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Archive for the ‘Finance & the Public Interest’ Category

Here is the first annual report of the Office of Financial Research.  Among other things, the report details what the OFR don’t know and would like to. Interesting reading for those interested in questions like what should be monitored? Why? Are there clever ways to measure it? And if not, how could one structure surveys or regulation to measure it?

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Robert Litan has written a forceful, balanced, and brave discussion of financial reform. Here is an excerpt:

I have written this essay primarily to call attention to the main impediments to meaningful reform: the private actors who now control the trading of derivatives and all key elements of the infrastructure of derivatives trading, the major dealer banks. The importance of this “Derivatives Dealers’ Club” cannot be overstated. All end-users who want derivatives products, CDS in particular, must transact with dealer banks …

I will argue that the major dealer banks have strong financial incentives and the ability to delay or impede changes from the status quo — even if the legislative reforms that are now being widely discussed are adopted — that would make the CDS and eventually other derivatives markets safer and more transparent for all concerned.

If you care about the prospects for meaningful financial reform, you should read Litan’s essay.

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The story today about Lehman’s accounting manipulations can only be described as shocking. The details are to be found in  the “Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report”. I am not an accountant, and based on a quick look at FAS 140 I do not understand why Lehman thought it could do what it did. But it seems to me that  this case is a poster child for a change in accounting rules.

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An impish grin spreads across [Goldman CEO Lloyd] Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work” — The Sunday Times, November 8, 2009

Goldman Sachs is in the headlines again, this time for a transaction that helped the Greek government report artificially low debt. When you ponder this case, it is hard not to think about Enron.

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Last week I had the opportunity to opine on this question at a lively conference on the financial crisis sponsored by the Federal Reserve Bank of Chicago and the World Bank.  Since I spoke about things I’ve been meaning to blog about for some time, I decided to post the transcript here.  Apologies that the tone is more Fed-esque than the usual posting, but here goes…

Where do we go from here?

“You never want a serious crisis to go to waste.  And what I mean by that is an opportunity to do things you think you could not do before.”  Rahm Emanuel, Feb. 2009

I would like to touch briefly on two issues in answer to the question posed for this session:  first, the integration of housing finance into the financial and regulatory mainstream; and second, the need to modernize budgetary and regulatory accounting.   I chose these topics for several reasons: they are important; they get less attention than is deserved; and I have thought quite a bit about them from both an academic and policy perspective. (more…)

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” ‘Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,’ said Camden R. Fine, president of the Independent Community Bankers.” — New York Times, Sept 22, 2009

We learn today from the New York Times that the FDIC — the independent government agency that insures your bank accounts — is effectively insolvent. It is going to ask insured banks to prepay three years worth of deposit insurance premiums in order to raise $45 billion to replenish the FDIC insurance fund. (more…)

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Here’s a wonderful idea for a financial product: raise trillions of dollars from investors, invest in a variety of risky assets, and then lie to investors about what the shares of the fund are worth. Just to make this easy, claim that each share is worth $1, even if it’s really worth less. To support this fiction, redeem shares at $1. If prices fall and investors suspect that the shares are actually worth less than $1, they will race to withdraw their funds. The first to withdraw receive $1, the last receive whatever is left, perhaps nothing.

You can be forgiven for thinking that I’ve just described Bernie Madoff’s investment fund. In fact, I’ve described the operation of money market mutual funds in the U.S. (Note that these are mutual funds, not insured “money market accounts” offered by banks.) (more…)

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