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

April 25, 2013 by Leave a Comment

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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.

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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

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Fed Officials Debate Bank’s Losses Once Economy Mends

February 23, 2013 by Leave a Comment

When the economy grows stronger, the Fed plans to sell some of its vast holdings of Treasury and mortgage-backed securities. The Fed also plans to pay banks to leave some money on deposit with it to limit the pace of new lending.

And that could prove an awkward combination. The Fed faces the possibility of large losses as it sells off securities, which could force the central bank to suspend annual payments to the Treasury Department for the first time since the 1930s, even as it would be increasing the amounts paid to the banking industry for its cash holdings at the Fed to control inflation.

“That sounds like a recipe for political problems,” said James Bullard, president of the Federal Reserve Bank of St. Louis. He described the predicament as one reason the Fed might consider limiting its plans for additional asset purchases.

But Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that concerns about potential losses needed to be weighed against the benefits of asset purchases. The Fed holds almost $3 trillion in Treasuries and mortgage bonds, and it is adding about $85 billion a month in an effort to cut unemployment.

Mr. Rosengren, a leading advocate of the purchases, said Boston Fed research showed asset purchases this year could help create about 400,000 new jobs.

“That’s what the Federal Reserve should really be caring about, what’s happening with the dual mandate with and without” the asset purchases, Mr. Rosengren said. “When I think about the costs, I have to weigh that against the benefits,” he said at the US Monetary Policy Forum in New York on Friday.

By law, the Fed sends most of its profits to the Treasury, and in recent years those profits have soared as the Fed has collected interest on its investments. Last year, the central bank contributed $89 billion to the public coffers — essentially refunding a significant portion of the federal government’s annual borrowing costs.

The purpose of the investment portfolio is to hold down borrowing costs for businesses and consumers. As the economy revives, the Fed has said it will begin selling some of those holdings. But it faces potential losses on those sales because interest rates would be rising. Security prices, which move inversely to rates, would be falling, and the government would be issuing new debt at the higher rates, making the low-yield bonds that the Fed holds less valuable.

Estimating the potential losses requires a wide range of assumptions on Fed policy, economic growth and interest rates. A Fed analysis published last month, which assumed that interest rates rose to 3.8 percent later this decade, estimated that the central bank might record losses of $40 billion and suspend contributions to the Treasury for four years beginning in 2017. If rates rose by another percentage point, however, the analysis estimated that losses would triple. An independent analysis published on Friday foresaw losses of around $20 billion and a suspension of payments for only three years.

The Fed can afford to lose money because it can simply print more. It would record a liability, and pay down the debt as profits rebounded.

But there are signs that the Fed’s political opponents would seize on any losses as evidence of economic malpractice. And such that criticism could come at a vulnerable moment: central banks are never popular when they are raising interest rates.

Representative Jim Jordan, an Ohio Republican, cited the potential losses in an open letter this week to the Fed chief, Ben S. Bernanke, requesting more information on what he called “the potentially devastating consequences from any unwind.”

Jerome H. Powell, a Fed governor, insisted Friday that the central bank would not allow its course to be influenced by such political pressure.

“We’re independent for a reason,” he said. “Congress has given us a job to do.”

Some supporters of current Fed policy also argue that an economic revival would inoculate the central bank against criticism, in part because the government’s coffers would be filling even without the Fed’s contributions.

But Frederic S. Mishkin, a Columbia economist and one of the authors of the independent analysis of the Fed’s potential losses, said that was wishful thinking.

“Politicians have very short memories,” said Professor Mishkin, a former Fed governor. “They’re going to focus very much on the fact that the Fed is no longer pulling its weight in terms of producing remittances for the federal government.”

Article source: http://www.nytimes.com/2013/02/23/business/fed-officials-debate-banks-losses-once-economy-mends.html?partner=rss&emc=rss

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Greek Opposition Leader Seeks Debt Conference

January 26, 2013 by Leave a Comment

The opposition leader, Alexis Tsipras, whose criticism of international bailouts propelled his party, Syriza, to win the second biggest bloc of parliamentary seats in the June 2012 elections, also said he did not believe Greece would be forced to withdraw from the group of 17 countries that use the euro currency. Greece’s heavy indebtedness has raised fears that the country could leave or be expelled from the euro zone, a possibility that many economists regard as a threat to the euro’s survival.

“They say I am the most dangerous man in Europe,” Mr. Tsipras said in an interview with the editorial board of The New York Times. “What I feel is dangerous is the policy of austerity in Europe. The Greek people have paid a heavy price.”

Mr. Tsipras was in New York as part of a trip to the United States that has included meetings in Washington with the International Monetary Fund and the Treasury Department. The trip is part of a campaign intended to bolster his credibility as a politician and to counter what his aides call the fictional portrayals of him as a financial bomb-thrower in Greece’s mainstream news media, controlled by the so-called oligarch families of privilege in the country who fear Syriza’s ascent to power.

Given the fragility of the conservative-led coalition that took over after the June elections, any no-confidence vote in Parliament could lead to new elections that give Mr. Tsipras the latitude to form a government. Recent polls put Syriza’s popularity at nearly 30 percent, about the same as the current coalition leader, the conservative New Democracy party.

This month Mr. Tsipras also visited Germany, Europe’s most powerful economy, which has been the driving force behind the insistence that Greece must endure sacrifices and impose fiscal discipline in exchange for help on its debt burden. Mr. Tsipras has argued that the strategy has not only been an expensive failure but has also increased Greece’s indebtedness relative to the size of its economy, where joblessness and cuts in wages and benefits have stoked widespread anger.

After six years of recession in Greece, he said, “we are witnessing a humanitarian crisis.”

The symptoms were on display this week in Athens, where striking subway workers, outraged over pay cuts, paralyzed a transit system that carries one million riders a day. The government on Friday used an emergency decree to halt the strike.

Mr. Tsipras said he would like to see a summit meeting that would result in an end to the austerity approach, which he said is needed to restart growth and avert a deeper economic malaise.

“We are suggesting an overall plan for a European solution,” he said. “A European conference on debt that would include all of the countries of the region facing a significant debt issue.”

He drew an analogy to the London Debt Agreement of 1953, in which postwar Germany’s debt was cut by 50 percent and the repayment spread over 30 years.

Mr. Tsipras said the German government, led by Chancellor Angela Merkel, has held the possibility of expulsion from the euro zone over Greece as leverage for enforcing its austerity solution, but that in his view neither Germany nor its supporters want to see Greece exit the euro.

“The constant threats, that they will kick us out of the euro zone, is a strategy with no foundation,” he said. “It’s just a way to blackmail us.”

Article source: http://www.nytimes.com/2013/01/26/world/europe/alexis-tsipras-greece-opposition-leader-calls-for-debt-renegotiation.html?partner=rss&emc=rss

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U.S. Trade Representative Will Step Down

January 23, 2013 by Leave a Comment

Ron Kirk, the United States trade representative, will step down in late February, his office said Tuesday. Lael Brainard and Michael Froman, two top administration aides on international economic policy, are considered among the front-runners to succeed him, people knowledgeable about trade policy said.

“From bringing home new trade agreements with Korea, Colombia and Panama and negotiating to open up new markets for American businesses to cracking down on unfair trade practices around the world, he has been a tremendous advocate for the American worker,” President Obama said in a statement.

The White House did not say when a successor would be named to the job, a cabinet-level position that advises the president on trade policy and negotiates trade agreements.

The next trade representative will inherit a full slate of issues. The administration is negotiating a free-trade deal with nearly a dozen Pacific Rim nations, including Canada, Mexico, Australia, Vietnam and Singapore, though not the regional powers of China and Japan. It is also edging closer to free-trade talks with the European Union.

Mr. Kirk, 58, a former mayor of Dallas, made clear last year that he intended to resign. In addition to losing another cabinet-level assistant, Mr. Obama is also losing a favored golf partner in Mr. Kirk.

“We have made great strides to bring about the president’s vision of a more robust, responsible and responsive trade policy that opens markets to products stamped ‘Made in America’ and enforces Americans’ trade rights around the world,” Mr. Kirk said in a statement.

Mr. Froman, 50, who has known Mr. Obama since they attended Harvard Law School together, holds a joint appointment at the White House National Security Council and National Economic Council. Ms. Brainard, also 50, an under secretary at the Treasury Department and a contender for secretary later in Mr. Obama’s second term, is the country’s top financial diplomat.

Mr. Kirk, Mr. Froman and Ms. Brainard are attending the World Economic Forum in Davos, Switzerland, this week, according to an official list of participants.

Article source: http://www.nytimes.com/2013/01/23/business/us-trade-representative-will-step-down.html?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: The Supreme Court and the Next Fiscal Cliff

January 3, 2013 by Leave a Comment

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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The end of the 2012 fiscal cliff drama was largely predictable. Faced with the prospect of large and immediate tax increases, Congress acted to raise income tax rates only on relatively well-off people — and also to allow payroll taxes to increase for all working Americans. The messy compromise raises revenue, although it does not bring our medium-term deficits under control, and it is unlikely to push the economy back into recession.

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Perspectives from expert contributors.

Unfortunately, the legislation that passed the Senate late on New Year’s Eve and the House on Jan. 1 sets up another fiscal-cliff-type experience – with a fight over extending the debt ceiling looming in about two months. And the outcome then could well be a significant slowdown in the economy and a struggle that might end up in front of the United States Supreme Court.

About the end of February, the Treasury Department will have exhausted its legal authority to borrow. Congressional authorization will be needed to allow additional federal government debt to be issued; this is the debt ceiling.

The last time the United States came close to hitting the debt ceiling, in summer 2011, a game of chicken was played on Capitol Hill and with the White House – with many Congressional Republicans insisting that the debt ceiling would not be extended unless there were matching spending cuts.

This led to the Budget Control Act of 2011, which created the now-infamous sequester mechanism: if politicians could not agree on ways to limit spending (and raise taxes), automatic spending cuts would kick in for both domestic and military programs of the government.

Under the New Year’s Day legislation, this sequester was postponed until the end of February.

So the next fiscal cliff includes both hitting the debt ceiling and carrying out the sequester. By itself, the sequester will cause government spending to fall in an arbitrary and inefficient manner. This will slow the economy to some extent.

But the greater danger is that world markets will be plunged into chaos when the debt ceiling is not extended, because this creates the prospect that the United States government will be unable to make payments on its existing obligations unless it breaks the law or makes vast spending cuts.

Using the debt ceiling in budget negotiations is a dangerous and irresponsible tactic. In summer 2011, financial markets were severely strained by the prospect that the United States would not pay its debts. This pushed up yields on risky debt around the world (including in Europe) and caused the stock market to fall almost everywhere.

Yet House Republicans seem willing to play the same card again unless they get large cuts to domestic discretionary spending by the federal government (or perhaps big cuts to Medicare, which is part of what they were asking for in 2012). The Obama administration and most Democrats will refuse to agree. Another showdown will loom.

In think about likely scenarios, you need to assess what the Supreme Court might do if it were to take center stage on the debt ceiling.

While the Tea Party movement is greatly weakened, it may still be strong enough to block any extension of the debt ceiling. If that were the case, an impasse with a great deal of impassioned rhetoric would result.

At the end of the day, the administration would probably break the debt ceiling and take its case to the Supreme Court. While the court’s ruling on the constitutionality of the Affordable Care Act was a significant moment in summer 2012, any decision on the debt ceiling would be much more important. We haven’t seen a court decision with that kind of potential macroeconomic impact since the 1930s (when the legality of suspending the gold standard was reviewed).

Many legal arguments will be heard, and in the end the Court is likely to be swayed by an assessment of the potential implications. If the government has already broken the debt ceiling, determining that this is unconstitutional would cause chaos for the United States and the global economy. As in the 1930s, the court would not want to second-guess the macroeconomic decisions of the administration, I hope.

Whatever the Supreme Court outcome, going down that route would create a great deal of uncertainty – and is likely to affect some investment and consumption decisions and to slow the economy enough to create a new recession.

For a specific quantitative measure and a great deal of helpful thinking on this issue, I recommend the work of Nicholas Bloom of Stanford University (with Scott R. Baker of Stanford and Steven J. Davis of the University of Chicago) on their general Web site and in their most recent paper, updated this week.

Their Economic Policy Uncertainty Index shows a big spike on the debt ceiling dispute in August 2011. We will face a comparable or even larger effect in early 2013. So the question for our politicians will be: whom do they think will be blamed for creating such an uncertainty-induced recession?

Based on its experience in 2012, the Obama administration will feel that it does well by standing up to the Republicans on fiscal issues (although some Democrats, of course, wanted to take an even stronger line). I do not see the two sides coming together on spending issues, so I expect a version of the sequester.

The Republicans are obviously divided on fiscal policy and many other issues; one is how extreme they want to be perceived to be relative to mainstream opinion.

Most likely the Tea Party faction will dig in deeply, as it did on Jan. 1, when the fiscal legislation passed the House with support from most Democrats and enough Republicans who were willing to vote with the administration (and the Senate). This is, of course, a sharp contrast to what happened at the start of President Obama’s first term, when all the House Republicans, without exception, voted against the fiscal stimulus package.

The Republicans will split, but more of them are likely to side with the Tea Party movement than was the case this week. We are headed directly for another fiscal-cliff confrontation – and this one could be much more damaging.

Article source: http://economix.blogs.nytimes.com/2013/01/03/the-supreme-court-and-the-next-fiscal-cliff/?partner=rss&emc=rss

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DealBook: Standard Chartered Agrees to Settle Iran Money Transfer Claims

December 10, 2012 by Leave a Comment

A Standard Chartered bank in London.Facundo Arrizabalaga/European Pressphoto AgencyA Standard Chartered bank branch in London.

The British bank Standard Chartered reached a deal with federal and state prosecutors on Monday over accusations that it had illegally funneled money for Iranian banks and corporations.

The 150-year-old bank will pay $327 million to settle claims by the Justice Department, the Manhattan district attorney’s office, the Federal Reserve Bank of New York and the Treasury Department. The settlement deals included a deferred prosecution agreement with the Justice Department, which accused the bank of “concealing” its ties to sanctioned countries like Iran and Sudan.

“You can’t do it, it’s against the law and today Standard Chartered is being held to account,” Lanny A. Breuer, head of the Justice Department’s criminal division, said in an interview.

The agreement allows the bank to move beyond a turbulent period.

In August, the New York State Department of Financial Services, headed by Benjamin M. Lawsky, broke from regulators and moved to accuse Standard Chartered of scheming for nearly a decade to hide 60,000 transactions worth $250 billion. Standard Chartered agreed to pay $340 million over the matter a month later.

United States authorities have been cracking down on banks that flouted federal law to transfer money on behalf of sanctioned nations. Investigations into Standard Chartered began in 2009, according to several law enforcement officials.

Executives at Standard Chartered have spent months trying to work out a settlement and resolve the investigation. Lawyers for the bank, in numerous conversations with federal and state prosecutors, maintained vociferously that a large majority of the transactions with Iran were permitted under a federal law that previously allowed foreign banks to transfer money for Iranian clients to another foreign institution through their American subsidiaries.

Since January 2009, the Justice Department, Treasury and the Manhattan prosecutor have charged five foreign banks in an effort to crack down on the illegal movement of tainted money across the globe. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for Cuba and Iran.

“Investigations of financial institutions, businesses and individuals who violate U.S. sanctions by misusing banks in New York are vitally important to national security and the integrity of our banking system,” Cyrus R. Vance Jr., the Manhattan district attorney, said in a statement.

As part of the agreement announced on Monday, Standard Chartered admitted to processing more than $200 million for Iranian and Sudanese clients through its American subsidiaries. To avoid having those transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed identifying information, according to the authorities.

Until 2008, foreign banks like Standard Chartered were permitted to transfer money for Iranian clients through their American branches to separate offshore institutions. These so-called U-turn transactions required banks to provide scant information about the original client to their American operations as long as they had checked for questionable activities. The Iranian loophole was closed in 2008 after American authorities suspected that Iranian banks were funneling money to support nuclear weapons development.

While the overwhelming majority of payments processed by Standard Chartered for Iran and Sudan were technically legal, they should have been disclosed, the Manhattan district attorney said on Monday. Mr. Lawsky of the New York financial services department had based his case against Standard Chartered, in large part, on similar claims that the bank had thwarted efforts to spot sanctions violations by cloaking the identities of Iranian clients and lying to regulators.

Article source: http://dealbook.nytimes.com/2012/12/10/standard-chartered-agrees-to-settle-iran-money-transfer-claims/?partner=rss&emc=rss

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DealBook: U.S. Plans to Cut More Than Half Its Stake in A.I.G.

September 10, 2012 by Leave a Comment

The Treasury Department said on Sunday that it was planning its biggest sale of shares in the American International Group to date, making the federal government a minority shareholder in the bailed-out insurer for the first time since it took control of the company four years ago.

With the sale of at least $18 billion worth of shares in A.I.G., a number that could grow to $20.7 billion if investors prove enthusiastic, the Treasury Department could reduce its holdings to as little as 15 percent from 53 percent.

Taking the government’s stake in A.I.G. below 50 percent is the realization of a long-held goal by both the Obama administration and the company, helping to cut ties to one of the most controversial bailouts of the 2008 financial crisis. The Treasury Department expects to earn a profit on its investment in A.I.G., though it is unclear how large.

“This was always meant as a temporary measure,” Henry T. C. Hu, a professor at the University of Texas School of Law at Austin, said. “The faster we can do this as a practical matter, the better for everyone involved.”

Professor Hu described the A.I.G. bailout as one of the government’s first major interventions in the economy and private enterprise, setting the stage for other major rescue operations.

The latest offering will take place during the heat of the electoral campaign, as the president seeks to defend the use of taxpayer money to save financial institutions like A.I.G.

Administration officials have long said that they would seek to sell off the holdings in private enterprises as quickly as possible, arguing that the government is not a natural long-term shareholder.

Regarded as one of the world’s most powerful insurers by the fall of 2008, A.I.G. nearly crumbled under the weight of risky bets on mortgages as the debt markets soured. The Bush administration intervened with an unusual $182 billion lifeline to help stabilize the global financial sector.

In the process, it gained a roughly 92 percent stake in the insurer.

But the rescue plan was initially denounced by some critics as likely to cost the government billions, while also leading to a breakup of the company.

Four years later, the company has turned around. It has reported several consecutive quarterly profits, while seeing its stock rise more than 10 percent since the government began selling its holdings in May of last year.

The company’s shares closed on Friday at $33.99, above the government’s break-even price of about $28.73.

The offering announced Sunday will be the fifth sale of A.I.G. shares by the Treasury Department and is the latest effort by the government to unwind the A.I.G. rescue this year. Last month, the Federal Reserve Bank of New York announced that it had sold the last of a collection of risky bonds acquired from the insurer as part of the bailout. All told, the sale of those securities reaped about $9.4 billion for taxpayers.

Yet the government remains entangled in a number of other corporate rescues, including those of General Motors and Ally Financial. The remaining bailouts are expected to be largely unprofitable, especially those for the fallen mortgage finance giants Fannie Mae and Freddie Mac.

A.I.G. was initially expected to fall into that camp, subject to a fire sale of assets that would lead to its quick wind-down. But under Robert H. Benmosche, the insurer has instead focused on rebuilding its operations, becoming smaller and more cautious about keeping away from the risky bets that nearly caused its demise.

Since its bailout, the company has sought a more orderly sale of assets aimed at maximizing the prices it can fetch. Those include the divestiture of stakes in major international insurance operations like the AIA Group and the American Life Insurance Company.

And A.I.G. is preparing to raise more capital by staging an initial public offering for its aircraft leasing business, the International Lease Finance Corporation.

As part of the stock sale announced on Sunday, A.I.G. plans to buy back about $5 billion of the shares that Treasury is selling. Some of the proceeds will come from the company’s sale last week of additional shares in AIA.

The reduction of the Treasury’s stake below 50 percent is likely to bring about other changes for A.I.G. Its primary regulator will become the Federal Reserve, since the company owns a small banking unit. And it may become subject to potentially tougher rules governing its capital, affecting its ability to continue buying back stock.

The sale is being managed by Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan Chase.

Article source: http://dealbook.nytimes.com/2012/09/09/treasury-to-sell-18-billion-worth-of-additional-a-i-g-shares/?partner=rss&emc=rss

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Law to Find Tax Evaders Denounced

December 27, 2011 by Leave a Comment

Legislation meant to help the United States government locate overseas assets of American tax cheats created little stir when it was quietly slipped into a jobs bill last year.

But the Foreign Account Tax Compliance Act, or Fatca, as it is known, is now causing alarm among businesses outside the United States that fear they will have to spend billions of dollars a year to meet the greatly increased reporting burdens, starting in 2013. American expatriates also say the new filing demands are daunting and overblown.

“Congress came in with a sledgehammer,” said H. David Rosenbloom, a lawyer at Caplin and Drysdale in Washington and a former international tax policy adviser for the Treasury Department. “The Fatca story is really kind of insane.”

Congress created the act after the Justice Department’s successful pursuit in 2009 of UBS that resulted in the Swiss bank — which had encouraged American citizens to set up secret offshore accounts — paying $780 million and turning over client details to avoid criminal prosecution.

The law is meant to ensure Americans cannot use hidden trusts overseas to evade taxes, a goal that is widely applauded. But critics say that it amounts to gross legislative overreach, and that the $8 billion the Treasury expects to reap in taxes owed over 10 years pales next to the costs it will impose on foreign institutions. Those entities are being asked, in effect, to pay for the cost of tracking down American tax evaders.

The law demands that virtually every financial firm outside the United States and any foreign company in which Americans are beneficial owners must register with the Internal Revenue Service, check existing accounts in search of Americans and annually declare their compliance.

Noncompliance would be punished with a withholding charge of up to 30 percent on any income and capital payments the company gets from the United States. Under the law, for example, if Deutsche Bank, having agreed to register with the United States authorities in compliance with the law, were to transfer $25 million to a noncompliant Polish bank, Deutsche Bank would be required to withhold part of that sum, transferring it to the I.R.S. The Polish recipient would then have the option of challenging that withholding by filing an American tax return, claiming the money, despite not being an American citizen.

In practice, tax experts say costs like that might drive the Polish bank out of business.

“They’re trying to force every financial institution in the world to sign onto this regime,” said Denise Hintzke, who heads the global tax compliance initiative at Deloitte in New York.

Financial institutions outside the United States also say that the law’s costs will be imposed overwhelmingly on them, giving a competitive advantage to United States rivals.

The European Banking Association estimates that its members would have to pay at least $10 to vet each existing account plus overhaul data systems and procedures.

In Japan, where savers often maintain several small accounts, only a tiny minority of the 800 million total accounts are held by Americans. The Japanese Bankers Association has said that manual verification of each account would be “extremely burdensome.”

The Treasury and I.R.S. say that they are addressing the concerns of Japanese and other institutions and that electronic screening, not manual checks, will be acceptable for most types of accounts.

The I.R.S., under pressure from angry and confused financial officials abroad, has extended the deadline for registration until June 30, 2013, and is struggling to provide more detailed guidance by the end of this year.

But beginning in 2012, many American expatriates — already the only developed-nation citizens subject to double taxation from their home government — must furnish the I.R.S. with detailed personal information on their overseas assets.

American Citizens Abroad, an advocacy group, estimates the new form will add three hours to tax preparation. Considering that the law provides harsh penalties for even unintentional errors, the organization says it is “simply not realistic for a vast swath of the normally law-abiding filer community unable to afford the expensive services of a professional tax adviser.”

Even with the new requirement, American expatriates must continue reporting their foreign financial assets to the Treasury Department, meaning they will be reporting twice, to different arms of the government, according to different standards.

Mia Li contributed research.

Article source: http://feeds.nytimes.com/click.phdo?i=7c66a43d6d7d7782ddde38f36b422c6b

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U.S. Mortgage Relief Program Widens Its Scope

November 30, 2011 by Leave a Comment

Although he would appear to be a good candidate, Mr. Compton, 57, has been turned down twice for a federal refinancing program aimed at homeowners like him.

Still, he has renewed hope. That’s because the government is expanding the Home Affordable Refinance Program, which was meant to help homeowners whose mortgages are backed by the government and whose home values have declined sharply, even below what the borrowers owe. Mr. Compton is one of those underwater homeowners.

When the Treasury Department announced the program, referred to as HARP, two years ago, it said it could help four million to five million homeowners whose home values had plunged. Yet just 900,000 borrowers — whose loans are owned by Fannie Mae and Freddie Mac, the government-sponsored housing finance companies — have successfully refinanced through the program. Starting early next month, though, banks will begin using new criteria intended to make more borrowers eligible: raising the ceiling on how much owners can borrow over the value of their home as well as relaxing rules that might force banks to take back bad loans from the government. In announcing the change, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, carefully eased expectations, suggesting about 900,000 more homeowners would be helped, roughly doubling the size of the program to date.

Analysts welcomed the change, but some criticized it for still not capturing nearly enough of the people who could benefit from lower interest rates.

Of the 22 million borrowers who could be eligible for the government refinancing program, nearly 70 percent of them are paying interest rates of 5 percent or more, according to CoreLogic, a research firm. Conventional mortgage rates are currently closer to 4 percent.

Greater participation could help the beleaguered housing market, which showed renewed signs of decline in data released on Tuesday, as well as help shore up the broader economy.

“The universe is much larger than what has come through the pipeline,” said Paul Ballew, chief economist at Nationwide Insurance. Mr. Ballew said that if 10 million more people refinanced and saved an average of $200 a month, that would work out to be about $240 billion a year of additional spending power in the economy.

Other economists and officials of the Federal Housing Finance Agency say it is unrealistic to expect all those borrowers to refinance. Some people are wary of government programs, while others will be put off by upfront application fees and the paperwork burden. Those who have home equity loans or second mortgages could face tougher approvals.

Since the refinancing program is optional, lenders may impose additional restrictions. What is more, it is costly to devote staff to refinancing applications, so lenders may simply be reluctant to do so.

Mr. Compton has calculated that a refinancing would save him and his wife, Lynne, about $275 on their $1,397 monthly payment. He has not missed a payment, despite being laid off from one job and enduring two pay cuts in the last two years. His salary is now roughly two-thirds what it was when they bought the house five years ago — a house that has since fallen in value.

The loan servicer, JPMorgan Chase, initially turned down the refinancing application because the Comptons had been living in another, smaller property they owned while renting out their main house.

The couple moved back in September and reapplied after changing their drivers’ licenses and utility bills.

This time, a loan officer told Mr. Compton, who works as a public transportation planner, that he did not qualify because his loan had been sold to two different investors. Mr. Compton said he confirmed through a government Web site that his loan was now owned solely by Freddie Mac.

“It angers me quite a bit,” said Mr. Compton, who added that unlike other borrowers, he never took out a home equity loan during the boom and has consistently paid his bills. The refinancing program, he said, should be “a perfect fit for me.”

He suspects that Chase — as well as other lenders — believe “that if you just tell people ‘no’ often enough, eventually they will just say O.K., and move on.”

After being asked about Mr. Compton’s case, a Chase spokesman said the company was investigating his file. “We are reaching out to the customer to see if we could refinance him through HARP 2,” said the spokesman, referring to the expanded government program, “or offer another option.”

Meg Burns, senior associate director for housing and regulatory policy at the Federal Housing Finance Agency, said the agency could not control individual lenders.

Article source: http://feeds.nytimes.com/click.phdo?i=bfc0f8d6e0b740f6e1063b4164d3dee1

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U.S. and China Data Highlight Weakness in Global Economy

October 13, 2011 by Leave a Comment

The United States trade deficit was essentially unchanged in August at $45.6 billion, its lowest level since April and $100 million narrower than a year earlier. Exports and imports both slipped by $100 million, to $177.6 billion and $233.2 billion, respectively.

The trade deficit was slightly narrower than analysts’ expectations. The level for July was revised downward from $44.8 billion.

A narrower trade deficit could lead to a slightly higher level for the gross domestic product, said Clark Yingst, the chief market analyst for the investment firm Joseph Gunnar, “but not exactly for the reasons that we’d like.” Sipping imports are a bad sign for the United States economy, since it shows weakness in consumer demand.

“In an ideal world we would like to see exports and imports growing at relatively strong rates, but with exports growing even faster than imports,” said Mr. Yingst.

Economists have also expressed concern that Europe’s slowing economy is leading to a reduction in demand for American exports. Alcoa, the aluminum producer, said its lower profit, reported earlier this week, was due in part to weak demand there.

Trade data from China for September showed that the country’s booming pace of export growth had begun to ease, as the global upheaval and a gradual rise in the value of the renminbi took their toll. The country’s trade surplus narrowed to $14.5 billion in September, from $17.8 billion in August. But the slimmer surplus was unlikely to defuse fully the criticism of American lawmakers, who argue that Beijing is keeping its currency unfairly low against the dollar.

On Tuesday, the United States Senate passed a bill that would impose tariffs on certain Chinese goods if the Treasury Department determined that China was undervaluing its currency to its advantage.

“Although Chinese imports remain close to record levels, some impact from weaker global growth was to be expected, and the fall in year-on-year growth in September suggests this is starting to happen,” Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong, wrote in a note to clients.

Economists are concerned that the American economy could be further damaged if this trend continues, especially if European demand remains weak.

The International Monetary Fund also warned Thursday that Asia could suffer “clear” financial and economic spillovers from continued problems. The fund forecast relatively robust growth of 6.3 percent for the region this year and 6.7 percent in 2012 on average, slightly before a previous forecast of 6.8 percent for 2011 and 6.9 percent for 2012 made in April.

The fund’s worries were tempered by a degree of confidence about Asian domestic demand cushioning the region from global upheaval.

“Domestic demand is still resilient, and it should continue to sustain activity across the region,” the I.M.F. said.

Joshua Brustein reported from New York and Bettina Wassener reported from Hong Kong.

Article source: http://feeds.nytimes.com/click.phdo?i=142f013aad044499d745c73b457cd56e

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