Geithner defends White House plan for derivatives - MarketWatch

Geithner defends White House plan for derivatives - MarketWatch:

"Geithner's plan calls for greater reporting, capital, leverage and disclosure standards for all derivative traders and dealers, but some lawmakers are seeking to have these specialized derivatives cleared through more transparent clearinghouses, which serve as an intermediary between buyers and sellers in transactions"

The Fall of the Toxic-Assets Plan - Real Time Economics - WSJ

Have you noticed that the plans to buy the so called toxic assets to spur more lending has not caught on? Harvard's Lucian Bebchuk gets to the heart of the matter in today's WSJ. EXCELLENT Piece that it well worth reading.


Short version?: Due to changes in accounting and regulatory practices, banks have no incentive to sell off their bad loans. So guess what? They aren't. They are holding assets on the books that are worth less than their financial statements say. This could prolong the downturn.


Guest Contribution: The Fall of the Toxic-Assets Plan - Real Time Economics - WSJ:

"The plan for buying troubled assets — which was earlier announced as the central element of the administration’s financial stability plan — has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell toxic assets. But the program’s inability to take off is in large part due to decisions by banking regulators and accounting officials to allow banks to pretend that toxic assets haven’t declined in value as long as they avoid selling them."

and later:

"The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.

A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets....

...In another blow to banks’ potential willingness to sell toxic assets, however, bank supervisors conducting stress tests decided to avoid assessing banks’ economic losses on toxic assets that mature after 2010....

As long as banks don’t sell, the policies enable them to pretend, and operate as if, their toxic assets maturing after 2010 haven’t fallen in value at all.

Bebchuk points out that we will get a sneak peak at the true value of these assets:

"While the market for banks' toxic assets will remain largely shut down, we are going to get a sense of their value when the FDIC auctions off later this summer the toxic assets held by failed banks taken over by the FDIC. If these auctions produce substantial discounts to face value, they should ring the alarm bells."

The article concludes:

"...it must be recognized that the curtailing of the PIPP program doesn't imply that the toxic assets problem has largely gone away; it has been merely swept under the carpet."

Read the whole article here.


Why is this a problem? It has the great potential of prolonging the problem. One only needs to look back to the Japanese Economy in the 1990s to see what happens when banks fail to admit their problems in a timely manner.

BTW I can't help but think of this cartoon. (and by the way, ostriches do not really bury their heads in the sand but seemingly bankers do.)

Thanks for the great article Lucian!

Cash Flow: a Better Way to Know Your Bank? - - CFO.com

On the first week of almost any introductory finance class the professor will begin off the lecture with a discussion of why cash flow matters more than accounting based numbers that depend on assumptions and choices that are often influenced by agency cost problems and a desire to abide by various loan covenants and even public opinion. Depending on the class, the discussion might then explain the difficulties in actually getting cash flow numbers.

The following piece by CFO.com focuses on this exact problem in banking and finds, sure enough, that accounting differences from bank to bank make comparisons difficult.

Cash Flow: a Better Way to Know Your Bank? - - CFO.com:

"If banks more consistently accounted for their operating cash flow, companies could gain a better grasp of their commercial banks' financial health, two professors suggest in a report to be released later this week.

The results would be astoundingly different than what financial institutions' statements of cash flows tell us today. In the course of an attempt to make the firms' cash-flow reports more comparable - which entailed several adjustments to how banks classified their investments, accounted for non-cash transfers of their loans, and recorded cash flow from acquisitions last year - the researchers saw huge swings, both downward (Bank of America) and upward (KeyCorp)."

Bernanke's and Fed's hardest task: Taking back $1 trillion - Jul. 6, 2009

Bernanke's and Fed's hardest task: Taking back $1 trillion - Jul. 6, 2009:

"'Your timing has to be perfect,' says David Jones, former Fed economist and president and CEO of DMJ Advisors LLC in Denver. 'If you do it too soon, you keep us in a deep recession. And if you do it too late, you get inflation.'"

SSRN-Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany by Harald Hau, Marcel Thum

SSRN-Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany by Harald Hau, Marcel Thum:

"Our data confirms that supervisory board (in-)competence in finance is related to losses in the financial crisis. Improved bank governance is therefore a suitable policy objective to reduce bank fragility."

Yeah! What we teach in class is right! :)

Tweets of the week (Post July 4th edition)

Tweets of the Week.

With the July 4^th holiday, travel, and nicer weather this will be a bit shorter than normal (which might be a good thing!)

I even added some of my own tweets near the bottom.

Simoelon Sense. Miguel had an amazingly good week. Literally could have posted almost any of his tweets

1. Behavioral Economist Richard Thaler: [Talks About How To] Make Mortgages Simpler: If my sources are correct Rich.. http://tinyurl.com/nrayzz
2. Small Lessons From A Big Crisis - Bank of England Official Says “Banking System Like South Sea Bubble̶.. http://tinyurl.com/lj72ve
3. US stockmarket returns since 1825: The total return of the S&P 500 index fell by nearly 40% last year, the s.. http://tinyurl.com/rcauhu
4. Presenting: Dan Ariely’s Predictably Irrational -Hidden Forces That Shape Our Decisions: I’ve posted.. http://tinyurl.com/koj45m
5. When Do Losses Loom Larger Than Gains?: Interesting research on the endowment effect. Click here to Read Dan Ari.. http://tinyurl.com/nm7eby

WayneMarr is back from travels and hits us with many great great posts.

1. SSRN [Alan Greenspan & James E. Kennedy] Sources and Uses of Equity Extracted from Homes http://bit.ly/16DvYC
2. [Harvard Law] Executive Summary: Are Independent Audit-Committee Members Objective? http://tinyurl.com/l7wcg9
3. [Robert Book, Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance http://bit.ly/15WLPF
4. HigherEd: Netflix for college textbooks http://tinyurl.com/lpxacq
5. SSRN [ECGI] Do Target CEO's Sell Out Their Shareholders to Keep Their Job in a Merger? http://bit.ly/7RPJq
6. SSRN [ECGI] Pyramids: Empirical Evidence on the Costs and Benefits of Family Business Groups Around the World http://bit.ly/18tx5t
7. SSRN [ECGI] Why Do Foreign Firms Leave U.S. Equity Markets? http://bit.ly/YULKY

Several from planetmoney

1. Studies find that messing up the environment isn't that great for the economy /mk http://bit.ly/UmHDE
2. A listener shares how compensation works in the video game industry./CK http://snurl.com/maodn
3. “Adult obesity vs. GDP, chart by @GWhit. And yes, Mississippi outpaces (outweighs?) West Virginia, @waitwait /lc http://snurl.com/lnrz8” ----[mmm…is it a chicken or the egg thing?]

Paul Soloman (from PBS)

1. Headline: Reader Response: The Uncounted Unemployed http://tinyurl.com/oe86nj
2. Headline: Why Are Christmas Tree Stands Different in NYC? http://tinyurl.com/mmppp7 (Robert Frank)
3. Great Cornell economist Robert Frank joins the Bus Desk for a regular feature: Economic Naturalist.Should be fun. http://tinyurl.com/9sftz5

Other great tweets:

Zbodie: Washington Post "The Case for Safer Saving Defaults" http://bit.ly/3QkyP

WestPanMauldin outside the box. Niels Jensen makes the case for deflation instead of inflation. I'm leaning that way myself. http://bit.ly/jg8h5

EverydayFinance Like a Million "How To" links on personal finance, career, savings tips, etc. Great roundup! http://tinyurl.com/ogfzvm

EconomicWoman: Unexpected: Russia, China, and Brazil are pushing a new global reserve currency onto the G8 agenda. http://tinyurl.com/l3s9u6

Columbia_BizProf Harris discusses the debate over fair-value and mark-to-market accounting rules in Public Offering - http://tinyurl.com/n8tb9h.

WallStSourceMuni bonds feel US states' fiscal stress, Borrowing costs rise for all issuers http://wssource.com/~7RgKdV...

Footnoted: Listening in on SEC open meeting now on executive comp. Comm Casey speaking now and says she won't support http://bit.ly/rAY3

KimSnider Recession - a period of time when dreams can be bought at rock bottom prices

My own favorites (Jimmahar)

1. Fascinating evidence on what has led to Foreclosure Crisis http://bit.ly/MZJhJ
2. Intentional Info Asymmetries to keep taxpayers in the dark? From WSJ: Public Pensions Cook the Books http://cli.gs/SLygT
3. The Simpsons' version of Ayn Rand's Fountainhead: http://tinyurl.com/pu89ca
4. REALLY!? Scary! Source pls. RT @WestPan"Tax cuts are a waste of money.Govt can spend tax money better than any consumer...." -Krugman
5. RT @esgriskguy Interesting interview on economic system issues with Black Swan's Nassim Taleb on CNBC http://tinyurl.com/ld6yod
6. RT @MRkumi, @TuckerPeterson: Shortly after 12pm on July 8, comes 12:34:56 7/8/9. Happens only once a century
7. So early but so exciting! What a finish! How is this not better than the Super Bowl? And I really really like football! #TDF #Livestrong

Lower finance content:

mashableToo Busy To Read Tweets? Try Twitter For Busy People - http://bit.ly/dHW6a

titeyogarunnerRT @WomensHealthMag: They say meditating adds years to your life. Here's the quick and easy way to do it, expert or not: http://twurl.nl/0os

EconomicWoman: If you're not interested in the G8, might I suggest http://twittersnooze.com/ rather than a permanent unfollow? 4 days should do the trick.

EverydayFinance: Intel's Barret-original and effective! "Any American kid who wants to get a driver’s license has to finish high school." http://bit.ly/5H9rU

New Evidence on the Foreclosure Crisis - WSJ.com

Here is a little game for you. Do ask ten people on the street what caused to all of the defaults and problem loans that led to the bank failures that led the the economy falling?

Chances are subprime lending and lying banks will be fairly high on the list of answers. Unfortunately, an article in the WSJ by Stan Liebowitz suggests that these common answers are wrong.

What caused the problem? Low and no-money-down borrowing.

The article: New Evidence on the Foreclosure Crisis - WSJ.com:

"The focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures."

and later

"...the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan."

and later yet:

"...stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell"

HT to John Carney and the good folks over at ClusterStock's Business Insider

Here's The Real Reason The Dollar Is Screwed

While dramatically oversimplified this does bring a very good point to light: namely that as other countries improve their transparency and governance, the US dollar loses its relative advantage. There is more to the article, but the below quote catches the flavor well.

Here's The Real Reason The Dollar Is Screwed:(from Clusterstock)

"...what's the real reason to fear a dollar decline? It's that governments around the world are more stable and transparent than they used to be, meaning more currencies are worth 'holding in the mattress.' It still is, for the most part, that no matter where you are, it makes sense to hold some US Dollars as a reliable store of value. But maybe now you'll carry some Brazilian Real or Singapore Dollars. Basically, the real issue is current and growing Dollar competition, a trend that doesn't look likely to abate."

Are You Ready to Manage in an Irrational World? — HBS Working Knowledge

Are You Ready to Manage in an Irrational World? — HBS Working Knowledge:

".....Things become much more complex in the world of irrationality. Much of traditional economics becomes outmoded when complex relationships based on often counter-intuitive behaviors are taken into account. Instead of a management philosophy centered around the manager as the play-caller, assigning tasks and motivating people to carry them out, we are told by the neuroscientists that the new management job is one of facilitating more of a customized, do-it-yourself process centered around each newly-energized employee, one centered on questions (often leading) rather than direction."

Public Pensions Cook the Books - WSJ.com

Sometimes all I can say is wow. Oh sure it is predictable. And it happens more often in all fields (so not just government), but it is still disappointing to see.

Short version? Hide the bad news.

Public Pensions Cook the Books - WSJ.com:

"Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset.

What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that's the essence of the managers' recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn't bother applying.

....The numbers are worse using market valuation methods (the methods private-sector plans must use),.... Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers."

"

Rangers borrow money from MLB - MLB - Yahoo! Sports

Rangers borrow money from MLB - MLB - Yahoo! Sports:

"Major League Baseball within the last week loaned millions to Tom Hicks, the evidently cash-strapped owner of the Texas Rangers, and will continue to offer financial assistance to Hicks until he is able to sell the team

.....The Rangers’ opening day payroll this season was around $68.1 million, which ranked 22nd among MLB’s 30 teams and was less than $1 million more than its 2008 level."

Two angles you could take on this in a class that would surely spark some conversations:

1. The league has a vested interest that a team does not go under. This is one reason they have requirements to buy a team and for salary caps. Are there any similarities with the banking sector? (Brings back old lessons on Reg Q).
2. Financing (and the lack thereof) can negatively impact operations.

CO2 Traders Hedging Against Climate Laws, RNK Says (Update1) - Bloomberg.com

A simple rule: "In times of uncertainty, options (calls or puts due to Put call parity) have more value".

A case in point:

CO2 Traders Hedging Against Climate Laws, RNK Says (Update1) - Bloomberg.com:

"Ken Schneider, an options trader at New York-based environmental hedge fund RNK, said investors are buying put options on speculation there will be new restrictions on United Nations’ Certified Emission Reduction credits. Polluters can now use the UN’s so-called offset credits from projects in less- developed nations to meet European Union requirements to reduce carbon dioxide emissions. Restrictions on their use may slash their value.

“The Certified Emission Reductions are a keg of dynamite in a matchstick factory,” Schneider....

and later:

..."buyers paid about 3.25 euros ($4.57) a ton last week for 5 million tons of 2012 Certified Emission Reduction puts with a strike price of 10 euros a ton, according to data from the European Climate Exchange in London. Today’s closing price for 2012 CERs was 12.43 euros a ton, up 2.1 percent compared with June 26."

Jenkins: Too Bernanke To Fail? - WSJ.com

Well said.

Jenkins: Too Bernanke To Fail? - WSJ.com:

"The effort of congressmen to uphold the distinction between the public and private sectors is noble, and doomed to fail in this case. Last week's hearing reflected unmedicated unease over two facts legislators recognize but resist acknowledging: There is no practical solution to 'too big to fail,' and no alternative to the Fed's ability to print money to ease potentially destabilizing financial panics.

Governments long ago authorized banks to operate with capital and reserve requirements inadequate to cover serious panics, with the understanding that government would step in. 'We have chosen capital standards that by any stretch of the imagination cannot protect against all potential adverse loss outcomes,' Alan Greenspan explained in a talk at the American Enterprise Institute this month. 'Implicit in this exercise' is the occasional bailout of the financial system."

Dollar Cost Averaging - Fama/French Forum

A really good video of Ken French on Dollar Cost Averaging. :

Dollar Cost Averaging - Fama/French Forum:

"Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective."