Category Archives: Credit markets

Gillian Tett on Losses at Central Banks

Is the old Gillian Tett back? The one-time Financial Times capital market editor has taken to writing less frequently (understandable now that she has head the US operation) and less intrepidly (much of her commentary was prescient, particularly on my pet topic, collateralized debt obligations).

But her latest piece sounds a wee warning, and it’s one we’ve commented on as well, namely, that central banks are vulnerable to losses, and just like the banks they mind, may need a rescue by taxpayers if the err badly enough.

Her object lesson is the Swiss National Bank. Unlike most central banks, the SNB is quite transparent, and publishes periodic statements of the value of its assets on a mark to market basis. The usually conservative SNB made a uncharacteristically aggressive move last year, intervening in currency markets in an effort to suppress the value of its levitating franc.

Even though the locals applauded the move, the central bank was outgunned by currency traders and threw in the towel mid year. As the swissie continued to rise, the bank showed losses at the end of 2010 of SFr 21 billion. The only saving grace was that the gains on the bank’s hefty gold positions exceeded the damage. But that does not reassure its shareholders, who have become accustomed to annual payments out of bank “profits”, and are concerned that the profits this year will be too meager for them to enjoy their customary level of income.

Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated

American leadership is reliable in one respect: it consistently undershoots my already low expectations.

Or maybe I have it backwards because I keep forgetting who the authorities are really serving, and it clearly isn’t you and me. As we will discuss below, the latest scam is that the banking regulators are finalizing a mortgage “breakdown” settlement, and they’ve evidently decided to let the industry off the hook for a mere $20 billion.

In Saudi Arabia, the royal family has just offered $36 billion worth of concessions in an effort to placate an increasingly unruly public (this appears to be in addition to pledges to spend $400 billion on education, health care, and infrastructure by 2014). This is in a country with a population just under 26 million, including over 5 million non-nationals who presumably aren’t eligible.

Now you can easily pooh pooh this comparison, since Saudi Arabia is an autocratic country desperately throwing around money to buy off dissidents, right? But this is the kind of money a leadership group will shell out when pressed to defend an existing order. And the US was very quick to hand out funds right, left, and center during the financial crisis. It’s continuing to do so now in less obvious ways, by continued life support for the mortgage market through Fannie and Freddie, the Fed’s super low interest rates and QE2, and non-monetary measures, most important its refusal to make any sort of serious investigation into what happened in the crisis and prosecute key actors.

Daniel Pennell: MERS Counsel Calls Me

By Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS

I wonder if solar flares or something in the ether is prompting officials under attack to have unusually open conversations with people in the opposition. We’ve just had Governor Walker speak to “David Koch”, and I had a mini version of the same experience with MERS’ general counsel, except in my case, I was the recipient of the phone call. But the underlying assumptions of MERS and the Wisconsin executive were similar, in that each is confident of support from powerful allies.

Given that I am a vocal MERS critic, though testimony I have given, opinion pieces I have written and the work on legislation I have done over the last year decrying the legal standing and operational sloppiness of MERS, I was more than a little taken aback to get a call from Richard Anderson of the MERS legal team yesterday.

Bill Fleckenstein and Dylan Ratigan Discuss Commodities and “Individually Smart, Collectively Stupid” Regulators

This is a particularly crisp and straightforward discussion between money manager Bill Fleckenstein and Dylan Ratigan about central bank actions and commodities inflation. Enjoy!

MERS Endgame Nearing? One County Seeks Over $22 Million for Unpaid Recording Fees

Plank after plank of the mortgage recording company MERS’ business model has come under attack. To date, the results do not look good for the embattled company.

MERS has repeatedly insisted that its operations are legal. It would be more accurate to say that insufficient attention was paid to legal issues when the firm was created and the permissibility of its operations were under the radar and hence in a legal grey area for many years. Now that they have been challenged in court, MERS has had to retreat from many positions it took in public. Despite its protestations that everything it did was kosher, the database firm has now retreated from one of its widespread practices, of allowing foreclosures to be made in the name of MERS, after a number of state supreme courts and Federal bankruptcy courts issued rulings to the contrary.

Not surprisingly, MERS has the look of a company in trouble.

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 […]