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rffrydr
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rffrydr
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rffrydr
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 Posted: Fri May 14, 2010 10:40 pm Post subject: |
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SEC will have a hearing on floating NAV for money market funds. This, would be a killer for the industry and help banks. People are not going to want to see their “cash” trade below $1.
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rffrydr
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| Posted: Mon May 10, 2010 2:50 pm Post subject: |
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The cure worse than the disease? The house may have been saved but the funhouse has been lost:
The challenge of halting the financial doomsday machine
By Martin Wolf
April 20, 2010
| Quote: |
Can we afford our financial system? The answer is no. Understanding why this is so is a necessary condition for evaluating ideas for reform. The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.
People pay too much attention to the direct cost of bail-outs. As Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis, has noted, these costs may be around 1 per cent of gross domestic product in the US and UK. The costs that matter, however, are those of the recession and the huge jump in public debt. If only a quarter of the world's loss of output during the recession were to prove permanent, the present value of these losses could be as much as 90 per cent of annual world product.
How did this happen? Quite simply, the financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades. Capital ratios have fallen sharply, while returns on equity have become higher and more volatile. As Mr Haldane notes in another paper, leverage is the chief determinant of returns on equity and increased leverage also explains the level and volatility of banking returns. Finally, the banking sector has also become substantially more concentrated. (See charts.)
Mr Haldane bemoans "a progressive rise in banking risk and an accompanying widening and deepening of the state safety net". This is a "Red Queen's race": the system is running to stand still with governments racing to make finance safer and bankers creating more risk. The route was via liquidity, deposit and capital insurance. Mr Haldane notes that rating agencies value government support for banks. Government support must surely provide a part of the explanation for the low yields on bonds issued by these massively leveraged businesses (see chart).
The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as "rational carelessness". Its most dangerous effect comes via the extremes of the credit cycle. Most perilous of all is the compulsion upon the authorities to blow another set of credit bubbles, to forestall the devastating impact of the implosion of the last ones. In the end, what happens to finance is not what matters most but what finance does to the wider economy.
Does today's engorged financial system produce gains that justify these costs? In a recent speech, Adair Turner, chairman of the UK's Financial Services Authority, argues it does not.* Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.
As Mr Turner notes, the promise of securitisation has turned out to be partly illusory. Arguments used in its favour – "market completion" and the ability to extend credit more widely – look highly questionable. Particularly striking was the failure of the credit default swap market to give any forewarning of the financial crisis (see chart). At bottom, the invention of complex securities hugely exacerbated the information and incentive problems inherent in complex financial systems. Even the frequently heard argument that more market liquidity is better than less is far from unimpeachable: it exacerbates rational carelessness.
So what is to be done? In answering this question, one has to start from a recognition of the chief dangers: first, the high-income countries, with their low underlying rate of economic growth and huge costs of ageing, cannot possibly afford another crisis; second, the big issue is the impact on the economy.
Against these standards, what is one to make of ideas now being floated? Three common ideas need to be put in their place.
One idea, popular in US Republican circles, is: "just say no" to bail-outs. This is a delusion. Since financial institutions are powerfully interconnected, the government cannot credibly commit itself to not rescuing the system when in peril.
Another idea, popular among US liberals, is that the chief issue is "too big to fail". Mr Haldane shows that the implicit insurance to huge banks is bigger than to smaller ones. He agrees, too, that economies of scale in banking are modest. The challenge of managing such complex institutions is enormous. Finally, the diversification these institutions seek is ultimately illusory: they are all exposed to economy-wide risks.
Yet it is important not to exaggerate the significance of size alone. One point is that some of the systems that navigated the crisis relatively safely – Canada's, for example – are dominated by a stable banking oligopoly. Another is that, as happened in the US in the 1930s, the collapse of many small and undiversified banks can be highly destructive. Size matters. But it is certainly not all that matters.
A third notion is that the big issue is regulatory completeness. It is argued that if only oversight had been effectively imposed, the pattern of overleveraging and default could have been halted. This, too, is unlikely. It is hard to regulate finance against the incentives of those who run it. Fixing the problem has to include changing incentives in simple and transparent ways. To put it bluntly, participants have to fear the consequences of making serious mistakes, not just be told to stop.
In the end, halting the financial doomsday machine is going to involve fundamental changes in policy towards – and the structure of – the financial system. There are two broad approaches now under discussion. The official one is to make something roughly like the present system far safer, by raising capital and liquidity requirements, moving derivatives on to exchanges and enforcing prudential regulation. The alternative is structural reform. Which is the least bad option? I plan to address that issue next week. |
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rffrydr
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rffrydr
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| Posted: Mon Apr 26, 2010 9:23 am Post subject: |
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IMF's vision as regulator of, say, top 50 world banks in bailout administration? This would be an exciting new twist in its old vision as global bankruptcy court.
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rffrydr
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rffrydr
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| Posted: Fri Apr 23, 2010 9:24 am Post subject: |
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I was looking through Time archives for Prez quote yesterday:
| Quote: | | I’m going to quote: “Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed… would rivet upon their institutions what they considered a monstrous system… such a system, they felt, would not only rob them of their pride of profession but would reduce all U.S. banking to its lowest level.” That appeared in Time Magazine in June of 1933. (Laughter and applause.) |
And came across this little ditty:
http://www.time.com/time/magazine/article/0,9171,745815,00.html
There's the comments on the rationalization and consolidation of the autos you'd expect and there's the optimism coming out of the cycle...and there's the year, 1933. That's gonna be a long long road.
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rffrydr
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| Posted: Fri Apr 23, 2010 9:18 am Post subject: |
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For all the newfound hostility towards financial reform in the biz press it is strangely ironic that a central tenet of that reform is the reinstatement of its most fundamental stakeholder--the shareholder:
| Quote: | | ....Not only that, some of the salaries and bonuses that we’ve seen creates perverse incentives to take reckless risks that contributed to the crisis. It’s what helped lead to a relentless focus on a company’s next quarter, to the detriment of its next year or its next decade. And it led to a situation in which folks with the most to lose -- stock and pension holders -- had the least to say in the process. And that has to change.... |
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rffrydr
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| Posted: Thu Apr 22, 2010 9:08 am Post subject: |
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Combine this with net-neutrality and The GOOG's open-book privacy comromise site and it's a a brave new world:
| Quote: | VODAFONE LAUNCHES VODAFONE MOBILE RECORDING TO AID COMPLIANCE AND IMPROVE RISK
MANAGEMENT IN THE FINANCE SECTOR
NH
Vodafone Global Enterprise, the Vodafone business that delivers managed
communication solutions and services to multinational enterprise customers,
announces the launch of a new service to enable regulated financial firms to
record all incoming and outgoing mobile calls and texts, as new regulations on
compliance loom.
NH
The solution will significantly enhance governance, business continuity and
risk management processes. The launch comes as the Financial Services
Authority (FSA) in the UK reviews the need to record mobile phone calls and
texts made by employees of regulated companies from business devices to
improve governance procedures www.fsa.gov.uk/pubs/cp/cp10_07.pdf.
NH
The solution is called Vodafone Mobile Recording and enables regulated
companies to record and archive mobile conversations, voicemails and text
messages to protect against losses from disputes, support mobile working
practices, and deliver improved compliance and risk management capabilities.
It will be made available across Europe.
Although financial companies commonly record calls on fixed lines as part of
their regulatory requirements, mobile calls and texts have, until now, been
exempt due to the technical complexity involved. |
Apple now has an app hooked to Macy's and others that will utilize the GPS feature to ping ads as you walk through the store--welcome Minority Report.
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rffrydr
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| Posted: Wed Apr 21, 2010 8:14 pm Post subject: |
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I think I heard that Glass-Steagall was some 18-pages: current plan you can't see the bottom. Yet pagination may not be the right scale on this one.
Left field Ag. Committee pushing for OTC commodity abolition, knockin' the investment banks again. Looks like there's little more "political will" over there.
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rffrydr
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HenryTo
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rffrydr
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| Posted: Tue Jan 26, 2010 11:21 am Post subject: |
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Does this chart mean what the makers think it means?
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HenryTo
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| Posted: Thu Jan 21, 2010 1:22 pm Post subject: |
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It seems like Obama is indirectly reinstating Glass-Steagall without explicitly pushing legislation for it. It's probably the best the banks could hope for under the current political environment, however.
The hedge funds will love it. While it will drive liquidity lower in the short-run, investment banks scaling back their trading/principal investing operations will no doubt result in more inefficiencies and for the hedge funds to step in and capture those inefficiencies and illiquidity premiums. |
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