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  • Robert Pozen on Fair Value Accounting

    In the November Harvard Business Review , Robert Pozen --former adviser to President George W. Bush and Massachusetts Governor Mitt Romney, and current chair of MFS Investment Management--weighs in on the debate over whether accounting rules bear some blame for the financial crisis. And he says that both sides in the argument over whether "fair value accounting" exacerbated the credit crunch a year ago may be wrong: We do not want banks to become insolvent because of short-term declines in the prices of mortgage-related securities. Nor do we want to hide bank losses from investors and delay the cleanup of toxic assets—as happened in Japan in the decade after 1990. To meet the legitimate needs of both bankers and investors, regulatory officials should adopt new multidimensional approaches to financial reporting. Before we can begin to implement sensible reforms, though, we must first clear up some misperceptions about accounting methods. Critics have often lambasted the requirement to write down impaired assets to their fair value, but in reality impairment is a more important concept for historical cost accounting than for fair value accounting. Many journalists have incorrectly assumed that most assets of banks are reported at fair market value, rather than at historical cost. Similarly, many politicians have assumed that most illiquid assets must be valued at market prices, despite several FASB rulings to the contrary. You can read his article here (subscription only). You can also watch Pozen discuss the issue, along with a brief introduction to some of the ideas he puts forward in a new book, Too Big To Save , in this video from Harvard Publishing:

  • COP November Report: Government Guarantees in TARP and the Costs and Benefits to American Taxpayers

    When the Treasury introduced the Troubled Assets Relief Program late last year, the government guaranteed the values of hundreds of billions of dollars in bank assets. The move was made, to put it very simply, to prevent a panic and protect the assets of millions of American taxpayers. The Congressional Oversight Panel , in its November report, concludes that the federal guarantees did that successfully. But the report also shows that the guarantees now account for the "single largest element of the government's response to the financial crisis," and that raises some timely questions for Treasury: These guarantee programs also created significant moral hazard. Guarantees create price distortions and can lead market participants to engage in riskier behavior than they otherwise would. In addition to the explicit guarantees analyzed in the Panel's report, the government's broader economic stabilization effort may have signaled an implicit guarantee to the marketplace: the American taxpayer stands ready to provide a financial backstop for certain markets and large market players to avert possible economic collapse. To the degree that investors, lenders and borrowers believe that such an implicit guarantee remains in effect, moral hazard will continue to distort the market. The extraordinary scale of these guarantees, the significant risk to taxpayers, and the corresponding moral hazard leads the Panel to conclude that these programs should be subject to extraordinary transparency. The Panel specifically identified the guarantee of Citigroup assets under AGP -- the largest single guarantee offered to date -- and strongly urges Treasury to provide regular, detailed disclosures about the status of the assets backing up this guarantee. Treasury should disclose greater detail about the rationale behind guarantee programs, the alternatives that may have been available and why they were not chosen, and whether these programs have achieved their objectives. This should include an analysis of why Citigroup and Bank of America were selected for AGP and not others. Here is COP Chair Elizabeth Warren introducing the November report: You can read the full report here .

  • WSJ Interactive Map Tracks Bank Failures

    The FDIC closed 9 banks in one day last Friday, including California National Bank of Los Angeles, which had 68 branches throughout the city. CalNational and the 8 other banks, which were also in Illinois, Arizona, and Texas, were all divisions of the Chicago-based bank holding company FBOP Corp, according to the Associated Press . 115 banks have been closed so far this year, and 140 since last November. One of the best tools we've found to track the bank closings comes from the Wall Street Journal online team. Click here to use an interactive version of the below map, on which you can see where the closing have hit, and get details about each bank. (H/t to Barry Ritholtz for the reminder about this interactive map).

  • Andrew Ross Sorkin on Lehman's Fuld, and 'Too Big to Fail'

    New York Times writer Andrew Ross Sorkin 's Too Big to Fail: Wall Street's Near-Death Experience is t he too-important-to-ignore book of the moment. The details about Hank Paulson's interactions with executives from his old firm, Goldman Sachs, when he was Secretary of the Treasury are getting a lot of attention ( from Felix Salmon, for example ). And Sorkin's detailed account of the government's efforts to broker a deal to merge Goldman Sachs and Wachovia after Lehman Brothers failed last September is another highlight (you can read an excerpt of the book that covers this at Vanity Fair ). Sorkin spoke about these and other hot topics from the book with Charlie Ros e. Here's an excerpt in which Sorkin talks about former Lehman CEO Richard Fuld: Watch the full interview here .

  • Stiglitz on International Monetary and Financial System Reform and the Too Big To Fail Problem

    Joseph E. Stiglitz , Bert Koenders , and Jose Antonio Ocampo discussed possible reform of the international monetary and financial system at the Carnegie Council on September 30. Stiglitz chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, and he told the audience that the multi-national commission's findings "provide a deeper analysis of the causes of the crisis and a long-term agenda of what to do about it than, for instance, what has come out of the G-20 communiqués and reports." One of the commission's concerns over the response to the global economic crisis, in the United States in particular, is consolidation in the banking sector. As Stiglitz said at the Carnegie Council: The problem of too-big-to-fail banks has become much worse since the beginning of the crisis. While we're making some strides in trying to improve things, we've made some things much worse. It's worse because we have bigger banks, more concentration, but also because we've increased the moral hazard problem. We've introduced in many countries around the world a new concept that never had any role in economics before: banks that are too big to be financially resolved, where you protect the bondholders and shareholders as well as the institution and the depositors. Here is an excerpt from the panel discussion: To watch the full session, click here . And you can read the Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System here .

  • 12 Months of TARP Funds

    This weekend marked 12 months since the Treasury Department launched the Troubled Assets Relief Program. In that time, nearly $450 billion of the $700 billion in TARP funds have been distributed. Here's a look at how much money has flowed to whom: (H/T CNN Money's David Goldman and his article TARP: Taxpayers on the hook for $200 billion .)

  • Federal Reserve Pushes New Rules to Protect Credit Card Users

    The Federal Reserve is proposing new rules to strengthen Truth in Lending regulation. And , according to the Fed, the new rules would: Protect consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance. Prohibit creditors from issuing a credit card to a consumer who is under the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so. Require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit. Limit the high fees associated with subprime credit cards. Ban creditors from using the "two-cycle" billing method to impose interest charges. Prohibit creditors from allocating payments in ways that maximize interest charges. Read the Fed's release here .

  • G-20 and Bankers' Bonuses

    The Group of 20 leaders meeting in Pittsburgh tomorrow and Friday have a substantial agenda with several contentious issues on the table, but Bloomberg is reporting that leaders are moving toward some consensus on bonus pay for bankers. French President Nicolas Sarkozy had pushed for pay caps and limiting bonuses. President Obama seems to be endorsing tying bonuses to banks' capital levels. This would appear to be good news to Bob Poze n , lecturer at Harvard Business School. Pozen writes, in a "Conversation Starter" for the Harvard Business Review , that caps on bonuses are unlikely to fix the perceived problem of overpaid bank execs: In my view, fixed limits on bonuses for individual bankers are likely to boomerang by leading to high guaranteed salaries. But limits on overall compensation at unprofitable banks make sense if combined with share awards based on performance. In February of 2009, Congress adopted legislative limits on bonuses of senior executives at financial institutions receiving federal assistance (Assisted Institutions). In specific, Congress limited their annual bonuses, or any other type of incentive awards, to grants of restricted shares of Assisted Institutions not exceeding one third of annual compensation. These legislative limits on individual bonuses have already led to much higher annual salaries at Assisted Institutions. For instance, Wells Fargo raised the base salary of its CEO from $900,000 to $5.6 million. More broadly, Morgan Stanley increased by 250% the base salaries of its four top executives just below its CEO. Thus, despite the best of intentions, these legislative caps have unlinked executive bonuses from executive performance. By raising base salaries, these institutions are effectively guaranteeing some or all of what used to be a variable payment contingent on that executive's performance. This is a perverse result, undermining years of efforts by investors, academics and others to tie executive pay more closely to company performance measured over a reasonable time period. Read Pozen's full piece here .

  • COP August Report Focuses on Troubled Assets

    In its August report, the Congressional Oversight Panel (COP) looks at toxic assets and the risks they pose for US banks and the economy. As the report points out, the Treasury 's Public Private Investment Program (PPIP) was designed to root out both "troubled securities" and "troubled loans." COP members appear to be concerned that the trouble loans portion of the program--administered by the FDIC --was postponed as the FDIC stated "that the banks' recently demonstrated ability to access the capital markets has made a program to deal with troubled whole loans unnecessary at this time." That becomes a problem if the economy worsens, and, the COP report states, small banks are especially at risk: The problem of troubled assets is especially serious for the balance sheets of small banks. Small banks‟ troubled assets are generally whole loans, but Treasury‟s main program for removing troubled assets from banks‟ balance sheets, the PPIP will at present address only troubled mortgage securities and not whole loans. The problem is compounded by the fact that banks smaller than those subjected to stress tests also hold greater concentrations of commercial real estate loans, which pose a potential threat of high defaults. Moreover, small banks have more difficulty accessing the capital markets than larger banks. Despite these difficulties, the adequacy of small banks‟ capital buffers has not been evaluated under the stress tests. The below graph shows how much capital banks would need under two different scenarios for loan loss rates. In each scenario, banks in the $1-100 billion (in assets) range suffer much greater capital shortfalls than the 18 large banks that went through the Treasury's stress tests. Read the full report here . Here is COP chair Elizabeth Warren explaining the report:

  • COP Examines Early TARP Repayment

    The Treasury Department has allowed 10 banks to exit the Troubled Assets Relief Program (TARP), by paying back the funds they received last year. Some have looked at this as a strong sign that the US banking system is well on its way toward recovery. But the Congressional Oversight Panel (COP)--established to evaluate the effectiveness of TARP--wants to be sure that the American taxpayer is not losing out in the process. After all, taxpayers put up the money for TARP, and assumed significant risk in the process. Theoretically, taxpayers are entitled to a return on their investment. From the COP July Report: When Congress authorized the commitment of $700 billion to rescue the financial system, it decided that taxpayers should have the opportunity to share in a potential upside if the banks returned to profitability. The opportunity to profit from TARP investments comes through special securities called warrants. Banks that received financial assistance were required to give the government warrants for the future purchase of some of their common shares. Simply put, warrants are the right to buy shares of a company at a set price at some point in the future. For example, a warrant might allow Treasury to buy shares of a bank for ten dollars at any time in the next ten years. If the share price rises above ten dollars, Treasury could pay less than market value for the shares, then sell them and turn a profit. In this way, the banks were repaying the taxpayers for their investment by sharing some of their future profitability. Now some members of the panel are concerned that the early repayment might cut taxpayers out. COP Chair Elizabeth Warren explains: Read the full COP July Report here .

  • COP's June Report: Stress Tests Were 'Reasonable,' May Need to be Repeated

    In its June report, the Congressional Oversight Panel (COP) gives the Treasury Department's "stress tests" a passing grade, though not exactly high marks. And the panel warns that "serious concerns remain," and offers these recommendations: highlights the importance of America’s small businesses to the country’s overall economic well being: -The unemployment rate climbed to 9.4% in May, bringing the average unemployment rate for 2009 to 8.5%. If the monthly rate continues to increase, the 2009 average may exceed the 8.9% assumed under the more adverse scenario, suggesting that the stress tests should be repeated if that occurs. -Stress testing should also be repeated so long as banks continue to hold large amounts of toxic assets on their books. -Between formal tests conducted by the regulators, banks should be required to run internal stress tests and should share the results with regulators. -Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system. COP chair Elizabeth Warren explains the panel's approach to evaluating the stress tests by comparing them to the types of questions American families are asking with regard to their own financial standing during the recession: Read the full report here .

  • Comprehensive Look at the Top 25 Subprime Mortgage Lenders

    Since September, the watchdog organization Center for Public Integrity has pursued several investigations into the financial crisis, subprime mortgages, lending practices, and theuse of federal bailout dollars. And this week they share what these investigations turned up in a comprehensive online project titled Who's Behind the Financial Meltdown?: The Top 25 Subprime Lenders and their Wall Street Backers. The project centers on 25 banks that together accounted for nearly $1 trillion of the nearly $1.4 trillion--or 72 percent--in "high-interest loans" that were handed out between 2005 and 2007. CPI analyzed government data on 7.2 million loans for the project. The lenders include some of the nation's largest banks (and recipients of TARP funds) like Wells Fargo, JP Morgan Chase, and Citigroup that have or had subprime lending units. Other lenders were subsidiaries of major financial institutions. Here are some of the topline findings of CPI's research: -At least 21 of the top 25 subprime lenders were financed by banks that received bailout money — through direct ownership, credit agreements, or huge purchases of loans for securitization. -Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were not banks and were not permitted to collect deposits. -Eleven of the lenders on the list have made payments to settle claims of widespread lending abuses. Four of those have received bank bailout funds, including American International Group Inc. and Citigroup Inc. CPI has developed some helpful interactive tools to get through all the data. For example, you can get information on one of the top 25 banks to the right. Click on company profile to access a series of maps that show where the company made its high-interest loans. Click here for the full report from CPI.

  • Stress Test Results: 10 of 19 Banks Need to Raise More Capital

    The Fed has released results of the government's stress tests for 19 of the nation's largest banks, and almost half the banks need to go and raise capital. 10 of the banks will need to raise a total of $74.6, according to the Fed. Bank of America leads the way, needing to raise $33.9 billion. The remaining 9 banks are now in the position of rehabbing their public image and working to pay back TARP funds. While the markets responded favorably to the stress test results, the Wall Street Journal points out that there is a potential downside: Experts warn that the tests could have a serious unintended consequence: Loans could be harder to come by for consumers and businesses. That's because the government's intense focus on thicker capital cushions might prompt banks to hoard cash and further curtail lending, said Jim Eckenrode, banking research executive at TowerGroup, a financial consulting firm. He said banks will have less room to offer consumers low interest rates, while corporate customers may have a tougher time getting financing for commercial real-estate and property development. There also remains the question of whether these stress tests were stressful enough. Nouriel Roubini argues it was not. You can watch him make his argument here . Read the Fed's full report here .

  • Change Begins at the Top: Two Stories of Company Transformation

    A lot of eyes are on the emerging economies these days to see if they will continue to rise during the global economic crisis, or if the recession will end up stunting their growth. IMF economists projected growth—albeit at a slowed down pace—for key emerging economies even as they expected contraction for the global economy as a whole. The McKinsey Quarterly has two interviews with key finance leaders in two of the most important emerging economies—India and Brazil. Over the last few years, Om Prakash Bhatt , of the State Bank of India, and Roberto Setubal of Banco Itaú , each took banks that were among their countries largest businesses and tackled major transformation projects. In each case, these CEOs say that change was necessary, and their companies have benefited. And the lessons they learned are applicable to other companies in transition. Both say change has to involve executives leading conversations with managers throughout the company. Roberto Setubal stresses that change begins at the top: The role of CEO is key. If you want change to happen, you have to change your own ways. I realized that the decision-making process was a reflection of how I used to manage the company. So if you want the company to be more democratic, you have to allow yourself to be challenged by others. You have to commit yourself totally and really believe that this is the right way to go. This is very difficult in the beginning because sometimes I knew that I could make the decision much faster on my own. But once we created an environment of discussing and listening to what others were saying and implemented a good process for making decisions, I could delegate more and rely on five or ten smart people with different backgrounds to make better decisions than one person. Om Prakash Bhatt says that he made sure to work with managers throughout the company and spend important face time with trade union leaders: These are important stakeholders, and I brought senior representatives from the unions and officers’ associations together in a meeting similar to the management conclaves. I spent four days with 30 leaders from across the country. Some of my best advisers at the bank warned that the leaders weren’t trustworthy and could be disruptive, but by being different and asking them to a conclave—like monks in a cave—I built up huge curiosity. They wanted to know what I was doing and to be a part of it. I told them I’d sit with them, but only if they came as friends of the bank. I think what hooked them was not only the quality of the discussions and the revelations but that the chairman was willing to spend so much time with them, eating and drinking, even singing and dancing. Read the full interviews at McKinsey Quarterly online. The Setubal interview is available here . Om Prakash Bhatt's interview is here .

  • Where the Returned TARP Money Goes

    There has been much discussion of the bank bailout funds this week--and some of it is good news for those who want financial insitutions to start giving back. Goldman Sachs and JP Morgan want to repay their TARP money. And earlier this week Treasury Secretary Geithner says he expects $25 billion of the TARP funds to be repaid by the end of the year. So where does that money go? According to The Explainer -- Slate 's Christopher Beam --the money goes back into the program: If a bank wants to return its TARP money, it gets siphoned back—by wire, usually—into the original pool. In his testimony, Geithner said there's $110 billion left of the original $700 billion allocated by the TARP program. So once the expected $25 billion is returned, the remaining stash should reach $135 billion. The return of the money seems like a good thing all around. But The Explainer points out there is a downside: Of course, there are risks to letting the banks return money. One is that they'll need it again, which would create a public relations snafu. Then there's a systemic risk problem: If one bank appears stronger than others, the weaker ones might get hurt as investors yank their money, and short sellers bet against them. That's why Geithner is insisting on completing the stress test—which measures the banks' strength—before deciding which big companies get to return their money. Read The Explainer's full explanation here . And track the returned money at Slate's Tarp-O-Meter here .
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