Category Archives: Risk and risk management

“Why Pay for Performance Should Get the Sack”

Yves here. Before reacting reflexively to the thesis of the article, consider this corroborating view from the former chairman of Goldman, John Whitehead, back in 2007:

“I’m appalled at the salaries,” the retired co-chairman of the securities industry’s most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are “shocking,” Whitehead said. “They’re the leaders in this outrageous increase.”

Whitehead went even further, recommending the unthinkable, that Goldman cut pay:

Whitehead, who left the firm in 1984 and now chairs its charitable foundation, said Goldman should be courageous enough to curb bonuses, even if the effort to return a sense of restraint to Wall Street costs it some valued employees. No securities firm can match the pay available in a good year at the top hedge funds.

“I would take the chance of losing a lot of them and let them see what happens when the hedge fund bubble, as I see it, ends,” Whitehead, 85, said….

By Bruno S. Frey, Professor of Economics at the University of Zurich and Margit Osterloh, Professor (em.) for Business Administration and Management of Technology and Innovation, University of Zürich; and Professor, Warwick Business School. Cross posted from VoxEU

Matt Stoller: Happy Lehman Brothers Bankruptcy Day

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller. Cross posted from New Deal 2.0

Lehman’s bankruptcy happened three years ago today. It should be quite clear at this point that another Lehman is going to happen again. Policymakers didn’t deal with the crisis of 2008-2009; they turned it into a much longer crisis with far greater lasting damage.

Anne Sibert: The damaged ECB legitimacy

Yves here. This post may strike readers as a tad wonky, but the role and governance of central banks has become a subject of debate in the US, and I expect it to move more into the spotlight in the EU as the crisis continues. And as you read the post, the ECB had been trying to avoid scrutiny for good reason. It manages to make the oft-criticized Fed look good.

Anne Siebert is the wife of former central banker, now Citigroup chief economist Willem Buiter, who was a very outspoken and vocal critic of the Fed during the crisis, particularly of its “quasi fiscal role,” meaning the way it subsidized banks in ways that involved taking real balance sheet risk outside Congressional budgetary processes. Buiter argued this might well be a violation of the Constitution.

He and Siebert have written and done advisory work together, often for central banks. They were called in by Iceland shortly before its crisis erupted, and apparently told the central bank it was toast. Her experience makes Siebert a commentator who cannot easily be ignored.

By Anne Siebert, Professor and Head of the School of Economics, Mathematics and Statistics at Birkbeck College, London and a member of the a member of the Monetary Policy Committee of the Central Bank of Iceland. Cross posted from VoxEU

The European Central Bank was once known for its obsessive focus on price stability. Since the global economic crisis, however, its role has extended to preventing the insolvency of banks and sovereign countries. This column argues that such a move has badly harmed the institution’s legitimacy – something that will damage both its policy effectiveness and confidence in the governing bodies of the EU as a whole.

An Almost-Open Letter to the CEO and Chairman of the UK’s Financial Services Authority

A letter to the UK’s Financial Services Authority, by one of the victims of an apparent massive fraud perpetrated on SME customers of Halifax-Bank of Scotland (HBOS)

How Chase Ruined Lives of People Who Paid Off Their Mortgages

Matt Taibbi, in giving a well deserved thrashing to the banking industry’s Tokyo Rose, aka New York Fed director Kathryn Wylde, said:

[S]tealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money.

Once you read the allegations in the cases included in this post, I strongly suspect you will agree that the “ruining lives” in the headline is not an exaggeration. And as important, these two cases, with very similar fact sets, also suggest that these abuses are not mere “mistakes”. These are clearly well established practices that Chase can’t be bothered to clean up, since cleaning them up costs money and letting them continue is more profitable.

More on the Opacity of Bank of America’s Financial Statements

Yesterday, I made a basic point about the financial statements of banks and other financial firms, citing Steve Waldman, who said it better than I could:

Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

The illustration of Steve’s point was that investors freaked out on Monday about an estimate that Bank of America might need to raise $40 to $50 billion in equity. The idea that the market would be surprised (as in not know that and simultaneously regard that figure as plausible) says a great deal about how little confidence investors have in their knowledge of big financial firms.

Why is Bank of America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame

Yesterday, the S&P 500 ended flat, yet Bank of America continued its truly impressive implosion, with its stock tanking 7.89%. It is now trading at a market cap of $65 billion, versus a book value of common equity of roughly $215 billion.

Market commentators were having so much fun discussing the meltdown that FT Alphaville even dedicated a post to the “The Bank of America Explanation Game.” This was its tally, and the post includes an explanation for each:

Bank of America Death Watch: Unloading “Non-Core” Assets Aggressively

Bank of America’s actions continue to betray its words. CEO Brian Moynihan bravely maintained in an investor conference call last week that the beleaguered bank would be around for the next 230 years and did not need more new capital. He nixed selling equity at its current price levels, because it would be highly dilutive.

Yet we and others have raised the issue that the bank is in a corner in dealing with its not so hot balance sheet.

Why “Business Needs Certainty” is Destructive

This is the start of my final guest post in Glenn Greenwald’s slot at Salon:

If you read the business and even the political press, you’ve doubtless encountered the claim that the economy is a mess because the threat to reregulate in the wake of a global-economy-wrecking financial crisis is creating “uncertainty.” That is touted as the reason why corporations are sitting on their hands and not doing much in the way of hiring and investing.

This is propaganda that needs to be laughed out of the room.
Read more...

New Zealand Company Registry Whack-a-Mole!

More old and new delights from the little shop of horrors that is the New Zealand Company Registry

New Zealand Government comatose, NZ Parliament surprisingly perky though

Written answers requested in New Zealand’s Parliament, triggered by reporting of the NZ companies register from Naked Capitalism and the NZ National Business Review

Satyajit Das: Still Stressed After All These Tests!

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (forthcoming August 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

For the second time in two years, the European Banking Authority (“EBA”) completed tests on European banks to demonstrate their “solvency” under conditions of “stress”.

The results have been over shadowed by other momentous events – the announcement by the European Union (“EU”) of a range of measures to deal with the European debt crisis. The tests remain highly relevant as the EU measures are unlikely to “resolve” the debt problems and European banks remain heavily exposed to losses. The risk of a European banking crisis remains.

“Time to Take Stock”

Yves here. I had come across the speech mentioned in this post, “The Race to Zero” by Andrew Haldane of the Bank of England and decided not to write it up because I had come across it a bit late. This post will probably persuade readers that that was a bad call.

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

Exactly how did we get into this mess with the capital markets? A situation where the global stock of derivatives is over $US600 trillion, which is about twice the capital stock of the world. A situation where high frequency trading is over two thirds of the transactions on the NYSE and about the same in the stock markets of the UK and Europe. Likewise they are over half the action in foreign exchange markets and they are rapidly becoming dominant in the futures market. Andrew Haldane from the Bank of England is arguing against allowing high frequency trading — algorithms chasing algorithms chasing algorithms — from being allowed to proliferate pointing at volatility as the problem: