Category Archives: Banking

Credit Rater S&P to Be Banned for a Year From Biggest Part of Commercial-Bond Market – Bloomberg

I wonder why they waited to deal with ratings from after the subprime period.

Will S&P crumble?  Are there other models of ratings production in other countries?  Does anyone have a more autonomous system (instead of fee for ratings)?

 

Standard & Poor’s will be suspended for a year from rating bonds in one of its most lucrative businesses in a $60 million settlement with the U.S. Securities and Exchange Commission, according to a person with knowledge of the matter.

The deal, which the person said may be announced as soon as tomorrow, is the agency’s toughest action yet in an industry blamed for fueling the 2008 financial crisis by assigning inflated grades to risky mortgage debt.

via Credit Rater S&P to Be Banned for a Year From Biggest Part of Commercial-Bond Market – Bloomberg.

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Filed under Banking, Great Recession

Some Common Sense at Last about Banks- Volcker

This strikes me as the right approach.

Volcker Calls for Restricting Banks’ Risk, Trading Activity – WSJ.com
The comments reflect Mr. Volcker’s long-held view that banks should act more in line with their traditional role and not take extremely risky gambles, which could threaten the viability of commercial banks and expose the Federal Reserve and taxpayers to large risks.

People keep yapping on about how the financial systems is the “circulatory” system of the economy.  Fine.  Then by extension, the amount of risk we have been allowing into the commercial banking systems is akin to eating four hamburgers every day for every meal, and then doing amphetamines, adn then running a marathon while smoking and hoping it won’t give us a heart attack.

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Filed under Banking, economics

What is wrong here

X-posted at my class blog.

“Retention bonuses” would seem to be bonuses by any other name.  Obviously, public and political scrutiny is at super high levels as we reel from the financial crisis.

This little nugget caught my eye about a joint venture between Citigroup and Morgan Stanley:

According to the newspaper [The WSJ], not all of the joint venture’s 20,000 brokers would get retention payments. It said a broker who brought in $1 million in revenue last year might expect to get $500,000 to $1 million, depending on how much he continues to produce.

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Filed under Banking, corporate governance, corruption, economics, Government, Political Economy

Through the looking glass: Putting a Value on a C.E.O.

January 28- Update:

Maureen Dowd Agrees with me:

“If you don’t pay your best people, you will destroy your franchise” and they’ll go elsewhere, he said.

Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism.”

My father in law sent me this article from two weeks ago int the NY Times.

Dealbook – Putting a Value on a C.E.O. – NYTimes.com
“By itself, more share and retention-based compensation is not the magic bullet, because it certainly didn’t stop us from running up very large losses,” Mr. Bischoff said.

This ranks up there with all time statements lacking any humility or self-awareness.  If you look at the explosion in financial sector profitability (much of it inflated) and bonuses and other stock-based payments, and then at the continued pay out of bonuses even as the financial sector sank, then the premise of this statement by the Chairman of Citigroup, which is that more of the same compensation schemes _may_, (may!) not help avoid large losses is weirdly up-is-down through-the-looking-glass logic that can only make sense to the world of Wall Street and high finance.  If you are the CEO, of, say, I don’t know, a car manufacturer, and your firm looses more than half of its value in one year, than you d not get a bonus.  You probably lose your job.

The article goes on to repeat the logic of more of these compensation ideologues several times that if firms do not continue to pay out huge bonuses tied to stock options, than they will lose the top management talent they need to compete.  ha ha, ho ho!  I am drying my eyes.

Let’s list some accomplishments of this great management talent (all are sarcastic, BTW)

Because they have done such a great job so far.

Because they did not create the conditions for this financial mess by advocating deregulation and obfuscation of financial systems under the guise of free market theory.

Because they designed and staunchly defend as in the general interest stock option compensation that creates clear and perverse incentives to smooth earnings, game financial accounting, and other malfeasance (whether deliberate or convenient).

Because they have not hijacked the very governance mechanisms meant to curb the abuses of greed in a free market- corporate boards and regulatory agencies.

Finally, is there a labor economist in the house?

The argument is that if not, as a group, paid super premiums over all other types of organizational leaders, from medicine, higher education, the frickin’ president, manufacturing, and every other sector of American economic activity, then oh no! there will be a mass exodus of CEO and top management.  Really?  And where in the hell where they go work?  Boeing?  Chrysler?  Schering Plough? Best Buy?  Given the vast pool of educated and experienced mangers and even financial managers in the world, you don’t think we could possibly find people willing to work for $2,$4,$6 million in total compensation? Especially if that is twice what they ear now (or more) and not any better than what they could get elsewhere.

The notion somehow massive bonuses and total compensation are the only way to keep people performing as the CEOs and top leaders of banks, brokerages, investment banks, and so on just seems laughable.

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Filed under Banking, economics, management

Network Liabilities- Citigroup Pays for a Rush to Risk

The Reckoning – Citigroup Pays for a Rush to Risk – Series – NYTimes.com
But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say. [my emphasis]

This NY Times article points out that the normal risk management controls at Citigroup that should have reined in exposure to CDOs [collateralized debt…] were thrwarted.

By?

“ties that clouded judgment.”

I suppose that is a network liability.  Every organization is cris-crossed  with network ties.  The question is why these had such an impact.  Org Culture?  Greed?  Something structural in the network?  The technology of communication?

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Filed under Banking, Business, Social Networks

The Reckoning – Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk – Series – NYTimes.com

The Reckoning – Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk – Series – NYTimes.com
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

I am glad the NYT is talking about this.  Why did the SEC rely on the banks’ models?  Ideological blindness or simply the complacency of being amongst familiar faces?  Or perhaps simply ignorance in the face of complexity leading decision-makers to rely on proxies of sound choice.

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Filed under Banking, Business, Government, Orgs Stuff (theory, science, studies)

No blank check for Wall Street.

No blank check for Wall Street.
This is worse than a bad deal – this isn’t a deal at all. This is a blank check to some of the richest companies in the world.

This is a blog post with a petition linked to  it.  I may not agree with all the language, but this is not the time to let the desire for the perfect trump the reality of present action.

We should express our concerns as citizens about the parameters fo this extraordianry action, even if we don’t get to write the legislation.

Krugman on “Cash for Trash.

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Filed under activism, Banking, economics, macroeconomics, policy, Political Economy, Politics, Power, Activism

FDIC does not publish its problem bank list

15 minutes of web searching for this mythical list of problme banks leads me to learn that the FDIC does not publiish the list.

Of course not.  It might cause people to worry about their deposits!  So, we have to protected from our own self-interest.

It is always the most critical information that is hidden.  One site did say I could pay for bank quality/soundness information.  Lovely, that won’t exacerbate inequality in America or anything.

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Filed under Banking, economics

Facing Default, Some Walk Out on New Homes

This NYT article caught my attention as a nice example of economic sociology.  The gist of it, captured in the quotation below, is about the shift in attitudes and practices around home buying and ownership in the US.   Traditionally home ownership is promoted by government policy and cultural norms because it is a means of encouraging personal savings, it boosts household credit ratings, and it improves neighborhoods by creating more local buy-in.  However, When those laudable goals merged with the world of financial innovation, deregulation, and a rise in a particular portfolio thinking world view, we end up with a new set of attitudes and behaviors about home ownership.  less than a Jimmy Stewart, feel-good, iron clad agreement between bank and homeowner, home ownership is a more fluid, transient financial deal that can be done or undone depending on the individual valuations of the players involved.  Home-ownership is one more liquid and negotiable financial arrangement, like owning stock, buying futures, or being paid in stock options.

Facing Default, Some Walk Out on New Homes – New York Times
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of   and foreclosure have changed, economists and housing experts say.

As the article points out, this change is made clearer by the foreclosure bulge (upswing?  crisis?  not sure which term is the most objective).  As Todd Sinai, a professor at Wharton, points out, the very loans that made the housing market balloon set the stage for people to walk away.  many marginal home buyers shifted from being renters to nominally owners.  What actually happened is that they started renting from the bank with the chance to won if the value of the home increased faster than their repayment obligations.  If it doesn’t, quite rationally, they walk away from a mortgage that costs more than the underlying value of the house.  For the purchaser, he says, its a Heads-I-win-tails-you-lose situation.

Of  course, banks could sue in some states, but what bank is going to sue someone who can’t afford the mortgage?  Seems like a bit of poetic justice to me.

The article also focuses on You Walk Away, a company that somehow (I don’t get the business model) makes a profit on people walking out.  There seems to be  another interesting tension over the knitting  together of economic and moral realities.  Traditional auxiliaries to the home buying process don’t want to encourage people to walk away due to the embedded assumption that home ownership is indisputable social good.  Jon Maddux, one of the owners of You Walk Away responds:

“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”

Mr. Zulueta said he felt he had let down the lender, himself, and his family.

“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”

Zulueta is one of the homeowners who Walks Away (is that trade-marked?  haha).

His line of reasoning seems good to me.  The financial and home buying industries ravaged the marginal home buyers and waved their magic wands of financial innovation to off load the debt to other financial players.  The unraveling of a social compact around home buying started among the banks and mortgage companies.  Seeing the writing on the wall, the home owners are following suit and treating a mortgage as one more financial arrangement and not a “marriage contract.”

My interest  in this was piqued by some work Jerry Davis is doing on “The Portfolio Society.”  So keep an eye peeled for that.

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Filed under Banking, economic sociology, innovation, macroeconomics, Political Economy

Market contagion

This will make economic sociologists of all of us.   Expand later…

A Crisis of Faith – New York Times
Today, we’re witnessing another kind of contagion, not so much across countries as across markets. Troubles that began a little over a year ago in an obscure corner of the financial system, BBB-minus subprime-mortgage-backed securities, have spread to corporate bonds, auto loans, credit cards and now — the latest casualty — student loans.

Indeed, this week the state of Michigan suspended a major student-loan program because of the sudden collapse of another $300 billion market you’ve never heard of, the market for auction-rate securities.

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Filed under Banking, economic sociology, Political Economy