Legal Commentary

Why Are Credit Markets Taking So Long To Turn Around?

Posted on October 31, 2008
The U.S. government, along with governments around the world, have taken extraordinary steps to unfreeze the credit markets. The government has, among other actions, recapitalized 25 banks to the tune of roughly $158 billion, guaranteed all senior debt issued by banks over the next 3 years, and extended unlimited swap lines to several other central banks...

"The Obama Premium"

Posted on October 31, 2008
It's been amusing, if increasingly grating, to watch people like James Pethokoukis push the bonecrushingly stupid argument that Obama's rise in the polls is the real reason the markets have been crashing.John Authers of the FT points out that even if you accept the dubious premise that politics has been driving the markets, Pethokoukis and company are still wrong:[O]ther global stock markets have suffered worse than the US in the past two months, and funds have flowed to the dollar...

Steve Chapman: Unconstrained by Intelligence or Facts

Posted on October 30, 2008
Chicago Tribune columnist Steve Chapman is a hack. Everyone knows this. But this is bad even for someone as cartoonishly ignorant as Chapman. In this morning's column, he wrote:For nearly a year, we've been told that the economy is on the verge, if not the thick, of a painful recession...

WSJ Catches On

Posted on October 28, 2008
Today's WSJ has an article that finally puts the "volatility spiral" I discussed in the previous post at the center of the post-Lehman rout:Brokers and exchanges calculate the level of collateral required to trade securities on margin based on potential losses in stress tests, determined by historical volatility...

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The Importance of Volatility

Posted on October 27, 2008
The most important financial market indicator right now is not the Dow, not swap spreads, and defintely not the TED spread. It's not even Libor (though Libor is still important, for obvious reasons).It's volatility.The most widely-used measure of volatility is the VIX, which measures the implied volatility of options on the S&P 500 index for the next 30 days...

Thomas Friedman: Not A "Details" Guy

Posted on October 26, 2008
Thomas Friedman warns his readers that having the government as a shareholder in banks might stifle innovation because the government might force banks to become overly cautious.If Friedman had taken the time to look at the details of the recapitalization plan, pesky though they are, he'd see that the government is only getting nonvoting shares...

CDS as Insurance

Posted on October 25, 2008
New York Governor David Paterson's announcement that the state of New York will begin regulating certain credit default swaps (CDS) as insurance sent shockwaves through the CDS market. Insurers are closely regulated at the state level?they must be licensed to write insurance policies, adhere to strict minimum capital requirements, etc...

Not All Economists Are Created Equal

Posted on October 25, 2008
I very much agree with Ezra Klein:One sidenote of the past few months is that folks turned to economists when what they needed were finance experts. But there are relatively few finance experts who aren't affiliated with financial institutions, and so much of their commentary is tainted...

EconomPic Data

Posted on October 20, 2008
I neglected to mention in my last post that the one blog I actually did start reading last week is EconomPic Data. I'm one of those people who likes to visualize data, so the daily charts and graphs of relevant economic data is perfect for me. Highly recommended.

Volcker Supported Recapitalization?

Posted on October 20, 2008
The Wall Street Journal article on Paul Volcker becoming a key economic adviser to Obama says:Like other prominent economists, Mr. Volcker also advocated early on for the recapitalization of banks. On this advice, Sen. Obama proposed direct-equity infusions in banks in his frequent conference calls with Treasury Secretary Henry Paulson...

Financial Crisis Coverage

Posted on October 19, 2008
Brad DeLong mocks the Washington Post for thinking that it has the ability to provide "authoritative" coverage of an event like the financial crisis:[W]hen an episode like the financial crisis hits, nobody even half-informed with even half a brain looks to the Post for "authoritative" coverage...

Another Great Keynes Quote

Posted on October 19, 2008
Via Robert Skidelsky, the foremost authority on all things Keynes:"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

Recommended Links

Posted on October 18, 2008
1. Paul Krugman: A Fateful Election (New York Review of Books)2. Myron Scholes: Re-Regulate Leverage, But Not Much Else (The Economist)3. Malcom Gladwell: Late Bloomers (New Yorker)4. Anna Schwartz: Bernanke Is Fighting the Last War (WSJ)5. Benjamin Friedman: A Challenge to the Free Market (New York Review of Books)6...

Regulating Finance: The "Now We Know" Factor

Posted on October 16, 2008
There's little doubt that the financial sector is about to be re-regulated in a serious way. This is sorely needed, and the conservatives and libertarians who say that increased regulation of Wall Street is a bad idea because regulation can't solve every problem, forever and ever, quite simply have no idea what they're talking about...

To Each His Own Regulator

Posted on October 15, 2008
Peter Boone, Simon Johnson, and James Kwak have an op-ed in today's WaPo, titled, "How to Manage the Banks." What's their proposal? Here it is, the sum total of the proposal that merited a place on the Post's op-ed page:Congress should create a consolidated and powerful regulator that can stand up to the banks...

Recommended Readings

Posted on October 15, 2008
1. Kenneth Arrow argues that a main cause of the financial crisis is asymmetric information. A new NBER working paper by Gary Gorton makes the same argument.2. Brad Setser sees little evidence of the nightmare scenario I mentioned last night (i.e., China broadly redirecting its monetary policy away from foreign exchange interventions):China?s trade surplus remains very large ? and that it is still adding to its reserves at a fast clip...

Speaking Without Knowing

Posted on October 14, 2008
An unfortunate consequence of the financial crisis taking center stage in the news is the barrage of commentary and opinion-pieces on the financial crisis from people who know absolutely nothing about financial markets. The offending commentary has come predominantly from the political arena?amateur political commentators (a category that includes political journalists and columnists, despite their claims of expertise) know even less about finance than they do about politics, and that's saying something...

The Recapitalization Phase

Posted on October 14, 2008
So far, here's what we know about the U.S. recapitalization plan (with my commentary sprinkled in):Preferred Stock: The government will buy $250 billion of perpetual preferred stock in U.S. banks. $125 billion has already been committed to 8 large banks?$25 billion to BofA/Merrill, Citi, JPMorgan, and Wells Fargo, $10 billion to Goldman and MS, $3 billion to Bank of NY Mellon, and $2 billion to State Street...

V-Shaped Recovery in Financial Markets?

Posted on October 14, 2008
The Nikkei closed up 14.15%, the DJ Euro Stoxx 50 is currently up 10.7%, and futures indicate a 174-point gain in the Dow tomorrow morning.Technicians assured me that we would see modest gains, followed by a retesting of lows, and would crawl our way back to more reasonable levels in fits and starts...

"Idiots and Liars"

Posted on October 14, 2008
Barry Ritholtz lays down the law on the Fannie/Freddie/CRA line:Those who continue to blame the CRA, Fannie Mae, etc. reveal their fundamental misunderstanding of how credit operates in general, what the financing process was like from 2002-07, and how this situation came to pass...

Simpson Thacher

Posted on October 14, 2008
The Treasury taps Simpson Thacher to serve as legal adviser for the recapitalization plan. Good firm with a top-notch PE practice (they represent KKR), so it definitely has the necessary expertise to advise on the recapitalization portion of the bailout...

What Scares Me

Posted on October 14, 2008
What could still cause a complete meltdown of the global financial system? Economic growth in Asia slowing so much that the Asian central banks -- particularly the People's Bank of China -- decide that monetary policy should be focused on fighting possible recessions rather than intervening in the foreign exchange market (i...

Financial Crisis Jokes

Posted on October 12, 2008
My favorite joke floating around right now:The financial crisis is worse than a divorce: I have half my money, but I still have my wife.

Chris Cox

Posted on October 07, 2008
It was obviously a political stunt, but John McCain was right. Fire Chris Cox. Right now.From Bloomberg:An unedited version of the 137-page study [by the Inspector General of the SEC] posted to the Iowa Republican's Web site Sept. 26 showed that Bear Stearns traders used pricing models for mortgage securities that ``rarely mentioned'' default risk...

Prescient

Posted on October 06, 2008
William Poole, writing in 1991:[A]ny policymaker who is unwilling to play chicken with the markets on the issues will be conceding a lot in Washington infighting over policy. This is another reason why it is so important to change the incentive structure in private markets to promote stability...

Still Alive

Posted on October 06, 2008
I apologize for the lack of posting. As I'm sure you can imagine, things have been beyond crazy for the past 3 weeks. My firm represents a large hedge fund, and I've been at the fund's headquarters in Connecticut for about 2 weeks now (I'm still in CT)...

Beware of Hackery

Posted on October 02, 2008
I see that Columbia Business School professor Chris Mayer is making the rounds on the op-ed pages (last week in the New York Times, and today in the Wall Street Journal). It's worth reminding people that at the height of the housing bubble, Mayer was prominently denying that a bubble existed at all...

I Guess We Live In Fantasy Land

Posted on October 01, 2008
Not to pick on Thomas Friedman too much, but this is just a perfect example of why his columns should never be taken seriously. Ever.Here's Friedman:We're all connected. "Decoupling" is pure fantasy.And here's the IMF:There is evidence of business cycle convergence within [both industrial countries and emerging economies], but divergence (or decoupling) between them...

How Not To Write

Posted on October 01, 2008
Thomas Friedman has never been the most eloquent writer, and he's not exactly known for his scholarly intellect, but no professional columnist should ever write something like this:The story cannot end here. If it does, assume the fetal position.If the story cannot end here, then why advise people on what to do if the story does end here? Ah, logic.

TARP + Tobin Tax = Successful Bailout Bill

Posted on September 30, 2008
There have been so many alternative bailout plans proposed in the past 2 weeks that I can't even keep up. Some, obviously, have been better than others, and most are either bad policy or bad politics. Jeff Frankel's suggestion that Congress add a small tax on securities transactions to the existing version of TARP is definitely good politics, and it might be good policy too?it's at least better than TARP standing alone...

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