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Today’s Economist: Simon Johnson: Why Are the Big Banks Suddenly Afraid?

August 30, 2012 by 1 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.”

Top executives from global megabanks are usually very careful about how they defend both the continued existence, at current scale, of their organizations and the implicit subsidies they receive. They are willing to appear on television shows – and did so earlier this summer, pushing back against Sanford I. Weill, the former chief executive of Citigroup, after he said big banks should be broken up.

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Typically, however, since the financial crisis of 2008 the heavyweights of the banking industry have stayed relatively silent on the key issue of whether there should be a hard cap on bank size.

This pattern has shifted in recent weeks, with moves on at least three fronts.

William B. Harrison Jr., the former chairman of JPMorgan Chase, was the first to stick out his neck, with an Op-Ed published in The New York Times. The Financial Services Roundtable has circulated two related e-mails “Myth: Some U.S. banks are too big” and “Myth: Breaking up banks is the only way to deal with ‘Too Big To Fail’” (these links are to versions on the Web site of Partnership for a Secure Financial Future, a group that also includes the Consumer Bankers Association, the Mortgage Bankers Association and the Financial Services Institute).

Now Wayne Abernathy, executive vice president of the American Bankers Association, is weighing in – with a commentary on the American Banker Web site.

These views notwithstanding, mainstream Republican opinion is starting to shift against the megabanks, as former Treasury secretary Nicholas Brady makes clear in a strong opinion piece published in The Financial Times.

Mr. Brady was Treasury secretary under Presidents Ronald Reagan and George H.W. Bush, and to the best of my knowledge, no one has ever accused him of being any kind of leftist.

Yet Mr. Brady’s thinking in his Financial Times commentary is strikingly similar to the reasoning that motivated the Brown-Kaufman amendment (supported by 30 Democrats and three Republicans) in 2010, which would have put a hard cap on the size and leverage of our largest banks, i.e., how much an individual institution could borrow relative to the size of the economy. (See this analysis by Jeff Connaughton, who was chief of staff to Senator Ted Kaufman; Senator Sherrod Brown, Democrat of Ohio, is still pushing hard on this same approach.)

Mr. Brady also stresses that we should make our regulations simpler, not more complex. Senator Kaufman made the same point repeatedly – and capping leverage per bank (Mr. Brady’s preferred approach) would be one way to do this.

Mr. Brady is not alone on the Republican side of the political spectrum. A growing number of serious-minded politicians are starting to support the point made by Jon Huntsman, the former governor of Utah and a Republican presidential candidate in the recent primaries: global megabanks have become government-sponsored enterprises; their scale does not result from any kind of market process, but is rather the result of a vast state subsidy scheme.

As Paul Singer, a hedge fund manager and influential Republican donor, says of the big banks, “Private reward and public risk is not what conservatives should want.”

A second problem for the bankers is that their arguments defending big banks are very weak.

As I made clear in a point-by-point rebuttal of Mr. Harrison’s Op-Ed commentary, his defense of the big banks is not based on any evidence. He primarily makes assertions about economies of scale in banking, but no one can find such efficiency enhancements for banks with more than $100 billion in total assets – and our largest banks have balance sheets, properly measured, that approach $4 trillion.

Similarly, the Financial Services Roundtable e-mail on “Some U.S. banks are too big” is based on a non sequitur. It points out that United States trade has grown significantly since 1992, and it infers that, as a result, the size of our largest banks should also grow.

But the dynamism of the American economy and its international trade after World War II was not accompanied by striking increases in the size of individual banks, and our largest banks did not then increase relative to the size of the economy, in sharp contrast to what happened since the early 1990s.

In 1995, the largest six banks in the United States had combined assets of around 15 percent of gross domestic product; they are now over 60 percent of G.D.P., bigger than they were before the crisis of 2008.

The Financial Services Roundtable is right to point out that banks in some other Group of 7 countries are larger relative to those economies. But which of these countries would you really like to emulate today: France, Italy or Britain?

The Financial Services Roundtable also asserts, in its other e-mail, that the Dodd-Frank financial reform legislation and the Basel III new capital requirements have made the banking system safer. That may be true, although the evidence it presents is just about cyclical adjustment; after any big financial crisis, banks are careful about funding themselves with more equity (a synonym for capital in this context) and holding more liquid assets.

The structure of incentives in the industry hardly seems to have changed, as witnessed, for example, by the excessive risk-taking and consequent large trading losses at JPMorgan Chase recently.

We need a system with multiple fail-safes, and making the largest banks smaller and less leveraged would achieve precisely that goal.

Mr. Abernathy’s article takes a much more extreme position. He contends that banks are already unduly constrained – by Dodd-Frank and Basel III – and this is holding back economic growth.

Mr. Abernathy goes so far as to say that if the banks were to raise $60 billion in additional equity capital, this “holds back $600 billion of economic activity.” In other words, strengthening the equity funding of banking would cause an economic contraction on the order of 4 percent of G.D.P.

Such assertions are far-fetched, not based on any facts and have been completely discredited (see the work of Anat Admati and her colleagues on exactly this point). Mr. Abernathy was assistant secretary for financial institutions under George W. Bush. If he has any evidence to support his positions – a study, a working paper, a book? – he should put it on the table now.

To make such assertions without substantiation is irresponsible. (A document from a lobbying organization would not count for much, in my view, but let’s see if he has even that.)

The big banks and their friends should be afraid. Serious people on the right and on the left are reassessing if we really need our largest banks to be so large and so highly leveraged (i.e., with so much debt relative to their equity). The arguments in favor of keeping the global megabanks and allowing them to grow are very weak or nonexistent. The arguments in favor of further strengthening the equity funding for banks grow stronger – see the recent letter by Senators Sherrod Brown and David Vitter, which I wrote about recently.

The views of sensible people like Secretary Brady, Senator Kaufman, Governor Huntsman and Senator Brown are spreading across the political spectrum.

Article source: http://economix.blogs.nytimes.com/2012/08/30/why-are-the-big-banks-suddenly-afraid/?partner=rss&emc=rss

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DealBook: Bank of England Says New York Fed Gave No Warning on Rate-Rigging

July 20, 2012 by Leave a Comment

Mervyn A. King, left, the Bank of England governor, and Timothy F. Geithner, the Treasury secretary, in Paris in 2011.Pool photo by Charles PlatiauMervyn A. King, left, the Bank of England governor, and Timothy F. Geithner, the Treasury secretary, in Paris in 2011.

LONDON – American authorities did not warn British officials about the rate-rigging scandal at the height of the financial crisis in 2008, according to documents released by the Bank of England on Friday.

The e-mails from the British central bank shed new light on conversations between Mervyn A. King, the Bank of England governor, and Timothy F. Geithner, who was head of the Federal Reserve Bank of New York at time of the discussions.

The documents will increase pressure on American and British officials, who have come under mounting scrutiny from politicians about why they did not respond more quickly to potential illegal activity at some of the world’s largest banks.

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Paul Tucker, the deputy governor of the Bank of England, talked to Barclays and a number of other global banks during 2008 about potential problems with how the London interbank offered rate, or Libor, was set, according to documents released on Friday. Despite the conversations, some traders and senior executives at Barclays continue to alter the rate until 2009.

The e-mails outline the Bank of England’s discussions with both the New York Fed and the British Bankers’ Association, the London-based trade body that oversees Libor. The conversations center on concerns about how the rate was set.

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The documents also called on the British Bankers’ Association to conduct a review, including input from international government agencies, to ensure the credibility of the rate.

“I don’t see that a group of junior bankers in London can decide this without a global debate,” Mr. Tucker wrote in an e-mail in May 2008.

The call for a review into Libor in 2008 came after Mr. King and Mr. Geithner had talked about potential problems with the rate during a meeting in Basel, Switzerland, in early May 2008.

This discussion was followed by a flurry of e-mails a month later in which Mr. Geithner, who is now the Treasury secretary, recommended changes to the rate, which is used as a benchmark for more than $360 trillion financial products worldwide.

The suggestions included ‘‘strengthen governance and establish a credible reporting procedure’’ and ‘‘eliminate incentive to misreport,’’ according to documents released by the New York Fed.

Mr. King told Mr. Geithner that he supported the suggestions. Yet the New York Fed did not make any allegations of wrongful behavior connected to Libor, according to documents released on Friday. Mr. King told a British parliamentary committee on Tuesday that Mr. Geithner’s suggestions did not represent a warning about the potential manipulation of Libor.

‘‘At no stage did he or anyone else at the New York Fed raise any concerns with the bank that they had seen any wrongdoing,’’ Mr. King said. ‘‘There was no suggestion of fraudulent behavior.’’

Other senior British officials also said that they did not believe that the New York Fed had raised concerns about possible illegal activity connected to Libor.

Mr. Tucker, who is a potential successor to Mr. King, held several conversations with the New York Fed in May and June, 2008 about the American suggestions for change the rate-setting process, according to the documents released on Friday.

Despite the discussions, the recommendations ‘‘didn’t set off alarm bells,’’ Mr. Tucker told British politicians on Tuesday.

In the wake of a public outcry against the Libor scandal, Mr. King wrote to central bank chiefs this week, inviting them to discuss Libor reforms at meeting scheduled for September.

Questions about the rate, however, had been raised as far back as 2007.

Barclays acknowledged to the New York Fed in April 2008 that it was reporting artificially low rates to mask its relatively high borrowing costs. The British bank also raised questions about whether other institutions were providing correct submissions to Libor. The concerns about the integrity of the rate were passed to Mr. Geithner and other top American officials, according to documents released last week.

American authorities began an investigation into potential manipulation of Libor at some of the world’s largest banks in 2008. The Financial Services Authority, the British regulator, opened its own inquiry in early 2010.

In the first settlement related to the international investigation, Barclays agreed to pay around $450 million to American and British authorities after some of the firm’s traders and senior executives were found to have altered the rate for financial gain.

Regulators’ failure to question the rate-setting process stemmed from a widespread view that Libor was a low-risk area of the financial services industry, according to parliamentary testimony from senior British officials.

The British Bankers’ Association continues to have receive minimal oversight from British authorities. The country’s government has started an investigation into how the rate is set.

‘‘There was no indication between 2005 and 2007 that the Financial Services Authority perceived the submission produced for Libor as a risk area,’’ the regulator’s chairman, Adair Turner, told a British parliamentary committee.

Mr. Turner did acknowledge that the chance of ‘‘deliberate manipulation was just waiting to happen.’’

The Federal Reserve chairman, Ben S. Bernanke, put it more bluntly during testimony before the Senate Banking Committee this week, saying he lacked ‘‘full confidence’’ in the accuracy of the rate-setting process.

Article source: http://dealbook.nytimes.com/2012/07/20/bank-of-england-says-new-york-fed-gave-no-warning-on-rate-rigging/?partner=rss&emc=rss

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In Davos, Europe Is Pressed for Debt Crisis Solution

January 29, 2012 by Leave a Comment

DAVOS, Switzerland — World leaders turned up the pressure on Europe on Saturday to erect a more formidable wall of money against the sovereign debt crisis, warning that the euro zone continues to pose a severe threat to the global economy.

George Osborne, the chancellor of the Exchequer in Britain, said a bigger firewall was “a key to unlocking further confidence,” while Christine Lagarde, managing director of the International Monetary Fund, said the fund should be big enough to eliminate any doubts about European resolve.

“If it is big enough, it will not get used,” she said on Saturday during a panel discussion at the World Economic Forum here.

Echoing comments by United States officials, including Treasury Secretary Timothy F. Geithner on Friday, leaders in Davos said that aid to the euro zone from the rest of the world would be contingent on a larger commitment by Europe. Some critics have said it is perverse that the I.M.F., which is financed partly by developing countries, should be aiding wealthy Europe.

“Europe has to be making more effort; otherwise, I don’t think developing countries will want to pay more for the I.M.F.,” said Motohisa Furukawa, the Japanese official responsible for economic and fiscal policy.

The firewall, known formally as the European Stability Mechanism, would have a lending capacity of 500 billion euros ($656 billion) when it begins operating in July, replacing a temporary fund. European leaders are debating ways to increase the bailout fund’s resources to aid overindebted countries, but they face powerful opposition from voters in countries like Germany and have so far failed to act boldly enough to reassure financial markets.

In the short term, though, leaders have gained some breathing room because of emergency cash that the European Central Bank has provided to banks, a measure that has calmed markets. Euro zone leaders are more focused on dealing with what they see as the more immediate danger of a Greek default, and less on testing their taxpayers’ patience by increasing the size of the firewall.

Top officials and economists from outside Europe warned of complacency, and on Saturday in Davos they presented a much more pessimistic view of the European crisis than has been heard in previous days. While many European leaders and businesspeople have argued that the risk of a catastrophic breakup of the euro zone has declined, leaders of other regions said the crisis still had the potential to sow global misery.

“I’ve never been as scared as now about the world,” said Donald Tsang, chief executive of Hong Kong. He said the effect on the world financial system is unpredictable. “We do not know how deep this hole would be when the whole thing implodes on us,” he said.

Ms. Lagarde said: “No one is immune. It’s not just a euro zone crisis. It’s a crisis that could have collateral effects, spillover effects around the world.”

The undercurrent of their remarks was that European policy still lacks credibility in the eyes of the world.

“This has got to have an effect on influence, on perceptions of power in the world that are going to be significant for years to come,” said Robert B. Zoellick, president of the World Bank Group.

Nouriel Roubini, a professor of economics at New York University known for his pessimistic views, forecast Saturday that Greece would have to leave the euro zone this year, and said that there was at least a 50 percent chance that the euro zone would break up within three to five years.

“The euro zone is a slow-motion train wreck,” Mr. Roubini said during a separate panel discussion.

Speakers on Saturday did not say how big they thought the European firewall should be. But, again echoing American officials, they agreed it should be so enormous that no investor would question its integrity. That has not been true of Europe’s financial commitment so far, which has consistently failed to restore market faith in the euro.

Without mentioning Germany by name, Ms. Lagarde said that European countries that are able to should do more to increase domestic consumer spending and slow down efforts to cut government outlays.

“Some countries have to go full speed ahead and do that fiscal consolidation that is so much needed,” Ms. Lagarde said. “But other countries have space and can do something. They should certainly explore what they can do to boost growth in order to help themselves but also to help the rest of the zone.”

The European Central Bank continued to draw praise for providing emergency cash to banks and avoiding a credit squeeze.

“There is not going to be a Lehman-style moment in Europe,” said Mark J. Carney, governor of the Canadian central bank, referring to the collapse of investment bank Lehman Brothers in 2008, which helped set in motion the financial crisis. But he added, “That is different than having a well, fully functioning banking system.”

The officials also drove home the message that Europe cannot expect more help from the outside world, by way of the I.M.F., unless it does more to help itself.

As the Greek government made slow progress on Saturday to reach a deal with creditors to reduce its overall debt, Mr. Osborne expressed amazement that such a tiny country continued to pose a threat to global stability.

“The danger is that the tail wags the dog throughout this crisis,” he said.

Article source: http://www.nytimes.com/2012/01/29/business/global/in-davos-europe-is-pressed-for-debt-crisis-solution.html?partner=rss&emc=rss

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Chinese Exports Grow, but Imports Show Signs of Weakening

January 10, 2012 by Leave a Comment

BEIJING — Exports from China rose 13.4 percent in December compared with a year ago, while import growth unexpectedly slowed to 11.8 percent because of lower prices and moderating domestic demand, government data released Tuesday showed.

Overall, the Chinese trade surplus shrank to $155 billion in 2011, from $183 billion in 2010, as imports picked up and demand for Chinese goods in Europe and elsewhere softened. IHS Global Insight, an economic forecasting firm, said that while still sizable, the surplus was China’s lowest in three years. That could help China fend off pressure from the United States to allow its currency to appreciate faster.

The trade figures were released just before the arrival of Treasury Secretary Timothy F. Geithner in Beijing. Mr. Geithner is hoping to persuade China to limit its purchases of Iranian oil to back up a recent strengthening of economic sanctions by major Western powers in reaction to new evidence that Iran plans to build nuclear weapons.

Mr. Geithner, who will also stop in Tokyo, is also expected to discuss currency disputes and escalating trade frictions between China and the United States. Last month, China imposed new duties on imports of cars and other vehicles from the United States, while the United States is investigating whether to impose extra fees on Chinese-made solar panels. American producers have alleged that government-subsidized Chinese companies are selling solar panels at below cost, damaging the domestic industry in the United States.

While it stopped short of accusing China of manipulating its currency, the Treasury Department said last month that the United States would continue to push China to let the renminbi strengthen against the dollar. The United States argues that despite steady appreciation, the renminbi remains substantially undervalued, which bolsters Chinese exports and makes American goods in China more expensive.

After adjusting for inflation, the renminbi appreciated 12 percent against the dollar in the last 18 months, the Treasury Department said. Some analysts predict that China will allow the renminbi to climb by another 3 percent against the dollar this coming year.

Despite concerns in China about the slowing pace of economic growth, “the Chinese economy remains on track for a soft landing,” Barclays Capital analysts said. They predicted that China’s exports will grow 10 percent this year — less than half of last year’s increase. They estimated that imports will increase 13 percent, down from 24.9 percent growth in 2011.

December’s export growth was only slightly behind that of the previous month, when exports rose 13.8 percent compared with the same period a year ago.

But last month’s import growth of 11.8 percent represented a slowdown compared with the prior three months. Import growth had been steadily outpacing export growth for months, hitting 20.9 percent in September, 28.7 percent in October and 22.1 percent in November.

Analysts with IHS Global Insight called the decline in import growth “worrying,” and an indication of rapidly falling domestic demand. “This will be of little help to a flagging global economy,” they said.

But Goldman Sachs noted that trade data is notoriously volatile and attributed much of the slowdown to lower prices, not fewer purchases. Barclays Capital also cited lower commodity prices, saying that domestic demand, while moderating, remained “robust.”

Export growth held up well because of looser monetary conditions and continued demand for Chinese goods, analysts with ANZ said. “While exports to the United States moderated, shipments to Japan and the emerging economies remained reasonably steady,” they said in a research note.

Article source: http://www.nytimes.com/2012/01/10/business/chinese-exports-grow-but-imports-show-signs-of-weakening.html?partner=rss&emc=rss

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William P. Carey, Leader in Commercial Real Estate, Dies at 81

January 7, 2012 by Leave a Comment

The cause was cardiac arrest, his brother and only immediate survivor, Francis, said.

Mr. Carey was the founder in 1973 of W. P. Carey Company, an investment management firm in New York with about $12 billion in assets around the world, among them nearly 1,000 retail and industrial sites totaling about 120 million square feet.

In the early 1980s the company closed transactions that were considered innovative in their use of the sale-leaseback model. The sale-leaseback is a form of financing in which a company sells its property for cash while remaining as a tenant under a long-term lease it signs with the buyer. It is often used by companies that are having trouble obtaining traditional financing.

In 1982, to finance its leveraged buyout of Gibson Greeting Cards, the Wesray Corporation, the investment company headed by William E. Simon, a former Treasury secretary, sold three Gibson manufacturing and warehouse buildings to Carey Company.

Of the many sale-leaseback deals the company has arranged in the last 38 years, a prominent one came in 2009 when it bought 21 floors of the 52-story headquarters of The New York Times on Eighth Avenue in Manhattan for $225 million. The Times, which entered into the transaction to pay down debt, has the option to buy back the space in the 10th year of a 15-year lease.

Mr. Carey, a leading philanthropist as well, donated more than $100 million of his wealth through the W. P. Carey Foundation, which he established in 1988. The gifts primarily went to promote business education.

The foundation gave $50 million to the Arizona State University School of Business in 2002. Five years later, it donated $50 million to Johns Hopkins University to create the James Carey Business School, named for Mr. Carey’s great-great-great-grandfather, a shipper in Baltimore in the early 1800s.

Last year, the foundation established a $30 million endowment for the Francis King Carey School of Law at the University of Maryland, named for Mr. Carey’s grandfather, a graduate of the school.

William Polk Carey was born in Baltimore on May 11, 1930, to Francis and Marjorie Armstrong Carey. Business acumen came early to him. As a boy, he sold soda on the streets near his home and ink he made in his basement.

Mr. Carey graduated from the Wharton School at the University of Pennsylvania in 1953 with a degree in economics. After serving in the Air Force for two years, he worked at a car dealership owned by a relative in New Jersey. At 28, he owned a company in Plainfield, N.J., that leased foreign cars. It was there he learned the basics of the sale-leaseback.

Mr. Carey’s middle name, Polk, is an acknowledgment that he was a descendant of the 11th president of the United States, James K. Polk.

“He was very proud of that,” Mr. Carey’s great-nephew, William Polk Carey II, said on Tuesday. “He liked to hand out those $1 gold coins with engravings of his Uncle Jim. That’s what he called him.”

Article source: http://feeds.nytimes.com/click.phdo?i=7b8b3a88bfffe974bce2f0708c22a681

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Greenberg Sues U.S. Over A.I.G. Takeover

November 22, 2011 by Leave a Comment

The two lawsuits were filed on behalf of Starr International, Mr. Greenberg’s company and a large A.I.G. shareholder. The suit against the Treasury was filed in the United States Court of Federal Claims in Washington. The case against the New York Fed, a private corporation, was brought in Federal District Court for the Southern District of New York.

“What these lawsuits say is that in our country, not even the government is above the law,” said David Boies, the lawyer at Boies, Schiller Flexner, who represents Mr. Greenberg and Starr. “When the government takes action, although it has enormous power, there are legal limits to what they can do. One of those limits is that they cannot take private property even for a good purpose if they do it in violation of legal protection or don’t give just compensation.”

The lawsuit against the Treasury contends that the takeover of A.I.G. discriminated against the company and its shareholders by charging onerous interest rates on loans extended by the government — 14.5 percent initially — and by taking an 80 percent interest in the company over the objections of shareholders.

The terms of the government’s assistance to Citigroup, which was aided about the same time, provide a contrast, the lawsuit contends. Indicating the punitive nature of the A.I.G. rescue, the suit pointed out that Citigroup received loans at a fraction of the interest rate charged to A.I.G. and that the government took on only a modest stake in the bank.

“The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency,” the lawsuit said.

At the time of the A.I.G. bailout, Henry M. Paulson Jr. was head of the Treasury and Timothy F. Geithner was president of the New York Fed. Mr. Geithner is now Treasury secretary.

A spokeswoman for the Treasury provided a statement from Tim Massad, assistant secretary for financial stability. “It is important to remember that the government provided assistance to A.I.G. — and stopped it from collapsing — in order to prevent a meltdown of the entire global financial system,” he said. “Our actions were necessary, legal and constitutional. We are reviewing the lawsuit and expect to defend our actions vigorously.”

Jack Gutt, a spokesman for the New York Fed, called the suit meritless and said that A.I.G.’s alternative to the government bailout was bankruptcy and a worthless stock. “The Federal Reserve’s actions with regard to A.I.G. helped to restore financial stability in the United States during a period of intense volatility and vulnerability in the U.S. economy,” Mr. Gutt said.

Together, the Starr lawsuits seek at least $25 billion in damages, which is the value of A.I.G. shares held by Starr before the government bailed out the insurer. But as they progress, Starr International’s lawyers will request information about the decisions to rescue A.I.G., including documents and e-mail traffic between the Treasury, the New York Fed, A.I.G. and its trading partners.

The court actions may fill in some of the details surrounding the takeover that remain shrouded in secrecy, especially the decision by the Fed to unwind the credit insurance the company had written on souring mortgage securities and pay A.I.G.’s trading partners in full. Mr. Greenberg declined to comment.

A.I.G.’s credit insurance positions were closed out in November 2008. It later emerged that New York Fed officials chose to pay the insurer’s trading partners 100 cents on the dollar, even though some institutions were willing to accept a discount. The New York Fed also tried to keep A.I.G. from identifying the institutions that received the payouts, even though the insurer argued that such disclosures were called for under securities laws.

Critics have called the Fed’s decision a backdoor bailout for prosperous institutions that had dealings with A.I.G. Only later were these institutions identified; they included Goldman Sachs, the French bank Société Générale and Deutsche Bank.

The lawsuit against the New York Fed also says that the Fed breached its duty to A.I.G. shareholders by requiring that the company release these trading partners from any possible legal actions related to the mortgage securities it had agreed to insure.

A report on the A.I.G. takeover published last month by the Government Accountability Office found inconsistencies and contradictions in New York Fed officials’ explanations for why it paid A.I.G.’s trading partners in full. The report also noted that the New York Fed’s decision to make these institutions whole on the credit insurance written by A.I.G. disregarded the expectations of Fed officials in Washington.

Article source: http://feeds.nytimes.com/click.phdo?i=ed0b7da3ceca96ebcd6ef9cd80592a86

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Spotlight Fixed on Timothy Geithner, a Man Obama Fought to Keep

November 13, 2011 by Leave a Comment

“Take a walk with me,” he said to Carole Sonnenfeld Geithner, within earshot of others.

Their stroll on the South Lawn was Mr. Obama’s last step in a lengthy effort to keep her husband, Timothy F. Geithner, as secretary of the Treasury for the rest of the president’s term. Having worn down Mr. Geithner, Mr. Obama wanted to explain why it was important that her husband delay his return to New York.

That Mr. Obama went to such lengths to keep Mr. Geithner, after not having done the same with others on his economic team who had left at midterm, underscored how much he had come to rely on Mr. Geithner.

The question for outsiders as varied as Tea Party Republicans and liberal Democrats is why Mr. Obama would be so insistent that Mr. Geithner stay. As Treasury secretary, he was the highest-ranking member of a team that underestimated the depth of the downturn, and he has managed both to anger Wall Street firms and to be a target of criticism at Occupy Wall Street rallies.

For Mr. Obama, however, Mr. Geithner has emerged as the indispensable economic adviser who has outlasted every other member of the original inner circle and whose successes easily outweigh his missteps. The two are not friends exactly — Mr. Geithner rolls his eyes at the idea of playing golf, the president’s preferred form of relaxation — but they are what David Axelrod, Mr. Obama’s political adviser, calls “kindred spirits.”

Europe’s troubles, perhaps more than anything, highlight what Mr. Obama likes about Mr. Geithner, because they help show how the effects of the financial crisis could have been worse in this country.

After a rocky first few weeks in the job, Mr. Geithner managed to stabilize the country’s troubled banks by forcing them to own up to their problems and seek additional funds from both the government and the private sector. The Treasury has even earned a profit for taxpayers on the still-reviled bank bailout program.

European leaders — defying repeated advice from Mr. Geithner, by phone and in five trips so far this year — have taken a much less aggressive approach, applying one Band-Aid after another to address their mounting debts and ailing banks, only to discover they must do more.

“They’re moving ahead, but we just need them to move ahead more quickly and with more force behind it,” Mr. Geithner said of European leaders on Thursday, after meeting with Pacific region finance ministers in Honolulu.

Many outside analysts believe that if Europe had followed the Treasury’s lead sooner and forced banks to hold more capital, its financial institutions would not be so vulnerable.

The administration misjudged the length of the downturn, as did many private economists. Although Mr. Geithner wanted Congress to pass more short-term help for the economy than it did, he was not among those in the administration who were pushing hardest for additional short-term measures to lift hiring.

As a consequence, Mr. Obama’s economic team failed to help him prepare Americans for the pain ahead. It has proved a defining mistake of the Obama administration.

Although Congress limited the administration’s options, many economists fault Mr. Obama and Mr. Geithner for being too timid in intervening, especially to help homeowners. In White House meetings, Mr. Obama has repeatedly voiced frustrations — sometimes brandishing letters from distressed homeowners — that the administration’s initiatives have not helped nearly as many homeowners as advertised.

“I just don’t think they tried hard enough, and I’ve told the administration that,” said Alan S. Blinder, an economist at Princeton and former vice chairman of the Federal Reserve. “They haven’t done the really difficult things — like using a lot more public money. Yes, there are legal complexities, political difficulties and all that. But stemming this epidemic of foreclosures was — and still is — vitally important.”

Article source: http://feeds.nytimes.com/click.phdo?i=1b9fb9d15ac02542159bbcf666e7e73f

Filed Under: Economy News Tagged With: , ,

Economix Blog: Simon Johnson: Mr. Hoenig Goes to Washington

October 27, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Thomas Hoenig, recently retired as president of the Federal Reserve Bank of Kansas City and nominated as vice chairman of the Federal Deposit Insurance Corporation, looks askance at too big to fail banks.Jin Lee/Bloomberg NewsThomas Hoenig, recently retired as president of the Federal Reserve Bank of Kansas City and nominated as vice chairman of the Federal Deposit Insurance Corporation, looks askance at “too big to fail” banks.

To fix a broken financial system and to oversee its proper functioning in the future you need experts. Finance is complex, and the people in charge need to know what they are doing. One common problem, manifest in the United States today, is that many leading experts still believe in some version of business as usual.

Today’s Economist

Perspectives from expert contributors.

At the height of the Great Depression, Marriner S. Eccles was summoned to Washington from Utah, where he was a regional banker. He helped remodel the Federal Reserve through the Banking Act of 1935 and then became its first independent chairman; the Fed board had previously been headed by the Treasury secretary.

Mr. Eccles was not a fan of big Wall Street firms and their speculative stock market operations; rather, he understood and identified with smaller banks that lent to real businesses. Mr. Eccles was the right kind of expert for the moment. Who has the expertise to play this kind of role in our immediate future?

Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City, has long been a strong voice for financial sector reform along sensible lines. Within the official sector, he has spoken loudest and clearest on the most important defining issue: “Too big to fail” is simply too big. And last week he took a major step toward a more prominent role, when he was nominated by President Obama to be vice chairman of the Federal Deposit Insurance Corporation.

The F.D.I.C. is not as powerful as the Fed, but in our current financial arrangements, it does play a critical role. The Dodd-Frank legislation has its weaknesses, but it gives the F.D.I.C. two important powers.

First, with regard to big banks, the F.D.I.C. can help force the creation of credible “living wills” — explaining how the bank can be wound down if necessary. If such wills are not plausible then, in principle, the F.D.I.C. could force simplification or divestiture of some activities. Second, the F.D.I.C. is now in charge of “resolution” for mega-banks, i.e., actually closing them down and apportioning losses in the event of failure.

One important concern is whether the F.D.I.C. has enough clarity of thought and — most critically — enough political support to take the pre-emptive actions needed to make our biggest banks smaller and safer. (For more specific suggestions – and some disagreement – on what exactly is required to strengthen financial stability, you can watch two speeches made on Oct. 21 at a George Washington University law school symposium: Sheila Bair, the former F.D.I.C. chairwoman, spoke first and I spoke immediately after; my remarks start around the 49-minute mark.)

The F.D.I.C. senior team is already strong, with a great deal of experience handling the problems of small and midsize banks. The current acting chairman, Martin J. Gruenberg, was vice chairman under Ms. Bair. These are not people who are easily intimidated by big banks. And Mr. Gruenberg is highly regarded on Capitol Hill, where he worked for the Senate Banking Committee for nearly two decades. (Disclosure: I’m on the F.D.I.C.’s Systemic Resolution Advisory Committee, which meets in public; I’m not involved in any personnel or policy decisions.)

I have been a strong supporter of Mr. Hoenig in recent years, endorsing his views and arguing in the past that he should be named Treasury secretary.

In the current mix of Washington-based policy makers, Mr. Hoenig would be a great addition. He spoke out early and often against “too big to fail” banks. In early 2009, his paper “Too Big Has Failed” became an instant classic. It is worth reading again because it contains a number of forward-looking statements that remain important. Perhaps the most relevant for his F.D.I.C. role:

Some are now claiming that public authorities do not have the expertise and capacity to take over and run a “too big to fail” institution. They contend that such takeovers would destroy a firm’s inherent value, give talented employees a reason to leave, cause further financial panic and require many years for the restructuring process. We should ask, though, why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of “toxic” assets they created and coping with a raft of politically imposed controls that would be placed on their operations?

This sounds very much like the basis for a sensible strategy of thinking about Bank of America, which is in serious trouble — and where the F.D.I.C. should consider a more proactive intervention.

The European debt situation is also threatening to spiral out of control, with potentially serious consequences for our financial sector. If you have not yet reviewed the details of Bill Marsh’s graphic from The New York Times on Oct. 23, I strongly recommend it — but you’ll need a big computer screen or the ability to print out on a very large piece of paper. (The picture is literally big, 18 by 21 inches; there is also a nice interactive version that lets you look at various scenarios.)

We do not know how these or other shocks will hit our financial system. Nor do we know exactly who will fall into what kind of trouble.

We need experts at the helm with sensible judgment and the right priorities – and with a good understanding of what kind of financial system we really need. We also need policy makers who have strong support from across the political spectrum, including on Capitol Hill.

Mr. Hoenig is exactly the right person for the moment.

Article source: http://feeds.nytimes.com/click.phdo?i=59cd483ba56bdf86c999aec672db3db4

Filed Under: Economy News Tagged With: , ,

G-20 Seeks Broader Solution for Europe Debt Crisis

October 14, 2011 by Leave a Comment

After offering piecemeal solutions for more than a year, the G-20 finance ministers are now seeking a broader plan to prevent the crisis from engulfing big countries like Spain, which saw its sovereign credit rating cut anew on Thursday, a move that may deepen the impact of the debt crisis on European banks.

The United States Treasury Secretary, Timothy Geithner, who is attending the meetings, has said a solution is needed to prevent Europe’s troubles from infecting the rest of the world.

Finance Minister Francois Baroin of France said after talks on Friday that officials had “already come to some agreements that will be very important,” but he did not provide specifics.

The weekend discussions are a precursor to a crucial summit meeting planned for Oct. 23 in Brussels by European leaders.

While they were not expected to produce all the solutions, officials want to strike a deal soon to increase the size of a Europe-wide bailout fund for troubled countries and banks, known as the European Financial Stability Facility. They also want to force Europe’s banks to raise more capital and require private investors to take larger-than-anticipated losses on their holdings of Greek government bonds to avoid running up the bill to taxpayers.

Financial markets seemed to believe that the Europeans were getting serious about a solution: stock markets have risen recently on hopes for a deal, especially after German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged last weekend to deliver a plan. Major European stock indexes closed up for the week and Wall Street was higher in midday trading Friday.

But investors reading between the lines see further complications, especially for Europe’s banks. Banks charge that new capital requirements will force them to curb lending to consumers and businesses, hurting already weak economic growth. But some are already selling assets and various businesses to raise money to meet them.

On Friday, Standard Poor’s downgraded the credit rating of the biggest French bank, BNP Paribas, citing its “material” exposure to Italy, which faces similar problems to Greece, but on a much-larger scale.

In an assessment of five major French banks, including Société Générale and Crédit Agricole, S.P. said that all of their financial profiles had weakened as a result of more difficult economic and funding market conditions ahead. The agency also said that it believed the French government was ready to provide them with “extraordinary support” if needed.

Also Friday, the Fitch ratings agency said it would review various ratings for Deutsche Bank, BNP Paribas, Société Générale, Credit Suisse, and Barclays, citing “increased challenges the financial markets are facing” as a result of economic developments and regulatory changes.

That followed the announcement by Standard Poor’s that it was downgrading Spain’s sovereign rating again, to AA- from AA, amid signs that harsh austerity measures may tip the country into a recession. The decision is ill-timed for the many European banks that together hold about $637 billion worth of Spanish government debt.

The banking industry has been girding to battle with European policymakers and regulators in the coming days, especially over a plan that would force the banks to take losses on their holdings of Greek debt of up to 60 percent — much more than a 21 percent loss agreed to under an accord reached by European leaders in July as part of a second Greek bailout.

Several of the continent’s biggest banks, including BNP Paribas and Société Générale, have said they are ready to take losses of around to 50 percent. But most banks that hold Greek debt would have to sign off on a new deal, and an agreement is not certain.

Bankers are particularly angered by two additional proposals from the European Banking Authority, which has come under fire for overseeing flimsy tests on the safety margins of Europe’s banks.

One proposal would require lenders to raise their capital buffers to around 9 percent from 6 percent now, or be forced into the undesirable position of taking money from their governments. Another would require lenders to value all their sovereign debt holdings at current market prices, as part of a “stress test” to ensure that Europe’s banks have enough capital to insure against large-scale losses if the crisis were to spread to the big euro zone countries like Italy.

Article source: http://www.nytimes.com/2011/10/15/business/global/g20-seeks-broader-solution-for-europes-debt-crisis.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Fed Oversight of Nonbanks Is Weighed

October 12, 2011 by Leave a Comment

The Financial Stability Oversight Council voted unanimously to seek public comment on a proposed rule that laid out the standards by which insurance companies, hedge funds, asset managers and the like could fall under stricter regulation.

Many companies and trade groups lobbied hard for months in hopes that their companies would not fall under the purview of the law, fearing increased regulation. Treasury Department officials declined to estimate how many nonbank financial companies might meet the proposed standards. There are approximately 30 banks in the United States with more than $50 billion in assets.

Several companies are obvious candidates, and a number of them have already submitted comments to the council or had meetings with Treasury Department officials on earlier drafts of the proposed rule.

Among those companies are big insurers like the Mass Mutual Financial Group and Zurich Financial Services; hedge funds like Citadel and Paulson Company; and asset management and mutual fund companies like BlackRock, Fidelity Investments and the Pacific Investment Management Company.

The new standards and the creation of the oversight council stem from the Dodd-Frank regulatory act, which, in response to the financial crisis, expanded the ability of financial regulators to oversee big companies that could prove to be a threat to the financial system. The council comprises the heads of the major regulatory agencies and other financial industry representatives.

Timothy F. Geithner, the Treasury secretary and chairman of the council, said the ability to designate so-called nonbank financial companies for heightened supervision was “one of the most important things that the Dodd-Frank Act did.”

“The United States in the decades before the crisis allowed a large amount of risk to build up in a wide variety of institutions outside the formal banking system,” Mr. Geithner said. “When the storm hit,” he said, “that put enormous pressure on that parallel financial system, causing a lot of tension and trauma across financial markets, amplifying the pressure on the formal banking system and adding to the broader damage to the economy as a whole.”

Several of the large financial companies that posed the biggest threats during the financial crisis — like Lehman Brothers, Bear Stearns and A.I.G. — were not supervised by a single agency charged with monitoring their financial stability.

Those companies would most likely fall under the newly proposed rules. In addition to applying only to financial companies holding at least $50 billion in assets, the rules would require companies to also meet one of several other characteristics.

These would include having $20 billion in debt, $3.5 billion in derivative liabilities, a 15-to-1 leverage ratio of total assets to total equity, short-term debt measuring 10 percent of total assets or credit-default swaps written against the company with at least $30 billion in notional value.

Companies that meet those standards will then go through another evaluation, where the council will analyze a broad range of industry-specific measures to determine whether significant financial distress at the company could pose a threat to the country’s overall financial stability.

If a company passes the first two hurdles, it would then be considered for heightened regulation and be given a chance to rebut the assertions. Finally, two-thirds of the oversight council, including its chairman, must vote to designate the company as systemically important, a finding that must be renewed annually.

Some insurance trade groups, which have lobbied aggressively against having their members subject to more stringent federal oversight, made the case again on Tuesday that they did not threaten the financial system.

“Property casualty insurers are not highly leveraged or interconnected and have a fundamentally different business model than banks, a fact that warrants different regulatory treatment,” said Ben McKay, a lobbyist for the Property Casualty Insurers Association, a group that counts giants like Ameriprise, Liberty Mutual and Geico as members.

Treasury Department officials, who briefed news reporters on the condition of anonymity after the council’s meeting, said the council would be particularly interested in comments on how to treat asset managers who invested money on behalf of others. The comment period will last 60 days.

BlackRock, for example, manages roughly $3.5 trillion for institutional and individual clients. But in a letter filed in February with regulators, it argued that, as an asset manager, it did not own those assets. They are not on its balance sheet, and the company does not employ significant leverage that magnifies the risk of its investments.

The Treasury Department officials said a decision about whether or not companies fell under its proposed rules would be made on a case-by-case basis.

The Dodd-Frank Act requires the council to assess 10 considerations when evaluating a nonbank financial company, and the proposed rule anticipates grouping those into six categories.

Three of those are meant to assess the potential impact of a company’s financial trouble on the broad economy. They are size; substitutability, or the degree to which other companies could provide the same service if a firm left the market; and interconnectedness, or linkages that might magnify a company’s financial distress and cause that distress to spread through the financial system.

The other three categories seek to measure the vulnerability of a company to financial distress: leverage, or level of borrowing; liquidity risk and maturity mismatch, or its ability to meet short-term cash needs; and existing regulatory scrutiny.

Eric Dash contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=f0782a287885635e9ea3fc1bd42d263f

Filed Under: Business News Tagged With: , ,
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