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 »
It’s by now a familiar story of the financial crisis: German and Icelandic bankers keep finding themselves the owners of mortgages on grandmothers’ houses in Kansas, and it’s hard to decide which side is more befuddled by it. The Federal Reserve yesterday went one step further up the value chain, publishing an interesting discussion paper called “ABS Inflows to the United States and the Global Financial Crisis” and adding some data and nuance to the story of how we got to a world where a banker flapping his arms in Saxony causes a foreclosure in Topeka.
The Fed researchers started out from a popular explanation of the financial crisis, that a “global savings glut” in certain countries (above all China but also other emerging markets, the OPEC countries etc.) inflated an asset bubble in the US as foreign savers searched for safe but yieldy investments. The puzzle with that theory, though, is that the Chinese didn’t really buy subprime ABS. They bought – and still buy – Treasuries, which worked out well for them. Europeans bought the shit:
Read more »
Remember that whole nasty incident with former New York Fed Chairman Stephen Friedman? The Fed sure does. And it’s taking steps to make sure no one on the boards of its 12 regional banks can have those annoying perceived conflicts of interest, because the public gets really pissed off when a bank you’re bailing out happens to have a representative on the inside.
From now on, any B or C class director on any regional Fed board affiliated with any company that becomes affiliated with the Fed has to quit one job or the other within 60 days. During those 60 days, he or she still gets to draw a paycheck, but doesn’t get to play with his or her fellow Fed directors during that time.
Read more »
The recession may be over, but that doesn’t mean governments should stop pouring trillions into their economies.
A pair of policymakers from both sides of the Atlantic want to keep those stimulus dollars (and euros and pounds) rolling. James Bullard, the St. Louis Fed president who’s had an awful lot to say these days, wants to see the Fed’s ability to buy mortgage-backed securities and bonds continue. IMF chief Dominique Strauss-Kahn agrees that it is way too early to give up on stimulus policies.
Read more »
Put down the emasculators, Chris Dodd. Your plan to geld Ben Bernanke just hit a serious roadblock.
President Barack Obama sent out some of his lesser minions to make clear he wants his Federal Reserve to remain virile and whole, whether or not it’s an “abysmal failure” as a bank regulator. While Dodd says his bill would “enhance” the Fed, it very clearly does not want to swallow a pill that would strip it of its power over banks and consumer finances.
The White House doesn’t want it to, either. The amazingly-named Austan Goolsbee warned that
cutting off the Fed’s cutting off the Fed “can, if you do it wrong, get into a left hand doesn’t know what the right hand is doing kind of problem in a crisis.” In other words, don’t leave the right hand without anything to do.
Read more »
Well, here’s a fun twist to Sen. Chris Dodd’s proposal to castrate the Federal Reserve: Big Ben Bernanke is set to travel to the Hill at some point after Thanksgiving for a few rounds with the gentleman from Connecticut, who heads the committee considering Bernanke’s renomination as chairman of the soon-to-be-inconsequential Fed.
Now, Dodd is saying all the right things, telling Bernanke he’s “doing a terrific job” and that his bid to give most of the Fed’s power to others is “not about individuals and personalities.” But then he turns around and says Ben’s Boys have been an “abysmal failure” when it comes to regulating banks.
One of Bernanke’s minions has already spoken out against doing anything to trim the Fed’s authority, with the Kansas City branch warning that messing with the F.R. “could lead to delays or second-guessing of supervisory recommendations and greater political interference.” And it was talking about Rep. Barney Frank’s proposals for financial regulation reform, which don’t go nearly as far as Dodd’s in cutting the Fed down to size.
Read more »
The most oft-heard description of the current economic recovery is “slow.” (Nonexistent is a distant second.) And hot on the heels of another disappointing jobs report, which put unemployment about 10% for the first time in 26 years, here’s some more evidence that the economy may eventually recover fully at some point in the next decade.
The Fed went around and talked to a bunch of banks, and found that only some of them are still tightening credit standards. Which I guess means that the credit crisis is only getting slightly worse more than two years on.
To its credit, the Fed didn’t exactly try to sugarcoat the news that only 15% of lenders–be they commercial, industrial or credit-card–were making it tougher to get their money. The central bank said the “tight credit” market is keeping the economy down, and is likely to do so for an “extended period.”
Read more »
The Federal Reserve has been quietly pressuring the Treasury Department not to adopt a rescue plan for Fannie Mae and Freddie Mac that would wipe out the value of their preferred shares, according to a source familiar with the matter. The Fed fears that any move that hurt the preferred could worsen the crisis in regional banks that is already under way.
At issue is $36 billion of preferred stock issued by Fannie and Freddie. Under several versions of widely discussed rescue plans for the mortgage giants, the US government would take a new preferred stake in the companies, subordinating or perhaps wholly eliminating the existing preferred. Critics of Fannie and Freddie believe such a move would be necessary to punish excessive risk taking by the companies and avoid creating additional ‘moral hazard.’
The situation is complicated, however, by the large share of preferred stock held by regional banks, many of which are viewed as possible candidates for failure in these credit crunched times. As the Financial Times reported over the weekened regional banks and US insurers hold the majority of Fannie and Freddie’soutstanding preferred stock. The Fed has begun advocating against wiping out these shares, saying the threat to stability of the banks is greater than the ‘moral hazard’ argument, a source familiar with the matter says.
“The fear is that this bailout, if done in a punitive manner, could be costly, resulting in even more bailouts,” the source said.
Last week Moody’s cut Fannie and Freddie’s preferred stock ratings from A to Baa3 on based on the uncertainty of how they would be treated in a rescue plan from the Treasury. That move could add to the need for the Treasury to take action soon, before banks are forced to report write-downs on the value of these lower-rated preferred shares. At the same time, the new pressure from the Fed to avoid wiping out the shares may stall an agreement on what form the intervention should take.
Bill Gross just appeared on CNBC to crush the rumor that Pimco was diminishing its exposure to Lehman Brothers either by reducing its trading positions with Lehman or reducing any investment in Lehman. In his comments he said that Pimco’s willingness to continue to deal with Lehman Brothers and other potentially troubled securities firms is influenced by the Federal Reserve’s “temporary” broker-dealer discount window.
Gross said that the discount window takes away any solvency risk on the part of Lehman, although he said that doubts about the business model of investment banks is most likely depressing Lehman’s price. The reduction of leverage across Wall Street and the decline of businesses that were, in essence, dependent on a booming real estate market and attendant mortgage boom has raised serious questions about the future profits of investment banks.
Today the Federal Reserve and the SEC signed the memorandum of understanding that would expand their information-sharing and cooperation along the lines of Henry Paulson’s “Blueprint” for regulatory reform. The agreement is designed to bridge the gaps currently in the oversight structure, notably by allowing Bernanke to see the positions and leverage of financial firms.
In exchange, he gives Cox’s SEC information on commercial banks’ health as it impacts their operations in capital markets as well as general assessments of market stability to give the SEC better idea of whether there is trouble ahead.
Normally the Fed only has remit over commercial banks, although it gained a supervisory role over the firms for the duration that the Fed’s window is open to them. With the MOU signed, Bernanke will have permanent access to information about all financial firms. This marks a significant step towards implementing Paulson’s Blueprint, which gives the Fed primary oversight over financial firms. Sources familiar with the negotiations say that the agreement is probably the furthest reform possible without a new legislative mandate. The SEC seems to be very passive about the Fed moving in on its regulatory territory.
Hank Paulson appears quite happy about the final form of the MOU, declaring it “consistent with the long-term vision of Treasury’s Blueprint for a Modernized Regulatory Structure.” He comments that it “should help inform future decisions” about modernizing the labyrinthine regulatory structure. Despite the political impossibility of passing the Blueprint through Congress during his tenure, it looks as if Paulson has ensured its implementation anyway.
-senior Kremlinologist Andrew