Category Archives: Moral hazard

How Botched Derivatives Risk Taming Regulations are Again Going to Leave Taxpayers Holding the Bag

An important piece in the Financial Times by Manmohan Singh, a senior economist at the International Monetary Fund, describes persuasively how one of the central vehicles for reducing derivatives risk, that of having a central counterparty (CCP) and requiring dealers to trade with it rather than have a web of bi-lateral exposures, or rely on banks to act as clearers (making them too big to fail) has gone pear shaped. While the immediate reason for this outcome is the unwillingness of national banking regulators to cede powers to an international clearinghouse, Singh fingers an equally important cause: the reluctance to recognize that the underlying problem was and remains undercollateralized derivatives positions. His introduction to the mess:

Rajiv Sethi: Of Bulls and Bair

By Rajiv Sethi, Professor of Economics, Barnard College, Columbia University & External Professor, Santa Fe Institute. Cross posted from his blog

Sheila Bair’s new book, Bull by the Horns, is both a crisis narrative and a thoughtful reflection on economic institutions and policy. The crisis narrative, with its revealing first-hand accounts of high-level meetings, high-stakes negotiations, behind-the-scenes jockeying, and clashing personalities will attract the most immediate attention. But it’s the economic analysis that will constitute the more enduring contribution.

Robert Jenkins: Puncturing Bankers’ Myths

In this speech,Robert Jenkins of the Bank of England blows apart the self-serving myths that ‘old guard’ bankers and their lobbyists have been peddling since the financial crisis ripped apart the global financial system in 2007.

Criminal Sanctions: How to Save Banks Without Rewarding Bankers

Yves here. This article falls in the “mirabile dictu” category: an economist arguing that putting bankers in jail is necessary to combat the deterioration in behavior.

By Giancarlo Spagnolo, Professor of Economics at University of Rome “Tor Vergata” and CEPR Research Affiliate. Cross posted from VoxEU

How to save the banks but not the bankers? This column argues that fines for criminal behaviour in banks are not enough – it may be time to start locking people up.

Randy Wray: Why We’re Screwed

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City. Cross posted from Economonitor

As the Global Financial Crisis rumbles along in its fifth year, we read the latest revelations of bankster fraud, the LIBOR scandal. This follows the muni bond fixing scam detailed a couple of weeks ago, as well as the J.P. Morgan trading fiasco and the Corzine-MF Global collapse and any number of other scandals in recent months. In every case it was traders run amuck, fixing “markets” to make an easy buck at someone’s expense. In times like these, I always recall Robert Sherrill’s 1990 statement about the S&L crisis that “thievery is what unregulated capitalism is all about.”

Chris Cook: Libor and Oil Market Manipulation – Rage Against the Dying of the Light

By Chris Cook, former compliance and market supervision director of the International Petroleum Exchange

A generation of markets is dying and the era of the Middleman is coming to an end. The ‘Bezzle’ – as J K Galbraith described financial misbehaviour in a boom, revealed by a bust – is now coming to light.

Satyajit Das: Personal versus Personalities

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011)

Jonathan Fenby (2012) Tiger Head, Snake Tails: China Today, How It Got There and Where It is Heading

Robert Frank (2011) Who Repo’d My Jet: the manic millionaires, and why they’ll lead us to the next boom and bust

John Coates (2012) The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust

Personal – relating to an individual or what serves the interest of that individual. Personality – distinctive assemblage of qualities which defines an individual, frequently in modern life conflated with celebrity. These three books deal with the ‘personal’ and ‘personality’ in the financial world.

“The Eurozone’s Strategy is a Disaster”

Yves here. Mr. Market is in a tizzy today over, per Bloomberg, “concerns over the slowdown of growth”. Cynics might note that journalists have to attribute motives to market moves, when their waxing and waning often defies logic. Nevertheless, we’ve had disappointing reports out of China, a bad Philly Fed manufacturing report, a less than stellar initial jobless claims report, and not so hot housing data this AM, and more and more signs of inability to bail out the sinking Titanic of the Eurozone (a meaningless announcement compounded by continued focus on ongoing German court challenges to more aggressive support of rescues. Even if these cases lose, any uncertainty and delay has the potential to accelerate the ongoing bank run out of periphery countries).

This post from VoxEU is a good short form summary of how the Eurozone got into this fix.

Dimon Redux: Why Bank Risk-Taking = Risk Making

In case you haven’t had enough of Congresscritters lobbing softballs at Jamie Dimon, the JP Morgan CEO is appearing before the House Financial Services Committee on Tuesday. There have been a number of suitably scathing accounts of how members of the Senate Banking Committee fawned over Dimon.

As we wrote, Dimon took what is actually an indefensible position: that any bank risk taking should be permitted, so long as it will arguably do well when there is a crisis (watch for this to be broadened to merely be a bet to improve bank profits when its regular businesses are under stress). We pointed out that this logic would justify engaging in systemically destructive activities like the Magnetar trade, and that with government backstopping behind it to boot. And that is a bigger risk than it might seem at first blush.

Walkback on Basel III Confirms Bank Victory on Regulation

The Wall Street Journal reports that a key element of Basel III rules, its provisions on liquidity buffers, are about to be watered down.

Dimon Testimony Whopper: CIO’s Gambling on Disaster = “Portfolio Hedging”

Well, there’s nothing like seeing Jamie Dimon swinging for the fences. Dimon has taken his defense and turned it into an offense, in both senses of the word.

More on Frontline’s Astonishing Whitewash of the Crisis

As readers may know, a recent post, “Frontline’s Astonishing Whitewash of the Crisis,”discussed the first half of the Frontline series, “Money, Power & Wall Street.” Producers Mike Wiser and Martin Smith sent a letter taking issue with this review, and I made an exception to my usual practice and posted their missive.

The major dispute is over whether their series lets the financial services industry off too lightly.

Andrew Haldane on the Arms Race in Banking

Regular NC readers have seen us repeatedly invoke the work of Andrew Haldane, the executive director of stability of the Bank of England. His thoughtful and original work on the risks and costs of our financial system have provided serious ammunition for reform advocates.

At the recent INET conference in Berlin, Haldane recapped some of his recent observations under the rubric of an arms race, in which efforts of individual players to improve their own position wind up leaving everyone worse off.