Tag Archives: banking

Bankers as Royalty

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Arianna Huffington has a very good read today about why bankers continue to get preferential treatment at the expense of Main Street. Here’s just an excerpt:

Just this week, the bankers and their lobbyists — who you might have reasonably thought would be the political equivalent of lepers in the halls of power these days — have kneecapped substantive bankruptcy reform in the Senate, helped pull the plug on a government-brokered deal with Chrysler, and tried feverishly to throw up a roadblock in the way of credit card reform in the House.

You heard me right. America’s bankers — those wonderful folks who brought us the economic meltdown — are still being treated as Beltway royalty by those in Congress.

According to Sen. Dick Durbin, the banks “are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

When it comes to reforming our financial system, we are truly through the looking glass. I mean, since when did it become “to the vanquished go the spoils”? How do the same banks that have repeatedly come to Washington over the last eight months with their hats in their hands, asking for billions to rescue them from their catastrophic mistakes, somehow still “own the place”?

But the banks continue to be rewarded for their many failures.

Debt revamps hindered by credit default swaps Dealscape

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Chrysler files bankruptcy.  Let’s be clear about who is responsible here.  It is the banks, bondholders, and Wall St. that created the derivatives and Credit Default Swap (CDS) monster.  Derivatives have already created the current economic depression (Bear Stearns, Lehman, Merrill, etc).  Now the presence of CDS’s distorts the normal workings of a market economy and prevents the proper functioning of institutions.  In times past, the threat of bankruptcy (itself a centuries-old institution) worked to make all stakeholders: labor, capital, and management work together through difficult and unforeseen times.  Now, no longer.  Now capital demands full compensation with no risk.  It demands sacrifice by all others, but not itself.  It kills the goose in order to get a larger share.

THE DEAL PIPELINE SNEAK PEEK: Credit default swaps are complicating efforts to work out bank, auto and other restructurings outside of bankruptcy.

As the holders of billions in credit default swaps against a bankruptcy of General Motors Corp. and Chrysler LLC, the automakers’ lenders have so far rejected the government negotiators’ demands to greatly reduce their claims on the car companies.

Emboldened by credit default swaps, bondholders in other restructurings have resisted efforts to reduce the amount of money they are owed or refused to accept offers to swap debt for equity in hopes of at least sweetening the deal after a bankruptcy filing. They also are fighting to reserve their right to CDS payoffs, bankruptcy experts and analysts said.

The prevalence of credit default swaps has been blamed for at least worsening the financial crisis. Now they are complicating efforts to clean up balance sheets, ease debt burdens and unwind the tangle of financial obligations between financial firms and their counterparties — critical steps in reviving the economy.

GM: Some Bondholders Want Bankruptcy – BusinessWeek

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Business Week catches up to Econproph from last month.

The barriers to getting a deal done with GM bondholders, and negotiating away enough of that debt to strike a deal and avoid a planned, government-assisted bankruptcy, remain very big, with five weeks to go before the deadline.

…And second, some of the bondholders own credit default swaps, which amount to an insurance policy against the debt and pay them in full if GM defaults. Those bondholders actually fare much better if GM goes into bankruptcy.

Using Anti-trust to remedy “too big to fail”

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Simon Johnson, along with Joseph Stiglitz, and Thomas Hoenig argued yesterday in hearings that we need to break-up “too big to fail” banks. I heartily agree.

But of course our argument, both in the Atlantic and more broadly, is not against finance per se. In fact, we’ve received some strong expressions of support from within the financial sector – just not particularly from firms that are Too Big To Fail – as well as from many in the risk-taking entrepreneurial sector. And here Thomas Hoenig – President of the Kansas City Fed, with long experience regulating, winding down, and generally overseeing banks; and very far from being a sensationalist – absolutely nailed it towards the end of yesterday’s hearing. My recollection of his exact wording is: whenever you have banks that are too big to fail, you will get oligarchs yes, he said oligarchs.

But, we need to realize more than an act of congress is needed.   Ideology, economic theory, and the lure of oligarchs can prevent enforcement of even a recently passed anti-trust law. Remember it was almost 2 decades after the Sherman Act was passed before it was really enforced.

If we start looking at anti-trust as a way to prevent “too big to fail banks” (which I whole-heartedly endorse doing), we will run into another ideological roadblock from our freshwater economic friends. In this crisis we have already encountered the freshwater economic views of New Classical & RBC macro theories. These theories started with the assumption that the macro econ is at a general equilibrium and the (surprise!) draw the conclusion that no generalized glut or similar disequilibrium is possible.

Anti-trust has been neutered since Reagan I. With the exception of the Microsoft case and some explicit price-fixing cases, anti-trust enforcement has stalled. Anything goes. Bigger is better has been the Justice dept philosophy. And the intellectual foundation for the abandonment of anti-trust has been “contestable markets” theory and game theory – the idea that no market power will be exercised for fear of encouraging new entrants. It’s a theory that holds that 2 or 3 firms will engage in the same degree of competition that a plethora of small and medium firms will. In much the same way that macro became infatuated with elegant DGE models regardless of their empirical emptiness or uselessness, oligopoly and monopoly theory in IO has become enamoured of elegant game theory formulations that offer clever expressions of intriguing hypothetical situations, but they offer little empirical content, testability, or practical policy guidance. Just as macro needs to go back and re-learn some of Keynes’ (and Fischer and Wicksell) messy, inelegant insights into real economies, IO will need to re-discover structure, conduct, and performance.

As long as contestable markets and similar “the free market is self-regulating and self-limiting” ideology persists in Anti-trust division, even a new bill from Congress won’t help.

Krugman: Make Banking Boring

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If the real economy, the economy of making goods and services that improve people’s lives is to recover, we need to make banking boring again.  We need to focus on how to create goods, services, productive processes and real businesses.  These means giving up the gin, poker, and roulette games of high finance.  It will take real reform, but I am not optimistic of the chances for real reform.  (see here for why)  Today, Paul Krugman writes:

Much of the seeming success of the financial industry has now been revealed as an illusion. (Citigroup stock has lost more than 90 percent of its value since Mr. Weill congratulated himself.) Worse yet, the collapse of the financial house of cards has wreaked havoc with the rest of the economy, with world trade and industrial output actually falling faster than they did in the Great Depression. And the catastrophe has led to calls for much more regulation of the financial industry.

But my sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.

Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.

via Op-Ed Columnist – Making Banking Boring – NYTimes.com.

The Geithner-Summers Plan: Let the games begin

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In economics, “games” are not about recreation and fun.  Instead, “gaming” a system is figuring out how to get around the intent and profit by out-smarting the rules.  It looks like the Geithner-Summers plan to bailout the banks and get rid of their “toxic assets” is ripe for gaming. From Jeff Sachs of Columbia Univ via Huffingtion Post and the Calculated Risk:

Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1). In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

via Jeffrey Sachs: The Geithner-Summers Plan is Even Worse Than We Thought.

“Ersatz Capitalism”, a.k.a. Crony Capitalism, aka Lemon Socialism, aka Obama Plan for Banks

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Joseph Stiglitz (Nobel economist) writes in the NY Times (registration may be req’d) how the the Obama/Geithner plan is bad for taxpayers and ordinary citizens.  This is not real capitalism folks, it’s gamed capitalism for the oligarchs.

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time. Continue reading →

Why GM will almost certainly go bankrupt.

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Right now, for GM to avoid a bankruptcy filing, it has to get concessions or “sacrifice” from the “stakeholders”.  In plain terms this means the union and the bondholders.  The union has already stepped up to the plate. It has sacrificed and offered additional sacrifice contingent on the bondholders.  So far, though, the bondholders haven’t agreed to anything. It is the bondholders who are blocking a “restructuring”.  Ultimately, the bondholders will force the company into bankruptcy.    Why?

To understand why, we need to look at the negotiation process. There are thousands of GM bondholders: some large, some small, some individuals, some banks, some are bondfunds like PIMCO, and some pension funds.  But while there may be thousands (perhaps even millions) of seperate bondholders, the vast majority have no voice in the negotiations.  Instead, there is a “bondholders’ committee”.  Who is on the committee?  The “experts” and the large bondholders: primarily banks and bondfunds.  These banks and bond funds presume to speak for all bondholders. But their interests are not in line with all bondholders.  We know that there are very large number of outstanding Credit Default Swaps (CDS) contracts on GM.  So who likely holds the CDS’s?  The very same large banks and bond funds that are negotiating.  So, in effect, if GM goes BK, then the bondfunds/big banks are hedged and get full payment via the CDS.  If they agree to a restructuring, they get less than full payout.  So there’s no chance they’ll agree.  Of course, the little bondholders (like Joe Retiree with his $10,000 of GM bonds) loses.  He’s not hedged and he has no real voice on the committee.  The little guy gets no voice until after the committee approves sending a tender offer.  Not likely to happen.

This is doubly true since AIG, the likely writer of many of those CDS’s, continues to get full bailout from the gov.

The only chance of avoiding BK for GM is if the Obama administration either:  makes a credible threat to stop bailing out AIG  –OR– the administration decides to make CDS’s null and void.  Neither is likely.

Why GM could still go bankrupt: Banks & AIG are the problem

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GM has a problem.  It’s not the cars or the union.  GM needs to get it’s costs down as required by the govt loan terms.   The union has agreed to it’s share of the restructuring.  Waggoner is now gone.  What’s left and what’s blocking GM’s turn-around are the the banks and bondholders.  They refuse to take a “haircut” to re-structure GM’s capital structure and debt costs.  Why?

Because the big banks and bondfunds have already insured themselves against GM default (bankruptcy).  So heads they get paid, and tails they get paid.  The only way they don’t get paid fully is if they agree to a restructure now.

Ahh, but you say, isn’t AIG, the “insurer” of these bonds through it’s credit default swaps already kaput itself?  Yes, but The Treasury has shown that it will make good 100% on AIG’s CDS.

GM (and all of it’s employees, dealers, and communities) is being held hostage by the banks and bondholders until the US govt pays full ransom to them.

Why, oh why, oh why won’t the govt just declare Credit default swaps null and void?

Why GM’s CEO is out, but no bank CEO is gone

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Yesterday the Obama admin forced GM CEO Rick Waggoner to resign as a condition of continued support for GM’s restructuring.  Yet, the administration has not yet demanded any of the banks change management (except AIG & Fannie last Sept), despite the banks using 18-20 times as much bailout money.

Several folks have asked me why? Why the double-standard?  The answer is that in the last 30 years, the banking industry has captured Washington.  Our Treasury Dept officials are ex-bankers and when done in DC they return to banking. The leading economic advisors (Larry Summers now, Bob Rubin and Hank Paulson in past) are either bankers or have long career ties to banking.   This is not a good thing.

Simon Johnson, ex-IMF chief economist, has written analysis of the problem that, while long, is very worthwhile read. He calls the financial industry’s capture of our government’s policy a Quiet Coup.

I have some key excerpts below the fold, but it’s worth checking out the whole article. Continue reading →