Legal Commentary

Sonia Sotomayor

Posted on May 06, 2009
Like Glenn Greenwald, I'm puzzled by the attacks on Judge Sonia Sotomayor's intellectual abilities in Jeffrey Rosen's TNR profile. I've appeared in front of Judge Sotomayor twice (admittedly many years ago) and I've practiced in her jurisdiction for many years, and "not that bright" is the last way I would describe her...

"Too Big to Fail" Experts on "Make Them Smaller" Idea

Posted on May 04, 2009
Gary Stern and Ron Feldman, Minneapolis Fed President and Senior Vice President, respectively, are without question the leading experts on the "too big to fail" (TBTF) issue. In 2004, they published an excellent book called, Too Big to Fail: The Hazards of Bank Bailouts...

KC Fed President Hoenig on Nationalization

Posted on May 04, 2009
Ezra Klein is right that Kansas City Fed President Thomas Hoenig "can't be dismissed as an idealist unaware of the government's workings or an armchair observer with an insufficient grasp of the complexity of the American banking system." Hoenig has always struck me as an extremely thoughtful observer of the financial system, and he's been an active participant in the "too big to fail" debate for many years...

MBIA not screwing around in suit against Merrill

Posted on May 01, 2009
MBIA is suing Merrill Lynch over four CDS written on super-senior CDO tranches. MBIA is alleging, inter alia, fraudulent inducement and breach of contract, and is seeking rescission of the CDS contracts as well as compensatory and punitive damages. MBIA has retained Quinn Emanuel, a prominent litigation firm...

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Failed SIV's "toxic assets" sold in auction, fetching almost 70%

Posted on May 01, 2009
The much-anticipated auction of Whistlejacket's $6bn portfolio of so-called "toxic assets" went very well, fetching an average price of 67 cents on the dollar. Whistlejacket was a large structured investment vehicle (SIV) that failed in February 2008 when its sponsor, Standard Charter, stopped providing liquidity...

Quote of the Day

Posted on April 29, 2009
"[O]ne dollar held by a particular bank at the beginning of the day changes hands around one hundred times during the course of the day."From: Afonso & Shin, Systemic Risk and Liquidity in Payment Systems, New York Fed Staff Reports (March 2009).

Government Loan Guarantees Are Not New

Posted on April 29, 2009
When Goldman announced that it was raising capital to pay back its TARP money, there was a palpable outrage in the blogosphere. The main theme was that TARP money wasn't the only form of government aid Goldman received, so paying it back shouldn't free Goldman from the TARP restrictions (e...

Fed: Ideal Taylor-rule interest rate is -5%

Posted on April 27, 2009
From the FT:The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve?s last policy meeting.The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation...

Treasury and "Least Cost Resolution"

Posted on April 27, 2009
It shouldn't surprise you to learn that I was not a fan of Gretchen Morgenson and Jo Becker's big profile of Tim Geithner in the NYT. As the late Tanta demonstrated time and again, Morgenson is an atrocious financial journalist. But I have neither the time nor the energy to highlight all of the errors and wildly misleading statements in the article...

John Carney's Weak Defense of Elizabeth Warren

Posted on April 25, 2009
Clusterstock's Joe Weisenthal wrote a post a few days ago highlighting the recent criticism?from Megan McArdle, Eric Falkenstein, and Thomas Cooley?of Congressional Oversight Panel (COP) chair Elizabeth Warren. I've been critical of Warren's attempt to use the COP to address issues well outside the panel's mandate, so I'm glad she's coming in for some criticism...

Securitization is important to consumer lending

Posted on April 24, 2009
Gillian Tett has an excellent column in today's FT on the implosion of the securitization markets:What is imploding though is the securitisation world. If you exclude agency-backed bonds, in 2006 banks issued about $1,800bn of securities backed by mortgages, credit cards and other debts...

Since when is Treasury under a "wait and see" policy?

Posted on April 23, 2009
I'll give Simon Johnson one thing: he's great at knocking down straw man arguments.Today's straw man is Treasury's alleged "wait and see" policy on the banks. Johnson and Peter Boone claim on the NYT's Economix blog that Treasury's plan is to "look the other way on big banks' problems and hope an economic recovery brings them back to sustained profits...

Wall Street Pay

Posted on April 22, 2009
Like Justin Fox, I was struck by this passage in Gabriel Sherman's New York magazine piece about Wall Street pay (but for an entirely different reason):A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers...

William K. Black is an Idiot

Posted on April 18, 2009
William K. Black has been making the rounds lately, and has been drawing a lot of attention (from people who want to hate the Geithner plan) by claiming that the Obama administration is "refusing to obey the law" by not seizing the major banks. On Bill Moyers' show, Black stated:I think, first, the policies are substantively bad...

"Too Big to Fail" Again

Posted on April 18, 2009
I wrote a long post for The Atlantic's business blog the other day about the idiocy of the whole "too big to fail, too big to exist" idea, which is sadly catching on in the blogosphere. And it's showing no signs of slowing down. Matt Yglesias wrote this about Goldman Sachs:So instead of [the issue] being "if they want taxpayers to save them, then they have to take fewer risks and become smaller" it's given that taxpayers will save them, then have to take fewer risks and become smaller...

The Purpose of the CAP

Posted on April 09, 2009
Matt Yglesias badly misunderstands the purpose of the Treasury's Capital Assistance Program (CAP):I thought the point of the [stress] tests was to open up the possibility that a minority of banks would be shut-down, while the others would be proclaimed healthy (as in actually healthy rather than "healthy given a government guarantee") and we could shift out of the implicit guarantee phase...

More AIG Counterparty Nonsense

Posted on April 08, 2009
ProPublica has ridiculous article titled, Does AIG Really Need to Pay Its Counterparties in Full?Yes, AIG really has to pay its counterparties in full. The whole point of rescuing AIG was to keep it out of bankruptcy, and short of bankruptcy, there's no mechanism for forcing AIG's counterparties to take a haircut...

PIMCO: Just lucky, I guess

Posted on April 07, 2009
One of the most important aspects of the ISDA's recent overhaul of the credit default swaps (CDS) market ? known in the market as the "Big Bang" ? is the creation of a Credit Derivatives Determinations Committee. Starting tomorrow, the Determinations Committee will make binding decisions on a range of issues, the most important of which include whether a "credit event" has occurred, and which obligations will constitute "deliverable obligations" in a settlement auction...

Non-Toxic Assets Priced Properly. Therefore, Toxic Assets Priced Properly

Posted on April 06, 2009
That seems to be the argument in this paper by Harvard's Joshua Coval and Erik Stafford and Princeton's Jakub Jurek, which is being touted as evidence that Treasury is wrong to believe that the toxic assets are underpriced.The introduction states:On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products...

"Gaming" the PPIP

Posted on April 06, 2009
Paul Krugman says that Jeff Sachs's worries "need to be taken seriously." I think people need to stop taking academics seriously on the bank rescue.Sachs claims that banks like Citi can game the PPIP by partnering with the government to buy their own toxic securities at inflated prices...

Martin Feldstein on the Geithner Plan

Posted on April 04, 2009
Martin Feldstein is generally supportive of the Geithner plan, but he says it needs to be expanded in three ways to ultimately succeed. The odd thing is, the Treasury has already announced two of his three proposed expansions.Feldstein writes:First, the Treasury must be prepared to inject capital into the banks that agree to sell mortgages...

Tyler Cowen Is Very Wrong

Posted on April 04, 2009
Tyler Cowen has a truly bizarre column in this morning's New York Times. He argues that there's "a big hole" in the Obama administration's proposals to reform financial regulation: "the new proposals immunize the creditors and counterparties of [firms like AIG] by protecting them from their own lending and trading mistakes...

As long as we're capping things...

Posted on April 04, 2009
Along with executive pay and bank size, I propose that we cap the number of adjectives Glenn Greenwald is allowed to use in a given post. Substantive issues aside, his writing is atrocious. It's a legitimate public health issue at this point.

A behind-the-scenes account of the financial crisis

Posted on April 03, 2009
This behind-the-scenes account of the financial crisis by Phillip Swagel, the former Assistant Secretary for Economic Policy at Treasury, makes for absolutely fascinating reading.Swagel takes academic economists to task for their failure to understand the very real legal constraints on policymaking...

"Stress Test" Scenarios

Posted on April 02, 2009
The Obama administration has taken a good deal of heat for the less-than-catastrophic assumptions in its bank stress tests. In the "more adverse" scenario, average unemployment is 8.9% in 2009 and 10.3% in 2010, while housing prices fall 14% in 2009 and 4% in 2010...

Joe Stiglitz, Mainstream?

Posted on April 01, 2009
In his op-ed in this morning's NYT, Joe Stiglitz ends up just regurgitating all the superficial mainstream arguments about the Geithner plan: it's a backdoor bailout for banks, Treasury wants investors to "overpay" for toxic assets, nationalization is the solution, yada, yada, yada...

On Mark-to-Market

Posted on April 01, 2009
I've actually changed my mind somewhat on mark-to-market (MTM) accounting during the financial crisis. At first I was strongly against relaxing MTM?the banks' complaints about MTM sounded way too much like the bogus complaints I had grown accustomed to hearing from banks over the past 15 years...

One good thing about London

Posted on April 01, 2009
Casual Wednesday!(Explanation here.)

Is the Financial Sector Too Big?

Posted on March 31, 2009
Probably.But a lot of the recent arguments for why the financial sector is too big don't make the case. For example, Simon Johnson cites the financial industry's share of domestic corporate profits:From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits...

Debating the Optimal Bank Size

Posted on March 31, 2009
Everyone seems to agree that financial regulations should strive to prevent banks from ever becoming "too big to fail" in the first place. First, you have to identify the point at which a bank becomes "too big to fail." Felix Salmon proposes limits based on bank assets:To get specific, I think that maybe $300 billion in assets would be a reasonable cap on bank size -- there's very little evidence that banks get any economies of scale beyond that in any case...

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