Relevant and even prescient commentary on news, politics and the economy.

Neel Kashkari and the Minneapolis Plan to End Too Big to Fail

Neel Kashkari has been President of the Federal Reserve Bank of Minneapolis since January 1, 2016. Prior to that, he was brought over from Goldman Sachs to be Assistant Secretary of the Treasury for Stability from October 2008 to May 2009. His job was to hand out money to the banks as bailout.

I believe the first time first time he was mentioned at this blog was right after he was appointed to give away our money:

The bail-out will succeed only, repeat, only in the sense that the US succeeded in Iraq in 2003 and 2004 when Simone Ledeen and the rest of the Heritage interns were running around the country handing out trash bags full of money and giving Halliburton money for services it would never begin to render. There will be less yabbering of silly catchphrases like “but what about all the schools that were painted?” this time around, though, because the schools will be exploding when GW is no longer in office. To be extremely precise, this is what I think the success will look like: shady, undeserving characters will be enriched, young versions of the idiots who got us into the mess will launch successful careers (can you say “Kashkari”?), and the promised benefits to the American public, the schmucks footing the bill, will never materialize.

From memory, not only is that the first time I mentioned Mr. Kashkari, it is also the most complementary I have been toward him yet. But now, Mr. Kashkari is back with a new scheme to reduce the likelihood of a meltdown.

Kashkari provides this slide as a summary of his plan:

Figure 1 - The Minneapolis Plan

Figure 1  (click on the slide to embiggen)

Accompanying the slide is this platitude which also functions as a fly in the ointment:

We cannot make the risk zero, and safety isn’t free. Regulations can make the financial system safer, but they come with costs of potentially slower economic growth. Ultimately, the public has to decide how much safety they want in order to protect society from future financial crises and what price they are willing to pay for that safety.

Because Kashkari is a political creature who won’t speak clearly, to get an understanding of what the vegetables he wants us to eat taste like we go to the full plan:

We measure the cost of higher capital requirements in terms of lost GDP due to tighter lending conditions. This calculation requires a number of steps. We trace the impact of higher capital requirements to lower bank return on equity (ROE) and then to higher loan rates. Higher loan rates slow economic growth by restricting borrowing. As noted above, this approach closely follows the BIS.

And the banks agree:

The Financial Services Forum that represents U.S. financial services companies cautioned that implementing the recommendations would stymie the economy. “For those looking to accelerate economic growth and job creation, tripling bank capital levels — already double from pre-crisis levels — will make it much harder to meet those goals,” the forum’s spokeswoman, Laena Fallon, said by e-mail.

So, to summarize the negative side of this proposal: more stringent regulatory requirements –> higher interest rates –> less borrowing –> slower growth in GDP.

I recognize that this is gospel in the banking and regulatory community, and its been many moons since I thought of myself as an economist, but this seems pretty daft to me. Or rather, it seems like regulatory capture speaking. Consider for a moment this seemingly unrelated graph:

Figure 2 - The Fed Funds Rate and the Bank Prime Rate

Figure 2.

Note that the bank prime rate (orange line on the graph) is almost perfectly correlated with the fed funds rate (blue line on the graph) which is set by the Federal Reserve Bank. The difference between the two lines is shown in the gray bars. Do you see the large, sustained increase in that difference between the pre-Crisis period and the present that is due to the large increase in capital requirements we’ve already seen? No? Well, that’s because it didn’t happen. This notion that increased capital requirements raises the interest rates that banks charge their customers makes perfect sense in theory, but it stubbornly refuses to actually be true in the real world.

However, let’s assume this time things will be different. Let’s assume that unlike what we’ve seen so far, this time increased capital requirements do lead to a big sustained increase in the bank prime rate. Say for the sake of this post that the requirements effectively doubles the difference between the fed funds rate and the bank prime rate, permanently. What changes?

Well, if the Fed decided, at that point, that it wanted to raise or lower the interest rates charged by banks, it would do what it currently does in the same situation, namely change the federal funds rate. If anything changes at all, maybe, just maybe it will do so at the lower bound. And if there were some evidence that the Fed knows what its doing when the Fed Funds rate is near the lower bound, I admit that would be a concern.

So there’s no downside to this plan, at least as far as I can see.  Of course, the plan is just the tame one we’ve already enacted, but with a bit more in the way of a bite and, courtesy of Mr. Kashkari, a more extravagant soundtrack.  The Federal Reserve Bank of Minneapolis has a good sized research team. Kashkari could have asked any of them of to explain how the Fed Funds rate works, or about the relationship between the Fed Funds rate and the rates charged by banks. But failing upwards requires ignorance.  The higher up you are, the more ignorance is required. It is clear Mr. Kashkari has further to rise.

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Deregulation Without Cultivating Better Rules

Top bank lawyer’s e-mails show Washington’s inside game at Bloomberg shares insights into how regulation is impacted when regulators and the industry regulated share too much.

Pruning Hedge Fund Regulation Without Cultivating Better Rules By Jesse Eisenger, ProPublica at Dealbook, NYT also writes on the SEC and de-regulationscommercial water slides for sale.

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Guest post: “Mother” of All Bank Frauds Shocks and Awes Regulators

“Mother” of All Bank Frauds Shocks and Awes Regulators,
As LIBOR Victims Seek Justice

By Jeff McCord of The Investor Advocate
August 21, 2012

Many wonder why Federal regulatory precincts are so quiet several weeks following discovery that the London Interbank Offered Rate (LIBOR), a key interest rate determining charges to and earnings by American borrowers, lenders, pension funds, retirees and consumers had been rigged for years to benefit a handful of the world’s largest banks. Experts estimate damages to the economy can be measured in multiples of trillions of dollars.

Predictably, a relatively minor fine of $450 million – chump change in Jamie Dimon’s world – was levied by US and British regulators upon Barclays Bank, the most obvious of several likely perps in history’s biggest bank heist. Fortunately, the vigilant attorneys general of New York and Connecticut are issuing subpoenas to JP Morgan Chase and Citigroup, among other banks too big to regulate federally. And, private class action lawsuits charging violations of securities and anti-trust laws have been launched.

But, where are the expressions of horror and outrage, and other hot air emissions from the people’s elected representatives in Washington? We look in vain for a William Jennings Bryan, the Nebraska Congressman and 1896 presidential candidate who shouted at bankers: “You shall not crucify mankind on a cross of gold!”

Time to Order Golden Crosses?
Should middle-Americans use remaining credit on nearly maxed-out cards to buy life-sized gold-plated crosses at mall jewelry stores and report to their local mega-bank offices? Will bank “relationship managers” provide the nails, or will we need to pay for those as well?

These are just a few of the questions that cannot be fully answered until after the election. But, we can draw some conclusions from the statements of our presidential candidates and the views of well-informed observers.

Mitt Would Roll-back Regulations; President “Can’t get Too Involved”

First, let’s try on the Mitt. Governor Romney has long said he would roll back the regulatory knuckle raps enacted in the Dodd-Frank financial reform law. On the LIBOR fraud, he is apparently voting with his wallet. During his much publicized Olympic trip to London, Governor Romney met privately with bankers from Barclays and other financial behemoths, pocketing $2 million in campaign contributions for his time and this promise:

“I’d like to get rid of Dodd Frank and go back and look at [all financial] regulation piece by piece.”

With his Treasury Secretary accused of looking the other way years ago when as NY Fed Bank president he learned of LIBOR rigging, it is unlikely President Obama will call for “heads to roll.” Indeed, in one comment made by the White House on what is now being called the “Crime of the Century” by at least one syndicated columnist, White House press secretary Carney admitted he hadn’t discussed LIBOR with the President, but assured reporters the Administration supports financial reform, adding:

 “I don’t want to get too involved in Libor because I know it’s under investigation.”

What of the announced SEC and Department of Justice investigations? Based on their record pursuing the mortgage-backed securities and derivatives swindlers, we can’t hope for much. A Zachs financial analyst writes in a NASDAQ blog that a few more fines may be levied:

“Currently, we remain skeptical for JPMorgan and wait to see what the future beholds. If it is found guilty in this LIBOR scam, it is liable to be fined by authorities. Notably, in June, Barclays already faced a fine of $450 million by certain U.S. and U.K. authorities for rigging the rate.”

With recently revised and reported profits of $4.92 billion in just the first quarter of this year and with Cracker Jack PR and lobbying teams operating effectively, Jamie Dimon and his senior managers are likely sleeping soundly. After all, if anyone gets jail time, it will be line traders or lowly underlings.

Hedge Fund Says Private Lawsuits Will Recover LIBOR Damages
No wonder James Rickards, a New York hedge fund manager, author and columnist, wrote in US News & World Report that recovery of the immense financial damages suffered in this “mother of all bank scandals” by US mortgage holders, investors, small financial institutions and so many others will not come through regulators. Although a few criminal prosecutions may be launched and more fines levied, justice will be achieved and damages recovered by private lawsuits prosecuted by class action attorneys on behalf of victims, Rickards suggests.

He even dares to give voice to what many on Main Street have been thinking since 2008:

“Of course, the insolvency of a major bank in the face of LIBOR rate rigging charges cannot be ruled out. In that case, good riddance. The big banks have perpetrated a crime wave longer than that of Bonnie and Clyde. If it has taken the law this long to catch up with them, it’s better late than never.”

Lonely Federal Candidate Calls for Accountability

At least one federal candidate this year joins Rickards in demanding accountability for LIBOR fraudsters. Elizabeth Warren, whose Massachusetts Senate campaign is not bank-rolled by financial services giants, says:

“Real accountability would mean prosecuting the traders and bank officials who violated federal laws and prosecuting the executives who knew what they were up to. It would mean forcing executives to pay back any inflated compensation that was based on padded profits.”

Syndicated columnist and University of Southern California professor Robert Scheer seconds Ms. Warren’s call for justice. Unfortunately, he doesn’t see jail cells for LIBOR fraud masterminds:

“Modern international bankers form a class of thieves the likes of which the world has never before seen. . . . The modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale that is almost impossible to comprehend.”

Federal Judge Calls Time-out for LIBOR Suits, But Invites More

That brings us back to lawsuits and private enforcement of securities laws. Despite a decade or more of Congressional and Supreme Court efforts to reduce liability for those corporate and financial officers who design and perpetrate such complex crimes, investor and consumer lawsuits filed in federal and state courts can still recover damages and discipline robber barons with the only punishment they understand: taking away their money.

Small banks, municipalities, pension funds and other victims of the rigged LIBOR market are lining-up to do just that. In response to the magnitude and intricacy of the alleged violations of securities and anti-trust laws, on August 6th US District Judge Naomi Reice Buchwald in Manhattan placed a hold on new LIBOR lawsuits while she sorts out the complaints already filed. She did, however, encourage the filing of new complaints, as she explained to the Chicago Tribune:

“While parties are free to file new complaints—and, indeed, are encouraged by the court to do so if they do so promptly . . . I am imposing a stay on any action that is not the subject of a pending motion to dismiss. The stay will last until the current motions to dismiss are resolved.”

Once again, hedge fund manager Rickards explained in layman’s terms what is likely to happen:

“Bank defendants in cases like this typically ask a judge to dismiss the case because the claims are too vague. However, the facts in this case have already been made plain by Barclays . . . Once the plaintiffs get past the motion to dismiss, they begin discovery, which gives the class action lawyers access to internal E-mails, tape recordings, depositions, and other books and records of the perpetrator banks. Based on small glimpses of the doings at Barclays, the communications of the other major bank LIBOR trading desks could be shocking.”

Banks May Be Held Accountable This Time

Once the undoubtedly “shocking” internal documents of the mega-banks come to light and the public learns the sordid details of the “crime of the century,” politicians may find standing idle a difficult posture. Regulators and the Department of Justice may be handed the evidence to seriously prosecute the perpetrators (whether they want to or not).

If the private actions and discovery process are permitted to proceed, the mega-banks who have caused global economic mayhem of historic and biblical proportions may finally be brought to justice. Middle-Americans may get their day in court.
# # #

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Fines as special tax rates?

The NYT reported that:

Standard Chartered, the British bank, has agreed to pay New York’s top banking regulator $340 million to settle claims that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators.
(Dan here…We do not know how much remained with Standard Charter as various kinds of fees, admin., and charges…was there a premium for risk?)
…it falls near the middle of the collective settlements that the Justice Department and the Manhattan district attorney have reached with other global banks in recent years over money laundering charges, from $619 million with ING bank in June to $298 million with Barclays in 2010.

For a bit of speculation directly from the article with no special knowledge, let’s  comparison shop for human consumption and readers:

($345,000,000 /  $250,000,000,000 =  .00138 = one tenth and a bit of a percent) and to compare to a more human scale,  if you handled $100,000 for ten years in business it would be $1,000,000 times .00138 = $1,380  fine.  Not a hard thing to pay.

Another way to think of it is:   If you made 10% (Who knows?) of 250 billion as retained in some way in costs (salaries, bonuses, use of facilities risk premiums and such) that is 25 billion, so the fine might be ten times a % of money made billable at 2.5 billion/year, and a fine of 1.38 %, means a $345,000,000 fine out of $2,500,000,000 billable for the year.  A special tax rate of 1.38% for one year for risks over a decade is pretty good, no?

What am I missing?

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