the finance industry / wall street

Ah, yes, another incarnation of the she-was-asking-for-it defense.

http://www.ritholtz.com/blog/2012/07/lie-bor-we-knew-this-years-ago/

ritholtz blog runs down stories questioning libor as a sound number as far back as 07

not exactly. not a defense even.

just that libor never made sense, and everyone was always cynical about it and i mean yes go ahead fine the banks, they deserve it, but don't pretend that libor ever was or could be (or can be if we fine enough banks) anything but a mechanism for big banks to "vote" on short-term rates.

libor, remember, is a number that a bunch of banks got together and colluded to make up to begin with!

this is more of a gambling in rick's cafe sort of situation.

(xpost)

http://online.wsj.com/article/SB10000872396390443524904577649830558256586.html

about time.

bold prediction: there won't be a lot of jobs where untrained 21 y/os make 150k in 10 years

WASHINGTON (Reuters) - The New York Stock Exchange will pay $5 million to resolve U.S. civil charges that it gave certain customers "an improper head start" on trading information, marking the first time a U.S. exchange has faced a financial penalty from market regulators.

http://www.nytimes.com/reuters/2012/09/14/business/14reuters-nyse-sec.html?hp

Good that they are being charged. However, it's probably a slap on the wrist compared to how much money was made in the 2 years they did this.

Ok, so since QE and monetary policy is being discussed on the Taibbi thread, and since I also just heard Galbraith Jr. on NPR talking about related issues, I have these nagging doubts/questions about the standard line that "we're not at risk of inflation."

It seems to me that the reason we're not seeing inflation is that the economic recovery is so paltry. But the point of QE and other uses of monetary policy is to jumpstart the economy, right? And also, we keep hearing about how a lot of the liquidity the government is attempting to inject is not making its way into the system because banks aren't lending enough, correct? I mean maybe this is no longer true, but I thought so. Well what happens if the economy really does start to pick up, and all that extra liquidity starts to make its way into the economy again -- then aren't we finally going to start seeing some inflation? And then isn't the Fed faced with a problematic choice of either allowing inflation or putting the brakes on the recovery?

i think a lot of the recent stuff amounts to the fed saying that it is willing to have a period of higher inflation in once the economy starts to recover. paul krugman had a blog post recently noting the increased spread between inflation-protected and regular govt bonds and bascially saying that this is a feature, not a bug, even if they prefer not to explain it that way.

hah, i basically just reworded http://krugman.blogs.nytimes.com/2012/09/18/inflation-expectations-a-feature-not-a-bug/

One thing that is true about bubbles is that you can't reinflate them. Investors generally stay shy of whatever it was that went bust until the memory of it fades somewhat. That means that pumping banks full of reserves to loan to investors will probably result in that money flowing elsewhere than detached single-family housing.

Because this is not a housing-led recovery as is often the case in the past, it has not been a recovery led by strong gains in employment. So, there is a pretty good chance that some of those banks loans will flow toward speculation. A good candidate would be commodities, especially oil and food. That certainly does bring some risk of inflation with it, but not the hyper-inflation bugbear that the far right keeps waving around. That is also why government infrastructure projects would have been a far better vehicle for jump-starting the recovery. Such projects do employ people and also increase demand for industrial production, such as steel or concrete.

Again, it was our idiot, ideologue Congress that failed to understand basic economics, blinded by their stupid free-market fundamentalism.

also were perfectly happy w/ a shitty economy under obama

I certainly get that we're not at immediate risk of hyperinflation, and the paultard myopic focus on hyperinflation is lulzy. But I am also wondering if the left mantra of "a little inflation never hurt anyone" is myopic in this scenario too. I mean maybe higher oil and food prices are not hyper-inflation, but maybe they are exerting pressure against meaningful recovery, or inflicting additional pain on the hardest hit.

It seems to me like a competent, stable government would never allow hyperinflation. But they might be faced with a sophie's choice of doing serious harm to the economy to prevent it.

Since you can't "reinflate a bubble" I also wonder if the aim of current economic policy is really not to help the economy "recover" (to a state that it can't naturally return to), but to kind of give us a slow, soft landing into a new poorer existence.

the hardest hit don't have jobs right now

otm

right, and they have a hard time affording food and gas. But is there reason to think our recent uses of monetary policy are stimulating job creation?

I mean if anything, the unemployed are worse off than the employed in an inflationary situation, because they don't have wages that can rise with costs, but that wasn't really my point.

http://www.washingtonpost.com/business/economy/sheila-bair-in-new-book-faults-obama-and-bush-advisers-during-financial-crisis/2012/09/25/dd84c412-0731-11e2-afff-d6c7f20a83bf_story.html

Former FDIC chair pushing her new book

After she recommended that President Obama name former Federal Reserve chairman Paul Volcker as Treasury secretary, she wrote, Obama’s decision to tap Geithner was “a punch in the gut.” She considered Geithner the “bailouter in chief” because he wanted to make unconditional guarantees to top banks to keep them afloat without demanding much in return.

I mean, I'm not sure I have a point, exactly. I'm just trying to get a handle on what is the endgame or exit strategy or w/e of the kind of monetary policy we've been using.

right, and they have a hard time affording food and gas. But is there reason to think our recent uses of monetary policy are stimulating job creation?

yes

I hope so, but:

http://online.barrons.com/article/SB50001424053111904294104577637653521692724.html

So, central bank actions have pumped up asset prices while jobs have stagnated. Even chicken soup is more effective.

as w/ the stimulus you have to compare gdp/job growth figures to the counterfactual world where there wasn't any qe.

well to be more accurate, is it leading to job creation in some reasonable proportion to its overall impact? I mean

http://www.federalreserve.gov/newsevents/speech/raskin20110926a.htm

Potential Attenuating Factors
In my judgment, the Federal Reserve's deployment of our policy tools has been completely appropriate in promoting maximum employment and price stability. Ideally, such policy decisions would be informed by precise quantitative information about the effects of each tool. In reality, however, the estimated effects of the FOMC's policy actions are subject to considerable uncertainty. Such uncertainty is intrinsic to real-world monetary policymaking at any time but is particularly relevant under circumstances where the scope for conventional monetary policy is constrained by the zero lower bound on the federal funds rate, leaving unconventional tools as the only means of providing further monetary accommodation.

Although these monetary policy tools have been successful in pushing down interest rates across the maturity spectrum, the magnitude of the transmission to economic growth and employment has been somewhat more muted than I might have expected. Indeed, it seems plausible that the effectiveness of our policy tools is being attenuated by a number of unusual persisting factors, including an excess supply of housing and impaired access to credit for many households and small businesses.

Under normal circumstances, residential construction is an interest-sensitive sector of the economy that has played an important role in contributing to previous economic recoveries--especially the brisk recovery that followed the steep downturn in 1981 and 1982. In the wake of the bursting of the housing bubble, however, the housing sector has remained exceedingly weak. In effect, there is an excess supply of housing that seems likely to decline only gradually despite the record-low level of mortgage rates. Thus, in this crucial sector, one can argue that lower interest rates have not shown through to higher activity in the same way that would be expected under more usual recoveries.

Consumer spending is also being restrained by the excess supply of housing, which has put downward pressure on home equity values and household wealth. A substantial portion of homeowners now have negative home equity and are effectively unable to refinance at historically low mortgage rates. Many more have seen a drastic decline in the value of their homes, which would typically serve as collateral for home equity lines of credit or second mortgages.

The slow progress in repairing and restructuring households' balance sheets may also be lowering the normal responsiveness of consumer spending to a decline in market interest rates. In particular, lenders continue to maintain relatively tight terms and standards on credit cards and, to a lesser extent, other consumer loans. Consequently, many households may be unable to take advantage of the lower borrowing rates that are available to those who have a high net worth and pristine credit records.

Many small businesses also appear to be facing unusual obstacles in obtaining credit. If times were more typical, we would expect a smooth transmission in which lower interest rates would fuel credit expansion that would be used to finance expanding payrolls, capital investment, inventories, and other short-term operating expenses. Nonetheless, the latest Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices, which was taken in July, indicated that although domestic banks continued to ease standards on their commercial and industrial loans, the net fraction reporting easing on such loans to smaller firms (those with annual sales of less than $50 billion) remained low and was well below that of loans to large and middle-sized firms.8 In its August survey, the National Federation of Independent Businesses reported a noticeable increase in the proportion of small businesses reporting that credit has become more difficult to obtain.9 These businesses not only expect credit to become tighter in coming months but--like other businesses--have turned sharply more pessimistic about the broader economic outlook.

Finally, and perhaps most comprehensively, it is worth observing that the financial crisis has undermined the wealth of many Americans. Low- and moderate-income families entered the recession with little financial buffer against the adverse effects of wage cuts, job loss, and drops in home values. According to the 2007 Survey of Consumer Finances (SCF), home equity accounted for about half of the total net worth for low- and moderate-income families, which made them extremely vulnerable to the eventual housing market collapse.10 Families at the lower end of the income distribution saw a substantial drop in their net worth between 2007 and 2009, and families in the middle of the income distribution fared even worse.11 Combined with widespread unemployment, housing and stock price declines, and increasing rates of mortgage defaults, foreclosures, and bankruptcies, the assets of many American families have been significantly eroded. The effect of these developments may be to attenuate the revival of normal consumption patterns that would otherwise be dictating increases in consumer demand and growth.

What bothers me about that analysis, is the fallback on "if these were normal circumstances" as an excuse -- assuming that there's an economic "normal" seems like a big mistake in the thinking. I mean "it is worth observing" that the financial crisis destroyed all that home equity wealth, well yeah duh shit that's the whole point isn't it? I mean there's just something very frustrating in the thinking here -- "We are using measures to solve the financial crisis which, under normal circumstances, would solve the financial crisis, but due to the financial crisis..."

as w/ the stimulus you have to compare gdp/job growth figures to the counterfactual world where there wasn't any qe.

― iatee, Thursday, September 27, 2012 11:28 AM Bookmark Flag Post Permalink

sure, but maybe there's also a third option to be compared? Not that I profess to know what that is.

that was a year ago.

http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

xp

xp well the third option is surely a more expansionary fiscal policy? or do you mean a third monetary option...

I mean I guess one third option would be stimulus that targets the demand side rather than monetary stimulus, sure. And what worries me is not that QE "doesn't work" in the sense that it has no impact on job creation, but that it will have negative impacts that are disproportionate to the resulting job creation. Because it seems to take an awful lot of monetary stimulus to get a little tiny bump in job creation/consumer spending.

that fiscal policy is better really doesn't matter thanks to democracy, that it happens to be in the set of theoretical policy decisions doesn't mean that it's also in the set of actual policy decisions

Yeah, fair point. I was thinking like "if all you have is a hammer, everything begins to look like a nail," but when the Republicans won't let you have the drill you don't have much choice.

That said, I would be interested in hearing a more detailed comparison of the counterfactuals of more QE vs no more QE right now. The case for the stimulus is easy -- the financial system not completely collapsing is clearly a preferable outcome.

Things would likely be a good deal worse. I doubt any plausible intervention (monetary or fiscal) would dramatically change things for the better, as its the debt overhang that is preventing private investment:

http://static.seekingalpha.com/uploads/2012/5/7/428250-13363801587809994-Michael-Clark.png

As for non-plausible ones, sure Bernanke could really throw currency out of helicopters, but the line the Fed is walking is to ensure that the U.S. dollar, for all its looming problems, is still the leper with the most fingers (vs €, ¥, etc).

<3 leper with the most fingers <3

I'll add though, that I'm not at all sure the Federal Reserve has figured out how to return to "normal". The Federal Reserve has in effect financed every home purchase over the past 4 years (and some prior) by buying the hell out of mortgage backed securities. The MBS spread with the 10 yr. treasury dropped to 5 basis points (0.05%) (!!!, >8o) last week.

https://lh6.googleusercontent.com/-2cwPatMXhno/UFcmpO9GjVI/AAAAAAAAFS4/UDP6PHdrVD4/1-Fed%2Bbalance%2Bsheet.jpg

Just as that cash injection was stimulatory (well, in the sense that adrenalin to the heart of a OD patient is), its withdrawal, someday over the horizon, is going to be rather messy. Maybe the most likely scenario is that the Fed just holds everything to maturity so that return to normalcy (in the MBS markets) is a 10-15 year affair.

Just to clarify - the just announced QE3 will center on the MBS markets, like QE1 did.

wait, that's nuts in re the spreads. Sorry for basic question, but if spreads on MBS vs treasuries are very low, doesn't that mean there's little incentive to create and securitize new mortgages?

nm I think I am oversimplifying and confusing things

It certainly doesn't give banks any incentive to hold on any newly created MBS. Chris Whalen (who's a pretty bright bank analyst, lotsa podcasts out there) has long argued that the artificially low interest rates (no profit if loan is kept, banks aren't being compensated for potential defaults) has actually prevented private financing. The now government owned Fanny Mae/Freddy Mac are pretty much the only game in town buying mortgages.

This is interesting:

http://soberlook.com/2012/09/yes-its-good-to-be-mortgage-originator.html?utm_source=BP_recent

Damnit I want to quit my job and study econ, or is that just the brief-writing procrastination talking

I think that right now the Fed is still more worried about deflation than inflation, and rightly so. Inflation has been rather subdued of late, despite high-profile volatile prices like food and oil picking up. Although inflation is scarier to the average person, deflation is apparently just as bad and harder to get out of - witness Japan's ongoing woes, some 20 years after their housing bubble burst. I think that the Fed is confident that if inflation starts to get out of control they have the tools to bring it in line, and they want to give themselves some margin of safety by keeping inflation in their preferred range in case another shoe drops in Europe or China. Also, they want to support the housing market as best they can by keeping mortgage rates low. Whether this will lead to robust growth is debatable, but at least they hope to prevent Japan-style deflation.

Kweku Adoboli repeatedly broken down in tears on Friday as the former UBS "rogue trader" defended himself against charges that he gambled away £1.5bn of his Swiss bank's money.

Adoboli, 32, burst into tears several times as he told the court in his first day of testimony that he was so wedded to his job that he put in 16-hour days, sometimes slept under his desk, and skipped his grandmother's funeral because he couldn't bear to drag himself away from his trading platform as he battled to reverse multimillion-pound losses.

"UBS was my family and every single thing I did, every single bit of effort I put into that organisation, was for the benefit of the bank. That is everything I lived for," he said as he dabbed his eyes with a paper handkerchief in the witness box of court three at Southwark crown court. "To find yourself in Wandsworth prison for nine months because all you did was worked so hard for this bank."

that last line is wonderful

Frontline on the Bam dereliction in prosecution

http://www.guardian.co.uk/commentisfree/2013/jan/23/untouchables-wall-street-prosecutions-obama

Curious whether Hurting 2 watched the Frontline episode? I got the impression from some of his posts that Hurting 2 thinks its was nearly impossible to bring criminal charges against the Wall Street folks; so I wonder what he thinks of Lanny Breuer, based on that show?

bam is appointing mary jo white to the SEC which is supposedly a good move?

mixed but mostly positive takes in NYT on her nomination

http://dealbook.nytimes.com/2013/01/24/mary-jo-white-to-be-named-new-s-e-c-boss/

excerpt:
Ms. White is expected to receive broader support on Capitol Hill. Senator Charles E. Schumer, a New York Democrat, declared that Ms. White was a “tough-as-nails prosecutor” who “will not shy away from enforcing the laws to ensure that markets operate fairly.”

But she could face questions about her command of arcane financial minutiae. She was a director of the Nasdaq stock market, but has otherwise built her career on the law-and-order side of the securities industry.

People close to the S.E.C. note, however, that her husband, John W. White, is a veteran of the agency. From 2006 through 2008, he was head of the S.E.C.’s division of corporation finance, which oversees public companies’ disclosures and reporting.

Some Democrats also might question her path through the revolving door, in and out of government. While seen as a strong enforcer as a United States attorney, she went on in private practice to defend some of Wall Street’s biggest names, including Kenneth D. Lewis, a former head of Bank of America. She also represented JPMorgan Chase and the board of Morgan Stanley. Last year, the N.F.L. hired her to investigate allegations that the New Orleans Saints carried out a bounty system for hurting opponents.

Consumer advocates generally praised her appointment on Thursday. “Mary Jo White was a tough, smart, no-nonsense, broadly experienced and highly accomplished prosecutor,” said Dennis Kelleher, head of Better Markets, the nonprofit advocacy group. “She knew who the bad guys were, went after them and put them in prison when they broke the law.”

The appointment comes after the departure of Ms. Schapiro, who announced she would step down from the S.E.C. in late 2012. In a four-year tenure, she overhauled the agency after it was blamed for missing the warning signs of the crisis.

http://www.nakedcapitalism.com/2013/01/for-once-maybe-lying-does-not-pay-dojs-lanny-breuer-resigns-abruptly-after-frontline-appearance.html

Curious whether Hurting 2 watched the Frontline episode? I got the impression from some of his posts that Hurting 2 thinks its was nearly impossible to bring criminal charges against the Wall Street folks; so I wonder what he thinks of Lanny Breuer, based on that show?

― curmudgeon, Thursday, January 24, 2013 2:02 PM Bookmark Flag Post Permalink

will watch when I get home if I have time, very interested