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?
Archive for the ‘Treasury’ Category
Here, in a readable but general document, is the Office of Financial Research’s strategic plan.
A huge amount depends on the talent that it can draw and the culture it can develop.
Did I, an economist, really say that about culture? Huh. I guess it shows how little we know about what makes for an (in)effective regulatory agency.
The SEC now has a proposal for how to implement the Dodd-Frank requirement that institutions retain some of the risk of loans when securitizing and selling loans. The idea of this requirement is to give originators better incentives to originate and sell good loans. Not sure why the private sector screwed this up – one reasonably hypothesis is that a few large players screwed it up, AIG, Lehman and others — but anyway. The proposed SEC rules are here for public comment. To make things interesting, important government officials are now weighing in. Here is the comptroller of the currency’s response (mostly concerned with fighting exemptions), and here is the press release for Tim Geitner’s (Treasury is supportive of the general rule and accepting of the specifics). In my opinion, financial institutions need retain no common or systemic risk to be properly incentivized, they just need to hold the risk of the loans they originate relative to similar other loans. Otherwise, systemic crises damage bank capital. But I have blogged a fair bit on this before . . .
The Fed is asking for comments on their proposed phasing-in of the implementation of the Volcker rule that places tight restrictions on proprietary trading, link here http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20101117a1.pdf . Among other things, there are lots of interesting issues about how to handle “illiquid” securities.
The Office of Financial Stability has issues it’s annual report for fiscal year 2010 (http://www.financialstability.gov/docs/2010%20OFS%20AFR%20Nov%2015.pdf). This end of year report, two years after TARP was created, gives a nice overview of TARP goals and financial performance (I worked on the 2009 version of this document). The bottom line or headline numbers? That TARP housing related programs will cost roughly 50 billion, the Capital Purchase Program and investment in the large banks look like money makers at current valuations, but the bailout of AIG and the auto companies still look like money losers, although only on the order of 50 billion given current prices. And reasonable assumptions about expected payouts (not risk-adjusted) implies that the expected value of TARP except for housing assistance may make a tiny positive ex post return for the taxpayer. So, nothing like the loss of the $770 billion of initial TARP spending authority.
One very interesting question in all of this accounting — and one that we may never answer completely — is whether the bank bailouts were profitable investments in an ex ante sense. They were not if one marked the investments to market (the average subsidy rate was huge – on the order of 25%). But, when the investments were made, were markets prices not reflecting the future state prices of the taxpayers? Were markets “stressed” enough that informed or sophisticated investors did not have the capital to take advantage of these profitable investments? If we were a very large player with the ability to borrow, how would we know when we could make profitable “systemic” investments, and when would we want the government (including the Fed) to have that mandate? If you answer that we should never do this at all, remember that, done successfully, this would reduce taxes. And remember that we do this all the time, in a small way. The Fed decides where in the US Treasury yield curve to trade in order to making the highest trading profits, and the Treasury decides what maturities to issue.
Of course TARP was not undertaken to be profitable, but to stabilize the system. Still a hard question, perhaps more interesting, but a distinct question from the issue of profitability.
The saga or AIG and the taxpayer continues, but with some surprising good news for the taxpayer. The Treasury reports here that AIG may actually be able to pay back the NY Fed and the Treasury for all the money poured into the firm to keep it afloat during the crisis. This surprises me to no end, given how bleak things looked for the firm in the summer and fall of 2009.
One could make the case that the foolish AIG insurance in the mid-2000’s caused the subprime crisis in that AIG nearly singlehandedly supported the price of the bonds by writing this insurance. It supported the mortgage machine despite some smart investors who were aware of the low expected payout of many of these assets. (more…)
The root cause of the liquidity freeze on Wall Street is clear: Financial institutions, for various bad reasons that have been discussed at length elsewhere and are beside the point here, made huge bets that house prices would continue to defy gravity. They didn’t. Now the losses from those failed bets keep on popping up in unexpected places; no one knows who can be trusted. For a bailout to solve the trust problem, it has to reveal who just got singed by the housing fallout, and who is still hiding third degree burns. Until that uncertainty is resolved, investors are going to be justifiably cautious about putting their capital at risk. (more…)