Category Archives: Credit markets

Wisconsin’s Walker Joins Government Asset Giveaway Club (and is Rahm Soon to Follow?)

Mike Konczal (thanks to ed at ginandtacos) reported earlier today on the latest release of a movie coming to states and cities all over the US, namely the sale of state and local government assets to alleviate pressures on strained budgets.

For those new to this concept, the term of art is the anodyne “infrastructure sales” and the company that more or less invented this lucrative business is Macquarie Bank of Australia (known down under as “the millionaires factory”), although US firms clearly intend to exploit the once in a lifetime opportunity presented by widespread state and municipal budget distress and downgrades.

The problem, of course, is that these deals put important public resources paid for by taxes (or even worse, financed by bonds and thus potentially not even yet fully paid for) in the hands of private investors. They then earn their returns by charging user fees of various sorts. The public must rely on the new owners for reinvestment and maintenance, and depending on how the deal is negotiated, may have ceded control as far as fee increases are concerned. This is tantamount to selling the family china only to have to rent it back in order to eat dinner.

Haldane Unto the Breach

We remarked before that attempts to nobble Mervyn King would soon bring other UK bank reformers out of the woodwork, and we have a confirming sighting today, via a puzzled tweet from @EconOfContempt: Strange op-ed by Andrew Haldane in the FT. No one is really pushing the argument that he’s trying to shoot down EoC […]

Further Discussion of Krugman on Mervyn King, Greenspan, and Bernanke

Paul Krugman was kind enough to link to me with respect to a Guardian article pointing to his criticism of the fiscal stance, and arguably more important, the political role that the Bank of England governor Mervyn King is taking. However, Krugman said I was in error in claiming he never criticized Greenspan for compromising Fed independence.

As an aside, I’m taking King’s side a bit more than I might otherwise. Yes, I agree fully with Krugman that austerity is a bad idea in the UK and pretty much anywhere still in a hangover after the global financial crisis. But there seems to be a lot of opportunism in the broadsides against King. He is the only central banker that has stood firm against the bad practices of the major dealer banks. And his dim view is reportedly widely shared among Bank of England staff. My sense (which UK readers confirm) is that the piling on seems unduly aggressive, and looks to be an effort to discredit King in order to weaken him (and as much as possible, the Bank) as a reformer.

I’m still going to quibble a bit. The NC remark in question about Krugman was: “And he’s said nothing about the “political” Greenspan and Bernanke.”

Bernanke Blames the Global Financial Crisis on China

They must put something in the water at the Fed, certainly the Board of Governors and the New York Fed. Everyone there, or at least pretty much everyone who gets presented to the media, seems to have an advanced form of mental illness, namely, an pronounced inability to admit error. While many in public life suffer from this particular affliction, it appears pervasive at the Fed. Examples abound including an overt ones like an article attempting to bolster the party line that no one, and hence certainly not the central bank, could have seen the housing bubble coming, or subtler ones, like a long paper on the shadow banking system that I did not bother to shred because doing it right would have tried reader patience Among other things, it endeavored to present the shadow banking system as virtuous (a necessary position since the Fed bailed it out) because it was all tied to securtization and hence credit intermediation. That framing conveniently omits the role of credit default swaps and how they multiplied the worst credit risks well beyond real economy exposure levels and concentrated them in highly geared financial firms.

Another example of the “it is never the Fed’s fault” disease reared its ugly head in the context of the G20 meetings.

Quelle Surprise! Cursory Foreclosure Exam Produces Expected Whitewash of Servicer Abuses

It is really annoying when people, particularly those in positions of power, can’t even be bothered to take the trouble to lie well.

As we noted back in November, in a post titled, “Foreclosure Task Force: Worse Than Stress Tests?“, the officialdom was embarking on yet another hollow exercise in oversight:

Felix Salmon reports on a conversation with departing assistant Treasury Secretary Michael Barr on newly-commenced reviews of the practices of bank servicers.

Barr’s patter might sound convincing to the uninformed. An “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”! Promises to hold miscreants accountable! Banks required to fix what’s broken!

Felix was skeptical, noting that the reviews were effectively a “physician, heal thyself” approach to a part of the banking business that has proven to be unable to change behavior…

In addition, as Felix pointed out, if the exams were to uncover issues that might pose systems risk, the Treasury is certain to reason to minimize them…

This “review” is clearly a Potemkin exercise, yet another stress test-type charade, in which the facade of a serious investigation is used to sell the message that all is well in the banking industry.

Why Liberals Are Lame

The chattering classes of the left are encouraged by the spectacle of 14 Wisconsin state senators having the intestinal fortitude to deny the governor a quorum for a budget vote that includes provisions to strip most state employees of virtually all of their collective bargaining rights. They were in turn emboldened by large scale demonstrations in the capitol, which seemed to get their momentum from the fact that students, rather than taking the day off when teachers called in sick so they could protest, turned out in large numbers to support them.

Don’t underestimate the ability of the Democrats to trade this opportunity away. All the defecting Senators are asking for is to slow down the process and negotiate the bill. Sounds reasonable, right?

As someone who been party to deal-making, the problem with being reasonable and measured is that that only works with fair-minded and/or experienced opponents. Being non-negotiable is not only terribly effective (you throw a tantrum and then make only token concessions to let the other side save a teeny bit of face), it also takes comparatively little in the way of bargaining skills.

The right wing, for the most part, has made being unreasonable and non-negotiable part of its branding. The left, peculiarly, has not adapted. And the result is that it too often winds up ceding way more ground than it needs to.

Many readers will point out that this ineffectiveness serves as useful protective cover, particularly with the Obama Administration. It has repeatedly sought to have its cake and eat it too, by appealing to as much as possible of the traditional Democratic base (which they figure they can abuse, since it has nowhere to go) while also playing up to corporate backers. The true state of play has reached the point that even purveyors of leading edge conventional wisdom like Jeffrey Sachs are now willing to say that we have two center-right parties in the US.

But this, while true, misses an underlying pathology.

“Project Merlin” keeps on giving

Well, it was obvious that this bullet point from the Merlin agreement: implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC). was a […]

The 7 Things Really Wrong with the Treasury’s GSE Reform Plan

As readers no doubt know, the Treasury Department released its overdue plan for reform of the Fannie and Freddie, otherwise known as GSEs (for “government sponsored enterprise”) last Friday. We were surprised that some normally astute commentators, such as Mike Konczal and Felix Salmon, were taken in by this thin and misleading document. As banking expert Chris Whalen said by e-mail, “The proposal is completely disingenuous. Read 180 degrees opposite what it says.”

What is particularly striking is it is not very difficult to difficult to see through the stage management. Throughout the document, the Treasury calls its proposal a “plan” when it is anything but. Putting some stakes in the ground and then offering three mutually exclusive alternatives and no timetable for resolution is not a plan.

The reason for this failure to put forward a real proposal is that Treasury is trying to present itself as a fair broker of a politically fraught process. But that’s bunk. The outcome, unless the public wakes up to this new effort at looting, is already clear.

The fix is just about in.

Our Response to the Center for American Progress Objection to Our Post on Its GSE Reform Proposal

Readers have hopefully had the opportunity to read “The Center for American Progress Objects to Our Critique of Its GSE Reform Plan”, which contained an e-mail by David Min of the Center for American Progress presenting its bones of contention.

While we appreciate that the CAP has gone to the trouble to communicate with us directly, we are not persuaded by its arguments.

We’ll recap the e-mail and then address the issues individually:

1. You need to have some form of government guarantee to have a mortgage product that is fair to middle class consumers (his writing is a bit confused, at one point he uses “no” when he means “yes”, but this is the drift of his gist).

2. We’ve mistated who would eat “catastrophic risk” under the CAP scheme, since the Catastrophic Risk Fund and the new mortgage insurer investors would take losses first

3. Not all “banks” are behind or support the CAP proposal

4. This plan is the best option for the public and less lucrative to the financial services industry than a “privatization” model

Let’s dispatch these arguments in order.

Irish Bond Haircuts: Too Little, Too Late

The justification for Lenihan’s ruinous guarantee of both bank deposits and senior bondholders was partly a legal one. Irish law, like UK law, makes it hard to favour depositors ahead of bondholders; so FDIC-style resolutions aren’t an option. One might object that laws can be changed by sovereign governments, but the other justification was political: […]

Why are Half of the FCIC Interviews Being Withheld?

The FCIC has made a great show of being transparent, but if you are going to make that your signature, you can’t engage in halfway measures. Lambert Strether, in an e-mail titled “A data conversion effort that shows FCIC’s “Resource Library” is farcically bad and obfuscatory” noted:

Obviously, any independent evaluation of the material is not at all a priority with these guys. Yes, they’ve made it easy enough to DISTRIBUTE, and no doubt there will be an iPhone app any day now. Yay. But as far as making it easy to EVALUATE, which takes data you can interchange and manipulate and search, everything they have done makes that harder. Every single thing.

More tooth gnashing from Lambert here and here.

Another mystery is why so many interviews are being withheld.