Yearly Archives: 2011

Satyajit Das: Controlling Sovereign CDS Trading – The Dysfunctional Debate

By Satyajit Das, 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)

In an opinion piece entitled “Hedging bans risk pushing up debt costs” published on 9 March 2011 in the Financial Times, Conrad Voldstad, the chief executive of the International Swaps and Derivatives Association (“ISDA”) and formerly a senior derivatives banker with JP Morgan and Merrill Lynch, made the case against the EU ban on “naked” credit default swap (“CDS”) contracts on sovereigns.

Just as “patriotism is the last refuge of a scoundrel”, arguments citing market efficiency and the benefits of speculation seem to be the first resort of dealers.

Guest Post: The 1785 Struggle Over Concentrated Banking Power

By William Hogeland, the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History who blogs at http://www.williamhogeland.com. Cross posted from New Deal 2.0

How a farmer, a weaver, and a backwoods prophet took on the money interest in founding-era politics — and won.

One of the better-known episodes in American founding finance occurred in 1791, when Alexander Hamilton, the first Treasury Secretary, proposed forming the United States’ first central bank. James Madison of Virginia, serving in the House of Representatives, objected. Prefiguring the Republican lawmakers who recently pledged not to introduce legislation without first citing the constitutional provision enabling it, Madison asserted that because the Constitution doesn’t grant Congress a specific power to form banks, a national bank would be unconstitutional.

Hamilton famously responded by arguing that if a power to do something is constitutional, then powers necessary to doing it must be constitutional too, even when not enumerated. If Congress determines that exercising its power to do anything “necessary and proper” in the discharge of its duties calls for forming a bank, it can form a bank. Any unconstitutionality, for Hamilton, would require a specific prohibition against banks (”Congress shall make no law…,” etc.).

So that’s typically how history students and readers get introduced to a key founding moment in American public finance: ideologically, intellectually and legally, in the context of a constitutional dispute between the lions of ratification Hamilton and Madison, two thirds of the “Publius” who authored “The Federalist,” now coming at odds in the fledgling republic. Anyone hoping to find anything related to how money and credit might flow to ordinary Americans will be disappointed.

Why is a Powerful Faux Liberal UK Think Tank Using a Tarnished Pol and Recycled US Republican Talking Points to Fight Breaking Up Banks?

By Richard Smith

The publication of a pamphlet from Demos, a British fauxgressive think-tank (unconnected with the American think-tank of the same name), is the latest visible move in a not-always-public epic battle between banks and regulators about bank reform. While Americans may assume that the time for regulatory intervention has passed, the preliminary findings of the Independent Banking Commission, a UK body whose output will put an important stake in the ground in the UK, is to be released on April 11th. Whatever mix of legislation, regulation and inaction is deemed appropriate by the politicians will follow the publication of the final IBC report in September.

Given the importance of this report, it should come as no surprise that the banks, or rather the bank that has most at stake, Barclays, is using every available channel to convey dire warnings about how terrible reining in the banks would be, particularly since the banks are really hardly at fault at all.

A curious centerpiece of this effort is this 100 page abortion of a pamphlet, penned by a fallen Labour MP (the usual expense account improprieties), Kitty Ussher.

The Elizabeth Warren Rorschach Test

The spectacle of a bunch of Republican Congressmen spending over two hours pillorying Elizabeth Warren, following weeks of death of a thousand unkind and generally offbase cuts coverage in the Wall Street Journal has led a lot of folks from what passes for the left, and even not so left, to ride in to her defense. A partial list includes Paul Krugman, Simon Johnson, Joe Nocera, Mike Konczal, and Adam Levitin.

The last time I can recall the Journal becoming quite so unhinged about an individual was over Eliot Spitzer. And since Warren seems pretty unlikely to be found to have similar personal failings, the specter of the right throwing what look to be ineffective punches at her makes for a peculiar spectacle. What is the real aim behind this drama?

Links 3/21/11

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Clearing Up Some Misperceptions on the Mortgage Modification/Second Lien Debate

A fairly long discussion, by blogosphere standards, has broken out over second liens. For those comparatively new to the topic, a recap is in order.

Second liens are either second mortgages or home equity lines of credit on homes. The bone of contention is that mortgage servicers, which also happen to units within the biggest US banks, have not been playing nicely at all with stressed borrowers out of an interest in preserving the value of their parent banks’ second liens. And the reason for that is that writing down second liens to anything within hailing distance of reality, given how badly underwater a lot of borrowers in the US are, would blow a very big hole in the equity of major banks and force a revival of the TARP. That is one of the very last things Team Obama would like to see happen, hence its eagerness to promote various extend and pretend policies.

The mortgage settlement proposal includes a provision that would call for second liens to be reduced pro-rata with the firsts. That, as Gretchen Morgenson noted, and Jesse Eisinger amplified, is contrary to long-standing principles of priority of creditor payments. Felix Salmon then argued that the banks were within their rights to try to extract some value from the seconds, which led to further rebuttals…

Quelle Surprise! Geithner Gutting Dodd Frank via Intent to Exempt Foreign Exchange

I have mixed feelings about an article by Robert Kuttner, “Blowing a Hole in Dodd-Frank.” On the one hand, he’s found an important example of the Administration’s lack of interest in meaningful financial reforms, which is its intent to exempt foreign exchange derivatives from the implementation of Dodd-Frank. But his discussion of what this matters at critical junctures confuses foreign exchange cash market trading with derivatives and thus leaves the piece open to criticism.

Kuttner warns that Geithner has signaled strongly his preference to exempt foreign exchange from Dodd Frank implementation:

Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole.

Links Spring Equinox

The Stigmatization of the Unemployed

One thing I have never understood in America is the way that people who lose their jobs become pariahs in the job market. We’ve now had a spate of commentary on the fact that official unemployment figures are looking a tad less dreadful by dint of the fact that increasing numbers of the long term unemployed have dropped out of the job market entirely. Even the conservative Washington Post woke up last week, Rip Van Winkle like, to take note of the growing number of long-term unemployed. Bizarrely, or perhaps as a fit illustration of the spirit of the day, the article was titled: “Hidden workforce challenges domestic economic recovery.” In other words, they are Bad People because if the economy ever picks up, they might come out of the woodwork and start looking for jobs!

Implosion of Foreclosure Mill Leaves 100,000 Cases in Limbo

Florida, as the ground zero of the foreclosure crisis, is arguably further along in seeing how some of the uglier aspects of this mess will work themselves out. The foreclosure mill abuses were so bad that even a not terribly venturesome AG, Bill McCollum, went after them, and his Republican successor, Pam Bondi, is reported to be keen to keep the heat up on mortgage arena miscreants.

As the cases against the big foreclosure mills have moved forward, clients have exited, and that is generally a death knell for a law practice. Normally, when law firms get in trouble, partners who have books of business not involved in the scandal plus senior associates capable of handling client relationships grab as much of the old business as possible and reconstitute under another name. But the foreclosure mills were very high leverage operations, with very few partners and much of the work handled by paralegals or junior attorneys. So there is no one to pick up the pieces when a firm like that falls apart.

Links 3/19/11

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Is Nuclear Power Worth the Risk?

One of the interesting features during the Fukushima reactor crisis were the fistfights that broke out in comments between the defenders of nuclear power and the opponents. The boosters argued that the worst case scenario problems were overblown, both in terms of estimation of the odds of occurrence and the likely consequences. The critics contended that nuclear power was not economical ex massive subsidies, that there was no “safe” method of waste disposal, and that nuclear plants were always subject to corners-cutting, both in design and operation, so the ongoing hazards were greater than they appeared.

Reader Crocodile Chuck passed along a story from the Bulletin of Atomic Scientists, “The Lessons of Fukushima“, by anthropologist Hugh Gusterson. Here is the key section:

On the Clouded Title Mess and the Difficulties of Cleaning It Up

Abigail Field’s latest piece at Daily Finance is a great one-stop summary of the most thorny problem underlying the securitization mess: how can we clean up title given how badly it has been screwed up? As we and many others have noted, integrity of property ownership is an essential foundation of development; this is straight Hernando de Soto gospel. And as our Richard Smith has pointed out, the various fixes to get around this mess run roughshod over well established court procedures that date back to the 1677 Statute of Frauds. Why was it necessary to implement those rules? Because without them, wealthy people could use the court system to steal property. Sound familiar?

One thing that it is important to stress: that the abuses to established real estate transfer and recording processes were not inherent to the securitization model. I’m not a fan of securitization but the sad reality is that no one is prepared to go back to the more costly in terms of equity required, model of on-balance sheet banking (it would result in a shrinkage of credit that every respectable economist would recommend against and hence will never happen). But no one (except the FDIC, which keeps being ignored) is thinking seriously enough about what it would take to make securitization safer.

Class, Social and Traditional Media, and the Mortgage Mess

I’m going to tell one on myself, and since I suspect my reflexes are atypical, I suggest you watch this video by a realtor, Leigh Brown, before reading the balance of the post: