Category Archives: Federal Reserve

Goldman “Partner” Hedging Circumvents Intent of Pay Reforms

While I don’t want to overdo the criticism of Wall Street pay practices (on second thought, I am not sure such a thing is possible), I’d be remiss if I neglected to highlight a very good job of analysis and reporting by Eric Dash of the New York Times (and Footnoted.org) on this topic.

The Times has been picking apart a partnership that Goldman preserved after it went public in 1999 and is the vehicle that holds stock options and shares allotted to the top producers of the firm, a 475 member group. It already holds 11.2% of the firm and its share is likely to increase as options vest.

The report published tonight reveals that members of the Goldman partnership would routinely hedge their Goldman exposures. That defeats the purpose of share grants and equity linked pay.

Floyd Norris Makes Bizarre Comparison to 1983 to Put Smiley Face on Job Outlook

Ben Bernanke was talking up the economy yet again yesterday, and it appears Floyd Norris got the same memo.

I must digress a tad by giving The Daily Capitalist’s translation of Bernanke’s remarks:

Since August when we began to flood our primary dealers in Wall Street with newly printed money the market went up because they used the money to buy financial products, including stocks. We are trying to cause price inflation because the majority of the FOMC is concerned about price deflation. If we cause price inflation then we will fool everyone into thinking that because prices are going up, such as in the stock markets, that it is real growth even though it’s just price inflation. Even better the national debt can be paid down with cheap dollars. Yields on Treasurys initially went up because the bond vigilantes aren’t stupid: they know it will cause inflation so they wanted higher yields. But, ha, ha, the Euro went into the tank because of the PIIGS and money flooded back in to the US and drove Treasury yields back down, for the time being. Screw the vigilantes. The same thing happened when we tried QE1, but as we all know, that failed and we are desperately trying again because we don’t have too many arrows left in our quiver. Hey, if it had worked, would we be doing QE2? We are desperate because if unemployment doesn’t come down, the Obama Administration will be screwed and I’ll lose my job. We are ready to do QE3 because we don’t have a clue what else to do.

Now to Norris’ truly bizarre column, in which he argues that circumstances now are very much like those of 1983, when forecasters were not optimistic about the odds of unemployment falling quickly, when lo and behold, it did.

The problem is that there are some of us who are old enough to remember 1983, like yours truly. And 1983 has about as much resemblance to today as a merely badly out of shape athlete does to one who is in the hospital and is refusing surgery (or in our case, structural change).

We Speak on BNN About Bernanke, Inflation, China

We had a wider ranging chat than usual at BNN today.

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Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs

One of my cynical buddies often remarks, “Things always look the darkest before they go completely black.”

His gallows humor comes to mind as a result of the hushed conversations inside the Beltway around GSE reform. While the shiny bright object these days in DC is health care repeal, or perhaps Egypt, in quiet corners in think tanks and trade associations the bankers and their allies are getting ready to appropriate themselves a permanent US credit card worth trillions of dollars. The dynamic that became all too familiar during the bailouts is about to repeat itself.

Barney Frank’s great moral passion is low-income housing, and that’s not an accident. The traditional alliance in financial politics since the 1950s was between liberal low-income housing advocates and Wall Street financiers. Since the 1970s, Democrats tried to balance the two sets of interests by creating consumer protections but allowing the capital markets to manage themselves. This dynamic has created a serious political problem in the last four years, because complete capitulation to the banks in the capital markets has pillaged the low-income and middle-income communities the Democrats thought they were standing up for.

It’s not that the people who made this Faustian bargain are bad so much as they are fundamentally irresponsible and childish. The breakdown of law and order in the capital markets arena has created predatory lending, and ultimately has subverted any attempt to implement new laws. Dodd-Frank not just a weak response to the crisis, but actually downright pathetic thanks to the lack of prosecution for anyone who breaks the rules set forth in the bill.

And so, we return to the reform of the GSEs.

Josh Rosner and Your Humble Blogger Discuss the Roots of the Financial Crisis on Radio Free Dylan

In addition to his weekday television show, MSNBC host Dylan Ratigan also has a regular radio/podcast. He interviewed Josh Rosner and yours truly on the origins of the financial crisis, which we both agreed started well before the housing bubble.

You can read the transcript at the site, but it has quite a few errors, and I’d recommending listening instead. Rosner is an emphatic, almost theatrical speaker, so I think you will enjoy the conversation.

Get the podcast here: http://www.dylanratigan.com/wp-content/uploads/2011/02/RFD-Ep-25-Rosner-Smith.mp3

More Evidence of Undercapitalization/Insolvency of Major Banks

Even as we and other commentators have noted the underlying weakness of major bank balance sheets, which have been propped up by asset-price-flattering super low interest rates and regulatory forbearance, we still witness the unseemly spectacle of major banks keen to leverage up again. The current ruse is raising dividends to shareholders, a move the Fed seems likely to approve. Anat Admati reminded us in the Financial Times on Wednesday that we are about to repeat the mistakes of the crisis:

Greenspan Put, aka “Be Nice to Banks”, Trumped Recognition of Housing Bubble in 2005

In an interesting bit of synchronicity, we’re getting other “how did we get there” snippets from the global financial crisis today. Bloomberg reports that the Federal Reserve actually did see that a housing bubble was underway, but stuck to its guns of measured interest rate increases. The problem is that its account is far too kind to the Fed and comes awfully close to being revisionist history:

Federal Reserve staff and policy makers identified a housing bubble in 2005, and failed to alter a predictable path of interest-rate increases to slow down the expansion of mortgage credit, transcripts from Open Market Committee meetings that year show….

The FOMC in June heard presentations from staff economists, with some raising alarms about housing markets, the transcript shows. Those warnings didn’t translate into a more aggressive policy. The committee raised the benchmark lending rate a quarter-point at that meeting and said “policy accommodation can be removed at a pace that is likely to be measured.”..

HuffPo: Fed Reverses Position, Prepared to Rein in Mortgage Abuses

I don’t want to jinx it, but the age of miracles may not be past. Huffington Post has been reporting on the split between the FDIC and other regulators on getting tough with mortgage, more specifically, securitization, abuses. The FDIC has been serious about putting serious securitization reforms in place; it launched a well-thought-out proposal […]

Fed Plans to End Tough Sanction Against Predatory Lending

Not only has the gutting of regulation made it hard to win criminal prosecutions for financial fraud, but the Fed plans to eviscerate a key sanction against predatory lending. If you somehow still had any doubts as to whose interests are really being served by banking regulators, look no further than this latest largely under […]

“Citizens call for tough regulation of residential mortgage servicers”

We just e-mailed the following message, along with a spreadsheet of signatures and messages, to Timothy Geithner, Ben Bernanke, Mary Shapiro, Sheila Bair, Ed DeMarco, and John Walsh. Thanks for your interest and involvement in curbing bad practices in the mortgage arena.

Make Yourself Heard on Mortgage Abuses

One of the most frustrating parts of the financial reform game is how powerless most of us really are, most of the time. Take this story:

Top policymakers at the Federal Reserve are fighting efforts to rein in widely reported bank abuses, sparking an inter-agency feud with the FDIC and the Treasury Department. The Fed, along with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules cracking down on banks that charge illegal fees and carry out improper foreclosures.

‘Summer’ Rerun: Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street

This post first appeared on August 24, 2008

Go Willem Buiter! The London School of Economics prof and former Bank of England and European Bank for Reconstruction and Development official has been saying for some time that the Fed suffers from “cognitive regulatory capture” and has been far too responsive to the needs of Wall Street. It’s been puzzling to watch his detailed, well argued criticisms go unnoticed, particularly when they have been offered at forums where one would think they’d be impossible to ignore (for instance, a conference co-hosted by the New York Fed where Buiter presented a pretty harsh paper on what he called the North Atlantic Financial Crisis).

Well, he finally seems to have gotten through, perhaps because he is forward enough to criticize Fed officials to their face at an event they are hosting. Or maybe it’s because the pattern of conduct he decries is so patently obvious that the key actors can no longer fool themselves.

“Summer” Rerun: Welcome Willem Buiter and Mohamed El-Erian to the Banana Republic Club!

The time has come to announce the formation of the Banana Republic Club. Membership is open, with the sole requirement being that nominees correctly discern behaviors in advanced economies that resemble those of corrupt developing countries, which for sake of convenience are referred to as banana republics. Members are eligible to receive a Carmen Miranda hat, although they are not required to wear it.

Brad DeLong has his Ancient and Hermetic Order of the Shrill. Why should he have all the fun?

“Summer” Rerun: Should the Fed Be Independent?

This post was first published on June 6, 2008

An article in today’s Wall Street Journal, “Insider Joins Critics of the Fed, Faulting Credit-Crisis Programs,” discusses at some length a recent speech by Richmond Fed president Jeffrey Lacker in which he took issue with some of the Fed’s recent financial services industry rescue efforts. The article itself failed to do justice to his speech, which was more nuanced than the usual “bailing out banks creates moral hazard” argument.

In fact, as we’ll discuss, the expanded charter of the Fed calls into question the appropriateness of its independence. It is increasingly making resource allocation decisions which are political in nature and should arguably be debated and determined in that realm.

Fed Extends Currency Swap Lines Over Eurobank Dollar Funding Concerns

The party line is everything is fine in bank land….even Eurobank land. But some recent developments suggest otherwise.

The business news on Europe has pretty much daily updates on the unfolding and linked sovereign debt/ bank solvency crisis. The officialdom insists this looming problem can be resolved but most observers think it can’t be in the absence of a fiscal union, which is a political bridge too far right now.

In a not-widely-noticed replay of pre-crisis conditions, the cost of swapping euros into dollars to the same high level observed last May, when sovereign crisis fears were at a peak.