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

I Be Officially Right of Center Now?

As I am arguing on the same side as Henry Kaufman, and against the kind-hearted Mark Thoma, does the phrase “left-of-center” at the top of this blog have as much Memory Meaning as the Suzanne Vega song from Pretty in Pink?


During the Greenspan years (1987-2006), the Fed clearly failed to recognize the significance of the many structural changes in the financial markets—such as the rapid growth of securitization and derivatives—on economic and financial behavior and thus for its monetary policy. The Fed also failed to foresee how the 1999 repeal of the Glass-Steagall Act, which had separated commercial from investment banking since 1933, would sharply accelerate financial concentration through mergers and acquisitions and thus contribute to the “too-big-to-fail” phenomenon.


The hope is that an independent Fed can overcome the temptation to use monetary policy to influence elections, and also overcome the temptation to monetize the debt, and that it will do what’s best for the economy in the long-run rather than adopting the policy that maximizes the chances of politicians being reelected.

On of those people lives in reality. The other, apparently, is a good econometrician.

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What is a Bank, then?

I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I’m not reading tone well these days. After all:

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make “merchant banking investments” in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how “annoyed,” wouldn’t have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, “murdered” we’re now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.

So the weekend was going to be a rocky one. And various plans in various stages were executed:

  1. Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
  2. Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
  3. Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn’t go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to lootsupport from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

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FTC/Blogger Silliness Defined

Mark Cuban gets the FTC’s artificial distinction between bloggers and journalism exactly correct.

Full disclosure: I had a Press Pass to the Clinton Global Initiative, and got things such as a disc copy of Financial Football* and a video ostensibly about the Rwandan National Forests (sadly, not so interesting) as a result.

*It’s not my fault Visa describes it as “Financial Soccer” on the U.S. edition of their website.

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OCC non-regulation keeps momentum going for Citi bank


Seeking Alpha’s Matthew Goldstein notes that the OCC is continuing the last decade of regulatory non-action.

The OCC, in its quarterly derivatives report, routinely notes that the Big Four “have the resources needed to be able to operate this business in a safe and sound manner.”

In other words, the biggest banks are best suited to handle all these derivatives contracts because they’ve been doing it for so long.

But it’s this regulatory logic that has helped enshrine the too-big-to-fail doctrine. A handful of financial institutions are deemed more indispensable than others because they are too interconnected to fail. It’s the large concentration of derivative contracts at a troubled bank like Citigroup that made a big bailout necessary.

So it’s particularly disturbing to find that the total dollar value of outstanding derivatives at Citi rose by $2.3 trillion, to $31.9 trillion in the second quarter. By contrast, the notional value of derivatives transactions at JPMorgan Chase — the leader in this category — fell by $1.2 trillion, to $79.9 trillion.

It’s hard to fathom how a bank that has yet to prove it can stand on its own two feet without huge amounts of federal support should be adding to its potential derivatives exposure.

The OCC report is here with accompanying charts. Notice John [Bloody Effing] Dugan still heads the agency. [edited, links added — klh]

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Simple Answers to Simple Questions, CRA edition

Dear Barry:

The need for posts such as this one recurs because the large majority of economists are idiots. (Multiple exceptions noted—but not enough to change the truth of the initial statement.)

As the regulatory reform report notes (quoted by PK at the last link above):

In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.

But the truth should never be allowed to get in the way of Economic Theory.

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I Do Not Think "Tool" Means What You Think It Does

Dear Brad,

Do you want to reconsider the title of this post in the context of this article?

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

To take a phrase more prominent in our middle-school days, he would qualify as an “unindicted co-conspirator.”

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Regulation matters

by reader Movie Guy

I reviewed the OMB Watch list of proposed and final rules. If approved and published in the Federal Register, it is possible if not likely that some will be reversed.

Unfortunately, OMB Watch doesn’t appear to provide government links necessary to follow up and monitor further actions. So, here are some key government links worth noting:

OMB – Regulatory Matters

Federal Regulatory Information – User Tips

Federal Register index

More interesting links:

Weekly Compilation of Presidential Documents

I recommend that those who have interest in monies flowing down to State level click on the “ASSISTANCE” and then the “BY PLACE OF PERFORMANCE” button under for specifics.

This is the best government web site of its type that I have ever encountered. Pretty good info once you go a step further and click on “list of recipients” and “list of transactions” under each State or Agency concerned.

I hope the Obama Administration continues to provide the web site or one just like it in the interests of transparency and time-saving research.

If the Obama Administration doesn’t continue to provide a web site very similar to, then a red flag should go up on the blogs and elsewhere. Hard to top this consolidated info.
by Movie Guy

(slightly edited to hyper-link format…rdan. I have also alerted OMB Watch to be more conscientious with original sources, and should link to us…we have MG.)

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White House not slowed down by disaster in financials

Steve Benen at The Washington Monthly points to a WSJ article that cautions us:

THE ULTIMATE BUSH LEGACY FOR BIG BUSINESS…. Bush’s presidency may be winding down, but he’s not quite done with his conservative domestic agenda.

Bush administration officials, in their last weeks in office, are pushing to rewrite a wide array of federal rules with changes or additions that could block product-safety lawsuits by consumers and states.

The administration has written language aimed at pre-empting product-liability litigation into 50 rules governing everything from motorcycle brakes to pain medicine. The latest changes cap a multiyear effort that could be one of the administration’s lasting legacies, depending in part on how the underlying principle of pre-emption fares in a case the Supreme Court will hear next month.

This amazing piece, from the Wall Street Journal’s Alicia Mundy, hasn’t generated a lot of attention so far today, and that’s a shame. The administration’s efforts on this are likely to have a huge impact.

Corporate America has been calling for some mechanism to “preempt” product-liability litigation for years, and Bush had promised to deliver. The White House, however, had limited options in dealing with a Democratic Congress which cares about consumer protections.

So, the Bush gang is adding provisions to obscure federal regulations that will block product safety lawsuits by consumers and states. The scheme would affect products ranging from cars to prescription medication to railroad cars.

But a possible Obama administration can undo this, right? If Obama wins, he’d no doubt want to, but reversing these regulations would take a long while.

These new rules can’t quickly be undone by order of the next president. Federal rules usually must go through lengthy review processes before they are changed. Rulemaking at the Food and Drug Administration, where most of the new pre-emption rules have appeared, can take a year or more.

The article is online here, and an WSJ video with Mundy talking specifically about how this affects state lawsuits is here. Take a look.

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Floyd Norris points out another reason the bailout will not work

Take a page from Douglas North et al., I will simply note that if the institutions charged with managing the process are corrupt, the chance of success approaches zero.

Case in point, Christopher Cox (R-BoughtAndPaid) and the SEC:

The interesting thing here is that we have already heard that the S.E.C. staff almost immediately demanded such changes. Christopher Cox, the chairman, emphasized Tuesday that the commission imposed its new rules after conferring with the Fed and the Treasury. If he consulted with anyone, inside or outside the S.E.C., who actually understood how markets work, I have not heard about it. [emphases mine]

So the two institutions that are battling to be able to say fu with $700,000,000,000 in taxpayer money could not provide Cox with reasonable guidance.

I feel so much better.

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