Posts filed under “Think Tank”

Rosner Says Stability Act Would Hurt Small, Medium Banks

We need to really push back against the TBTF industry’s lobbying pitch that forcing them to shrink or break them up will cause them to be “uncompetitive”. This is a false notion and the only link they have for arguing against a requirement they reduce their size and scope, by imposing uneconomically high capital requirements or trust-busting.

If we fail to achieve this reduction in size and risk, the rest of the world will become uncompetitive given the lower cost of capital that the “implied government guarantees” will provide the. Ergo, these banks will further destabilize their non TBTF peers with their uneconomic pricing.

The House Financial Services Committee is now going to try and avoid real change by requiring that the industry “prefund” a failed bank clean-up fund. This is another avoidance of the reality of the problem. The mere acceptance that there are TBTF institutions IS the issue. Forcing the rest of the TBTF instituions to pay in advance rather than after doesn’t solve the problem, is unworkable and will cause greater probems given that:

- At the time one TBTF institution is in trouble there is a great liklihood that the liquidity of the others will be impaired;

- To force an institution that may manage its risks well to stand ready to pony up large percentages of its equity to support poorly managed competitors will support a race to zero in risk management as the good actor is forced to race to zero in his activities knowing that he is currently will lose market share to the poor practices of his peer and will later pay for the clean-up of his peer.

- Instead of playing this game we should place severly high capital requirements and charge deposit insurance (not based on deposits). This would force them to rethink their business plans. Then THEY could decide if it is better for their investors for them to be TBTF. Once determined they would either pay to play or sell off units (to the benefit of shareholders) and become more manageable, less risky and no longer TBTF.

- Also, we should demand that legislation spell out, in plain English, that the entire capital structure of a TBTF institution be wiped out, and its holding company held responsible as a source of strength, before taxpayers are exposed to a single dollar of loss.

Expanding on the “unleveled playing field”, as I wrote this week on New Deal 2.0:

Those who argue against a more proactive reduction in risk and size of TBTF institutions will, as always, revert to an argument that strikes a natural chord in every American’s heart: ‘Doing so would create an unleveled international playing field for our institutions relative to their international competitors.’ Level playing fields are a worthy goal, but this is not a relevant argument. Instead, this tired bromide must be resoundingly dismissed on several counts:

* Those countries with the largest banks as a percentage of GDP (Iceland, Ireland, Switzerland) demonstrated that a concentration of banking power can cause significant sovereign risk and tilt global economic playing fields away from that country.

* The likely breakups of ING, Lloyds and KBC suggest that it is we who seek to support an unlevel playing field where we subsidize our TBTF banks while other nations recognize the policy failures of moral hazard. If we continue down this path we will likely be at risk of violating international fair trade regimes.

* When the “unlevel playing field” argument is cited, keep in mind this reasoning supports the disadvantaging of 8000+ community banks relative to our largest banks, all in the name of protecting big banks from government- subsidized international competition.

* There is no longer any evidence that, beyond a cost of capital advantage that comes with implied government support, there are sustainable and tangible economies of scale arising from being the largest. The financial supermarket concept has been proven a failure. The only ones who benefit are the high-level executives.

* We must demand that our legislators no longer allow unelected officials at the independent Federal Reserve to sign international accords created by the TBTF banks through supra-national bodies like the Basel Committee.

* Are we to believe that if we did not have such large and globally dominant firms, US borrowers might be paying more that the 29% interest that several of the TBTF firms are now charging on their card accounts? Perhaps we should think about what advantage our population has gained as a result of our financial institutions being such a large part of our economy or being globally dominant.

* Since when did we accept a national strategy of following rather than leading? When we do what is right, others follow. As example, consider the bank secrecy havens — they made money for a bit. Now, even the Swiss and the Cayman authorities are coming around to our view.

* We are already at a disadvantage given that the largest foreign banks operate in the US without any tier one capital requirement and yet most large, foreign banks have not built a bricks and mortar presence here. Nobody screams about their undercapitalization nor has that undercapitalization caused deposits to migrate to foreign banks.

Also published at:–-bring-in-the-bomb-squad/ (amazingly angry and thoughtful comments at this one)

Category: Think Tank

Catching Argentinian Disease

November 30, 2009
By John Mauldin

Catching Argentinian Disease?

The Ascent of Money

The Independence of the Fed Threatened

A Few Quick Thoughts on the Dollar, GDP, and the Recession

Uruguay, Philadelphia, Orlando, and then…


I have been in South America this week, speaking nine times in five days, interspersed with lots of meetings. The conversation kept coming back to the prospects for the dollar, but I was just as interested in talking with money managers and business people who had experienced the hyperinflation of Argentina and Brazil. How could such a thing happen? As it turned out, I was reading a rather remarkable book that addressed that question. There are those who believe that the United States is headed for hyperinflation because of our large and growing government fiscal deficit and massive future liabilities (as much as $56 trillion) for Medicare and Social Security.

This week, we will look at the Argentinian experience and ask ourselves whether “it” – hyperinflation – can happen here.

The Ascent of Money

I will be quoting from Niall Ferguson’s recent book, The Ascent of Money. I cannot recommend this book too highly. In fact, I rank it up with my all-time favorite book on economic history, Against the Gods, by the late (and sorely missed) Peter Bernstein. There are very few books I read twice. There are too many books and not enough time. This book I will have to read at least three times, and soon, and I have a lot of underlines and mark-ups in it already.

If there were one book I could require every member of the Congress to read, it would be this one. As I read it, I am struck again and again by how fragile and yet resilient our economic systems are. Fragile in the sense that governmental policy mistakes, no matter how well-intentioned, can destroy the wealth of a nation, and resilient in that it doesn’t happen more often.

In his introduction Ferguson writes, “The first step towards understanding the complexities of the financial institutions and terminology is to find out where they came from. Only understand the origins of an institution or instrument and you will find its present day roles much easier to grasp.”

As is often said, those who do not understand history are doomed to repeat it. If you want to understand what is happening in the economy, what the consequences of our choices could be, then I strongly suggest you get The Ascent of Money. It is easy to read, engaging, full of moments where you are led to pull together different ideas into an “Aha!” Ferguson is a brilliant writer and historian, and we are lucky to have this book at a time when it is sorely needed. (order it at

As I have been writing, the United States in particular, and the developed world in general, are faced with a series of very unpleasant, if not downright bad choices. The time for good choices was ten years ago. Now we face the prospect of painful decisions, no matter what we do. It is not a matter of pain or no pain, of somehow avoiding the consequences of our bad decisions, it is simply deciding how much pain we will take and when, or allowing the pain to build up to a climactic event. Today we look at what I think would be the worst choice of all.

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Category: Think Tank

Shallow 5% Pullback Led to Short Covering

Yesterday’s bounce occurred after a relatively shallow 5.00 % pullback in the S&P 500 from its recent peak.  So far this move appears to be more short covering driven than a new wave of institutional buying. Several things we noticed of late and also in yesterday’s activity were as follows”  The recent corrective wave saw…Read More

Category: Think Tank

Data of the day

The final Oct UoM confidence # was 70.6 down from 73.5 in Sept but above the preliminary reading out a few weeks ago of 69.4 and also above estimates of 70. The drop from Sept was led by a fall in the Outlook component which fell almost 5 pts. Current Conditions rose a touch. The…Read More

Category: MacroNotes

Fed Independence: R.I.P.?

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: Think Tank

Stocks and risky assets stumble

Stocks and risky assets stumble

I concluded a post on stock markets over the weekend saying: “After equities’ seven-month climb, stock markets certainly look vulnerable for a decline. Two downside reversal days – on Wednesday and Friday – would seem to indicate that stocks could commence a pullback to work off the overbought condition, allowing fundamentals to reassert themselves.”

Global stock markets, as well as other risky assets, closed sharply lower over the past few days as concerns mounted over the sustainability of the global economic recovery and the outlook for central bank policy.

The performance of the major asset classes is summarized by the charts below, with the top one showing the period from the March 9 stock market lows until October 19 peak and the second one the subsequent period. The numbers indicate an all-change pattern in the performances as risk aversion re-entered financial markets and government bonds and the US dollar regained some favor.





A summary of the movements of major global stock markets since the March 19 peak, as well as various other measurement periods, is given in the table below.

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Category: Think Tank

Governor Daniel K. Tarullo on Regulatory Reform

Governor Daniel K. Tarullo

Regulatory reform

Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., October 29, 2009

Chairman Frank, Ranking Member Bachus, and other members of the Committee, thank you for the invitation to testify this morning on systemic regulation, prudential matters, resolution authority, and securitization. The financial crisis was the product of many factors, including the tight integration of lending activities with the issuance, trading, and financing of securities; gaps in the financial regulatory structure; widespread failures of risk management across a range of financial institutions; and, to be sure, significant shortcomings in financial supervision. More fundamentally, though, it demonstrated that the regulatory framework had not kept pace with far-reaching changes in the financial sector, and the concomitant growth of new sources of risk to both individual institutions and the financial system as a whole.

Because the roots of the crisis reached so deeply into the very nature of the financial system, a broad program of reform is required. Much can be, and needs to be, done by supervisors–under their existing statutory authorities–to contain systemic risk generally and the too-big-to-fail problem in particular. As the discussion draft released by Chairman Frank recognizes, there is also a clear need for the Congress to provide significant additional authority and direction to the regulatory agencies.

Essential elements of this legislative agenda include: ensuring that all financial institutions that may pose significant risk to the financial system are subject to robust consolidated supervision; establishing a systemic risk oversight council to identify, and coordinate responses to, emerging risks to financial stability; directing all financial supervisors to take account of risks to the broader financial system as part of their normal oversight responsibilities; establishing a new special resolution process that allows the government to wind down in an orderly way a failing financial institution that threatens the entire financial system while also creating a credible process for imposing losses on the firm’s shareholders and creditors and assuring that the financial industry, not taxpayers, ultimately bears any additional costs associated with the resolution process; providing for consistent and robust prudential supervision of key payment, clearing, and settlement arrangements; and addressing weaknesses in the securitization process that came to light during the crisis.

Chairman Frank’s discussion draft addresses each of these areas and, in the Board’s view, provides a strong framework for achieving a safer, more stable financial system. In addition to addressing these areas for legislative change, I will discuss some of the actions the Federal Reserve and our supervisory colleagues are taking under existing authorities to strengthen the supervision and regulation of financial institutions–particularly large, complex institutions–and to prevent regulatory arbitrage.

Consolidated Supervision of Systemically Important Financial Institutions
The current financial crisis has clearly demonstrated that risks to the financial system can arise not only in the banking sector, but also from the activities of other large, interconnected financial firms–such as investment banks and insurance companies–that traditionally have not been subject to the type of mandatory prudential regulation and consolidated supervision applicable to bank holding companies. Chairman Frank’s discussion draft would close this important gap in our regulatory structure by providing for all financial institutions that may pose significant risks to the financial system to be subject to the framework for consolidated prudential supervision that currently applies to bank holding companies. As I will discuss shortly, it also provides for these firms to be subject to enhanced standards, reflective of the risk they pose to the financial system. These provisions should prevent financial firms that do not own a bank–but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities–from avoiding comprehensive supervisory oversight.

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Category: Federal Reserve, Think Tank

The evils of inflation

The better than expected Q3 Real GDP report has raised the debate over whether the American Recovery and Reinvestment Act of 2009, aka the stimulus package, was a positive catalyst in helping. I will not get into the political discussion and will only specifically discuss the tax cut that was given to individuals that qualified…Read More

Category: MacroNotes

Today’s Regulatory Hearings

Full Committee Hearing Systemic Regulation, Prudential Matters, Resolution Authority and Securitization 9:30 a.m., October 29, 2009, 2128 Rayburn House Office Building Full Committee Click here to watch live webcast of this hearing. Witness List & Prepared Testimony: Panel one: The Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury Panel two: The Honorable Sheila…Read More

Category: Think Tank



Traders again bought stocks on Wednesday’s open but an unexpectedly soft New Home Sales report chilled bullish proclivities. September New Home Sales declined 3.6% to 402k; 440k was expected. And once again, the previous month’s data was revised lower, from 429k down to 417k.

Though inventories are reported at 7.5 months, this is an illusionary number because there are beaucoup homes in the hidden inventories of investors, banks, mortgage holders, builders, etc. that are not listed.

Mark Hanson: New Home Sales just can’t get going despite foreclosure moratoria and national mortgage mod initiatives that have kept competing low-end inventory levels historically low and demand for existing houses from low-end buyers throughout the 2009 purchase season up.

Not Seasonally Adjusted, only 31k New Homes were sold in September, slightly greater than 1500 units per day. This was down a sharp 11.4% YoY and 16.2% MoM – the normal Aug to Sept decline is closer to 10%. To keep the 1500 daily sales in perspective, today there will be 2000 foreclosure starts in CA alone…The report made for the weakest September since 1981.

Another factor that depressed stocks on Wednesday was: Goldman lowered its Q3 GDP forecast to 2.7% from 3%. GS see 3% Q4 GDP and weaker 2010 GDP. GS’s day-before-release revisions to its NFP forecast the previous two months were bull’s eyes, so traders believed that Goldie knows something.

Due to the trillions of dollars thrown at or pledged to the economy and financial system many pundits thought GDP would surge 4% to 6% in Q3. Now, reality, which is evinced in jobs and income, is weighing on the economy, sentiment and finally stocks.

If GDP is less than 3% for Q3, people will have to readjust Q4 and 2010 GDP projections. This was the main factor in yesterday’s stock decline.

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Category: Think Tank