October 23, 2017

G-20 Ministers Aim for More Job Growth

“Growth and creating jobs remains our priority,” the statement from the finance ministers and central bank governors of the Group of 20 countries said.

It added that the governments in the organization, which collectively represent about 90 percent of the world’s economic activity, “are fully committed to taking decisive actions to return to a robust, job-rich growth path.”

Previous communiqués issued after such meetings had also indicated policy support among some member governments to focus on balancing budgets, not just spending to get out of recession. In this light, Saturday’s statement suggested the weight of policy consensus in large governments was shifting toward continued stimulus.

While not openly critical of austerity measures like the across-the-board automatic federal budget cuts in the United States, the statement suggested most governments see recovery as too weak to risk reducing spending on unemployment benefits, job training, education and other public sector outlays.

Not even Germany objected to the new wording, said a senior Treasury Department official who attended the two days of meetings in Moscow.

“The debate between growth and austerity seems to have come to an end,” the official said.

The benefits of the American pro-growth fiscal policies tapered only after the automatic cuts known as sequestration kicked in earlier this year. The efforts of the G-20 to coordinate economic policy are intended to help the world recover from the recession that began in 2007.

The officials also discussed strategies for ending central bank monetary stimulus, like the bond-buying program known as quantitative easing in the United States, without causing turmoil on financial markets.

Anton Siluanov, the finance minister of Russia, which is hosting the meeting, spoke in a final news conference about the tremor that American monetary policy is sending through emerging markets like Russia.

A suggestion last month by Ben S. Bernanke, the chairman of the Federal Reserve, that the United States economy may recover sufficiently this year to wind down the bond-buying program caused a sell-off in emerging market bonds.

With United States Treasury rates rising in response to Mr. Bernanke’s comment, investors no longer saw the benefit of taking the extra risk of putting money in government bonds issued by wobbly emerging markets like Russia.

“We had an experience where just a comment that quantitative easing could end wound up seriously affecting developing economies,” Mr. Siluanov told journalists.

The joint statement sets the stage for a G-20 summit meeting in St. Petersburg in September. It suggested that leaders including President Obama would similarly play down concerns about deficits in light of continued weakness in the global economy during an uneven recovery: demand remains weak in China and Europe while growth in the United States is anemic.

The officials discussed efforts to stimulate demand in China. Beijing has removed a floor on interest rates banks can charge, which could lower rates and encourage business activity and spending.

Article source: http://www.nytimes.com/2013/07/21/business/global/g-20-ministers-aim-for-more-job-growth.html?partner=rss&emc=rss

Herbert M. Allison Jr. Dies at 69; Led Bailout Efforts

The death was confirmed by his son Andrew, who said the cause was possibly a heart attack.

Mr. Allison, a political appointee of both President Obama and President George W. Bush, was put in charge of Fannie Mae in 2008 as part of the Bush administration’s effort to rescue it and its sister company, Freddie Mac. The two companies, both government-sponsored, are the nation’s largest mortgage finance entities, created during the Depression to help make mortgages more affordable for homeowners.

The bailout of the companies, engineered by the Treasury secretary, Henry M. Paulson Jr., was one of the most extraordinary and expensive federal interventions in American history, totaling about $180 billion. By taking over the companies and replacing their managements, the administration sought to calm Wall Street concerns that these “too big to fail” institutions would go under and take the rest of the housing market — as well as the entire economy — with them.

Mr. Allison, who at the time had only recently retired as chairman and chief executive of TIAA-CREF, the giant financial services company, replaced Daniel H. Mudd at Fannie Mae after Fannie suffered a staggering $29 billion third-quarter loss in 2008. The losses almost wiped out shareholders entirely as housing prices plummeted, leaving millions of homeowners struggling to pay mortgages that were often larger than the value of their homes. Five years later the government still controls Fannie and Freddie, which are now profitable.

After President Obama took office in 2009, he appointed Mr. Allison to the Treasury Department as assistant secretary for financial stability. Mr. Allison had supported Mr. Obama’s 2008 presidential run, even though two election cycles earlier he had run the finance committee for Senator John McCain’s 2000 presidential campaign.

As assistant secretary, Mr. Allison helped oversee the Troubled Asset Relief Program, or TARP, the banking industry bailout also created under the Bush administration and endorsed by Mr. Obama. Mr. Allison left the Treasury Department in September 2010, and about a year later the White House appointed him to conduct an independent review of government loans to energy companies after the bankruptcy of Solyndra, a solar panel company that had received government financing under the Obama administration.

In a statement on Monday night, Timothy F. Geithner, the former Treasury secretary, described Mr. Allison as “both a C.E.O. and a statesman, who served his country at a time of peril, bringing financial expertise and commercial judgment to the challenge of saving the American economy from a failing financial system.”

Herbert Monroe Allison Jr. was born on Aug. 2, 1943, in Pittsburgh and grew up on Long Island in Garden City. His father worked for the F.B.I.

Mr. Allison earned a bachelor’s degree in philosophy from Yale before earning his master’s degree in business at Stanford.

“People used to say that working for Herb was like getting an M.B.A. from Harvard,” said Steve Goldstein, who was executive vice president under Mr. Allison at TIAA-CREF, “but he’d correct them and say, ‘No, it’s like getting an M.B.A. from Stanford.’ ”

Mr. Allison also served in the Navy as an officer for four years, one of them based in Nha Trang during the war in Vietnam.

He began his financial services career at Merrill and remained with it for 28 years, working his way up to president, chief operating officer and member of the board. While at Merrill, he helped coordinate the group of banks that bailed out the hedge fund Long-Term Capital Management in 1998. That same year he oversaw large layoffs after a period of turmoil in the markets. He left in 1999 amid a leadership shake-up.

After joining TIAA-CREF (which stands for Teachers Insurance and Annuity Association-College Retirement Equities Fund), Mr. Allison oversaw its downsizing, laying off 500 of its employees, or about 8 percent of the work force. Employees called the dismissals “Herbicides.”

Mr. Allison was also the founder of a start-up called the Alliance for Lifelong Learning, a joint venture with several universities; a director of Time Warner; and a member of advisory panels at the Yale School of Management, the Stanford Graduate School of Business and the Federal Reserve Bank of New York. He was a director of the New York Stock Exchange from 2003 through 2005.

Mr. Allison wrote a book about the financial crisis in 2011, “The Megabanks Mess,” in which he argued that the nation’s largest banks should be broken up. He was working on another book at his death, his family said.

Besides his son Andrew, Mr. Allison is survived by his wife, the former Simin Nazemi; another son, John, and a younger brother, George.

Mr. Allison met his wife in Tehran, where he was working for Merrill at the time and she was a secretary to a bank managing director. Before the two could marry, however, her father insisted that Mr. Allison first learn some Persian, his son Andrew said. So Mr. Allison did, building a vocabulary of 1,000 Persian words over two weeks by reading them from flashcards.

Article source: http://www.nytimes.com/2013/07/16/business/herbert-m-allison-jr-former-merrill-president-dies-at-69.html?partner=rss&emc=rss

Economix Blog: Financial Crisis Reading List

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland, and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Andrew Ross Sorkin’s recent business-focused summer reading list leaves out books about the financial crisis to avoid naming his own best-selling “Too Big to Fail.”  This modesty is admirable, but knowledge of the crisis and policy response is essential for understanding today’s economy. The Fed’s current quantitative easing, for example, stems from the crisis, and the debates over financial regulation and housing finance reform reflect the events of the crisis and its aftermath.

Today’s Economist

Perspectives from expert contributors.

There are many worthwhile books on the crisis, with Mr. Sorkin’s volume among the essential reads.  The list below is informed by my experience at the Treasury Department, where I was assistant secretary for economic policy under Secretary Henry M. Paulson from December 2006 through the end of the Bush administration.  I worked on a variety of crisis-related issues at Treasury, many of which I detailed in an April 2009 paper, but not on the transactions related to Bear Stearns, Lehman Brothers and A.I.G. that are the focus of much crisis writing. Even so, obviously I am an interested party, and this list should be considered with that in mind.  Matthew Yglesias provided a crisis reading list from a different perspective in May 2010 and might usefully consider an update.

I think of crisis books as falling broadly into three groups: journalistic blow-by-blow accounts (what Mr. Yglesias calls “tick-tocks”); analytic assessments that sacrifice colorful details for a broader perspective; and screeds with half-baked conspiracy theories and infeasible “magic wand” policy alternatives.  On the latter set, my suggestion is to disregard books that claim that Lehman could have been saved, that losses could have been imposed on A.I.G.’s creditors or that the actions taken during the crisis were a conspiracy or undertaken to save one particular firm. Wrong, wrong, and wrong.  The comments section at the bottom of this Web page provides an outlet for frustration at that assertion.

What Happened in the Crisis

Mr. Sorkin’s “Too Big to Fail” tells what everyone said and did during the crisis, with fascinating insider details of efforts to save Lehman and other failing firms. This book won’t tell you why the crisis happened but is essential for appreciating the frantic pace and harried circumstances under which the response was formulated. Also useful is a September 2009 article in the New Yorker by James B. Stewart that focuses on the “Eight Days” of Lehman’s death throes.

In his memoir “On the Brink,” former Treasury Secretary Henry M. Paulson concludes that the efforts he led succeeded in stabilizing the financial system, even while acknowledging various hiccups. I’m far from unbiased, but I think this conclusion is right.  Policy makers faced the prospect of a financial collapse when short-term money markets locked up after Lehman’s failure, and wrapping the government’s metaphorical arms around banks averted catastrophe. No amount of positive return on the TARP investments will quell criticism of the interventions, but Mr. Paulson in his book is forthright about the trade-offs involved.

The slim “Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager” written with Keith Gessen captures the struggles of the anonymous co-author in dealing with the crisis while trying to understand and adapt to the evolving government response.  This mini-M.B.A. course of sorts gives an accessible introduction to financial markets and the securities into which mortgages were bundled.  This is the book I suggest to students looking for an introduction to Wall Street and the crisis.  “The Big Short,” Michael Lewis’s book about investors who saw the crisis coming, is enormously entertaining but narrower than “Diary.”

Causes of the Crisis

The second category of book helps readers understand the factors behind the crisis, the policy response and its aftermath. A first stop for readers is the dissenting report by three members of the Financial Crisis Inquiry Commission (Keith Hennessey, Douglas Holtz-Eakin, and William Thomas) that zeros in on the key causes of the crisis. With these 27 pages as background, the book-length treatments below provide full analysis.

Fault Lines,” by the University of Chicago professor Raghuram Rajan, is an economic tour de force that shows how economic and social factors converged to bring about the crisis. As I noted in a 2010 review, Professor Rajan explains that Americans borrowed too much, enabled by financial innovation and seemingly generous foreign lenders, with contributions from weak regulation, faulty rating agencies, out-of-control executive compensation and widening income inequality.

Roger Lowenstein’s “The End of Wall Street” mixes explanation with journalistic anecdote. The story about the former Citigroup chief executive Vikram Pandit’s discarding of expensive wine makes the book worth reading all by itself, but Mr. Lowenstein gives readers both the fun tidbits and insightful analysis.

Assessing the Full Financial Crisis Policy Response

A problem with the selections listed above is that they stop too soon, covering the period through the introduction of TARP in late 2008 but not much beyond.  Neil Irwin’s fascinating “The Alchemists: Three Central Bankers and a World on Fire” goes through 2012 but is narrowly focused on monetary policy and misses out on much of the policy action at the Treasury and White House under Presidents Bush and Obama.  Alan Blinder’s “After the Music Stopped” is comprehensive in covering the financial crisis and ensuing recession, but the analysis has a mild yet noticeable partisan flavor.

Future memoirs from Timothy Geithner and Ben Bernanke might fill in some of the gaps and eventually take their place on the list of essential crisis books.

I suspect that authors covering the broader sweep will note the remarkable continuity of crisis efforts across the two presidential administrations. Policies to stabilize the financial system included the TARP capital injections into banks, debt guarantees from the F.D.I.C. and targeted interventions into particular markets and industries by the Fed and the Treasury Department. These latter efforts stabilized money market mutual funds (including actions by the Treasury and the Fed); commercial paper markets (Fed); securitized lending (Treasury and Fed); the auto industry (Treasury); and individual entities like A.I.G., Citigroup, Bank of America, Fannie Mae and Freddie Mac (Treasury and Fed).

In a Feb. 24, 2009, address to Congress, President Obama said that he was “infuriated by the mismanagement and the results” of the assistance for struggling banks. And yet the financial rescue programs listed above were begun before Jan. 20, 2009, and continued by the Obama administration.  On top of these efforts would be added the quantitative easing purchases of Treasury bonds and mortgage-backed securities first announced by the Fed in late November 2008 and now in a third round.  The early 2009 fiscal stimulus was an Obama innovation, but its effectiveness remains the subject of considerable debate.

President Obama has received considerable criticism lately for continuing a range of Bush-era security policies.  An irony, then, is that this observation applies as well to the financial policy crisis response. As detailed in the books above, these efforts did not head off the Great Recession, but on the whole they succeeded in stabilizing the financial system and avoiding an even worse catastrophe.

Article source: http://economix.blogs.nytimes.com/2013/07/15/financial-crisis-reading-list-2/?partner=rss&emc=rss

Economix Blog: Progress on Housing Finance Reform

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland, and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Taxpayers received $66 billion of good news last Monday in the form of dividends to the Treasury from Fannie Mae and Freddie Mac as part of the compensation for the bailout of the two government-sponsored enterprises (G.S.E.’s). The bad news is that these payments reflect the fact that the two firms remain in government hands nearly five years after being taken into conservatorship in September 2008, putting taxpayers at risk in the event of another housing downturn.

A fundamental change in this situation requires Congressional action, which is always difficult in our divided political system. Even so, legislation introduced recently by a bipartisan group of eight senators led by Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, has focused renewed attention on housing finance reform.

Today’s Economist

Perspectives from expert contributors.

I was among the many people providing technical advice to the group working on the Corker-Warner proposal and think there is much to like in it.  The legislation includes the essential elements of housing finance reform: a dominant role for private capital; considerable protection for taxpayers against future bailouts; a secondary government backstop to ensure stability; competition and entry by new firms into housing finance so that no future entity is too big to fail; a clear delineation of the roles of private firms and the government; an empowered regulator to ensure that loan quality remains high for guaranteed mortgages; and support for activities related to affordable housing.

A paper I wrote with Ellen Seidman, Sarah Rosen Wartell, and Mark Zandi has a proposal similar in many respects to the Corker-Warner bill. Clicking through to the biographies of my co-authors quickly reveals that the four of us come at this issue from quite different political perspectives.  The common ground we reached in a sense mirrors that of the bipartisan group of senators in looking to move forward with reform rather than allowing Fannie and Freddie to remain effectively part of the government, which is the outcome that will obtain if no action is taken.

A key feature of the Corker-Warner proposal is the requirement that private investors must put up capital equal to 10 percent of the loans that will be guaranteed by a new government agency set up along the lines of the Federal Deposit Insurance Corporation. This provision alone goes a long way toward restoring the dominant role of private incentives and protecting taxpayers against the possibility of another costly housing bailout.  Indeed, Fannie and Freddie would have easily made it through the crisis had this been in place. The legislation further allows new firms to enter the mortgage securitization business now dominated by the two G.S.E.’s.  With enough competition, no firm in the future housing finance system will be too big to fail.

At the same time, a secondary government guarantee behind the private capital would ensure that mortgage financing is available across economic conditions, with taxpayers compensated for taking on residual housing credit risk.  This contrasts with the failed system of the past in which the government backstop was implicit but free.

The U.S. Mortgage Market

Some background might be useful for readers unfamiliar with the workings of our convoluted housing finance system. 

Originators such as banks make loans, which Fannie and Freddie then buy and bundle into mortgage-backed securities with a guarantee against losses from homeowner defaults.  The two firms then sell these securities to investors, now including the Federal Reserve as part of its quantitative easing program.  Banks and other lenders like the arrangement because they can readily sell loans to Fannie and Freddie and get cash to lend to yet again. The setup benefits home buyers through the greater availability of financing and lower interest rates as American families effectively tap into global financial markets for their mortgages.

There is a cost, however, borne by taxpayers. When the government took over the two firms in 2008, the Treasury Department promised to provide cash as needed to keep Fannie and Freddie afloat, effectively ensuring that the two firms’ $5 trillion in obligations will be honored (in addition to guarantees, that huge sum includes debt issued by the G.S.E.’s to finance their own purchases of mortgage-backed securities). Investors had long believed that the government would support the firms in a pinch, a belief that gave the G.S.E.’s an advantage over other financial firms.

Actions taken during the crisis turned the previously implicit government guarantee into an explicit one, at a cost to taxpayers that peaked at $189 billion at the end of 2012. American families at least got something from the bailout of Fannie and Freddie, as mortgages were available throughout the crisis even as other parts of credit markets experienced strains. The firms have paid some $132 billion in dividends to the government, but these funds do not get credited as paying down the taxpayer assistance. Moreover, the firms are not allowed to build up reserves with which to cover any potential future losses. Instead, the firms’ profits are swept to the Treasury, where they provide a temptation to Congress and the president as a means by which to pay for new government spending.

Fannie and Freddie today are linchpins of the nation’s housing finance system, providing guarantees on two-thirds of the mortgages originated in 2012.  Together with agencies like the Federal Housing Administration, the government stands behind nearly 90 percent of new mortgages. Taxpayers are thus extraordinarily exposed to future housing-related losses.

Many who follow Fannie and Freddie had long warned that their problems posed a risk to the financial system. The imperative of housing finance reform is to devise a new system that protects taxpayers against another costly bailout while ensuring that American families have access to mortgages on reasonable terms.

Challenges With Reform

A key challenge in moving forward with reform is that bringing in private investors who take losses ahead of taxpayers will translate into higher mortgage interest rates, reflecting the compensation demanded by private investors to take on housing credit risk. Indeed, in the past, proponents of reform were sometimes derided as being “anti-housing” for supposedly wishing for higher interest rates.  The crisis has mostly silenced this criticism, with broad agreement that reform must involve greater private capital to take losses ahead of any potential government backstop.

The Corker-Warner proposal requires investors to put at risk funds equal to 10 percent of the value of the mortgages included in mortgage-backed securities to be guaranteed by the government. The total losses of Fannie and Freddie during the crisis were equal to about 4 percent of the firms’ combined assets. The firms were shielded by homeowner down payments and by private mortgage insurance before they had to make good on their guaranteed securities, but the housing price collapse of more than 30 percent combined with concentrations of Fannie and Freddie’s risk in key bubble states such as Nevada combined to generate losses that wiped out the firms’ thin capital cushions of less than 1 percent of their assets. 

With a 10 percent capital requirement, the firms would easily have made it through the worst housing cycle in recent memory.  To be sure, a 10 percent capital requirement is not the same as the 100 percent in a fully private system.  But a fully private system is neither feasible nor stable. By the standards of the recent housing debacle, the Corker-Warner legislation provides considerable protection for taxpayers.

Still, any government guarantee gives rise to moral hazard, since investors will naturally seek to obtain government backing on risky mortgages that provide a high private upside if the loan works out, and a loss for taxpayers if it does not. The Corker-Warner legislation creates an empowered regulator with a mandate to ensure that underwriting standards remain high. This is helpful, but not enough by itself — after all, regulators failed to prevent the previous bout of poor lending behavior.

An important insight, however, is that requiring substantial private capital to take losses ahead of the government guarantee helps to mitigate the moral hazard.  This is because the investors with their funds at stake have a powerful incentive to enforce prudent underwriting.  The presence of first-loss private capital thus brings market discipline to bear by aligning private interests with those of the government. This is exactly the point made by the Federal Reserve chairman, Ben S. Bernanke, in an April 2007 speech on financial regulation. The Corker-Warner proposal involves sufficient private capital to generate a meaningful incentive for prudence.

A further critique of the Corker-Warner approach is that the government inevitably will charge too little for its guarantee. Indeed, this would be in keeping with other government insurance offerings, such as the federal flood insurance program.  In the first place, setting a price for the guarantee will be better than leaving it implicit and unpriced, as in a system that is notionally private until the crisis actually hits. Moreover, as reform brings in private capital and the government share of the housing market recedes from its current 90 percent, market-based mechanisms like auctions can be used to set the price of the government backstop.

Moving Forward

The policy debate over housing finance reform is a microcosm of the larger debate about the role of the government in society.   A government guarantee lends stability and ensures that taxpayers can get mortgages across economic conditions, but puts taxpayers at risk in the event of the next housing downturn. The Corker-Warner proposal seeks a balance by ensuring that considerable private capital is at risk ahead of the guarantee.

Other possible outcomes for housing finance reform are to maintain the status quo in which Fannie and Freddie are controlled by the government and there is no private capital, or to move to a private system in which government involvement is limited to the small share of loans made with the involvement of agencies such as the Federal Housing Administration that work with targeted groups of borrowers.

Both of these alternatives are flawed. The current government-dominated system exposes taxpayers to needless risk and stifles the possibility of beneficial competition and innovation.  Not moving forward with reform would lock in this unfortunate situation.

A move to a fully private system seems desirable, but it is difficult to see this as a stable outcome or one that actually protects taxpayers in the event of an inevitable future crisis.  This is because the government will feel compelled to intervene in the face of any future housing market collapse, regardless of promises that the system was private. To do otherwise would be to countenance an economic catastrophe.  A housing finance system that is notionally private would inadvertently recreate the key flaw of the past with an implicit, and uncompensated, guarantee.

Moreover, it is a political reality that legislation for a fully private system has scant chances.  Delay in moving forward with a pragmatic reform maintains the current system in which there is a dominant government role with a full guarantee and no private capital. Holding out for the unattainable but theoretically perfect housing finance system thus cements in place the nationalized outcome least favored by proponents of a market-based approach.

Article source: http://economix.blogs.nytimes.com/2013/07/08/progress-on-housing-finance-reform/?partner=rss&emc=rss

High & Low Finance: Wielding Derivatives as a Tool for Deceit

But they are often weapons of mass deception.

For some derivatives, a desire for deception is the only reason they exist. That deception can allow those who own derivatives to evade taxes or accounting rules. It can allow activity that might otherwise be illegal, were it not called a derivative, or that would face regulation if it were labeled what it truly is.

Sometimes, banks use derivatives they create to help their clients deceive the public. Other times, they enable the banks to deceive those clients.

The latest revelation of deception by derivative came in Italian government documents leaked this week to two European newspapers, La Repubblica and The Financial Times. The Financial Times said it appeared that Italy had used derivatives in the 1990s to allow it to make its budget deficit seem smaller, thus enabling it to qualify for admission to the euro zone. The report said it appeared those derivatives, now restructured, might be exposing Italy to a loss of 8 billion euros ($10.4 billion).

La Repubblica noted that the director general of the Italian Treasury Department at the time, Mario Draghi, is now running the European Central Bank.

Italy’s economy minister, Fabrizio Saccomanni, said it was “absolutely baseless” to say that the country used derivatives to lie its way into the euro zone. It was simply hedging against market risks. As for the current situation, he said, “There’s been no material damage to our public finances.” He drew a distinction between realized losses and those based on market values that could change.

What seems to have happened in Italy is similar to something that we already know Greece did. Rather than borrow money — which would increase the reported budget deficit — the country entered into a derivatives contract that called for the banks to make large upfront payments in return for larger payments later from the government.

And how did that differ from a loan? Functionally, not very much, in all probability. But if you call something a derivative you can often get away with keeping it off your balance sheet — or putting it on the balance sheet in a misleading way. If The Financial Times report is right, the deal made Italy’s reported budget deficit smaller just when the country needed that to join the euro zone.

There is some evidence that Europe knew what was going on and chose to ignore it. Joining the euro was seen as more of a political event than an economic one, a symbol of European unity.

The effect of the funny accounting was similar to that of a student cheating on college entrance exams. The student may get into a university where he or she cannot compete, just as Italy and Greece find themselves in a currency bloc where their economies are at a significant disadvantage.

But while uncompetitive students can drop out, or be expelled, the euro zone rules provide that no country can leave. That fact, perhaps more than anything else, accounts for the persistence of the euro zone crisis.

Such deception by derivative is hardly new. Enron was a pioneer. It used derivatives called “prepaid forward” contracts to hide debt in a way that made corporate cash flow appear better, something the company thought was necessary to impress the bond rating agencies.

Responding to claims that his bank and Citibank had made “disguised loans” to Enron, a JPMorgan Chase executive told a Senate hearing in 2002 that “the prepaid forwards were undoubtedly financing, as all contracts are that involve prepayment features, but every financing is not a loan.” He said the bank had properly accounted for them, but “the manner in which Enron accounted for them” was of no concern to the bank. It was, instead, “a matter for Enron and its management and auditors.”

Article source: http://www.nytimes.com/2013/06/28/business/deception-by-derivative.html?partner=rss&emc=rss

DealBook: Japan’s Largest Bank to Pay $250 Million Fine for Iran Deals

New York State authorities are poised to impose a $250 million fine on the Bank of Tokyo-Mitsubishi UFJ over claims that the bank, Japan’s largest by assets, transferred illicit funds on behalf of Iran and other countries blacklisted from doing business in the United States, according to people briefed on the case.

The bank, which is expected to settle the case on Thursday with New York’s financial regulator, Benjamin M. Lawsky, was accused of routing 28,000 payments worth about $100 billion through its New York branches. To avoid detection, Mr. Lawsky is expected to contend, the bank stripped information from the wire transfers that could have exposed the identity of the Iranian entities.

The bank approved the illegal transfers over at least a five-year span, ending in 2007, according to the people briefed on the case.

In addition to Iran, the bank is thought to have had dealings with Sudan and Myanmar. At the time, those countries were all operating under United States sanctions.

A spokesman for the Bank of Tokyo Mitsubishi declined to comment. The bank, according to the people briefed on the case, is thought to have voluntarily alerted regulators to its activity. It also has moved to bolster its internal controls in the years since.

Still, the $250 million penalty dwarfs an earlier settlement that the bank reached with an arm of the Treasury Department. Last year, the agency imposed an $8.6 million fine on the bank over its violations of United States sanctions.

The action on Thursday is Mr. Lawsky’s latest attack on foreign banks that enable sanctioned countries like Iran to tap into the American financial system. In August, Mr. Lawsky struck a $340 million pact with the British bank Standard Chartered, which he accused of transferring hundreds of billions of dollars in tainted money for Iran and lying to regulators.

The case became a source of tension between Mr. Lawsky and federal authorities, who were slower to act against the bank. In December, federal regulators and prosecutors reached their own deal with the bank.

It is unclear whether Mr. Lawsky’s action on Thursday will aggravate those tensions, given that he imposed a fine nearly 30-times that of federal authorities.

Mr. Lawsky’s aggressive style – and rare decision to act alone – inspired comparisons to Eliot L. Spitzer. Mr. Spitzer, during his tenure as New York’s attorney general, similarly received praise and criticism for his tough tactics on Wall Street and his tendency to muscle aside federal authorities.

A spokesman for Mr. Lawsky’s agency, the New York State Department of Financial Services, declined to comment.

The action against the Japanese bank caps a busy week for Mr. Lawsky. On Tuesday, the New York regulator took aim at the bank consulting industry, leveling a $10 million fine and one-year ban against Deloitte, one of the nation’s most prominent consultants. Mr. Lawsky accused Deloitte of watering down recommendations it made about fixing Standard Chartered’s dealings with Iran. It did so, he said, “based primarily on Standard Chartered’s objection.”

In the case against the Bank of Tokyo-Mitsubishi, Mr. Lawsky is expected to order the bank to hire an outside consultant to examine its operations. The consultant, the people briefed on the case said, will have to abide by a new set of standards that Mr. Lawsky unveiled this week.

Article source: http://dealbook.nytimes.com/2013/06/20/worlds-largest-bank-to-pay-250-million-fine-for-iran-deals/?partner=rss&emc=rss

Economix Blog: Jacob Lew’s Signature, Squiggle-Free

7:50 p.m. | Updated

Those awaiting a new, Slinky-like John Hancock to grace their dollar bills may be disappointed. On Tuesday, the Treasury Department released a copy of Secretary Jacob Lew’s signature, to appear on the bottom of newly printed dollar bills as early as the fall, and Mr. Lew’s famous loops are gone.

Treasury Secretary Jacob J. Lew's signature as it will appear on currency.United States Treasury Treasury Secretary Jacob J. Lew’s signature as it will appear on currency.

The new signature is illegible, but it looks like a traditional signature. It is starkly different from previous copies of his signature that surfaced from his days as White House chief of staff and director of the Office of Management and Budget:

The White House

That earlier signature – a roller-coastering series of (usually) seven connected loops, resembling a long series of zeros or O’s – had attracted widespread mockery and armchair psychoanalysis from the media and Twitterverse, and had been compared to a crazy straw, the icing on a Hostess cupcake, and Charlie Brown’s hair. The signature even made appearances on “The Daily Show” and “The Colbert Report.”

Asked about his opinion of the new signature on Tuesday afternoon, John Oliver, who is the host of “The Daily Show” this summer, said he hadn’t seen it yet. “What is it now, a series of squares?” he said. “Has he moved onto a new form of geometry? Or does it look like a real adult’s signature?”

The Treasury Department declined to provide a comment from Mr. Lew about the evolution of his signature, but said he did not go through any particular training to get his signature up to snuff.

A spokeswoman explained that once a new secretary is sworn in, there is an 18-week process during which the Bureau of Engraving and Printing produces a new currency. That process includes getting the signature (the secretary sat down and signed a couple of sheets of paper in a binder 10 times, one of which was ultimately chosen to be used on every new bill that is printed); approving the signature for technical reproduction; and getting the printing plates made.

The first bills to feature Mr. Lew’s signature will be five-dollar bills that will roll off the presses later this summer, and appear in circulation as early as the fall. The Federal Reserve, which controls the money supply, determines exactly when the bills appear in circulation.

It’s common for both Treasury secretaries and treasurers, who also sign currency, to “practice and refine” their signatures, the spokeswoman said. Mr. Lew’s predecessor, Timothy F. Geithner, had also acknowledged in an interview on “Marketplace” that his signature had evolved. When the interviewer, Kai Ryssdal, said he preferred the old version of the signature, Mr. Geithner said, “I think on the dollar bill I had to write something where people could read my name.”

“I didn’t try for elegance. I tried for clarity,” he added.

One Web site offers a collection of all the Treasury secretary signatures that have appeared on American currency.

Article source: http://economix.blogs.nytimes.com/2013/06/18/jacob-lews-signature-squiggle-free/?partner=rss&emc=rss

Stocks Fall Sharply

Wall Street fell sharply Wednesday, with industrial and financial sectors leading the market down more than 1 percent.

The three major benchmarks — the Standard Poor’s 500-stock index, the Dow Jones industrial average and the Nasdaq composite — were all down about 1.1 percent in afternoon trading. The Dow was just above the 15,000-point level.

A private sector jobs report released earlier showed companies picked up the pace of hiring in May, though job growth remained sluggish. The report came ahead of the crucial nonfarm payrolls report on Friday.

“The market is overlooking this disappointing number, and putting greater emphasis on the nonfarm payrolls for better clues on what the Fed is going to do,” said Andrew Wilkinson, chief economic strategist at Miller Tabak Company.

A separate report showed a gauge of United States labor-related costs fell in the first quarter by the largest amount in four years, although the reading appeared distorted by a shift in employee compensation during the prior period to avoid a tax hike.

Trading has been volatile over the last few weeks amid a slew of economic reports and comments from Fed officials that have hinted on when the Fed may start reducing its stimulus efforts, which have powered this year’s stock market rally.

The market is expected to continue to be volatile this week, with intraday swings of more than 1 percent in either direction during a single trading session.

The American International Group said on Tuesday that a proposed $8.5 billion settlement between Bank of America and investors of Countrywide Financial mortgage-backed securities was not big enough. A.I.G. shares gained 1.2 percent.

The Treasury Department said it would begin another round of sales of the General Motors stock it acquired during the government’s bailout of the auto sector. The stock was down 2.1 percent.

European shares fell on concerns that the United States might begin to taper economic stimulus measures, with the FTSE 100 index ending 2.1 percent lower.

Comments late on Tuesday from two senior Federal Reserve officials highlighted divisions over the future of the central bank’s stimulus program.

Richard Fisher, president of the Federal Reserve Bank of Dallas, and Esther George, president of the Federal Reserve Bank of Kansas City — both long-term critics of the bond-buying program — reiterated their concerns over the risks of waiting too long to cut it back.

“The markets are hanging on every word of the central bankers in Europe and the U.S.,” said Richard Griffiths, a Berkeley Futures associate director.

Japan’s Nikkei share average sagged to a two-month low on Wednesday, as Prime Minister Shinzo Abe pledged to bolster incomes and attract foreign businesses, but did not mention a proposal to encourage Japan’s public funds to seek higher returns by investing more in riskier assets like equities.

“Investor expectations were for more specific growth policies and the disappointment has only exacerbated a trend for a correction in Japan’s stock market,” said Lee Hardman, currency analyst for Bank of Tokyo-Mitsubishi UFJ.

Since the Nikkei index rose to a five-and-a-half-year high on May 23, up more than 50 percent this year, doubts about the effectiveness of Mr. Abe’s economic reforms and the Bank of Japan’s stimulus efforts have led to a steady erosion of the gains.

Article source: http://www.nytimes.com/2013/06/06/business/daily-stock-market-activity.html?partner=rss&emc=rss

A $4.6 Billion Profit for Freddie Mac

Freddie said it would pay a dividend of $7 billion to the Treasury Department next month and requested no additional federal aid for the fourth consecutive quarter.

The earnings from January through March compared with net income of $577 million in the first quarter of 2012.

The government rescued Freddie and its larger sibling Fannie Mae in 2008 during the financial crisis after both incurred huge losses on risky mortgages. The companies received loans totaling about $170 billion, the costliest bailout of the crisis. So far, the companies have repaid a combined $62.2 billion.

The companies are benefiting from a housing recovery that began a year ago. Record-low mortgage rates and slow but steady job growth have helped bring buyers back to the market. Home sales and construction have increased. And home prices are rising at the fastest pace in six years.

For Fannie and Freddie, a better housing market means fewer delinquent loans on their books. The improvement has also allowed the companies to charge mortgage lenders higher fees to guarantee the loans.

Under a federal policy adopted last summer, Fannie and Freddie must turn over any quarterly profits to the government.

Freddie earned $11 billion last year and paid $7.2 billion in dividends to the Treasury. It requested no government aid in the second, third and fourth quarters last year.

Fannie reported last month that it earned $17.2 billion last year and said it expected to stay profitable for “the foreseeable future.” It paid $11.6 billion in dividends to the Treasury in 2012. Last year was also Fannie’s first since its government takeover in which it asked for no federal aid.

Fannie and Freddie do not directly make loans. Rather, they buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.

Article source: http://www.nytimes.com/2013/05/09/business/a-4-6-billion-profit-for-freddie-mac.html?partner=rss&emc=rss

Today’s Economists: Simon Johnson and John E. Parsons: The Treasury’s Mistaken View on Too Big to Fail

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management.
John E. Parsons is a senior lecturer in the finance group at the Sloan School and co-author of the blog bettingthebusiness.com.

At this point, no one will stick up for too-big-to-fail financial institutions. Even Tim Pawlenty, the newly appointed head of the Financial Services Roundtable, a group that represents big banks, contends that we must end the phenomenon of too big to fail. No financial institution should be so big — or so systemically important for any reason — that its failure would jeopardize the macroeconomy.

Today’s Economist

Perspectives from expert contributors.

The question of the day has therefore become whether too big to fail is already dead and buried or whether, like some resilient and unsavory zombie, it still stalks within our financial system.

In a speech on April 18, Mary Miller, Treasury under secretary for domestic finance, made the case that the Dodd-Frank reform legislation has substantially ended the problem of too-big-to-fail financial institutions. This is a well-composed speech that everyone should read — and then compare with the broadly parallel messages coming from parts of the financial sector (e.g., see the presentation of the Clearing House, an association of banks).

The original written version of Ms. Miller’s speech did not contain footnotes or precise references to the sources on which she drew, but the Treasury Department was kind enough to share this information with us and has now posted a version of the speech with links to sources; this is also most helpful. As a result, we are able to evaluate Ms. Miller’s arguments in some detail.

Ms. Miller’s argument rests on eight main points. On each there is a serious problem with her logic or her reading of the data, or both. Taken together, we find her position to be completely unpersuasive. Unfortunately, the problem of too big to fail still lurks.

First, Ms. Miller makes a great deal (at the top of Page 2) out of legal changes under Dodd-Frank that make it harder to bail out financial institutions. She is right on the formal changes but misses the essence of the issue. The question is not whether the government can swear up and down not to provide bailouts or some other form of support, but rather whether such commitments are credible. If banks are so big or so linked to the rest of the economy that their distress will bring unacceptable costs, then any government or central bank will be tempted to provide support, for example by seeking new legislation that authorizes emergency bailouts.

Ms. Miller stresses the lack of potential future “taxpayer support” — and that is an appropriate point for a Treasury official to make. But sophisticated modern central bankers have many ways to provide help to troubled financial institutions (e.g., through various kinds of asset-purchase programs), while complying with the letter of Dodd-Frank. To assert otherwise is to create the wrong impression.

Second, Ms. Miller claims that “some evidence actually suggests the opposite conclusion — that larger banks’ funding costs are higher than those of their smaller peers” (see Page 2). The Treasury’s evidence on this point is embarrassingly naïve; it compares funding costs irrespective of the source (see Page 11). A small bank funded mostly with insured deposits will have a lower funding cost than a bank that relies more on wholesale funding. But this difference does not speak to the issue of too-big-to-fail implicit subsidies.

The right comparison is what large banks are paying compared with what they would pay if they did not have implicit government backing.

Banks used to be good at measuring this kind of implicit government support, when it provided an unfair competitive advantage to Fannie Mae and Freddie Mac. Now that they (the private megabanks) are the recipients of this largess, they have become much hazier on methodology — asserting that everything anyone tries to measure is awfully complicated.

In a speech at the International Monetary Fund last week, Jeremy Stein, a Federal Reserve governor, acknowledged that too big to fail is not over: “We’re not yet at a point where we should be satisfied,” he said in the third paragraph. The Fed chairman, Ben Bernanke, has recently made the same point. It’s interesting that Treasury should want to confront the Fed on this relatively technical point. This is exactly the kind of issue on which the Fed usually has better information and analysis, and in the current iteration the Fed also seems to have a distinct edge.

Third, Ms. Miller insists that “the evidence on both sides of the argument is mixed and complicated” because of the many factors besides too big to fail that could be the cause of the funding advantage. But isn’t this why we elevate Treasury appointees to such a high position in the pantheon of our officials, because they are supposed to be able to sort out complex issues?

Where is the Office of Financial Research, a unit created within Treasury by Dodd-Frank, on this issue? In her reluctance to take sides or state a clear position, Ms. Miller appears to be ducking (Pages 3-4). This is a disappointing performance by an experienced and well-informed official.

In fact, there is a long list of studies that find various ways to take into account all of the complicating factors and isolate the too-big-to-fail subsidy. None of these are cited by Ms. Miller, but taken together, the conclusion is clear — the implicit subsidy is large and still with us.

One example is a study by Profs. Viral Acharya of New York University, Deniz Anginer of Virginia Tech and A. Joseph Warburton of Syracuse (released on Jan. 1) that measures the funding cost advantage provided by implicit government support to large financial institutions, while controlling for other factors. Credit spreads were lower (because of implicit guarantees) by approximately 28 basis points on average over the 1990-2010 period — with a peak of more than 120 basis points in 2009 (when having access to this subsidy really mattered). In 2010, the last year of the study, the implicit subsidy this provided to the largest banks was worth nearly $100 billion. The authors conclude, “Passage of Dodd-Frank did not eliminate expectations of government support.”

If Ms. Miller contests the methodology or results of this (or any other) study or regards the numbers as insufficiently current, she should request that the Office of Financial Research, the Fed or any other competent government body devise better methodology on the latest available data (or even use the real-time data available to supervisors). The United States government has many smart people, the best available data and the undoubted ability to conduct sensible econometric work (with full disclosure). Five years after the onset of the worst financial crisis since the Great Depression, we should expect nothing less from the Treasury Department.

Fourth, Ms. Miller is very taken with the fact that credit rating agencies have reduced the “uplift” they determine is due to government support for megabanks — i.e., they assign a lower probability of default (and losses for creditors) because there is some form of official backstop. And she makes a great deal of Moody’s saying that it may eliminate uplift altogether. We can debate for a long time about the value of credit-rating-agency opinions, but the striking fact about Ms. Miller’s reference to Moody’s is that it exactly contradicts her on the current situation (see Moody’s report). Moody’s still has a significant too-big-to-fail uplift for big banks.

Fifth, Ms. Miller is adamant that if too big to fail were a problem, we would see low credit-default-swap spreads across the board (for megabanks). But the figure to which she refers (see Page 10) is not persuasive. Look at the pattern of credit-default-swap spreads at the height of the crisis, when the doctrine of too big to fail was undeniably in effect; it is very similar to what we see today. Or hide the date and try to find the magic moment when Dodd-Frank supposedly changed the bailout game.

Sixth, Ms. Miller points out that credit-default-swap spreads have declined since the crisis. That is correct. But all that tells you is that we are not currently in a crisis phase. The real question is what happens the next time large financial institutions mismanage their risks and bring us to the brink of disaster.

Seventh, Ms. Miller asserts that capital requirements have increased “significantly” since the crisis (Page 4). But notice the complete absence of numbers in this part of her speech. How high are minimum capital requirements under Basel III? They are low — a bank could fund itself with 97 percent debt and 3 percent equity and still comply with the rules (see Section 4 in this handy Accenture guide to Basel III, Page 32). In this context, global megabank is a fancy name for a high-risk hedge fund, albeit one with access to the government-sponsored safety net.

Eighth, Ms. Miller points out that banks now have more capital on their balance sheets than they did four years ago (meaning they are funded with more equity relative to debt). This is correct, but it is a completely standard reaction among corporate survivors of financial crises. They are more cautious, for a while. But then they start to push up their return on equity, unadjusted for risk; this is the basis for executive and trader compensation, after all. And the best way to do this is to borrow more heavily, increasing leverage and reducing equity funding relative to their balance sheets (an equivalent way of saying that they borrow more and rely less on equity — in banking jargon, they reduce their capital levels).

It is alarming that Ms. Miller demonstrates no awareness of this well-established historical pattern — or the ingrained incentives in the financial system that make overleveraging hard to avoid.

Over all, Ms. Miller’s speech is completely unconvincing on the substance of the points that she is trying to make. Dodd-Frank alone will not end too big to fail.

It makes sense that senior Treasury officials should want to put Dodd-Frank into effect. But it is disconcerting when they are unable to confront the market and political realities of too-big-to-fail banks. Any such level of denial will not serve us well.

Article source: http://economix.blogs.nytimes.com/2013/04/25/the-treasurys-mistaken-view-on-too-big-to-fail/?partner=rss&emc=rss