Category Archives: Banking industry

J.D. Alt: Bank Dollars & Sovereign Spending

Why do so many people—including the authors of most economics textbooks—believe the U.S. banking system creates the U.S. dollars we earn and spend and pay our taxes with?

Huarong’s Shadow Bank Bailout: This Changes Everything

Two days ago, we learned that the Chinese government was behind the bailout earlier this year of a trust product—a type of financial product that the central government has heretofore emphatically distanced itself from. Huarong Asset Management, using a 3 billion RMB loan from the Industrial and Commercial Bank of China (ICBC), the trust product seller, was the mystery lender behind the January bailout of the Credit Equals Gold trust product, the Financial Times reported on August 31. ICBC and Huarong Asset Management are both state-owned entities.

Publish or Be Damned – Or Why Central Banks Need to Say More About The Path of Their Policy Rates

In the wake of the crisis, forward guidance has become a prominent tool of monetary policy. This column argues that central banks should go a step further, communicating to the public the internal policy debate that goes into monetary policy formation – especially regarding uncertainty. Since policy is determined contingent on a range of possible outcomes, forward guidance would become more effective by explicitly communicating how policy would respond along this uncertain path.

Hidden Bomb in Single-Family Rental Securitizations: Trigger Risk

Yield-hungry investors have been snapping up single family rental securitizations, with recent deals heavily oversubscribed. Buyers have been comforted by raging agency reviews that give the top tranches AAA grades, based on loss cushions that these scorekeepers treat as generous (a dissenting view comes from Standard & Poors, which stated that the “operational infancy” of these rental securitizations made them ineligible for a triple A rating).

However, investors appear to be overlooking a risk component that can deliver large-scale losses. We’ll call it trigger risk.

Gillian Tett’s Astonishing Defense of Bank Misconduct

I don’t know what became of the Gillian Tett who provided prescient coverage of the financial markets, and in particular the importance and danger of CDOs, from 2005 through 2008. But since she was promoted to assistant editor, the present incarnation of Gillian Tett bears perilous little resemblance to her pre-crisis version. Tett has increasingly used her hard-won brand equity to defend noxious causes, like austerity and special pleadings of the banking elite.

Today’s column, “Regulatory revenge risks scaring investors away,” is a vivid example of Tett’s professional devolution.

Yves Talks With Zephyr Teachout, Challenger to Cuomo in New York Democratic Primary

Zephyr Teachout, with her running mate Tim Wu, are running against Democratic party fixture, the State governor Andrew Cuomo, and his lieutenant governor nominee Kathy Hochul.

How Significant is the BRICS New Development Bank?

Yves here. Quite a few readers have contended that the commitment by the BRICS countries to create a developing country challenger to the World Bank represents a serious blow to the dollar hegemony.

While rising anger against the US use of its currency/banking system dominance to further geopolitical ends is well warranted, translating that into effective counter-measures is something else completely.

Pending Suit Against Countrywide’s Angelo Mozilo: Yet More Politically-Driven Selective Enforcement

Let’s be clear: we are fans of going after bank execs who bear significant responsibility for damage to borrowers and the economy, rather than just the footsoldiers. We also prefer criminal prosecutions. But in this era when the elites just don’t think of white collar crime as criminal, at least if performed by people who have big titles are large institutions, we have to highlight whatever progress we do see on the “get tough with the bad guys” front.

One deserving target is Angelo Mozilo, head of Countrywide, the biggest and most efficient subprime originator.

Bank Settlement Grade Inflation: High Bullshit to Cash Ratio in $17 Billion Bank of America Deal

Over the last year, the Administration has entered into a series of bank settlements over various types of mortgage misconduct. The sudden rush to generate headlines from misdeeds that have been covered in the media in lurid detail during and after the crisis looks an awful lot like an effort to stem continuing criticism over the abject failure to punish banks and more important, their execs for blowing up the global economy for fun and profit, particularly since the Dems are at serious risk of losing control of the Senate in the Congressional midterms.

But as much as the media dutifully amplifies the multibillion headline value of these pacts, we’ve reminded readers again and again that all of these agreements have substantial non-cash portions which are ludicrously treated as if they have the same value as cold, hard cash.

NYT’s William Cohan Blasts “Holder Doctrine” of Headfake Bank “Settlements” With No Prosecutions

Even though there is tacit acceptance, or perhaps more accurately, sullen resignation, about regulators’ failure to make serious investigations into financial firm misconduct (probes on specific issues don’t cut it), occasionally a pundit steps up to remind the public of the farce that passes for bank enforcement.

Top White Shoe Law Firms Cited as Enablers of Bank Misconduct

One of the tacit agreements among those at the very top of the power pecking order is not to criticize each other in public (with a few ritualized exceptions, like roughings up in Congressional hearings).

So while this account, from Susan Beck at Litigation Daily, might not seem all that bad, given the mind-numbing range and variety of bank misdeeds, what is critical to recognize here is the way that these top blue-chip law firms have abandoned their traditional role of helping clients stay on the right side of the knife edge of misconduct.

Benjamin Lawsky Shows Other Bank Regulators How to Do Their Jobs

It’s really easy to default to cynicism these days, since you are almost always certain to be right. And that goes double as far as bank regulators are concerned.

So that makes it even more important to call attention to exceptions to that sorry rule. One big one is the New York Superintendent of Financial Services, Benjamin Lawsky. As we’ll discuss later in this post, he’s again the subject of a top story in the Financial Times for doing what the banks treat as horrifically unwarranted behavior: punishing them for failing to live up to agreements to reform their conduct. Didn’t he get the memo that that was all theater for the rubes, and no one takes those commitments seriously?

Philip Pilkington: Taxation, Government Spending, the National Debt and MMT

The other day my friend Rohan Grey — a lawyer and one of the key organisers behind the excellent Modern Money Network (bringing Post-Keynesian economics to Columbia Law School, yes please!) — directed me to an absolutely fascinating piece of writing. It is called ‘Taxes For Revenue Are Obsolete’ and it was written in 1945 by Beardsley Ruml. Ruml was the director of the New York Federal Reserve Bank from 1937-1947 and also worked on issues of taxation at the Treasury during the war.

Regulators Punting on “Too Big to Fail” Problem of Repo, Looking to Install Yet Another Bailout Vehicle

The post-crisis era is rife with band-aid-over-gunshot-wound approaches to deep-seated weakness in the financial system. Perversely, because the authorities were able to keep the system from falling apart, albeit via a raft of overt and covert subsidies to the perps, they’ve reacted as if all that needs to be done is a series of fixes rather than more fundamental interventions. One glaring example is a critically important funding mechanism, repo, for firms that hold large inventories of securities and/or enter into derivative positions, such as major capital markets firms like Goldman, Deutsche Bank, and Barclays, as well as hedge funds. Here, the authorities have been giving way to industry demands that will assure that repo, which was bailed out in the crisis, will be bailed out again.

Does the Central Bank Control Long-Term Interest Rates? A Glance at Operation Twist

Although less prevalently talked about today many economists assume that while the central bank has control over the short-term rate of interest, the long-term rate of interest is set by the market. When Post-Keynesians make the case that when a country issues its own sovereign currency the rate of interest is controlled by the central bank and that the government never faces a financing constraint some economists deny this and point to the long-term rate of interest which they claim is under the control of the market. They say that if market participants decide to put the squeeze on the government they can raise the long-term rate of interest.