Category Archives: Politics

Is the Proposed NYSE-Deutsche Börse Merger All It’s Cracked Up to Be?

The financial media is duly falling in line and giving a thumbs up to the proposed merger between the New York Stock Exchange and Deutsche Börse. Mayor Bloomberg contends it is both good for New York City and provides customers better service in an era of increasingly global equity trading. Industry analysts approved. Not surprisingly, stocks of other exchanges are up based on takeover speculation.

Your truly is wary about concentrations of power in the financial arena, and consolidation of stock exchanges has the potential to go in that direction. One critic of the deal was former Goldman Sachs co-chairman John Whitehead. Admittedly, some of his objections sound quaint, echoing the hand wringing of the 1980s when the Japanese acquired trophy assets such as the Rockefeller Center. From Bloomberg:

“I speak out rarely, and this is one time when I can’t hold myself back,”

GSE Headfake: Yet More Looting Branded as “Reform”

As time goes on, the various Ministries of Truth just get better and better at their stock in trade. We’ve gone from artful obfuscation like “extraordinary rendition”, and “Public Private Investment Partnerships” to stress free “stress tests” (particularly the Eurozone version) designed to get bank stocks up and credit default swap spreads down, to even grosser debasement of language. What passes for the left has for the most part been dragged so far to the right that the use of once well understood terms like “liberal” and “progressive” virtually call for definition. And the word “reform” has virtually been turned on its head. Financial services reform was so weak as to be the equivalent of a jaywalking ticket; health care reform was a Trojan horse for even large subsidies to Big Pharma and the health care insurers. But GSE reform takes NewSpeak one step further by turning the “reform” concept on its head and using the label to describe an effort to institutionalize even bigger subsidies to the mortgage industrial complex.

While Team Obama appears to have backed down from the trial balloon floated by the Center for American Progress (note that press reports give another rationale) and is expected to offer a menu of choices for “reform” in its overdue white paper on Friday, don’t be fooled. The proposals coming from the lobbyists expected to have real influence on which ideas get the green light are virtually without exception serving up such a narrow menu of choices as to constitute unanimity. We offered our take as of the release of the CAP report; a subsequent proposal by Moody’s Mark Zandi (see details here) is more of the same.

It’s as if a population suffering from a toxic reaction to mustard was now offered options ranging from Dijon to pommery to spicy brown as meaningful improvements.

George Osborne Channels Bob Diamond; that won’t End Well

Here’s Bob, on the 12th of January, thumbing his nose at the Treasury Select Committee: The new boss of Barclays refused to bow to demands by the MPs that he waives his 2010 bonus, which could be as much as £8m. He said he had forgone his bonus in 2008 and 2009 and would decide […]

UK About to Implement Massive Tax Break for Banks; Is the US Far Behind? (Updated)

The UK is about to implement a tax code change that amounts to a massive subsidy for large corporations, most of all big banks. The remarkable bit is that this is taking place when the UK is projected to fall short of its budget targets, at a time when the government professes to take that sort of thing seriously. Although we don’t hew to the logic of austerity in the wake of a financial crisis (the better course of action is to encourage debt renegotiations/writedowns, and offset the contractionary impact with fiscal stimulus), a big tax break is contrary to the official policy stance.

For those in the US who have steered clear of the budget drama on the other side of the pond, a story from from the Financial Times just over a week ago will give you a sense of the state of play:

George Osborne says he has little option but to push on with the harshest public spending cuts in living memory because a reversal would alarm the bond markets and plunge Britain into “financial turmoil”.

The New York Times’ Half-Hearted Hatchet Job on the Bank of England’s Mervyn King

By Richard Smith, a UK based capital markets IT specialist, and Yves Smith

It’s always a fraught business when a foreign paper hazards into parsing UK politics. But one has to wonder at the unseemly spectacle of the Grey Lady giving such a distorted reading on Mervyn King, the governor of the Bank of England.

Were you to rely on the New York Times story on Monday, “A Crisis of Faith in Britain’s Central Banker,” you would think that this central banker is under assault on all fronts. While most of the article is on his fiscal/monetary policy stance, where King is taking a great deal of criticism, it also leads readers to believe he is isolated on bank reform as well. These are the first and third paragraphs of the piece:

The Specious Logic of Wall Street Pay

It’s remarkable how Masters of the Universe, the new financial elite first identified by Tom Wolfe in 1986, remember nothing and regret nothing. And why should they? Their position remains remarkably secure 25 years later.

We see the “Who us, take responsibility for our actions?” stance in full view courtesy one of their most effective spokesman, Steve Eckhaus, an attorney who has negotiated many big ticket Wall Street compensation contracts. From the Wall Street Journal:

“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”..

In general, he said his clients are “pure as the driven snow” and doing work that supports the economy and justifies their pay….

“You have to know what the profits are” to know what someone should make, said Mr. Eckhaus, noting Wall Street’s top performers usually gobble up 80% of the bonus pool. “Those who are responsible for profits should share in the profits in a way that rewards them.””

This is the usual “heads I win, tails you lose” logic. The rationale for bulging pay packets is that the producers created it, therefore they deserved their cut. But Eckhaus says any bad events are due only to bad luck. Sorry to tell you, but only narcissists and their agents take credit for good stuff and lay the blame on everyone else. Unfortunately, we breed for that in Corporate America, it happens to be a very effective career strategy in large organizations.

Alexander Gloy: What a taifun in Vietnam taught me about the Euro crisis

By Alexander Gloy, CIO of Lighthouse Investment Management

As I was traveling through Vietnam in the mid-nineties our bus drove through an area visited by a taifun. The road was running on a slightly elevated dam, so initially there was no obstacle to continue the journey. Looking out of the window there was water on both sides as far as the eye could see. Eventually the water rose to overflow the road, but the bus kept going.

A Volkswagen transporter, after having passed the bus in a moment of exuberance, was soon found in the ditch with water up to the roof – there was no way to tell where the road ended and the ditch began. The water rose further and started entering the bus through the front door. Still, the driver kept going. I was amazed at how little damage occurred despite the vast flooding. The flood waters slowly receded towards the ocean. Uninhibited by any dams, the water had enough space to expand.

At one point, the water had washed out the elevated road, and a gaping hole forced even our bus to stop. I thought this to be the end of the trip. Miraculously, a bunch of locals showed up, and, with the help of a bulldozer, quickly filled the hole with large rocks. All passengers were asked to de-board as the bus slowly wiggled across the rocks. And we were ready to resume our trip. Closer to the coast we saw the effects of wind damage; at least every third home had been cut in half by a fallen palm tree. Pigs and chicken ran around disoriented, as their barn had probably disintegrated. Despite the damage there was no feeling of this being a catastrophic event; the houses would probably be repaired (they were covered with palm leaves) within a few days, and life would get back to normal.

Compare this to what happens in our “developed” countries when house prices decline by 10 or 20 per cent: the wheels of the entire financial system come off.

I am not suggesting we all live in thatch covered huts. But building higher and higher dams with flimsy sandbags just increases the pressure (and leads to much greater damage when the dam finally breaks).

Look at how Euro-zone politicians and central bankers are increasing the risks by building higher and higher dams with flimsy sand bags.

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.

Call Your Attorney General Tomorrow, February 3, to Call For Tough Penalties for Foreclosure Fraud

A number of national consumer groups are organizing calls to state attorney generals to stiffen their collective spines. As you may recall, the 50 state attorney general investigation into mortgage and foreclosure abuses started with the usual fanfare and promises of tough action and has been trying to beat a quiet retreat since them.

The AG leading the probe, Tom Miller of Iowa, made a public promise in December to put bank
executives in jail for the crimes they’ve committed against the American people. Last week, he backtracked almost completely, and is now claiming the matter is inherently civil, not criminal. The laws certainly haven’t changed since last year, only the party line has.

A Whole Bunch of Prominent Economists Backs the Use of Capital Controls

A letter signed by over 250 economists opposing restrictions on capital controls is more of a shot across the bow than it might appear to be. The letter with signatories appears here, and it includes highly respected trade and development economists like Ricardo Hausmann, Dani Rodrik, Joe Stiglitz, and Arvind Subramanian; we are reproducing the text below: