Author Archives: Susan_Hall

What Happens When Banks Comply With Capital Requirements

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The Bank for Financial Settlements issued a quarterly report which shows us what happens.

  • Banks are better capitalized.
  • They are not cutting back on lending.**
  • They are cutting back on “other income,” which includes (among other things) sorts of income that lots of people find naughty, prop trading and so forth.
  • Shareholders, meanwhile, are getting less cash back than they used to.
  • They’re also getting lower returns: Return on assets is down 27 percent, and leverage is also down (which is what higher capital ratios mean), so return on equity is down by over 60 percent.  

What Happens When Banks Are Boring Small Business Loans Up

SEC Lets Lehman Looters Off the Hook

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The Department of Justice (DOJ) and the SEC focused their “investigations” solely on Lehman’s quarter-end “Repo 105” transactions that were entered into for the sole purpose of deceiving investors and the SEC about Lehman’s liquidity, earnings, and leverage crises – crises that would soon cause it to collapse.

A “repurchase obligation” (REPO) is a short-term borrowing that is nominally structured as a “sale” with a “repurchase obligation.” Lehman improperly treated these short-term borrowings as if they were a true sale with no repurchase obligation, which caused Lehman to report lower debt levels.

It is not normal for a U.S. investment bank to go to a UK firm to obtain a legal opinion on U.S. law. Nevertheless, the cynical act by Lehman’s leaders of legal dumpster diving to obtain a legal opinion blessing an obvious fraud was not treated by the Department of Justice (DOJ) as it should have been as an aggravating factor, but rather as a “get out of jail free card.”

“They discovered that Repo 105 had nothing to do with Lehman’s failure and was technically allowed under an obscure accounting rule. Noting that London lawyers had approved Repo 105, prosecutors in Manhattan also worried they could not prove that executives intended to mislead investors.”

Enforcement attorney George Cannelos arrogated the client’s right to define its interpretation of its rules. It was a perfectly reasonable and normal “suggest[ion]” by Cannelos’ boss that Cannelos’ team prepare a draft of potential charges against Lehman’s officers. When your boss makes a “suggest[ion]” of this nature you prepare the document. There is no “ethical” issue in providing your superior with the strongest notice of charges you believe is supported by the evidence.  

Cannelos’ real problem was that had he drafted such a notice of charges it would have been obvious that the evidence did support a finding of materiality under the agency’s interpretation of materiality. The limited nature of his draft would also reveal how little about Lehman’s far larger frauds Cannelos’ team had actually investigated.   The SEC and Lehman BrothersLehman Brothers

Has Quantitative Easing Worked?

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It is nearly five years since the U.S. Federal Reserve slid into quantitative easing, the deployment of artificially created money into the bond market. QE and a prolonged period of near-zero interest rates have been the highlights of post-crisis monetary policy. That era is far from over, but it has lasted long enough for a preliminary judgment of monetary policy – especially as the Fed says it is now preparing to “taper” its bond purchases. My verdict: QE could have been worse, and it should have been better.  Quantitative Easing

Quantitative Easing

Why Stiglitz Supports Yellen for the Fed

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Nobel prize winning economist Joseph Stiglitz has worked with both Janet Yellen and Lawrence Summers.  Attention must be paid to his advice.  Always a frank speaker, he said after advising Obama that the administration’s bank rescue plan is “either in the pocket of the banks or they’re incompetent.”

Now he tackles Yellen v Summers.  Stiglitz Supports Janet Yellen for the Fed

Yellen v Larry Summers

 

Nobel Economist Ronald Coase Dies at 102

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For people interested in economics but not necessarily mathematics, Coase offered a new way of looking at the field.  Last year (at 101!)  he tried to start a new academic journal amplifying his belief that traditional economics had become too focused on statistical measures.  Nobel Economist Ronald Coase Dies at 102

“Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship,” he wrote in an essay for Harvard Business Review, which we have also provided.  Coase on Economists

In this article he pointed out that “a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.”

Ronald Coase