Monday, March 23, 2009
AIG and "Payment in Full"
Some press stories note that the Fed is paying holders of AIG credit default swaps full face value. I am not really sure what that means. My understanding of the CDSs is that when issued, they were structured to have a zero value, with the premium being paid just sufficient to cover the insurance liability. If the likelihood of default on the underlying security went up, then there would be a premium paid for that contract. So to say that the Fed (I take this to be the Maiden Lane funds that were set up) is paying full face value is kind of nonsensical. I suspect what is happening is that the Fed is buying a portfolio of underlying securities and the related CDS/insurance for full face value of the underlying security. That makes sense, for a holder of both the security and the CDS would essentially have a guarantee of full payment (so long as the seller of the insurance was going to pay). If this is the case, there is nothing that I see wrong in paying 100% of face value of the underlying security and in fact that makes sense. The transaction eliminates a liability from AIG’s balance sheet and eliminates a need for them to post collateral – and these are the reasons the Fed bailed out AIG in the first place.
AIG and the House of Thugs
The US House of Representatives actually caved in to the rising clamor of populist rhetoric and passed some kind of bill that would ostensibly tax AIG bonuses at 90%.
I only hope that the world sees this as the grandstanding which it is, not as a true willingness to use the United States Tax Code not just as a tool of social policy but as a device to enforce the Members’/Thugs’ code of ethical behavior.
The AIG bonuses do upset anyone, me included, at first hearing. But calmer people think about it a bit and reflect on why they perhaps make sense. There is also a long history -- well, several months -- of Fed and/or Treasury employees dealing with this issue. Our President and his Treasury Secretary would be well advised to stop fueling the populist fires.
Let’s see if the Senate can put the damper on this craziness. If not, Obama’s chickens will have come home to roost.
I only hope that the world sees this as the grandstanding which it is, not as a true willingness to use the United States Tax Code not just as a tool of social policy but as a device to enforce the Members’/Thugs’ code of ethical behavior.
The AIG bonuses do upset anyone, me included, at first hearing. But calmer people think about it a bit and reflect on why they perhaps make sense. There is also a long history -- well, several months -- of Fed and/or Treasury employees dealing with this issue. Our President and his Treasury Secretary would be well advised to stop fueling the populist fires.
Let’s see if the Senate can put the damper on this craziness. If not, Obama’s chickens will have come home to roost.
Wednesday, March 11, 2009
The Meaning of Leadership
President Obama signed an omnibus spending bill today that included 9,000 earmarks worth over $8 billion (yes, that is real money). Several news sources have noted that he signed the bill outside the range of cameras, but he did come out to make comments on the bill and earmarks. Here is part of what he said:
Ah yes, the old Prisoner's Dilemma. Hey, if everyone is feeding at the trough, I am an idiot for starving my constituents.
What a leader would do is eliminate the incentives for everyone to behave like a pig instead of complaining about how legislators act in their own self interest.
President Obama added: "Now, let me be clear: Done right, earmarks give legislators the opportunity to direct federal money to worthy projects that benefit people in their district, and that's why I have opposed their outright elimination. I also find it ironic that some of those who railed the loudest against this bill because of earmarks actually inserted earmarks of their own -- and will tout them in their own states and districts.
Ah yes, the old Prisoner's Dilemma. Hey, if everyone is feeding at the trough, I am an idiot for starving my constituents.
What a leader would do is eliminate the incentives for everyone to behave like a pig instead of complaining about how legislators act in their own self interest.
On Hiring Foreign MBAs
The WSJ today printed an editorial from my colleagues and fellow deans Matt Slaughter and Paul Danos, and me.
The topic is the Employ American Workers Act, which restricts hiring practices of US companies that accepted stimulus and/or TARP funds. Like I said in my NYT post -- see here -- once you accept Federal money, you better be prepared to have them tell you what to do.
In this case, the government's restrictions are especially pernicious. Besides the economic illogic of it, pitting US citizens and foreign citizens against one another is not the way to go. A colleague sent me an email with the words from the Statue of Liberty, and they say it better than anything else:
Some people want to close that golden door -- and they accuse the bankers of being selfish!
The topic is the Employ American Workers Act, which restricts hiring practices of US companies that accepted stimulus and/or TARP funds. Like I said in my NYT post -- see here -- once you accept Federal money, you better be prepared to have them tell you what to do.
In this case, the government's restrictions are especially pernicious. Besides the economic illogic of it, pitting US citizens and foreign citizens against one another is not the way to go. A colleague sent me an email with the words from the Statue of Liberty, and they say it better than anything else:
"Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
Some people want to close that golden door -- and they accuse the bankers of being selfish!
Tuesday, March 10, 2009
Mark to Market: Gains to come
The mark-to-market, fair value debate is a rich one, with the two sides both having support. In principle, of course, mark to market is great -- market prices impound all relevant information, so they should be used in financial statements and in regulation as well. The issue today is not even how informative prices are (I could argue they are not) but how informative mark to model results are. Without knowing all the parameters that were used to fairly value assets, in the absence of relevant market prices, I think I might prefer just full disclosure of holdings and let me do the valuations (of course, we don't have full disclosure either, so we are really choosing from imperfect choices).
But nonetheless, my belief is that for banks, most securities and derivatives have been marked down to levels that are, at worst, not too much above any sense of true value. Thus, there is a tremendous upside for mark-ups once asset prices begin to rise (and they will). If we repeal mark to market now, banks will be able to take some write-ups, which will of course get reported as profits, just as the writedowns were taken as losses. If we don't repeal mark to market, I expect the gains will come a bit later, as valuation models won't change immediately. The total gains to be reported will be the same, but the timing may well be different. If one believes in some market psychology, I suppose that there could be a differential effect. I am not one to bet on such things, but I could see an argument for keeping mark to model for now and letting the writeups occur with a big bang all at once -- hopefully sometime soon. Since in principle I think mark to market is what we want, we might as well stick to our principles and hold out for what could be some massive writeups.
But nonetheless, my belief is that for banks, most securities and derivatives have been marked down to levels that are, at worst, not too much above any sense of true value. Thus, there is a tremendous upside for mark-ups once asset prices begin to rise (and they will). If we repeal mark to market now, banks will be able to take some write-ups, which will of course get reported as profits, just as the writedowns were taken as losses. If we don't repeal mark to market, I expect the gains will come a bit later, as valuation models won't change immediately. The total gains to be reported will be the same, but the timing may well be different. If one believes in some market psychology, I suppose that there could be a differential effect. I am not one to bet on such things, but I could see an argument for keeping mark to model for now and letting the writeups occur with a big bang all at once -- hopefully sometime soon. Since in principle I think mark to market is what we want, we might as well stick to our principles and hold out for what could be some massive writeups.
Thursday, March 05, 2009
Layoffs, Across the Board Wage Cuts, and Elections
We had our local school budget vote in Hanover on March 3 -- one of the great things about NH that is taken for granted is that we still have significant local control over school issues that matter (like the budget).
On the ballot was a special item: a single ballot measure that asked for an appropriation of around $80,000 to keep one elementary school teacher position. This was over and above the vote on the overall budget. If this single item did not pass, a teacher would lose his/her job and class sizes, especially for the third grade, would increase slightly.
I voted for it, and I usually vote for resources for our schools. I don't have any children in the elementary or middle schools any longer, and just one senior in high school. I do have an interest as a Tuck professor in making sure that our schools are excellent, for faculty recruiting purposes. So that is my disclosure.
One would think, in these times, and with all the outcry for people to take salary cuts to allow others to keep their jobs, that something like this would win by a landslide. At a cost of $17 on average per household (increased property taxes) one could let a teacher keep their job, and at the same time improve the quality of education at the elementary school. Think about it -- this is not a "redundant" position we are eliminating, like many layoffs where the work just no longer needs to be done or even can be done. This is a teacher's position, which if eliminated means more students for the other teachers to deal with.
It barely passed. By 20 votes on a total vote cast of around 1,000.
Now maybe it is my viewpoint, but I see this as interesting commentary on those calls for working people to take salary cuts to maintain the jobs of others. And I don't take it as positive, even though the item passed. What is striking is that so few people were willing to cough up a few more dollars to keep a teacher!
In another post to come, I will lay out why I think the push for wage cuts to preserve jobs is generally ill-advised.
On the ballot was a special item: a single ballot measure that asked for an appropriation of around $80,000 to keep one elementary school teacher position. This was over and above the vote on the overall budget. If this single item did not pass, a teacher would lose his/her job and class sizes, especially for the third grade, would increase slightly.
I voted for it, and I usually vote for resources for our schools. I don't have any children in the elementary or middle schools any longer, and just one senior in high school. I do have an interest as a Tuck professor in making sure that our schools are excellent, for faculty recruiting purposes. So that is my disclosure.
One would think, in these times, and with all the outcry for people to take salary cuts to allow others to keep their jobs, that something like this would win by a landslide. At a cost of $17 on average per household (increased property taxes) one could let a teacher keep their job, and at the same time improve the quality of education at the elementary school. Think about it -- this is not a "redundant" position we are eliminating, like many layoffs where the work just no longer needs to be done or even can be done. This is a teacher's position, which if eliminated means more students for the other teachers to deal with.
It barely passed. By 20 votes on a total vote cast of around 1,000.
Now maybe it is my viewpoint, but I see this as interesting commentary on those calls for working people to take salary cuts to maintain the jobs of others. And I don't take it as positive, even though the item passed. What is striking is that so few people were willing to cough up a few more dollars to keep a teacher!
In another post to come, I will lay out why I think the push for wage cuts to preserve jobs is generally ill-advised.
Gore on the Warming Debate (Oops, I'm sorry, there is no debate)
Al Gore had a great little exchange with Bjorn Lomborg, as reported in the Wall Street Journal:
Right, climate change is not a matter of theory. Then what exactly is it? Empirical evidence without any theory to tell us how to interpret the data?
I don't know what the political system of the Maldives is, but if the NH legislature were to pass a bill saying that we needed to build a coastal defense against sea rise, I would not give it a minute of thought (but it would be amusing).
And, even if there is a significant human element to climate change, does it automatically follow that resources should be devoted to climate change rather than to other problems?
You should be wary when people move to close off debate. How many "certain" things in economics and finance have been challenged successfully after having been broadly accepted? Several for sure (the CAPM being perhaps the number one example).
But he was challenged by Mr. Lomborg, the Danish skeptical environmentalist who thinks the world would be better off spending more money on health and education issues than curbing carbon emissions.
“I don’t mean to corner you, or maybe I do mean to corner you, but would you be willing to have a debate with me on that point?” asked the polo-shirt wearing Dane.
“I want to be polite to you,” Mr. Gore responded. But, no. “The scientific community has gone through this chapter and verse. We have long since passed the time when we should pretend this is a ‘on the one hand, on the other hand’ issue,” he said. “It’s not a matter of theory or conjecture, for goodness sake,” he added.
As an example, he pointed to a new addition to the budget for the island nation of the Maldives: “Funds to buy a new nation.”
Right, climate change is not a matter of theory. Then what exactly is it? Empirical evidence without any theory to tell us how to interpret the data?
I don't know what the political system of the Maldives is, but if the NH legislature were to pass a bill saying that we needed to build a coastal defense against sea rise, I would not give it a minute of thought (but it would be amusing).
And, even if there is a significant human element to climate change, does it automatically follow that resources should be devoted to climate change rather than to other problems?
You should be wary when people move to close off debate. How many "certain" things in economics and finance have been challenged successfully after having been broadly accepted? Several for sure (the CAPM being perhaps the number one example).
Tuesday, March 03, 2009
Lloyd Blankfein's Views
For those who have not seen it, Lloyd Blankfein, CEO of Goldman Sachs, gives a nice overview of lessons learned in the Financial Times. See here.
I cannot agree more on his point that the financial services industry has destroyed a lot of trust. I am not sure what they have destroyed more of -- trust or wealth.
The thing that bothers me most is the destruction of trust in markets generally. There will be a wholesale shift to the public sector. It won't surprise me to see some Eastern European countries shifting seriously back to a communistic mentality, thinking that they were actually better off back then. I for one think that is very wrong.
One source of optimism is that sales of Atlas Shrugged have been soaring. The Economist had the original story, but here is a link from another paper.
I cannot agree more on his point that the financial services industry has destroyed a lot of trust. I am not sure what they have destroyed more of -- trust or wealth.
The thing that bothers me most is the destruction of trust in markets generally. There will be a wholesale shift to the public sector. It won't surprise me to see some Eastern European countries shifting seriously back to a communistic mentality, thinking that they were actually better off back then. I for one think that is very wrong.
One source of optimism is that sales of Atlas Shrugged have been soaring. The Economist had the original story, but here is a link from another paper.
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