Monthly Archives: July 2016
“This is nonsense. Rather than reviewing people’s actual payment performance on their debts and/or rent, utility bills, etc. (if they don’t have any debts), let’s look at their internet search history…
That’s nuts and any company who partners with and/or uses this idea is probably nuts (or non-substantive) too!!!! Beyond it being an unlikely predictor of the future/likelihood of prospective borrowers’ timely payment, it probably does not hold up (logically and/or statistically) to government regulations on consumer fair credit. Also, isn’t this a very thin market? How so? Think about it, people who don’t have a real credit track record (credit score) would generally be much poorer than average and I would think this group would generally be far less likely to spend much time searching the internet.”, Mike Perry, former Chairman and CEO, IndyMac Bank
July 17, 2016, James Rufus Koren, Los Angeles Times
What does that Web search say about your credit?
Douglas Merrill is founder and CEO of ZestFinance, which is working with Chinese search engine Baidu to turn online search information into credit scores. (Michael Robinson Chávez / Los Angeles Times)
James Rufus Koren
For Chinese consumers, what you search for online soon could determine whether you’re eligible for a loan.
Through a landmark deal with Hollywood credit scoring firm ZestFinance, China’s leading search engine, Baidu, soon will assign credit scores to its users based on search, location and payment data.
A handful of Chinese companies already judge creditworthiness based on the shopping and payment histories of their customers, but Baidu’s plan to use search data appears to be a first.
“Nobody’s ever been able to turn search data into credit data,” said Douglas Merrill, chief executive of ZestFinance, which also will get an equity investment from Baidu as part of the deal. Merrill would not disclose terms of the investment.
Aaron Rieke of consulting firm Upturn, which has tracked various alternative credit scoring firms, said the deal, thanks to Baidu’s size, would mark the first time a company has taken such a vast amount of information about online behavior and used it to make credit decisions.
“They’re going to have a lot of data,” Rieke said. “It’s an important moment. Once you’re going to be judged by the byproducts of online activity, that’s a brave new world.”
ZestFinance, founded in 2009, specializes in scoring the creditworthiness of borrowers who have little or no credit history. The firm uses complex algorithms that look for correlations between creditworthiness and all kinds of nontraditional credit information.
In the U.S., it makes consumer loans under the brand Basix, and judges customers based on a wide array of information gleaned from data brokers and other sources. In China, e-commerce site JD.com uses ZestFinance’s systems to underwrite loans to its customers based on their browsing and transaction history.
But the deal with Baidu takes things a step further, setting ZestFinance’s system loose on a huge trove of information about what consumers are looking for online, where they go and what they purchase through merchants on Baidu’s e-commerce platform.
Though much of that information has nothing to do with money, Merrill said behavioral data can weed out fraud and produce solid credit information.
“If you get enough data about people’s behavior, you’ll be able to extract information about ability to repay and willingness to repay,” Merrill said.
Because of the vagaries of ZestFinance’s system, which may find correlations that are far from obvious, it’s difficult to say precisely how the Baidu scores will work or what factors will lead to a good or bad score.
For instance, in ZestFinance’s U.S. lending practice, Merrill has said that borrowers who fill out a loan application using proper capitalization are more likely to repay than those who use all capital letters — though Merrill also acknowledges he’s not sure why that is.
The deal with ZestFinance comes less than a year after Baidu and Chinese finance firm Citic Group announced plans to start a new bank, to be called Baixin Bank.
At the time, Baidu said in a statement that its search data could “help the bank understand the individual needs of customers.” Now, by working with ZestFinance, it’s likely planning to use that same data to help it underwrite credit cards, loans and other financial products for hundreds of millions of potential customers.
In a statement announcing the deal with ZestFinance, Tony Yip, Baidu’s head of investments, said the deal will “help transform the financial services market in China.” The company declined to comment beyond a news release announcing the deal.
China’s consumer credit market is growing fast, but it’s still relatively small, and most Chinese consumers don’t have a traditional credit score.
In December, Fitch Ratings estimated about 35% of Chinese consumers — or about 350 million out of an adult population of more than 1 billion — had a formal credit history. By comparison, about 89% of American adults have a credit record, according to the federal Consumer Financial Protection Bureau.
That gap has pushed other Chinese firms to look for new ways to estimate consumers’ creditworthiness.
Last year, Ant Financial, an affiliate of Beijing e-commerce giant Alibaba, unveiled Sesame, which builds a credit score based on factors including the volume of purchases a customer makes with Ant’s Alipay payment system and whether a customer pays bills on time.
Though it may seem creepy to judge creditworthiness based on someone’s Web search or location history, Rieke of Upturn said it’s likely that such a system will give consumers more access to credit.
“If someone has no traditional credit, those things will yield something that’s better than nothing,” he said.
Indeed, Merrill said the Baidu-ZestFinance deal is aimed at scoring consumers who are left out of the system now.
“Today, three out of four Chinese citizens can’t get fair and transparent credit,” he said. “For a small amount of very carefully handled loss of privacy, to get more easily available credit, I think that’s going to be an easy choice.”
“This is similar to what IndyMac and I were dealing with in 2007 and 2008 and these guys, one of the largest and most respected money managers in the U.S., had Fannie/Freddie collateral, which was made 100% whole later in 2008, when Fannie/Freddie were placed in conservatorship and bailed out by the U.S. government for something like $180 billion…
…In other words, they failed because they were highly levered with uncommitted financing from Wall Street, that could be marked-to-market at very discretionary levels and/or terminated abruptly…..so when Wall Street and the repo market panicked, these guys were out of business much faster than IndyMac, despite having “pristine” collateral and IndyMac having mostly Alt-A and other non-prime collateral and being heavily reliant on the private MBS market. Why did we survive longer than almost everyone? Because I had prudently converted IndyMac from a mortgage REIT to a thrift after the 1998 global liquidity crisis and so we were able to easily pay off all of our repo and commercial paper (and build up billions in cash reserves), because we had insured deposits and more stable and secure, committed lines of credit with the FHLB and Federal Reserve. That’s why we survived way beyond firms like this….much larger firms like Bear Stearns….up until United States Senator Schumer caused a run on the bank in June/July 2008, with his inappropriate public comments about us (why, I guess we will never know?)…..We survived until July 11, 2008. P.S. I agree with Carlyle’s statements in the article below. They did nothing wrong and their investors understood their business model and its risks, clearly. As they say in the article below, “it was just way beyond the worst case anyone could ever imagine.””, Mike Perry, former Chairman and CEO, IndyMac Bank
July 18, 2016, Margot Patrick, The Wall Street Journal
Carlyle Goes on Trial for a Financial-Crisis Meltdown
A $1 billion civil lawsuit over a failed mortgage-bond fund shows how the troubled days of 2007 and 2008 continue to reverberate
Carlyle Group co-founder Bill Conway, shown in 2014, has been testifying this month on the island of Guernsey, where he is a defendant in a civil case over the failure of Carlyle Capital Corp. in 2008. PHOTO: PETER FOLEY/BLOOMBERG NEWS
By Margot Patrick
ST PETER PORT, GUERNSEY— Carlyle Group co-founder Bill Conway was in court on this small island last week recounting one of the most bruising episodes in his private-equity firm’s history: the 2008 collapse of mortgage-bond fund Carlyle Capital Corp.
Carlyle Capital Corp., or CCC, borrowed vast sums from banks to buy $23 billion in bonds. When a deteriorating U.S. housing market spooked CCC’s lenders, investors in the fund lost their entire $945 million in capital.
Mr. Conway was summoned to Guernsey, where the fund was registered a decade ago, to testify in a $1 billion civil lawsuit by CCC’s liquidators. They allege that Mr. Conway and six other Carlyle and CCC officials acted recklessly and should have started selling the fund’s assets months before it failed. The defendants deny those allegations.
The trial, which hasn’t previously been reported on, demonstrates how fallout from the 2008 financial crisis continues to reverberate eight years on.
“We all lived through something that was worse than the worst-case scenario,” Mr. Conway said in court earlier this month. “Until March 2008, I was always convinced that CCC was going to make it.”
The 66-year-old is one of the highest-profile figures to appear at a civil trial tied to the financial crisis. Washington D.C.-based Carlyle Group manages $178 billion in private-equity and other funds.
“Carlyle always met its fiduciary obligations to CCC investors,” a Carlyle spokesman said. “We had more money at risk than anyone, having loaned $130 million in an effort to save the fund and with Carlyle individuals losing $85 million of their own money. Unfortunately, a 100-year storm overwhelmed our efforts, but we stayed focused on serving our investors.”
For six days this month, Mr. Conway answered questions from a lawyer of the liquidators about the fund’s business model, governance and funding problems. Among the specific allegations against him: that he refused to have CCC sell assets or restructure as loans dried up in the summer of 2007 because he didn’t want bad publicity from CCC to jeopardize an investment by an Abu Dhabi government fund in Carlyle Group. Mr. Conway denies that.
“I would say I always tried to do what was in CCC’s best interest,” Mr. Conway said in court.
Mr. Conway’s path to this courthouse on Guernsey, a bump of land in the waters between the U.K. and France, started when CCC was registered at a law firm’s office here in 2006. At that time, private-equity firms and hedge funds were boosting their assets by floating publicly traded investment funds. Carlyle Group came up with CCC to cash in on the trend and branch out from its business of buying and selling stakes in companies.
‘Pulling the deal will be a public black eye. On the other hand I’m at a loss to say how the whole market can be wrong about the product at this time and we are right.’
—Carlyle’s David Rubenstein wrote in a June 2007 email, according to court filings
CCC aimed to make around 12% a year buying assets including Fannie Mae and Freddie Mac bonds with a type of short-term loan called repurchase agreements. Investors were told in fund documents that the bonds didn’t have any credit risk because the two government-chartered companies, which buy mortgages from lenders, had an implicit guarantee from the U.S. government. But they were also informed that CCC was subject to risks involving its leverage, or amount of borrowed money, and funding.
From the start, Carlyle anticipated that its connections with Wall Street banks—which were making around $500 million a year in fees from the firm’s buyouts and other business—would help CCC secure favorable funding terms, according to documents in court and Mr. Conway’s testimony.
It hired John Stomber, a former Merrill Lynch treasurer, as CCC’s chief executive. David Rubenstein, one of Carlyle Group’s three co-founders, legendary for his fundraising ability, started talking CCC up to clients across the globe, according to court filings. Mr. Stomber, who is a defendant in the lawsuit, started testifying Wednesday. Mr. Rubenstein isn’t a defendant and isn’t testifying.
Mr. Stomber didn’t respond to a request for comment through a representative. He denied the liquidators’ allegations against him in a court filing. Mr. Rubenstein declined to comment through a Carlyle spokesman.
In testimony that provided flashes of Carlyle Group’s rarefied perch in the investment world, Mr. Conway said the Angolan government, CCC’s biggest investor, considered putting $500 million in the fund. The West African country ended up taking a $150 million stake.
Several CCC investors, including former Republican U.S. congressman Michael Huffington and Kuwait’s National Industries Group, later brought lawsuits against Carlyle Group, but only the liquidators’ case made it to trial. The other suits were all thrown out or dropped and are no longer active.
The liquidators were appointed by the Guernsey court in 2008 as part of the island’s insolvency procedures.
After raising $600 million privately in late 2006 and early 2007, CCC prepared to offer shares on Euronext Amsterdam in the summer of 2007. But alarm bells began to sound on U.S. subprime mortgages, and other mortgage-related assets were hit. It was touch and go whether CCC’s initial public offering would go ahead, according to emails shown in court.
CCC’s Fannie Mae and Freddie Mac bonds had fallen in value, and banks wanted more cash and collateral to keep providing loans. CCC borrowed around 30 times its equity to increase returns and had little wiggle room.
“Pulling the deal will be a public black eye,” Mr. Rubenstein wrote in an email to Mr. Conway at the end of June 2007, according to court filings. “On the other hand I’m at a loss to say how the whole market can be wrong about the product at this time and we are right,” he wrote.
The shares were listed on July 4, 2007, at $19 apiece. By the time CCC threw in the towel 252 days later, on March 12, 2008, they traded for pennies.
A retired U.K. judge now living in Guernsey will decide the case, which centers around whether the defendants broke their duties to shareholders by not selling CCC’s assets and reducing its reliance on borrowed money.
After the IPO, it became even harder for CCC to get cheap, regular loans, the court heard. Markets melted down in August 2007 as fears grew over the U.S. housing market and banks’ exposure.
“I am afraid,” Mr. Conway wrote to Mr. Stomber and CCC Chairman James Hance on Aug. 10, 2007, according to an email shown in court. By the end of August, Carlyle Group lent CCC $100 million to cover margin calls, and Mr. Conway and Mr. Stomber called on Wall Street executives to try to lock in affordable funding for CCC, according to Mr. Conway’s testimony and documents shown in court.
Mr. Conway testified that he “was in shock” when Steve Black, then co-head of J.P. Morgan Chase & Co.’s investment bank, advised immediately selling a big chunk of CCC’s assets.
Selling around $4 billion in bonds was explored, but it would have meant swallowing big losses and CCC’s board and management decided not to proceed, according to a filing by the defendants.
Instead, CCC limped on for a few more months before defaulting on its loans. Banks liquidated its assets in March 2008.
July 18, 2016, Margot Patrick, The Wall Street Journal
Markets Emails and Testimony Go Inside Carlyle Group During the Financial Crisis
Evidence in civil trial over failed mortgage-bond fund shows how pressure mounted on firm in 2007
By Margot Patrick
From June 2007 to March 2008, Carlyle Capital Corp., or CCC, went from a company planning an IPO to one that had run out of options. The fund, which had borrowed 30 times or more its capital to buy mortgage-backed securities, couldn’t keep functioning when its borrowing rates suddenly rose.
Carlyle Group co-founder Bill Conway in an August 2007 email as its mortgage-bond fund struggled to get financing: ‘Maybe panic is appropriate’ PHOTO: SIMON DAWSON/BLOOMBERG NEWS
Excerpts from emails shown this month in a Guernsey court recount exchanges between executives of Carlyle Group and CCC as conditions worsened in the lead up to the July 2007 IPO and through August 2007. Carlyle Group in late August provided emergency funding to CCC, but ultimately it wasn’t enough.
“Carlyle always met its fiduciary obligations to CCC investors,” a Carlyle spokesman said. “Unfortunately, a 100-year storm overwhelmed our efforts, but we stayed focused on serving our investors.”
Excerpts from Emails
June 13, 2007 email from CCC Chief Executive John Stomber to Carlyle Group co-founder Bill Conway and other Carlyle and CCC executives:
“Last night we made the decision to postpone the IPO of CCC as a result of volatile market conditions. We are having a major liquidity event so I invoked emergency powers on the balance sheet.”
June 14 email from Mr. Stomber to investment banks working on the IPO:
“Tomorrow is a new day—assuming all goes well—we plan to file on Monday with the [market regulator] and proceed with the IPO.”
June 23 email from Mr. Stomber to Mr. Conway and other executives:
“My bottom line is we should press forward and get this IPO done at a discounted price to reflect the (mark to market) depreciation/discount … to protect existing investors.”
June 25 email from Carlyle Group co-founder David Rubenstein to Mr. Conway:
“Pulling the deal will be a public black eye, particularly juxtaposed with the successful Blackstone IPO. On the other hand, I’m at a loss to say how the whole market can be wrong about the product at this time and we are right.”
Aug. 9 email from Mr. Stomber to Mr. Conway and CCC Chairman James Hance:
“We are now fully in uncharted territory. I suspect more funds to fall in the next 10 days….ECB actions today are unprecedented. The Fed is playing a dangerous game. We will watch our repo lines closely….This is making ’98 look like a walk in the forest, not the Amazon jungle.”
Aug. 10 email from Mr. Stomber to Mr. Conway:
“Biggest worry—availability of repo lines as banks allocate balance sheet—banks pulling or increasing haircuts on our repo lines.”
Aug. 14 email from Mr. Stomber to Mr. Conway and other executives:
“All we want to do is survive the market. 1. No new purchases. 2 … negotiate repo lines 3. Push TCG relationship as well as CC’s relationship to the point of being a total pain in the “a—.” 4. Never show weakness (these guys are still greedy and can be bluffed) or a lack of confidence and respect. Remember, repo dealers are full of sh—. I once had repo reporting to me at Deutsche Bank. They will lie any time for any reason. We will smartly fight every mark.”
Aug. 14 email from Mr. Stomber to Mr. Conway and other executives:
“Yes things got worse. UBS—silly prices and $7M margin call. Bear called about 8/25 roll, talked haircuts. Contagion is not about to happen. It has happened. It has happened for anything with risk. … Worst I’ve seen since the 70s An extra % is $230M of funds.”
Aug. 14 response from Mr. Conway to Mr. Stomber’s email: “Maybe panic is appropriate.”
Aug. 15 email from Mr. Stomber to Mr. Conway and other executives:
“Between today and August 25 will make us or break us depending on dealers. I hate to say it but we should start thinking about whether a back-up rescue package can be put together to cover our worse case.”
Aug. 2007 email from Mr. Stomber to Mr. Conway, Carlyle Group co-founder Daniel D’Aniello, Mr. Rubenstein and Mr. Hance:
“Thanks for your support and $100M injection….Yes, CCC will do things different on funding RMBS in coming years. A subject for a board meeting. We made mistakes assuming the repo market would work as it did in ‘98—but that was a Greenspan Fed.”
Aug. 17 email from Mr. Stomber to Mr. Conway and other executives:
“Bill has asked if I can still digest solid food? Wish that was my problem. I will likely have to listen to my taped speeches of Churchill during WWII for inspiration….Bill C. and I are meeting with the six investment banks Monday to present our proposal….We were margin-called last night to the point where we have about $5M in cash left.”
Excerpts from Testimony
Mr. Conway, a Carlyle Group co-founder, testified for six days between July 4 and July 12 before the Guernsey court hearing the civil case involving the failed mortgage-bond fund. Here are some of his answers to the liquidators’ lawyers about decisions made by Carlyle and CCC.
On the repurchase agreements with Wall Street banks and brokers that CCC relied on: “Most repos are overnight, they’re not even 30 days. In the scheme of things, this was 30 times longer than what was typical. On the other hand it was pretty short.”
On CCC’s use of 30 times or more borrowed money: “It was highly leveraged but I didn’t think the risks were going to happen, the risks that led to the downfall of CCC, the systemic market collapse.”
On 2007’s credit crunch: “I certainly did not think it was something that was going to lead to the end of Lehman Brothers, the end of Bear Stearns, the end of Wachovia, the end of Merrill Lynch as companies.”
On the allegation CCC should have sold bonds in August 2007: “What could we do, default? Dump repos in the market? Ask investors for more money? We had just gone public a month before that. In the heat of the battle who was going to put more money in?”
On his clout with Wall Street banks: “I don’t want to act like I’m some big hitter. I started Carlyle and we paid them a lot of fees. I wouldn’t say I have extensive contacts on Wall Street. I mean the people that work for me have pretty good contacts with the people on Wall Street. I wish I had all the power that people think I have, actually.”
“This article is filled with bullshit “phony stats” produced by a biased consumer advocacy group (not any legitimate source or the government). We have learned nothing from our recent past. Here we go again, pressuring banks and mortgage lenders (using absolutely false allegations of racism) to make more mortgage loans to less financially-qualified minorities…
…that are risky for the financial institutions and as we now know…very risky for the borrowers and even the broader economy in times of crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank
July 19, 2016, Peter Eavis, The New York Times
Race Strongly Influences Mortgage Lending in St. Louis, Study Finds
By PETER EAVIS
A street in Ferguson, Mo., in the St. Louis metropolitan area. Many neighborhoods in the St. Louis area remain largely segregated. Credit Whitney Curtis for The New York Times
In the two years since the shooting death of Michael Brown in Ferguson, Mo., the nation has come to learn much about the stark socioeconomic differences between black and white neighborhoods in the St. Louis area.
Now, a new study says that mortgage lending appears to have played an important part in reinforcing segregation there.
Federal data has long shown that the black neighborhoods of St. Louis have been almost devoid of mortgage lending in recent years. A major reason for the dearth of lending is that the incomes of many black residents may be too low to afford a house or qualify for a loan.
But the new report, released on Tuesday by the National Community Reinvestment Coalition, a consumer advocacy group, found that race was also an important factor in deciding where banks lend.
Specifically, the report indicated that banks made fewer loans to middle- and lower-income borrowers in minority neighborhoods than to borrowers with similar incomes in white neighborhoods.
This finding, as well as other data in the report, supports the view that banks avoid depressed minority neighborhoods over time, which in turn makes it harder for residents of these communities to take out loans that could be used to buy and improve properties. It is well documented that a steady rise in homeownership can help bolster the economy of lower-income neighborhoods.
“We need a full and genuine commitment from financial institutions to responsibly serve all communities,” John Taylor, president of the National Community Reinvestment Coalition, said in an email. “We need to make sure that your skin color or your ZIP code doesn’t determine whether or not you have a fair shot to prosper.”
The coalition’s report also looked at trends in mortgage lending and race in Milwaukee and Minneapolis, which also have high levels of racial segregation. In each city, the coalition determined that income was often the most powerful determinant of who got a mortgage. But the researchers also tried to identify whether whites in the same income bracket as minorities got more loans.
They first looked at how many mortgages were made to low- and moderate-income borrowers of all races. In St. Louis, these borrowers accounted for 32 percent of mortgages made in 2013. The researchers then looked at the racial makeup of the neighborhoods in which this particular set of loans were made, using United States census data and mortgage data that banks report to a federal financial regulator.
They found that most of these loans went to neighborhoods in St. Louis where whites made up most of the population. Nearly half went to census areas where minorities made up less than 10 percent of the population, and another fourth went to areas where minorities made up 10 to 19 percent of the population. Only 3 percent of loans to low- and moderate-income borrowers were made in St. Louis neighborhoods where minorities made up 80 to 100 percent of the population.
“In the city at large, we found that the lack of lending is not fully explained by income — race is a critical factor,” Bruce Mitchell, a researcher at the coalition, said in an email. “Credit is flowing more to neighborhoods with higher percentages of white residents than it is to majority African-American neighborhoods of the same income profile.”
The disparity can be clearly seen in individual St. Louis census tracts.
In one tract, where 23 percent of the population was African-American, and where residents had a moderate income, six mortgages were made per 100 homes in 2012 to the end of 2014.
That number of loans was higher than in a nearby middle-income tract where African-Americans made up 58 percent of the population. In this area, 2.5 loans were made per 100 homes in the same period. (The frequency of lending is measured per 100 homes to account for the fact that tracts don’t contain the same number of homes.)
The low number of mortgages made in minority areas can be explained in part by the fact that fewer people in these areas applied for a mortgage. The lower number of applications may to a large extent be explained by lower incomes and the belief of some prospective borrowers that it is too difficult to qualify for a mortgage.
That said, applicants for mortgages in minority neighborhoods were denied a loan at significantly higher rates than in mostly white neighborhoods. In areas where minorities made up between 10 and 19 percent of the population, 64 percent of mortgage applications by low- and moderate-income applicants were approved. In St. Louis areas where minorities made up 50 to 79 percent of the population, only half the mortgage applications in this income bracket were approved, according to the coalition’s analysis.
The lower approval rate in minority neighborhoods in St. Louis may partly be a result of factors like weaker credit scores and lower or more intermittent incomes. But the lower rate might also reflect the relatively low number of banks in some of these minority neighborhoods.
“Some areas of North City and East St. Louis may constitute ‘banking deserts,’ as they are isolated from access to conventional financial services,” the coalition’s report said.
Last year, the group did a similar analysis of lending in Baltimore, concluding that the racial composition of an area often drove where banks made mortgages.
A version of this article appears in print on July 19, 2016, on page B3 of the New York edition with the headline: Race Strongly Influences Mortgage Lending in St. Louis, Study Finds.
“As Charles Kindleberger taught, the essence of a credit mania is that everyone follows everyone else and thinks it will never end. Regulators are no better than bankers. As late as March 2008, then New York Fed President Tim Geithner was telling his colleagues on the Open Market Committee that banks were in good shape…
…Mr. Hensarling has a better idea (than the excessive financial regulation of Dodd-Frank), which is to let banks build much higher equity-capital cushions to protect against the next mania and panic…The Texas Congressman wants a simpler system in which private investors with money at risk decide which assets are safe. Under the Hensarling plan, banks can opt out of today’s complicated rules if they have capital equal to 10% of their assets….Capital at the largest banks today often runs below 7% of assets. The Wall Street giants would have to raise a lot more equity—and therefore pose less danger to the public—to get regulatory relief. They thus may not like the Hensarling plan, which is fine. Smaller competitors willing to operate without a taxpayer safety net deserve the advantage of lower regulatory costs. One reason the 2008 panic was so severe is that the government had encouraged all financial institutions to invest in the same stuff. When housing declined, they were all in trouble. Dodd-Frank is encouraging the same mistakes. Witness the recent insanity of Washington forcing Wells Fargo to issue more debt so it can look more like the Wall Street giants at the heart of the government’s regulatory model. The Hensarling plan would make the financial system more stable by encouraging greater diversity. Freed to make their own decisions on the quality of assets, some banks would run off the rails, but they are less likely to make the same mistake at the same time.”, The Wall Street Journal Editorial Board, July 11, 2016
“The WSJ Editorial board is right….House Financial Services Chairman Jeb Hensarling’s plan is absolutely the right direction and it mostly is in agreement with the brilliant Nicholas Nassim Taleb’s thoughts (author of Fooled by Randomness, The Black Swan, and Anti-Fragile).”, Mike Perry, former Chairman and CEO, IndyMac Bank
Fixing American Finance
High capital is better than betting on the foresight of regulators.
Representative Jeb Hensarling at the Economic Club of New York on June 7. PHOTO: BLOOMBERG NEWS
House Republicans are rolling out their 2017 agenda, and one promising idea is Financial Services Chairman Jeb Hensarling’s plan for financial rules that promote economic growth and protect taxpayers.
Don’t believe the shrieks that this is about “rolling back” financial reform to let the banks run wild. The financial system was heavily regulated before the 2008 panic; regulators failed to do their job (seeCitigroup) and missed signals from the housing market, among other mistakes. The Dodd-Frank Act of 2010 doubled down on the same approach: Give even more power to regulators with the promise they’ll be smarter the next time.
History tells us that is a fantasy. Regulators will focus on solving the previous problem, while they miss where the excesses are really building. As Charles Kindleberger taught, the essence of a credit mania is that everyone follows everyone else and thinks it will never end. Regulators are no better than bankers. As late as March 2008, then New York Fed President Tim Geithner was telling his colleagues on the Open Market Committee that banks were in good shape.
Mr. Hensarling has a better idea, which is to let banks build much higher equity-capital cushions to protect against the next mania and panic. Now, as before the crisis, regulators pretend that giant banks have abundant resources to absorb losses by allowing them to report a bogus “Tier 1 risk-based capital ratio.”
With a complicated process subject to intense lobbying, regulators undercount exposures they deem to be safe—the way they designated mortgage-backed securities rock-solid before the last panic. This allows well-connected bankers to convince Washington that their favorite assets should have low “risk weights.” Regulators can politically allocate credit by favoring some types of lending over others.
The Texas Congressman wants a simpler system in which private investors with money at risk decide which assets are safe. Under the Hensarling plan, banks can opt out of today’s complicated rules if they have capital equal to 10% of their assets. Their tally of assets has to include off-balance-sheet exposures. No more hiding toxic paper in conduits or structured-investment vehicles as Mr. Geithner allowed Citi to do before the financial crisis. And no more pretending that a financial instrument has no risk because a regulator says so.
Capital at the largest banks today often runs below 7% of assets. The Wall Street giants would have to raise a lot more equity—and therefore pose less danger to the public—to get regulatory relief. They thus may not like the Hensarling plan, which is fine. Smaller competitors willing to operate without a taxpayer safety net deserve the advantage of lower regulatory costs.
One reason the 2008 panic was so severe is that the government had encouraged all financial institutions to invest in the same stuff. When housing declined, they were all in trouble. Dodd-Frank is encouraging the same mistakes. Witness the recent insanity of Washington forcing Wells Fargo to issue more debt so it can look more like the Wall Street giants at the heart of the government’s regulatory model.
The Hensarling plan would make the financial system more stable by encouraging greater diversity. Freed to make their own decisions on the quality of assets, some banks would run off the rails, but they are less likely to make the same mistake at the same time.
Mr. Hensarling goes further in shrinking the safety net by kicking non-banks out of the too-big-to-fail club. This means no more taxpayer-backed derivatives trading, a Dodd-Frank innovation that has given Wall Street’s giant clearinghouses access to emergency loans from the Federal Reserve.
Whether a Wall Street giant is a bank or not, the creditors of its subsidiaries should no longer be protected by Dodd-Frank’s political “resolution” process. Mr. Hensarling aims to create a special bankruptcy court for large financial companies with experienced judges and the resources to act quickly—but these resources will not include a taxpayer bailout.
The promise of the Hensarling plan is more safety for taxpayers and a banking system that supports a growing economy. One reason Dodd-Frank has never delivered the economic boost that President Obama promised in 2010 is that Washington’s distorting role in the flow of credit was dramatically increased.
In this era of hyper-regulation, David Malpass of Encima Global notes that banks have been making relatively few loans to small and mid-size companies while extending huge credit to large corporations and government. A slow-growth economy that doesn’t efficiently allocate credit isn’t safe for anyone.
“Doesn’t the bond market have to be a bubble? And yet because many investors, both sophisticated and unsophisticated, have been “winning” with bonds for decades (and “rational short sellers have been crushed”), most still don’t believe there is a bond bubble. Isn’t that the classic definition of a bubble? If the bond market isn’t a bubble, then the pre-crisis U.S. housing market (which in key markets, home prices have fully recovered or more, despite inflation being nil) wasn’t a bubble either…
…If the bond market is a bubble, doesn’t this put the lie to mortgage lenders causing the housing bubble? I think so. Why? Clearly, it is something else….government and central banks distorting markets and rates/money, investors investing “other peoples’ money”, etc. causing these asset bubbles/busts.”, Mike Perry, former Chairman and CEO, IndyMac Bank
July 6, 2016, Min Zeng, The Wall Street Journal
Are Treasurys Headed for 1%? New Lows in a 35-Year Downtrend
The yield on the benchmark 10-year U.S. Treasury note fell to its lowest level ever Tuesday
By Min Zeng
The yield on the benchmark 10-year U.S. Treasury note fell to its lowest level ever Tuesday, a new milestone in a three-decade downward run that even veteran traders never thought would go so far or last so long.
The yield closed below 1.4% for the first time at 1.367%, surpassing the previous record low set four years ago, according to data going back to 1977.
The question now is how low can they go. Investors buying Treasurys now are taking big risks, as prices of longer-term debt can move significantly if interest rates unexpectedly rise. But a generation of traders has been wrong in trying to call the top.
David Coard, now head of fixed-income trading in New York at Williams Capital Group, thought he had a handle on the direction of Treasurys when he bought his first house with his wife around the end of the 1980s. His mortgage rate was about 10%, and he told his wife mortgage rates, closely linked to Treasury yields, would probably never fall to 5%. Today, they are below 4%.
“It has been hard to fight this low-yield trend,” Mr. Coard said. “If you have been a bond bear, you have been on the wrong side.”
Tuesday’s move lower had familiar causes: Investors, worried about uncertainties facing markets and key economies after the U.K. voted to leave the European Union, moved into safer assets. Stocks and oil fell, as did the British pound.
Jae Yoon, chief investment officer at New York Life Investment Management, which had $286 billion of assets under management at the end of May, said the record leaves the 10-year in a precarious spot. Its yield could climb to 2% before the end of the year if the U.K. and European Union have “an amicable divorce,” work out trade issues and fears fade away.
On the other hand, he said, “if the global and U.S. [economies are] pulled down by Brexit, then yields have room to fall, and potentially we could see 10-year U.S. yields below 1%.”
Bond yields fall as prices rise—and the price of Treasurys has risen sharply. The Barclays U.S. Treasury Index has posted a total cumulative return of 1334.7% from the 10-year note yield’s peak near 16% on Sept. 30, 1981, through end of June.
The bout of falling yields since the start of 2014 has wrong-footed investors because it came even as the U.S. economy has recovered and as the Federal Reserve raised interest rates for the first time since 2006.
Yet few in the financial markets had foreseen negative interest rates in Europe and Japan—signaling investors are so desperate for safety that they are willing to buy bonds for more than they would get back at maturity.
Wednesday morning, the yield on Japan’s benchmark 20-year government bond fell below zero for the first time. The 10-year Japanese government bond yield also fell, hitting a record low of minus 0.275%.
The total of sovereign debt with negative yields jumped to $11.7 trillion as of June 27, up $1.3 trillion from the end of May, according to Fitch Ratings.
“At this juncture, I don’t think you can see anything but low interest rates in the U.S.,” said Gemma Wright-Casparius, senior portfolio manager of the fixed-income group at the Vanguard Group, which had more than $2.4 trillion in global assets under management at the end of March. “We continue to feel the gravity of the global bond markets. The bull run may still have a few years to run.”
U.S. bond yields soared during the 1970s and early 1980s as inflation rose in part because of surging oil prices. Paul Volcker, then the chairman of the Federal Reserve, raised the central bank’s key policy rate above 19% in June 1981. The 10-year Treasury yield hit a record three months later, then settled into its long dive.
“As long as the recent trend of low inflation, modest economic growth and reasonable wage pressures remain intact, the probability for an extended period of low interest seems sustainable,” said Bob Andres, managing partner at Andres Capital Management LLC, which has about $700 million in assets under management.
The consumer-price index rose 11% in September 1981 on an annual basis. This May, it was up 1%.
The bond market has been hit by a number of big selloffs over past decades. Among the biggest was the rout in 1994, when the Fed raised interest rates earlier and more aggressively than investors expected. That year, the Treasury index from Barclays posted a negative-3.4% total return.
The long bull market has been the backdrop for an entire career for John Mousseau, executive vice president and director of fixed income at Cumberland Advisors Inc., who started on Wall Street in 1980. Now, he is cutting his holdings of long-term Treasury debt to buy shorter-term securities, where the risk of big price moves is smaller.
“It has been a terrific ride [for] bond investors over the past decades,” he said. “But the risk of loss on your bondholdings is higher than before.”
Thomas Roth, executive director in the rates trading group at MUFG Securities Americas Inc., has been on Wall Street since the summer of 1984, when markets still worried about high inflation. Now, he says, the problem is stubbornly low inflation.
His youngest child will soon enter his final year of high school. Mr. Roth worries the economy may still be lackluster and yields still at these low levels when his son joins the labor force.
“We don’t know how low yields can fall, and we don’t know what the endgame is for the bond market,’’ Mr. Roth said. “It may end up badly. That is the scary part.”
“Eight years ago, unsustainably high debt was the root cause of the worst recession since the Great Depression. Yet world debt overall now is far above 2008 levels. And as with millions of American home buyers back then, many of today’s borrowers owe amounts that could become crushing burdens if the global economy should careen into a new recession…
…The overstretched include plenty of governments. Total government debt outstanding worldwide was worrisome in 2008. It has since doubled to $59 trillion, according to Economist Intelligence. But that is just one slice of the global debt pie. Add in household, corporate and bank debt and the grand total was a mind-boggling $199 trillion in mid-2014, up 40% since 2007, according to a study last year by McKinsey Global Institute.”, Tom Petruno, “Another financial crisis? Soaring global debt since 2008 raises risk as world economy sputters”, The Los Angeles Times, July 10, 2016
“Doesn’t this article expose the narrative that greedy and reckless bankers caused the 2008 crisis as false? I think so. How? Its been governments and central banks distorting the marketplace, that has fueled the expansion of debt throughout the world.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Another financial crisis? Soaring global debt since 2008 raises risk as world economy sputters
Eight years after the financial crisis, governments, companies and consumers owe more than ever while the economy struggles. (Michael Glenwood / For The Times)
Ancient Babylonian kings had a special tool at their disposal when economic or social conditions turned dicey: They would declare a “debt jubilee” and instantly wipe out borrowers’ loans, allowing average people deep in hock to start over with a clean slate.
It says something about the global economy in 2016 that the concept of a modern debt jubilee has been finding its way into some mainstream financial market discussions.
Eight years ago, unsustainably high debt was the root cause of the worst recession since the Great Depression. Yet world debt overall now is far above 2008 levels. And as with millions of American home buyers back then, many of today’s borrowers owe amounts that could become crushing burdens if the global economy should careen into a new recession.
The overstretched include plenty of governments. Total government debt outstanding worldwide was worrisome in 2008. It has since doubled to $59 trillion, according to Economist Intelligence.
But that is just one slice of the global debt pie. Add in household, corporate and bank debt and the grand total was a mind-boggling $199 trillion in mid-2014, up 40% since 2007, according to a study last year by McKinsey Global Institute.
Students rally in Denver in 2011 to protest high education debt. (Craig F. Walker / Denver Post)
One of the most dramatic increases has been in U.S. student debt. College loans outstanding have rocketed to $1.35 trillion from $589 billion in 2007, a 130% jump, Federal Reserve data show. That extraordinary burden on young people has become a political issue in the presidential election, at least for Democratic rivals Hillary Clinton and Bernie Sanders.
The irony for college students, and for other borrowers over the last eight years, is that many did exactly what governments and central banks wanted them to do to help end the Great Recession: Take advantage of super-low interest rates to borrow and spend.
Since the financial crash, “central bank policies have all been based on the theory that low interest rates will stimulate demand,” said Edward Yardeni, head of economic and market research firm Yardeni Research Inc. “But that theory now has exhausted itself.”
The reason: Whatever demand was spurred wasn’t enough to keep the world economy from slowing sharply in the last few years. Without a head of steam to keep advancing, the economy simply hasn’t paid off for many people, companies and governments that borrowed aggressively after 2007.
“The whole world is growing at a level that is far lower than in the pre-crisis environment,” said Jeffrey Rosenberg, chief investment strategist for fixed income at money management giant BlackRock Inc.
Real global growth averaged just 2.4% a year from 2012 through 2015. By contrast, growth averaged a brisk 3.7% from 2001 through 2010, including the Great Recession years.
Debt can be a good thing if it’s used productively and fuels economic growth, of course. But when the McKinsey study looked at government, household and corporate total debt relative to the size of the economies in 47 countries from 2007 through 2014, it found the ratio rose in every one — in some cases substantially.
In the U.S., the debt-to-gross-domestic-product percentage edged up to 233% in 2014 from 217% in 2007. In Spain the figure jumped to 313% from 241% and in Japan it rose to 400% from 336%. There is no single “right” number, but obviously higher is riskier.
As debt has mounted, the overall effect has been to choke off growth rather than promote it.
“The problem with high debt levels is that it’s very paralyzing,” said Kenneth Rogoff, a Harvard University economics professor who has written extensively on the implications of debt.
In Greece, the flashpoint of Europe’s initial government debt crisis in 2009, debt woes have remained so onerous for local banks that “if you’re any kind of business, you can’t get a loan,” Rogoff said. That further starves the economy.
In Italy, where banks also are weighed down by bad loans, surging economic fears in the last two weeks have raised the specter that lenders will soon need new government help.
And in the U.S., the student-loan burden of the millennial generation has helped keep many of them from spending the way previous generations did when they were in their 20s and 30s. Consider: For the first time in 130 years, adults ages 18 to 34 are more likely to be living with parents than married or cohabiting with someone else, according to the Pew Research Center.
That deprives the economy of the traditionally heavy spending people do when they form a new household — buying such things as furniture, televisions, window blinds and dishwasher soap.
For the Federal Reserve and the world’s other major central banks, this year has brought another stark reminder that the economy, and markets, aren’t buying the idea that policymakers’ traditional interest-rate tools could ignite faster growth.
The Fed in December lifted its benchmark short-term rate for the first time since 2006, raising it from near zero to a range of 0.25% to 0.50%. The heart of the Fed’s message was that things finally were getting back to normal in the economy, so rates should rise.
Yet by early January, fresh fears that China’s slowing economy would drag down the rest of the world drove investors into U.S. Treasury bonds as a haven, pushing yields down sharply. Markets stabilized in spring, then Treasury yields dived again in recent weeks after the British people stunned the world by voting to exit the European Union — a decision that has further undermined confidence in Europe’s struggling economy.
By last week the bellwether 10-year Treasury note yield hit a record low 1.37%, down from 2.27% at the end of last year. What’s more, yields now actually are negative on a wide swath of European and Japanese government bonds. A negative yield means that rather than earn interest, investors agree to pay the government a small amount to safely hold their money in bonds.
The yield on 10-year German government bonds was negative 0.18% on Friday; on Japanese 10-year bonds it was negative 0.29%.
One message of negative interest rates is that some investors fear worse economic turmoil. That, in turn, stokes concern about borrowers’ ability to repay their lenders. Psychologically, “debt becomes like a dark cloud outside your door,” said Mohamed El-Erian, chief economic advisor to financial services firm Allianz.
This time, American homeowners aren’t likely to lead a debt crisis. But there are other candidates, including companies in emerging-market countries. Since 2008, “the most worrying development has been the steep rise in private-sector debt … especially in several emerging-market economies,” the Bank for International Settlements, which is owned by the world’s central banks, warned in a report in March.
More than 5,200 emerging-market companies issued $1.1 trillion in bonds in 2014, double the level sold in 2010, according to Dealogic. Some chunk of that was used to finance or refinance more manufacturing or commodity-production capacity. But amid weak global growth, adding new factories or raw materials supplies can shrink profits for every player.
“The problem is what you created with the debt,” said Steven Ricchiuto, chief U.S. economist for Mizuho Securities. “The fundamental issue is we have excess supply.”
But will that necessarily lead to another “crisis”? BlackRock’s Rosenberg notes that some kind of global debt blowup has occurred roughly every seven or eight years since the early 1980s. That means 2016 would be right on schedule.
Inevitably, some banks and investors lose when lending money. That’s capitalism. The financial system is set up to deal with losses, on a modest scale, via foreclosure and bankruptcy laws.
The question is whether the global economy has reached a point where something more drastic is needed to fire up growth — such as the Babylonian solution of massive debt forgiveness.
On the face of it, the “debt jubilee” idea seems preposterous. Unilaterally wiping out debt also would mean wiping out the assets of untold numbers of lenders and investors, including pension funds. When loan losses in the Great Recession threatened to destroy the banking system, U.S. and European governments stepped in with taxpayer money to save it — and vowed “never again.”
Yet many experts believe that debt forgiveness for some desperate high-profile borrowers now is a certainty. Greece, which owes $359 billion, tops the list.
From a practical standpoint, “debt forgiveness is really, really hard,” El-Erian said. “There are enormous issues of fairness. But for Greece today the alternative is worse.” That alternative is the likelihood that the economy would remain in ruins.
Puerto Rico, too, clearly can’t repay the $70 billion it owes, Rogoff said.
Democratic presidential hopefuls Clinton and Sanders both have proposed ways to lessen the burden of federal college loans, mostly by speeding refinancing of the debt at lower interest rates. That is forgiveness in the sense that the government would earn less on the loans.
Many economists believe the world can continue to muddle through with high debt and slow growth for a while. It helps that central banks have bought up trillions in bonds since 2007 as a way to ease governments’ burdens. The crucial test will come if the global economy slides toward a new recession sooner than later.
With debt levels so high, and interest rates already near zero or below, the pressure would mount on central banks to use what Wall Street regards as the nuclear option: Start printing mountains of money for governments to hand directly to consumers — to spend, pay off debt or save with no strings attached.
The political and economic risks of such a move would be enormous — which is why it would only be considered as a desperation move.
For central banks, “it’s the last gasp,” Rosenberg said.
“What policy makers should be doing, instead, is accepting the markets’ offer of incredibly cheap financing. Investors are willing to pay the German government to take their money; the U.S. situation is less extreme, but even here interest rates adjusted for inflation are negative. Meanwhile, there are huge unmet demands for public investment on both sides of the Atlantic…
…America’s aging infrastructure is legendary, but not unique: years of austerity have left German roads and railways in worse shape than most people realize. So why not borrow money at these low, low rates and do some much-needed repair and renovation? This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too. I know, deficit scolds would issue dire warnings about the evils of public debt. But they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously. They say that money talks; well, cheap money is speaking very clearly right now, and it’s telling us to invest in our future.”, Paul Krugman, “Cheap Money Talks”, The New York Times, July 11, 2016
“Tell me…what’s the difference between Krugman telling governments to “listen to the market” and “respond to unprecedented low sovereign debt rates by borrowing more” and buyers and sellers of homes, other mortgage borrowers, home builders, Realtors, banks and other mortgage lenders, and so many others responding to low pre-crisis rates (the mortgage debt marketplace) and the pre-crisis housing marketplace? Krugman has said bankers were evil for doing so and others like Shiller have said consumers/homebuyers were irrational…I don’t get it? Isn’t the current sovereign debt market (and other debt markets) another unprecedented (central bank-fueled) bubble also waiting to bust? And also, isn’t it more than a little hypocritical that anti-free market Krugman is advocating for governments/sovereigns to “listen and respond to the private markets for sovereign debt?” Mike Perry, former Chairman and CEO, IndyMac Bank
Cheap Money Talks
What with everything else going on, from Trump to Brexit to the horror in Dallas, it’s hard to focus on developments in financial markets — especially because we’re not facing any immediate crisis. But extraordinary things have been happening lately, especially in bond markets. And because money still makes the world go ’round, attention must be paid to what the markets are trying to tell us.
Specifically, there has been an extraordinary plunge in long-term interest rates. Late last year the yield on 10-year U.S. government bonds was around 2.3 percent, already historically low; on Friday it was just 1.36 percent. German bonds, the safe asset of the eurozone, are yielding minus — that’s right, minus — 0.19 percent. Basically, investors are willing to offer governments money for nothing, or less than nothing. What does it mean?
Some commentators blame the Federal Reserve and the European Central Bank, accusing them of engineering “artificially low” interest rates that encourage speculation and distort the economy. These are, by the way, largely the same people who used to predict that budget deficits would cause interest rates to soar. In any case, however, it’s important to understand that they’re not making sense.
For what does “artificially low” mean in this context? Compared to what? Historically, the consequence of excessively easy money — the way you know that money is too easy — has been out-of-control inflation. That’s not happening in America, where inflation is still below the Fed’s target, and it’s definitely not happening in Europe, where the central bank has been trying to raise inflation, without success.
Traders on the floor of the New York Stock Exchange last Friday. Credit Eric Thayer/Bloomberg
If anything, developments in the real economies of the advanced world are telling us that interest rates aren’t low enough — that is, while low rates may be having their usual effects of boosting the housing sector and, to some extent, the stock market, those effects aren’t big enough to produce a strong recovery. But why?
In some past episodes of very low government borrowing costs, the story has been one of a flight to safety: investors piling into U.S. or German bonds because they’re afraid to buy riskier assets. But there’s little sign of such a fear-driven process now. The premiums on risky corporate bonds, which soared during the 2008 financial crisis, have stayed fairly low. European bond spreads, like the difference between Italian and German interest rates, have also stayed low. And stock prices have been hitting new highs.
By the way, the financial fallout from Britain’s vote to leave the European Union looks fairly limited, at least so far. The pound is down, and investors have been pulling money from funds that invest in the London property market. But British stocks are up, and there’s nothing like the kind of panic some pre-referendum rhetoric seemed to predict. All that seems to have happened is an intensification of the trend toward ever-lower interest rates.
So what’s going on? I think of it as the Great Capitulation.
A number of economists — most famously Larry Summers, but also yours truly and others — have been warning for a while that the whole world may be turning Japanese. That is, it looks as if weak demand and a bias toward deflation are enduring problems. Until recently, however, investors acted as if they still expected a return to what we used to consider normal conditions. Now they’ve thrown in the towel, in effect conceding that persistent weakness is the new normal. This means low short-term interest rates for a very long time, and low long-term rates right away.
Many people don’t like what’s happening, but raising rates in the face of weak economies would be an act of folly that might well push us back into recession.
What policy makers should be doing, instead, is accepting the markets’ offer of incredibly cheap financing. Investors are willing to pay the German government to take their money; the U.S. situation is less extreme, but even here interest rates adjusted for inflation are negative.
Meanwhile, there are huge unmet demands for public investment on both sides of the Atlantic. America’s aging infrastructure is legendary, but not unique: years of austerity have left German roads and railways in worse shape than most people realize. So why not borrow money at these low, low rates and do some much-needed repair and renovation? This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too.
Write A Comment
I know, deficit scolds would issue dire warnings about the evils of public debt. But they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously.
They say that money talks; well, cheap money is speaking very clearly right now, and it’s telling us to invest in our future.
A version of this op-ed appears in print on July 11, 2016, on page A23 of the New York edition with the headline: Cheap Money Talks
“Could it be any clearer? Who sets (and has for decades) bank capital requirement in the U.S. and around the world? Governments and their institutions not bankers!!!”, Mike Perry, former Chairman and CEO, IndyMac Bank
July 12, 2016, Julia-Ambra Verlaine, The Wall Street Journal
EU Finance Ministers Warn Over New Basel Banking Standards
Concern that new standards disadvantage European banks against U.S. counterparts
Germany’s Finance Minister Wolfgang Schäuble said he supported the Basel review, “but we have to, of course, do this in a reasonable fashion.” PHOTO: STEFANIE LOOS/REUTERS
By Julia-Ambra Verlaine
BRUSSELS—European governments officially spoke out on behalf of the bloc’s banks on Tuesday, warning the Basel Committee—the global banking-standards setter—to avoid creating a new set of rules that would force banks to raise large amounts of further capital.
EU finance ministers in Brussels urged the Swiss-based supervisor to not bring about “a significant increase in the overall capital requirements for the banking sector” and do nothing “resulting in significant differences for specific regions of the world.”
Their comments are targeted at new standards expected to emerge from the Basel Committee of Banking Supervision in a review of current bank-capital requirements that it expects to publish by the year-end.
European banks are concerned that the new standards, dubbed “Basel IV,” would put them at a competitive disadvantage to their U.S. peers given structural differences such as where mortgages sit on the balance sheet. American banks tend to sell on their mortgages, whereas European institutions leave them on their balance sheets, creating higher capital requirements.
The statement was amended by ministers during Tuesday’s meeting. An earlier draft had specified that the reforms shouldn’t result in a significant capital increase for “the European banking sector.”.
Jeroen Dijsselbloem, the Dutch finance minister, requested that the tone be softened, according to an EU official, and even asked why the statement was needed at all. Germany and France, the main backers of the statement, pushed back.
Wolfgang Schäuble, Germany’s finance minister, said after the meeting he supported the Basel review “but we have to, of course, do this in a reasonable fashion. We still need a few banks in Europe.”
The ministers said it was important that the Basel Committee assessed the overall design of the overhaul, which includes revisions of how credit risk is assessed and constraints on banks’ use of internal models to assess risk.
They requested a quantitative impact analysis from Basel that took into account the overall effects of the expected changed, as well its impact on banking models used in different countries.
The Institute of International Finance, a Washington-based group that speaks for financial institutions in 70 countries, welcomed the ministers’ statement, saying that “disproportionate increases in capital requirements would unduly impair banks’ ability to finance stronger growth.”
“From July 12, 2016 front-page of The New York Times: The core issue that caused (and is causing) the Black Lives Matter-type protests; blacks being shot (more than whites) by police is found to be false (another false narrative that the mainstream press and as a result many Americans have latched onto) in an objective study of 1,332 American police shootings from 2000 to 2015, by Harvard-tenured and honored (he won the John Bates Clark medal for the most promising American economist under 40) black economics professor Roland G. Fryer, Jr…
…To be clear, whites in the same circumstances are shot either the same or more than blacks by police, but the study did show that non-lethal uses of force by police against blacks (like a gun pointed at them or being handcuffed) is about 20% higher for blacks than whites, without regard to whether they complied with the police or not. There is a chart that adjusts for compliance and “eyeballing it”, it looks like this 20% difference drops in roughly half when adjusted for compliance to police instructions. Why post this on my IndyMac blog? This is exactly how the false liberal narrative started that greedy and reckless banks and mortgage lenders abused hapless borrowers and caused the financial crisis. There has been NO DATA or STUDIES (that I am aware of) to support this false narrative about the mortgage crisis….only anecdotal stories of a handful of individual borrowers and their circumstances. And yet the U.S. mortgage market is massive (tens of millions of borrowers and trillions in mortgage loans outstanding)….far larger than the population of police shootings or other non-lethal “uses of force”. You can’t properly analyze a market as massive as the U.S. mortgage market, without using total market data and/or statistically-valid samples/studies. My point here is discussed consistently throughout my blog, but fairly well in recent blog postings #1205, #1208, and #1215.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“The federal government’s FDIC-R sued me (alone) civilly five years ago this month seeking $600 million in damages, related to IndyMac Bank’s July 11, 2008 seizure by the FDIC, as a result of a U.S. Senator’s remarks that caused a “run on the bank”, during the unprecedented financial crisis. They did not claim I was “extremely careless” or that “any reasonable person in my position should have known it was wrong” (as the FBI Director did of Hillary Clinton and her State Dept. emails on Tuesday and many legal experts have said is no different than “gross negligence”). They also did not claim I committed fraud, misappropriated funds, or had a conflict of interest…
…They sued me for ordinary (not “gross”) negligence; claiming I was a negligent banker, because I alone, did not see the financial crisis coming in early 2007 and reduce IndyMac’s mortgage lending volumes by even more than I was already doing. My attorneys sought to have the case dismissed, because under The Business Judgement Rule directors and officers are protected against reasonable business decisions, that later turn out to be wrong. In fact, some business judgements that later turn out to be wrong in hindsight, might in fact have not been a bad decision at the time they were made. (See discussion of The Business Judgement Rule below.) The federal judge who heard this matter ruled that California’s commercial code (unlike every other State in the U.S.) had a provision that eliminated this protection for officers only. So the FDIC-R sued me as CEO, but not as Chairman of the Board, to exploit this issue. My attorneys cited other rulings and pointed out that the related California law was unclear and asked the judge to certify his ruling, so we could immediately appeal it to the 9th Circuit Court. He agreed the California law was unclear, certified his ruling, and we appealed to the 9th Circuit Court. They declined to hear the matter until after trial and to this day, as far as I am aware, this important California corporate law issue remains unsettled. As a result, as an individual with limited resources, I was forced to settle this matter with the FDIC-R. In the settlement agreement, I DENIED in writing the FDIC-R’s bogus negligence allegation. And the settlement agreement also made clear that the FDIC-R never alleged that my actions caused the bank to fail (because they did not, I did everything in my power to save IndyMac Bank). I paid the FDIC-R $1 million from my families’ personal funds. It wasn’t a fine or penalty, it was a tax-deductible settlement of a civil dispute…really an amount they extorted from me and my family. At the last minute, in order to get myself and my family out from under a $600 million civil suit, they demanded a lifetime ban as a banker. My attorneys said to the FDIC, “settle the $600 million suit and sue Mr. Perry in an enforcement action, as required by law.” They refused. So I was forced to either accept a lifetime ban as a banker or fight both a $600 million civil lawsuit and a separate enforcement lawsuit. They essentially used the “negligence” law glitch in California to extort the banking ban. So I know a little about ordinary negligence, “extremely careless” (e.g. gross negligence), “no reasonable person would have done it”, etc.. I feel strongly that there is one set of rules/laws for business people and ordinary citizens like myself and an entirely different one for politicians and other government officials like Hillary Clinton. When frankly, I and most Americans believe that our government officials and politicians should be held to a higher standard than private citizens. p.s. My blog at www.nottoobigtofail.org has significantly more information re. this matter, if you are interested.”, Mike Perry, former Chairman and CEO, IndyMac Bank, July 6, 2016
“Mr. Comey went further, citing “evidence to support a conclusion that any reasonable person in Secretary Clinton’s position….should have know that an unclassified system was no place for that conversation.” To be “extremely careless” in the handling of information that sensitive is synonymous with being grossly negligent.”, Excerpt from former U.S. Attorney General Michael B. Mukasey, “Clinton Makes the FBI’s Least-Wanted List”, The Wall Street Journal, July 6, 2016
Why The Business Judgment Rule is designed to protect directors and officers of corporations from ordinary negligence suits and hindsight judgment:
“In paradigm negligence cases involving relatively simple decisions, like automobile accidents, there is often little difference between decisions that turn our badly and bad decisions. In such cases, typically only one reasonable decision could have been made under a given set of circumstances, and decisions that turn out badly therefore almost invariably turn out to have been bad decisions. In contrast, in the case of business decisions it may often be difficult for factfinders to distinguish between bad decisions and proper decisions that turn out badly. Business judgments are necessary made on the basis of incomplete information and in the face of obvious risks, so that typically a range of decisions is reasonable. A decision-maker faced with uncertainty must make a judgment concerning the relevant probability distribution and must act on that judgment. If the decision-maker makes a reasonable assessment of the probability distribution, and the outcome falls on the unlucky tail, the decision-maker has not made a bad decision, because some of the outcomes will inevitably fall on the unlucky tail of any normal probability distribution.”
“WHETHER THE BUSINESS-JUDGMENT RULE SHOULD BE CODIFIED”, by Melvin A. Eisenberg, May 1995 (http://www.clrc.ca.gov/pub/BKST/BKST-EisenbergBJR.pdf)
Excerpt from an online description of The Business Judgement Rule:
“Fraud and misappropriation cases often involve the business judgment rule. Situations where an officer or director failed to disclose a conflict of interest and instead benefited personally from the situation may also require a plaintiff to get past the business judgment rule. One exception to the business judgment rule requirement exists, however. If no reasonable person would have done what the defendants did, most courts will allow the case to go forward even if the plaintiff cannot yet show that the defendants breached any of their fiduciary duties. Since these cases usually involve some extreme risk-taking or misbehavior, however, they do not come up very often. In most cases, the business judgment rule protects the officers and directors from lawsuits. Corporate officers and directors do not have to make the right decisions to use the business judgment rule, but they do have to uphold their duties of care, good faith, and loyalty to the corporation.”