We all know that no one listens to what credit ratings agencies say, and that if you were buying up all of that RMBS eight years ago marveling at what a great deal you were getting on triple-A rated stuff, you had it coming. But wouldn’t it be neat if you could put the tiniest bit of stock into a credit rating? Wouldn’t it be great if the folks at Fitch and Moody’s and S&P actually had to do the things they get paid to do?
I feel like if I were the Financial Services Roundtable and I wanted to send a letter to Congress telling them to get rid of a rule that gives lashings of government support to little banks at the arguable expense of, um, this cast of ne’er-do-wells, I would do it anonymously. Or, like, I’d try to trick Matt Taibbi into writing it. Because it’s government support of banks. Banks! We hates banks:
This past week, Sen. Bob Corker (R., Tenn.), a member of the Senate Banking Committee, said the program shouldn’t be extended. “The program’s benefit to the community banking system is, at best, unclear,” he said. “It’s time to move beyond this period of unprecedented government support of the banking industry.”
The program is the FDIC’s transaction account guarantee program, which basically guarantees transaction accounts above the normal $250,000 FDIC limit, meaning that corporate and municipal treasurers can confidently keep their checking accounts at tiny little (but government guaranteed) General Universal Nationwide Bank of America1 instead of opening a money-market checking account at, like, Reserve Primary. Read more »
Banks Prove That They Are Not Too Big To Fail By Saying “We Can Fail” On A Piece Of Paper, Moving OnBy Matt Levine
One way you could spend this slow week is reading the “living wills” submitted by a bunch of banks telling regulators how to wind them up if they go under. Don’t, though: they’re about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**:
(1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank).
(2) If after stiffing its non-deposit creditors it didn’t have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar.
This seems wrong, no? And not just in the sense of “in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy.” It’s wrong in the sense that it’s the opposite of having a plan for dealing with banks being “too big to fail”: it’s premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can’t get out of without taxpayer support, it’ll just file for bankruptcy like anybody else. Depositors will be repaid (if they’re under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha. Read more »
There are so many good stories in Jesse Eisinger’s piece in ProPublica about how the Fed let banks return capital to shareholders that they somewhat obscure the central non-story:
In early November 2010, as the Federal Reserve began to weigh whether the nation’s biggest financial firms were healthy enough to return money to their shareholders, a top regulator bluntly warned: Don’t let them.
“We remain concerned over their ability to withstand stress in an uncertain economic environment,” wrote Sheila Bair, the head of the Federal Deposit Insurance Corp., in a previously unreported letter obtained by ProPublica. …
Four months later, the Federal Reserve rejected Bair’s appeal. In March 2011, the Federal Reserve green-lighted most of the top 19 financial institutions to deliver tens of billions of dollars to shareholders, including many of their own top executives. The 19 paid out $33 billion in the first nine months of 2011 in dividends and stock buy-backs.
That $33 billion is money that the banks don’t have to cushion themselves — and the broader financial system — should the euro crisis cause a new recession, tensions with Iran flare into war and disrupt the oil supply, or another crisis emerge.*
Here’s one way to think about bank capital:
(1) Banks should have a minimum capital of X**
(2) If banks have less capital than X, they have to raise more until they have X
(3) If banks have more capital than X, they can get rid of some capital until they have X
There are various ways to get rid of capital; my favorite is the money-burning party but other good ones include paying outlandish bonuses, building trophy headquarters, lavishing gifts on your potted plants to make up for your previous callous behavior, and of course the old standby of losing fuckloads of money on bad trades. All have their adherents. Two that are particularly popular are dividends and share buybacks. These are popular in part because, if you think of capital as money that people were nice enough to entrust to you, then when you don’t need it any more it does kind of make sense to give it back to the people who entrusted it to you, though again the other options all have their points too. Read more »
Here is a standard set of moves in talking about bank riskiness:
1. Banks take too many bad risks!
2. Regulators should only let them take good risks!
3. All better now!
There is, like, a problem there, because actually bankers tend to have compensation structures that are more directly tied to their success, and also larger, than those of bank regulators – which means that, if you had to guess who would be better at picking the good risks, you might pick the bankers over the regulators. You can try to address that problem, maybe by improving the incentives of the regulators to make them better at picking the good risks, or by improving the incentives of the bankers to make them better at picking the good risks, because after all your goal is actually not optimal regulation but optimal risk-picking.
There are other approaches available. Here is a cop-out option:
Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed.
Sheila Bair, former head of the FDIC and cartoon-klutz-villain of Too Big to Fail, comes in for the occasional gentle ribbing on Wall Street, and her column in Fortune today is well set up for another round of gentle ribbing, which I will get to in just a minute, so you might think that that headline was intended to make fun of her, but actually, no, she makes a solid point:
MF Global took proprietary positions in European sovereign debt through what Wall Street calls “repo to maturity” transactions. It technically sold the European bonds to other firms, agreeing to repurchase them at a premium when they matured in 2012. MF hoped to make money by pocketing the difference in the rate it paid its trading partners and the higher rate paid on the bonds themselves. … Under the 300-page Rube Goldberg contraption of a regulation recently proposed by federal agencies to implement the Volcker Rule, “repo” transactions like MF Global’s are not generally treated as verboten proprietary trades. Thus, even if MF Global had been a bank, it arguably could have used this exception to gamble away, putting the FDIC at risk.
Now, if I had to guess, I’d say the better side of the argument is that the MF sovereign trades would in fact be streng verboten under the Volcker Rule. (Except, of course, as she points out, that MF is not an FDIC insured bank and so is not covered by the Volcker Rule.) I read the rule’s coverage of “any long, short, synthetic or other position” in a security to include the Corzine repo-to-maturity, which is at least a “synthetic position” in the underlying debt, and since the position seems to have been more “prop” than “flow” it would probably be prohibited. But I had to search around in the proposal for some time to come to that conclusion – it’s not apparent even from the mammoth Davis Polk flowchart that has replaced the actual rule text for my day-to-day Volcker Rule pondering efforts. And the meaning of “synthetic” may not be the same to everyone. So I’ll spot her the claim that a bank could “arguably” use a repo-to-maturity structure to prop trade to its little heart’s content. [Update: A lawyer I trust points to the Volcker Rule's "repo exception" for trades arising out of repo agreements; he thinks that Bair is right that the MF Global trades would fall under the exception and not be covered by the rule. I suspect that the intent of the "repo exception" is to cover the people providing the repo funding (here MF's counterparties), not the people with economic exposure to the position, so I'll tentatively stick to my original claim, but in any case the murk is even murkier than I'd thought. By the way, if I'm wrong, then things are even worse than Sheila Bair thinks. Basically any prop trade is fine as long as you fund it via repo.] Read more »