleight of hand around the word “authorize” to skirt the issue:On September 16, 2008, the Board of Governors authorized the New York Fed to lend up to $85 billion to AIG through a secured revolving credit facility.And then again:
In November 2008, the Board of Governors authorized the New York Fed to take a second step to alleviate these pressures.These statements are technically accurate, but they do not address the central point, which is: the Federal Reserve Board…

Were There Widespread Fire Sales of Assets During the Financial Crisis?

Last week I argued that Gary Gorton failed to prove there were fire sales of assets during the financial crisis. Of course he chose a bad indicator, and so set himself up for a formidable challenge, sort of like trying to hit a home run with a plastic whiffle bat. He looked at spreads of investment-grade corporate bonds -- specifically, at periods during the crisis when, inexplicably, investors demanded higher yields for AAA corporates than for AA. But, alas, the inexplicable proved all too explicable on closer examination.

Still, that's a narrow example. What about those big U.S. banks that refused to sell securities, citing "fire sale" prices they were being offered. Was that accurate at least?

This is worthwhile to ponder because the Treasury and the Fed completely bought into the "fire sale" story. They fashioned a response to the crisis appropriate to a situation where the biggest problem was not bad assets, but investors with bad (irrational) thoughts about…

Debunking Gary Gorton's "Fire Sale" Thesis

A few weeks ago I looked at Gary Gorton's Somewhat Flawed Take on Shadow Banking. One big problem I had with his paper (which now has been enshrined as part of the public record at the Financial Crisis and Inquiry Commission) is his analysis of a very curious phenomenon during the first half-year of the worst part of the crisis. Namely, at several points, AAA rated corporate bonds paid bigger yields than AA rated. This is a real "upside down topsy turvy" kind of thing. Bonds that achieve a triple AAA rating -- the highest possible -- are supposed to be really safe, almost U.S. Treasury safe. AA, the next ranking down, denotes a bit more risk. And a bit more risk means that investors demand a higher yield.

But over two periods -- one in the fall of 2008 and the other early in 2009 -- investors were getting a dramatically lower yield (well, dramatic in the bond world) for AA than AAA. That's Alice in Wonderland stuff, it seems.

Gorton explains the market weirdness on pag…

Parsing the Categories of Necessary and Accidental By Means of Mortgages

In the past three years, I have looked high and I have looked low, but never – not once – have I seen even a hint of a reference to the conscious, premeditated and deliberate destruction of Fannie Mae and Freddie Mac that set the stage for the ongoing crisis.

Everyone was involved in the conspiracy: The Wall Street Journal, The New York Times, Alan Greenspan and his Fed machinery, Wall Street, chief executives of financial conglomerates. I chronicled the destruction in a two-part series on this blog, here and here and in a subsequent epilogue. If you have not read them, I urge you to do so. In light of what has transpired, they read even better today. And more evidence keeps coming in.

Look at this admission from today’s New York Times. It comes from the paper’s real-estate section:But many of guidelines that New York City apartment buildings don't meet have been in place for years. Fannie and Freddie guidelines have long held, for example, that no single person or entity can own m…

What Does Repo 105 Tell Us About This Crisis?

Now that a couple of news cycles have washed over us since the revelation of the Lehman Brothers accounting scheme known as "Repo 105" (cute street drug name that suggests quick-hit crack for financiers), I thought it was worth trying to distill the takeaways from this news.

First, if you need to get up to speed: Lehman was very heavily massaging its books so as to hide its high leverage from shareholders and other outsiders (such as the credit-rating agencies). It was using "repo" transactions to shift large sums off the balance sheet temporarily at quarter's end. The program was known as "Repo 105" because Lehman would get $1 for each $1.05 of securities that it temporarily parked with any of seven counterparties (Mizuho, Barclays, UBS, Deutsche, etc.).

If you want more on Repo 105:
The original (gasp!) 2,200+ page report by examiner Anton Valukas
Here's Zero Hedge as one of the first to weigh in
Karl Denninger waxes indignant (and justifiably so)
My …

The U.S. Senate Exempts Payday Loans from Regulation

Today’s New York Times reported that “Payday loans get exemptions in Senate bill”. No surprise there. That was/is par for the course. Just a few comments on the subject:In a payday loan, you receive an immediate cash loan against your employment paycheck. The rate, according to the Times, is generally around 400%. But if you count late fees and rollover fees, the rate is about 600%. Who borrows under these conditions is clear: the absolutely, totally desperate. The Times said that payday lenders charge “exorbitant fees for low income consumers with little financial sophistication.” But that is The Times maligning the poor. I’ll match the financial knowledge of any payday borrower against any Madoff “investor” any day. It is just that the poor are desperate. They have no option, no choice. So they yield.The Times made it sound like one senator, Bob Corker of Tennessee, was the culprit behind the exemption. Don’t you believe that spin. Everyone was involved. Dodd of sophisticated Connec…

The Meaning of “System” in Systemic Risk – Part 1: Blair’s Morality Play

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Michael Foot, the British Labor leader, died past Wednesday at the age of 96. Gordon Brown half-praised him as a “genuine British radical [who] possessed a powerful sense of community”.

Reading the obituaries, I came upon this picture of him with a young protégé.



Yep, that’s Tony Blair on the left. The year was 1982. You know the rest. He could have been a contender. He could have had class.

How did an intelligent, socially active and presumably well-intentioned young man become “Yo Blair”, the disgraced politician of late – a moral “elephant man”, disfigured by the charges of deceit and war crimes?

Blair was not a politician of Berlusconi or even Sarkozy mold. These latter men are hacks, with no sense of community or continuity. For them, politics is an escapade. You can see this in their lack of social decorum: giving finger, spewing obscenities. They are recruited to advance private agendas, and nothing else.

Tony Blair had élan. He came from a tradition of active political involvement…

Felix Salmon: Your Dyed-in-the-Wool Credit Default Swaps Enthusiast

Every smart guy has to have a blind spot.

Felix Salmon -- whom I usually find myself nodding vigorously in agreement with -- is an ardent credit default swaps supporter. In a recent post, he uses Greece's recent successful bond sale as a way to trot out his favorite hobbyhorse. Why did the 10-year issue go off so well? Wait for it ... credit default swaps! His take:
A liquid CDS market is a great way of enabling countries to access the primary markets even when the secondary markets are full of uncertainty and turmoil.The commenters below his short post are understandably angry and baffled, as Salmon doesn't quite explain how the CDS market played savior to beleaguered Greece. So I'll take a stab here: (1) Greece was beset by uncertainty and turmoil. (2) There wasn't enough trading in its existing bonds to give potential investors confidence about what the "correct" credit-risk spread should be for the bonds it was selling, thus threatening to push up yields de…

Why Barney Frank Tied His Tongue In Knots Over Fannie and Freddie

Barney Frank got caught in an interesting bit of backpedaling and sidestepping this week on mortgage giants Fannie Mae and Freddie Mac after he suggested that, as the Washington Post worded it, "investors who have lent money to the two firms or bought their mortgage-backed securities could one day suffer losses."

In other words, he tried to make the case that Fannie and Freddie don't enjoy implicit U.S. government support, as investors have been assuming for a long time.

This created predictable consternation. Later Frank executed a cute little spin move and sought to clarify: His position, he said, "does not prevent the Treasury from treating the debt of Fannie and Freddie in the manner that it believes best supports the important goal of stabilizing the financial system." So Congress won't try to interfere with the folks at Treasury as they infuse billions of dollars ($100 billion so far, the Post tells us) into the tottering agencies.

Got that? Here's w…