One reason that a lot of people are enamored with the Brown-Vitter approach to bank regulation is that it’s very simple, and everyone deep down sort of thinks that the simple answer has to be better than the complicated one. “You don’t need risk-based capital or stress tests or liquidity coverage ratios or VaR models or multiple tiers of capital or bail-in debt,” Brown and Vitter promise. “You just need to make sure that big banks don’t have assets of more than ~6x their common equity.”
Some people disagree1 and by all means feel free to question those people’s motives. Certainly some people benefit from complexity, bankers above all but also banking regulators, former regulators, and I suppose me too. Simple banking seems really boring, though maybe Brown-Vitter simple banking wouldn’t be.
Anyway that seems like the background to this interesting speech by Fed governor Daniel Tarullo about financial stability, which you could if you like read as sort of the Fed’s initial response to Brown-Vitter. And it’s not not that; the speech engages with Brown-Vitter on the capital stuff, basically defending the status quo of risk-based regulatory capital while conceding a little to Brown-Vitter’s call for higher capital.2
But he seems at least as focused on another source of systemic risk: not banks but wholesale funding markets, not capital but liquidity. You could see why the Fed might be focused there. Read more »
Attending Harvard, surrounded by classmates with trust funds and blue blood, who had no idea what it was like to grow up in the projects. His years with those same WASPs, many of whom had probably never met a Jew. The period in which there was a lot more Lloyd to love, which coincided with the ‘You can never be too rich or too thin’ era. All experiences that likely made Lloyd Blankfein acutely aware of the fact that he was different, and maybe made him feel like a little bit of an outsider.
None of them, however, can compare to the most ostracizing experience of his life: working as a young commodities trader in an investment bank. Some might say it was the equivalent of being gay in a world that is yet to fully accept homosexuality. Read more »
One reason that it’s silly to get worked up about banks gambling with your deposits is that they’re mostly not. Your deposits have a tendency to be structurally senior, insured, at regulated subs, etc.; nothing all that bad will happen to them. Banks are gambling with your money market funds, and with the securities-lending proceeds from your mutual funds. Which are not insured, or particularly regulated, but which fund something like $1.9 trillion of securities dealers’ inventory through tri-party repo, as well as providing some $6 trillionish in other collateralized funding for dealer and hedge fund inventories. And this is really much worse, crisis-wise. Since deposits are insured, runs on them are rare. Runs on repo probably caused the financial crisis. Maybe.
NY Fed President William Dudley gave a pretty good speech about this stuff today; you should read it, or read some summaries here or here. The most fun parts for me had to do with the tri-party repo market.
First of all, if you’re following that market you may be aware that the Fed is moving to get rid of “the unwind,” in which
- by day, cash investors deposit their cash at JPMorgan and BoNY and JPM/BoNY lend cash to securities dealers, but
- by night, those cash investors lend the cash directly to the dealers in the freaky unregulated shadow banking market.
Those two activities sort of live on a continuum – traditional(ish) banking by day, shadow banking by night, but still the same provision of credit to the same people based on the same collateral. It’s just that during the day the cash investors’ risk is wrapped in the gentle embrace of the clearing bank; at night the cash investor snuggles up directly with the collateral. Dudley argues that this combined the risks of shadow banking with the complacency of regular banking: Read more »
And in America, we don’t negotiate with terrorists! Except for when we do! [RCP]
The president is set to share his thoughts on Detroit’s big day at 4:15. What do we think he’ll say? Will he urge everyone to go out and buy a Yukon Denali Hybrid? Will he call out UBS by name? Will he mention today’s winner of Call The (GM) Close (who should email me to redeem his/her prize)?
Things look, you know bad, but really, nothing is fucked. Read more »
An abbreviated version of Einhorn’s speech ran as an Op-Ed in this morning’s Times. We’ve obtained the full text of yesterday’s chat.
Read more »
Thoughts? Opening reaction– disappointed in the lack of Blankfein shout-outs (especially since Gary Cohn canceled a lunch to make this thing) and not enough jokes.