Yearly Archives: 2011

Bank of America Likely to Settle Case with NY Fed, Pimco, Blackrock for $8.5 Billion

I must confess I am surprised that Bank of America is close to settling a litigation threat by a group of investors headed by the New York Fed, Pimco, and Blackrock, which was discussed in the media quite a bit last fall for a reported $8.5 billion.

While most threatened litigation is settled out of court, this case in theory had to overcome procedural hurdles for any suit to be filed, and no group of investors had ever surmounted this impediment. Chris Whalen similarly noted that BofA could simply tell the investors to “pound sand.” However, we had noted that if it moved forward, that this type of case, a representation and warranties case, is always settled because they are too expensive to fight in court.

Capital and liquidity: whose problem?

Jon Daniellsson of the LSE has spotted something odd about the Basel III debate on capital levels…

“Somalia has slightly higher standards than Wyoming and Nevada” (Corporate Secrecy Edition)

We’ve taken an interest in tax havens thanks to Nicholas Shaxson’s book Treasure Islands, which is a must read. Although the book gives a historical account of the rise of what he calls “offshore”, which includes forms of tax avoidance that extend beyond the use of secrecy jurisdictions, which gives the UK the leading role, Shaxson discusses is that the US is the now the biggest tax haven in the world. He discussed briefly the role of Wyoming, which has incorporation rules that are so lax that it is trivial to hide the owners of Wyoming domiciled companies.

An article in Reuters fleshes out this topic in more detail. I encourage you to read it in full. Key extracts:

On Eurozone budgetary constraints

Cross-posted from Credit Writedowns “Slovenia becomes the new problem child of the EU”. This is the headline today in Handelsblatt, a leading German financial newspaper. Below is a translation of that article and a few comments: Slovenia was long regarded as a model country. But now it is becoming a new problem case for the […]

Links 6/28/11

Philip Pilkington: Economic Fetishism – Three Objects of Perverse Intellectual Pleasure

By Philip Pilkington, a journalist and writer based in Dublin, Ireland

Watch out, I have a large, very large fur, with which I could cover you up entirely, and I have a mind to catch you in it as in a net.
– Leopold von Sacher-Masoch

Many aspects of contemporary economic theory certainly seem to have their origins in the mythic and the moral rather than in the realm of the rational. But while this seems to be an accurate description of the system as a whole, it does not seem quite able to account for certain aspects of this system which appear to be rather obsessive in the minds of its adherents.

These obsessions, or ‘fetishes’, can be explained in like terms, that is: compared to certain primitive rituals and superstitions. To do so we will first have to form a better understanding of the fetish itself; an Enlightenment concept that has a long and interesting history.

The specific fetishes we will explore will be the most important today: the government, inflation and gold. All these phenomena are interconnected in neoclassical economic theory (yes, even gold, or at least the ghost thereof), however, they tend to lead their own individual existence outside of the Grand Neoclassical System itself. In and of themselves they are, for economists and economic commentators, fetishes that can be worshipped in dark rooms away from the great hall. They are like fragments of the main theory that adherents smuggle out of the temple and obsess over in their own private shrines.

Comments on the Second Greek Bailout

Cross-posted from Credit Writedowns Edward here. Yves is away so I have a few guest posts up the next few days. Here’s one on Greece. I will be on CNBC at 1:30ET to talk about Greece. The situation has evolved since I last talked about the sovereign debt crisis on CNBC in May. Greece is […]

DeLong Illustrates Why We Should Be Scared of Economists

Several readers sent me links to a Brad DeLong post which they took to be a rebuttal to a takedown I did of a recent Ezra Klein piece.

Since DeLong did not link to or mention my post, I doubt his piece had anything to do with mine. But his post is noteworthy for a completely different reason: it illustrates how economists have refused to learn much, if anything, from the crisis.

Links 6/27/11

Tom Adams: How Treasury’s “Kick the Can” Strategy Exacerbates Mortgage Market Woes (Mortgage Insurer Edition)

By Tom Adams, an attorney and former monoline executive

Barron’s published a detailed take down of the mortgage insurance industry weekend that highlights how Treasury’s approach to the mortgage mess will ultimately make matters worse. As the article points out, in the fairly likely scenario that mortgage claims exceed the amount of capital the insurers have available to pay them, the parties taking the biggest hit will be Fannie Mae and Freddie Mac. That means taxpayers are probably on the hook for more bailouts.

Despite having questionable capital reserves for the future claims they face, mortgage insurers are still continuing to write significant insurance business. Why would anybody want to continue to buy insurance from such shaky companies?

The continuing business of the mortgage insurers help shed light on the fact that virtually the entire mortgage industry is run through zombie companies that ought to have expired years ago.

Satyajit Das: Default Semantics – Credit Default Swaps & Greece

Yves here. Despite the technical focus of this post, the underlying issue, of whether Greek CDS will pay out as protection buyers expected, is very important. As Das discussed in an earlier post, in the first real test of the CDS market (the Delphi bankruptcy in 2005), credit defaults swaps had required delivery of bonds to get the insurance payout on the contract . Since the volume of CDS on Delphi was over five times the amount of bonds outstanding, that would have meant a lot of people bought dud insurance. That was recognized to have the potential to have very bad outcomes for the market. So, on the fly, the International Swaps and Derivatives Association implemented “protocols” by which any two counterparties, by mutual consent, substitute cash settlement for physical delivery. In other words, they came up with a big fix that was nowhere in the contracts. Ain’t it nice to be a big financial player?

Efforts to extend Greek debt may require similar efforts at fixes, and if they aren’t fully effective, it could have a chilling effect on the CDS market (not that we think that is a bad outcome, mind you). But even with all the powers that be out to preserve the product and avoid roiling the markets, the conflicting objectives of various players may render that outcome not so easy to achieve.

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming September 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

The European Union’s linguistic gymnastics, redefining default as “restructuring” or “re-profiling” and the structure of any final deal on Greek debt has “real” implications for the arcane workings of the CDS market.

In the film Casablanca, Rick (Humphrey Bogart) tells Captain Renault (Claude Rains) that he came to the city because of his health, to take the waters. Informed that they are in the desert, Rick ironically replies that he was “misinformed”. Investors and banks that purchased Greek sovereign credit default swap (“CDS”) to protect themselves against the risk of default may find that they have been similarly “misinformed”.

Links 6/26/11

Quelle Surprise! World’s Richest Profited From the Crisis!

Much ink has been spilled about the increase of wealth at the top. This graphic comes from the Guardian (hat tip Merrill K, click to enlarge):