Category Archives: Risk and risk management

Quelle Surprise! Geithner Gutting Dodd Frank via Intent to Exempt Foreign Exchange

I have mixed feelings about an article by Robert Kuttner, “Blowing a Hole in Dodd-Frank.” On the one hand, he’s found an important example of the Administration’s lack of interest in meaningful financial reforms, which is its intent to exempt foreign exchange derivatives from the implementation of Dodd-Frank. But his discussion of what this matters at critical junctures confuses foreign exchange cash market trading with derivatives and thus leaves the piece open to criticism.

Kuttner warns that Geithner has signaled strongly his preference to exempt foreign exchange from Dodd Frank implementation:

Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole.

Is Nuclear Power Worth the Risk?

One of the interesting features during the Fukushima reactor crisis were the fistfights that broke out in comments between the defenders of nuclear power and the opponents. The boosters argued that the worst case scenario problems were overblown, both in terms of estimation of the odds of occurrence and the likely consequences. The critics contended that nuclear power was not economical ex massive subsidies, that there was no “safe” method of waste disposal, and that nuclear plants were always subject to corners-cutting, both in design and operation, so the ongoing hazards were greater than they appeared.

Reader Crocodile Chuck passed along a story from the Bulletin of Atomic Scientists, “The Lessons of Fukushima“, by anthropologist Hugh Gusterson. Here is the key section:

Do We Need Big Banks?

Yves here. I normally let VoxEU articles stand on their own, but this topic, of whether the bank PR that bigger banks are essential stands up to scrutiny, is near and dear to my heart.

Note that the authors point to a 1990s study that finds that a $25 billion in assets bank was the optimal size. There were a fair number of studies done then of bank size versus efficiency. I’m a bit surprised that this is the one that is most often cited, since it also came up with the biggest size threshold at which a negative cost curve kicked in (meaning the bank became more costly to run). One study found that the slightly negative cost curve started at $100 million in assets (!); more typical was somewhere between $1 and $5 billion. And remember, these studies were done in the days when banks returned checks, and check processing was believed to have strong scale economies (ie, if check processing was a bigger proportion of total costs then than now, it could arguably have increased scale economies).

Some academics were frustrated with these results. I recall reading a paper where the author argued that there were theoretical cost savings to being bigger (duh) and basically contended that the empirical data had to be wrong.

Why American Officials Have Been Criticizing the Japanese Nuclear Containment Efforts

Some bloggers as well as readers in comments have been very surprised at and unhappy with the spectacle of American officials taking issue with the Japanese response to the crisis at the Fukushima reactor. For instance, the US recommended evacuation for a 50 mile radius from the facility, as opposed to the 20 kilometers, or 12 miles, established by the Japanese.

The disparity in reporting appears to continue today.

Guest Post: Curbing the Credit Cycle

Credit booms sow the seeds of subsequent credit crunches. This column argues that these have their source in cross-bank externalities. To internalise these cross-sectional spillovers, policy should operate “across the system”. It adds that this is the essence of macro-prudential policy, which, for the first time is about to be undertaken internationally.

Satyajit Das: The Economic Calculus of Japan’s Tragedy

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

The behaviour of financial markets over recent days confirms British Prime Minister Lloyd George’s observation that “financiers in a panic do not make a pretty sight”. While workers in the Fukushima nuclear plant risked death trying to bring damaged reactors under control, financiers cowered in fear. Oscillating between boom and doom, they sought opportunities to benefit from death and destruction.

Instant experts on the nuances of nuclear power generation and the Japanese economy have crowded the airwaves providing ‘analysis’.

Japan Earthquake Shows Business Reengineering Relies on Bogus Thinking Similar to Financial Engineering

Gillan Tett’s latest offering in the Financial Times discusses the woes that have befallen various major companies that find themselves exposed as a result of having extended supply chains that have Japan-based manufacturing as an important part. She correctly depicts this as a symptom of a much larger problem, of having pushed the idea of wringing out production costs too far. But perhaps due to space constraints, she fails to draw out the most important conclusion: just as with financial engineering, management incentives favored ignoring risk, and the resulting blow ups were predictable.

Tett tells us the Japan-related disruptions are merely the most visible symptom of a widespread pathology:

Remaining Staff at Fukushima Plant Told to Leave (Temporarily?); Intrade Predicts IAEA Will Upgrade Accident Level (Updated)

Markets like Intrade are only as good as the intelligence (as in G2, not IQ) of the people making the bets. Given the dearth of real information coming from Tokyo Power, it’s hard to reach informed conclusions about whether the powers that be are making progress in getting the damaged reactors in the Fukushima power complex under control. Japanese are just not big on Western-style disaster presentations: “Here is what happened,” (with a few schematics) “here is what we’ve done and this is what we are going to do next” with backup plans sketched out if the first line of attack fails. Their reflex is instead a combination of apologies and sincere vows to do better, plus and inward hiss if they are asked a really uncomfortable question. So the collective nervousness is based on the legitimate concern that Something Really Awful still could happen, and the incomplete and often inconsistent tidbits don’t provide much reassurance.

Why Adulterous Failed Banker Sir Fred Goodwin’s Covered-Up Workplace Affair is a Matter of Public Interest

We will probably see in the next few days whether the newspapers manage to get the super-injunction by Sir Fred Goodwin, the CEO of failed bank RBS, lifted. Since the facts of the matter, or “speculation” if you will, are now all over the Internet, keeping the super-injunction in place seems pretty pointless, as the Telegraph confirms in Sunday’s Links.

So what’s the real point of this circus? A demonstration of the superiority of the Web over the tabloid press as a mechanism for transmitting salacious tittle-tattle? A grandstanding MP working parliamentary privilege to get a bit of banker-bashing publicity? Naked Capitalism getting into the regulatory arbitrage game and thumbing its nose at the UK court order from the relative safety of its NYC-hosted web server? Or perhaps it is blogger Guido Fawkes sarcastically pointing out that the law is now officially an ass:

So there was this ****** bloke who worked closely with another ****** colleague, they apparently began an adulterous affair not long after the ****ing crisis of 2008. He went to Court to stop it getting out that he had been banging her. Because he is the most notorious ****** of his generation he also banned references to his profession lest he be identified. Guido would be in contempt of Court if he told you his name or profession…

Indeed, the law should not be mocked; but who’s mocking it? The UK certainly needs major overhauls of its privacy (and libel) laws, rather than the current abusive shambles, but in this particular case, one might contend that it’s Sir Fred who’s doing the mocking.

Partial Meltdown Underway at Two Reactors in Japan; 200,000 Evacuated (Updated)

Details from the Washington Post on the partial meltdown at the Fukushima Daichi complex number 1 reactor:

Tokyo Electric Power Co., owner of two heavily damaged nuclear power complexes near the center of Friday’s earthquake, told Japanese regulators Sunday that it faced a new emergency at one of its 10 reactors, even as it struggled to bring several others under control.

Earlier, the big electric utility took the unprecedented step of pumping seawater mixed with boric acid into the core of Fukushima Daiichi’s unit 1 reactor to tame ultra-high temperatures from fuel rods that had been partially exposed….

Adulterous failed banker Sir Fred Goodwin obtains superinjunction

…So the UK press aren’t allowed to call him a banker (!), or mention his infidelity with a married colleague.

However, since MP John Hemming mentioned the case under parliamentary privilege, you can get part of the story from the Telegraph:

He said: “In a secret hearing this week Fred Goodwin has obtained a super-injunction preventing him being identified as a banker.

Shades of 2007: Synthetic Junk Bonds

Aha, the level of financial innovation spurred by super low interest rates is starting to have that “I love the smell of napalm in the morning” feel to it.

The Financial Times reports that there is a frenzy to create synthetic junk bonds, ostensibly to satisfy the desire of yield-hungry investors. Any time you see a lot of long money flowing into synthetic assets rather than real economy uses, it’s a sign that Keynes’ casino is open for business (“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.”)

The author compare this development to that of the asset backed securities CDO market, one of our betes noirs which blew up spectacularly in the crisis. There are some similarities and differences.

A Straightforward Criminal Case Against Wall Street CEOs and Senior Executives

Various people who ought to know better, such as the New York Times’ Joe Nocera, haven taken to playing up the party line of the banking industry and I am told, the SEC, that we should resign ourselves to letting senior financial services industry members get away with having looted their firms and leaving the rest of us with a very large bill.

It is one thing to point out a sorry reality, that the rich and powerful often get away with abuses while ordinary citizens seldom do. It’s quite another to present it as inevitable. It would be far more productive to isolate what are the key failings in our legal, prosecutorial, and regulatory regime are and demand changes.

The fact that financial fraud cases are often difficult does not mean they are unwinnable. And a prosecutor does not need to prevail in all, or even most, to serve as an effective cop on the beat.

Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operations.

Speculators Not Wagering Much Against Periphery Country Eurobonds

Given how many commentators believe that Greece is destined to default on its bonds (particularly since they are subordinate to any new money from the IMF and EU), you’d think they’d be putting their money where their mouth is.

But the old saw in the US is “don’t fight the Fed”. And the same logic appears to apply with the ECB. John Dizard of the Financial Times reports that perilous little in the way of CDS contracts is being written on everyone’s favorite sovereign default candidate (although the leader of Fine Gael, which will be leading the new coalition in Ireland, fired a shot of sorts across the bow of the eurozone officialdom).