Category Archives: Moral hazard

Robert Prasch: The “Lessons” that Wall Street, Treasury, and the White House Need You to Believe About the Lehman Collapse

Five long years have passed since the demise of the once venerable firm of Lehman Brothers. To mark the occasion, Wall Street, the United States Treasury Department, the White House, and their several political proxies and spokespersons have taken to the mass media to instruct the public in the “lessons” to be drawn from the financial crisis of 2007-09. Regrettably, we are witnessing the propagation of several self-serving falsehoods in the hope that the public can be induced to embrace them now that the immediacy of the events in question is in the past. Some of the lessons are so flagrantly false that they demand immediate correction.

What the Orgy of “Lehman Five Years On” Stories Missed

One of the reasons I haven’t weighed in with the obligatory Lehman five year anniversary piece is that so many of them are variations on a limited range of themes. So it may be more instructive to discuss the stories that it would have been nice to see instead.

David Dayen: Regulatory Apparatus To Provide Full Employment For Chroniclers of Future Bailouts, as Useless Mortgage Origination Rules Introduced

There’s no way to possibly count the various ways in which Dodd-Frank rules have been watered down, even from their already waterlogged original intent. But we got another example of it yesterday, the product of a corrupt bargain between the mortgage industry and so-called “progressive” housing groups.

Bill Black: The Banksters Master Irony – Push Summers & Geithner for Fed Due to Their Regulatory Zeal

The big banks are desperate to prevent Janet Yellen from being appointed as Bernanke’s successor to run the Fed. Their sexist attacks have backfired.

Wolf Richter: When Flight Safety Gets Outsourced To China

Aircraft maintenance was a highly paid blue-collar job that required education, training, manual skills, and brains. It was one of the perfect American middle-class jobs with generous healthcare, retirement, and vacation benefits; and free flights! They were working for icons like Delta, American Airlines, Continental, TWA, or Pan Am. Icons indeed!

Obama’s Patronage System: Pritzker Nomination for Commerce Department, Limp-Wristed Dodd Frank

The consternation at the not-exactly-a-surprise nomination of billionaire Penny Pritzker to be Commerce Secretary, is sadly much less than is warranted. That suggests that the Forbes 400 member will survive her confirmation hearings. And in a telling bit of synchronicity, last week some fauxgressives set about amplifying an article in the Nation that big bank lobbying efforts were the reason Dodd Frank was amounting to very little. As we’ll discuss, both reflect how much Obama supports the interests of the FIRE sector (finance, insurance, and real estate).

Vice Chairman of Chinese Accounting Association Warns Chinese Local Debt Could Create Bigger Crisis than US Housing Implosion

On the one hand, Bloomberg today tells us retail demand for stocks is as hot as ever. On the other, we have someone well-placed in China telling the world that its local debt is a train wreck waiting to happen, a classic Minksy Ponzi unit, but the timing of the unraveling is uncertain.

Will Slovenia Be the Next Victim of German Politics?

The IMF says that Slovenia will need to issue €3 billion in bonds this year. The country may be forced to seek painful assistance from the Troika. Will Germany be the heavy as it was with Cyprus?

Yanis Varoufakis: The Good, the Bad and the Extremely Ugly (Aspects of the Cyprus Deal)

Yves here. The longer you look at the Cyprus “rescue,” the worse it looks. As you can learn from our compendium in today’s Links, the Cypriot economy is already reeling. It’s straining under the extended bank holiday, which is scheduled to end Thursday. Moreover, the impact of losses radiating from number two bank Laiki are already propagating through the island.

And that’s before we get to the wider ramifications. Whether Germany understands it or not, it has delivered a fatal blow to the Euro project. How long it continues is anyone’s guess, but the Balkanization of the financial system that the Eurocrats have set in motion means they won’t be able to go the US/Japan zombification route.

Gaming the Cyprus Negotiations (Updated)

The state of play in Cyprus is that negotiations in Parliament are underway, with the hope of a yes vote on a “Plan B” today. The Cypriot officialdom has allowed for slippage in this timetable, with the bank holiday in effect till Thursday. The latest events were largely a nothingburger, aside from the big news of the failure to approve the president’s plan yesterday: European ministers confirmed that they’ll approve an agreement so long as Cyrpus obtains €5.8 billion from depositors. Monday night, President Nicos Anastasiades gave his version of the Hank Paulson armageddon speech on national TV, laying out the fact that no deal means an immediate collapse of “one bank” (presumably Liaki), and a possible exit from the Eurozone.

The widespread assumption is that the Cypriots will fall into line, since the alternative really does look even uglier. But the runway is pretty short.

Hair of the Dog that Bit Us: Capital Requirements Provide Ethical Cover for Abuse of the Safety Net

By Edward Kane, Professor of Finance at Boston College and founding member of the hadow Financial Regulatory Committee

“We are a moving company not a storage company”
…Apocryphal Bear Stearns executive

Regulators define a financial institution’s capital as the difference between the value of its asset and liability positions. The idea that capital requirements can serve as a stabilization tool is based on the presumption that, other things equal, the strength of an institution’s hold on economic solvency can be proxied by the size of its capital position. That in turn assumes you can rely on those figures.

Will Cyprus Become Creditanstalt 2.0?

The cheery view that Europe had moves past its crisis now looks to have been a tad premature.

Cyprus: The Next Blunder

Yves here. Our post today on Cyprus provides some broad background, including the political dynamics and the not-terribly-defensible reasons the Eurozone went that route, and a short discussion of the large risk that this inept move precipitates a wider crisis. This article by Charles Wyplosz serves as a companion, since it discusses the “tax,” um, expropriation option versus other alternatives. Even more important, it sketches out why this scheme, even if it manages not to kick off a crisis, is still inadequate to rescue Cyprus. It is thus a toxic variant of the Eurozone “kick the can down the road” strategy.