March 20, 2013 5:00 AM
There's no shortage of criticism of the Cyprus "bail-in" -- the one-time tax the government had proposed levying on insured and uninsured depositors to rescue the nations' banks.
And there is no shortage of criticisms that I could levy either on Cyprus and the EU's slapdash approach, which now looks like it will be rejected by the Cyprus parliament. The biggest being that the failing financial institutions should have been put through a bankruptcy system rather propped up -- whether through this levy or general taxation. Having said that, the initial Cyprus approach could have been much worse, and what comes next may be much more likely to spread contagion.
There is one fundamental thing the initial plan got right. Depositors must not be considered sacrosanct in a bank failure, and, conversely, a bank's contractual obligations to creditors such as bondholders cannot be ignored. The controversy should also open a much-needed debate about the role of ever-expanding deposit insurance in spreading moral hazard, as it encourages a lack of due diligence among customers of banks.
March 16, 2013 2:57 PM
If the Conservative Political Action Conference’s (CPAC) organizers wanted a speaker or panel on the causes of the financial crisis and what to do about too-big-to-fail financial insitutions, they could have chosen from among many conservative and libertarian experts who not only issued prescient warnings about government policies that egged on reckless behavior through subsidies, regulations, and flawed monetary policies, but also offered detailed free-market solutions to prevent future financial crises and taxpayer-funded bailouts
Such experts include John Allison, president and CEO of the Cato Institute, former chairman and CEO of BB&T Corp, and author of The Financial Crisis and Free Market Cure; Peter Wallison, counsel to the Reagan White House in the 1980s, co-director of the American Enterprise Institute’s program on financial policy studies, member of the Congressionally chartered Financial Crisis Inquiry Commission, and author of the new book Bad History, Worse Policy: How a False Narrative About the Financial Crisis Led to the Dodd-Frank Act; and Fred Smith, founder and chairman of the Competitive Enterprise Institute, where I work, and board member of CPAC’s parent organization, the American Conservative Union.
All of them sounded the alarms about the dangers of the government-sponsored housing enterprises Fannie Mae and Freddie Mac and mandates such as the Community Reinvestment Act, which encouraged banks to lower standards for borrowers in the name increasing home ownership. In congressional testimony in 2000, Smith warned that if anything goes wrong with the entities, taxpayers could be on the hook for “$200 billion tomorrow.” At the time, his warning was dismissed as exaggerating Fannie and Freddie’s risk, but it turns out he actually underestimated the amount for which taxpayers would later be on the hook.
Yet for CPAC’s single event on the financial crisis , held today, featured none of these experts. Instead, the sole speaker was Federal Reserve Bank of Dallas President Richard Fisher, who also has been a longtime Democratic operative with a decidedly big-government approach to financial regulation. Trying to appeal to the conservative audience, Fisher opened his speech with an anecdote about meeting President Ronald Reagan in 1984. He didn’t mention his having served in the Carter and Clinton administrations or his unsuccessful 1994 run as a Democrat against Sen. Kay Bailey Hutchison (R-Texas), in which he took standard liberal positions, including opposing school vouchers and supporting the Clinton “assault weapons” ban.
March 13, 2013 12:13 PM
This week, Illinois became only the second state in U.S. history to by charged with securities fraud by federal regulators (New Jersey was the first, in 2010). On Monday, the Securities and Exchange Commission (SEC) accused Illinois of deceiving investors regarding the health of its state employee pension funds, in a series of bond offerings from 2005 to 2009. In its cease-and-desist complaint, the SEC claimed:
Specifically, in numerous bond offerings from approximately 2005 through March 2009, the State misled bond investors by omitting to disclose information about the adequacy of its statutory plan to fund its pension obligations and the risks created by the State’s Structural Underfunding of its pension obligations. During this same time period, the State also misled bond investors about the effect of changes to that plan, including the Pension Holidays in 2006 and 2007.
Illinois settled immediately, without either admitting or denying the charges. The state did not have to pay a penalty, which, considering the extent of its pension funding shenanigans, is surprising, to put it mildly.
February 20, 2013 2:00 PM
Pension obligations' strains on state budgets have made pension reform a priority for state policy makers across the nation. Over the last couple of years, states from Utah to Rhode Island have implemented pension reforms once considered politically nigh-impossible. Montana may soon join the ranks of states with pension shortfalls where fiscal reality trumps politics as usual.
Last week, Montana legislators heard testimony from pension experts who painted a bleak picture of the current situation. Taken together, the state's pension plans are only 64 percent funded.
David Draine of the Pew Center for the States said, “If not addressed, Montana’s growing pension debt of $4.3 billion will threaten public workers’ salaries and benefits and will crowd out essential state services.” He added that to pay off the $4.3 billion debt -- equivalent to about half the state's annual budget -- all at once would cost every Montana household $10,600.
Gary Buchanan, co-owner of an investment firm in Billings and former chairman of the State Board of Investments, said, “Pension shortfalls should be direct reductions against any surplus,” and criticized the state's actuarial assumption of average 7.75 percent annual investment returns as "totally unrealistic."
February 20, 2013 1:26 PM
Few state governments are as in as much fiscal trouble as California's, so it's not surprising that few state pension funds have been as mismanaged as the California Public Employee Retirement System (CalPERS). But worse than that, CalPERS -- along with its sister fund, the California State Teachers' Retirement System -- has led the nation in implementing shoddy investment and management practices that have exacerbated led to billions of dollars in losses and foregone revenue.
Now, as policy makers in other states consider ways to address their own pension deficits, CalPERS -- the nation's largest pension fund, with about $230 billion in assets under management -- offers an example of exactly what not to do. They would do well to read "The Pension Fund that Ate California," Steven Malanga's article on the fund in the current issue of City Journal. Malanga, a senior fellow at the Manhattan Institute, recounts CalPERS' history -- which can be characterized as a fall from fiscal rectitude that only seems to get worse.
Even worse yet, CalPERS actively lobbied state lawmakers to implement many of the risky practices that have spelled so much trouble for it.
"When California’s government-employee pension system was established in 1932, it was a model of restraint," writes Malanga. "With the 1929 stock-market crash in mind, California opted for a cautious investment approach, allowing the fund to buy only safe federal Treasury bonds and state municipal bonds." That strategy worked while it lasted, but it began to unravel with the rise of unionization among government workers.
February 12, 2013 7:40 PM
Why not Moody's? Why not Fitch? Of all the questions raised about the U.S. government's strange case against Standard & Poor's—a lawsuit that actually asserts that some of the nation's largest banks were S&P's "victims," and that the credit rating firm somehow fooled these banks about products the banks actually created—the lack of similar actions against S&P competitors still rings the most alarm bells.
S&P, Fitch and Moody's all gave AAA rating to many packages of subprime mortgages that imploded. But of those three, only S&P downgraded the U.S. government from its decades-old AAA credit rating.
Floyd Abrams, the attorney representing S&P's parent company McGraw-Hill in the litigation and a veteran First Amendment lawyer (and yes, the First Amendment is a strong concern here, as I will get to in a second), has said that the government ramped up its investigation of S&P shortly after the downgrade in 2011. “Is it true that after the downgrade the intensity of this investigation significantly increased? Yea,” Floyd Abrams, S&P’s lead attorney, told CNBC in an interview last week. “We don’t know why.”
The Justice Department's civil suit against S&P looks even more suspicious when paired with the action a few weeks ago by another arm of the government against a small, upstart credit ratings firm that also had the temerity to downgrade the U.S. In late January, the Securities and Exchange Commission (SEC) stripped rating agency Egan-Jones of its accreditation as a "nationally recognized statistical rating organization" (NRSRO) in rating the creditworthiness of government or asset-backed securities. This was the first time the SEC had ever stripped a rating agency of its NRSRO status, an action that effectively bars financial institutions from relying on the rating agency to meet capital requirements.
Ironically, Egan-Jones' rating had been widely praised as an alternative to that of the "Big 3" of Moody's, Fitch and S&P. Receiving its funding through investor subscriptions, rather than payment of the entities being rated, it avoided the conflicts of interest that "Big 3" critics say led to inflated ratings for mortgage securities. The firm also turned out to be prescient in its early downgrades of Bear Stearns and Lehman Brothers, the first institutions to implode in the mortgage crisis.
January 29, 2013 1:24 PM
When I bought my home, I chose a mortgage that was within my means. That meant buying a little two-bedroom house, and using much of my life savings for a 40-percent downpayment, so that my mortgage interest rate would be lower, and my monthly payment would be manageable even on my modest salary as a think-tank employee. It turns out that people who behaved like me -- saving up their money for a big downpayment and not buying more house than they could afford -- are suckers, since the Obama administration is using their tax money to bail out people who made smaller downpayments relative to their home value (and thus have larger mortgages that exceed the value of their home in the current depressed real estate market).
The administration is busy writing down mortgage loans, but only for certain favored categories of people whose mortgages exceed the value of their homes. Even in depressed real estate markets, people who made downpayments as large as mine don't have mortgages that exceed the value of their homes. So effectively, the administration is rewarding certain lucky people who either (a) didn't save enough money to afford a large downpayment, or (b) bought more home than they could really afford, or (c) have lots of money, but chose not to use it for a large downpayment. The thriftiest people are generally being treated worse. This isn't as enraging as the Obama administration's past bailouts for real estate speculators and flippers, and deadbeats who had high-incomes and modest mortgage payments, but it is disturbing nonetheless.
January 23, 2013 12:45 PM
The extent and huge costs of the damage from Hurricane Sandy to New Jersey should make rebuilding the worst affected areas a priority for Garden State lawmakers. That would include keeping down costs. Yet the Democrat-controlled New Jersey State Senate is trying to do the exact opposite. Last week it passed, along a 23-13 party-live vote, a bill (S2425) that expands the use of project labor agreements (PLAs) in state construction projects.
Astoundingly, the Senate did not consider any other legislation. “So in these days post-Sandy, we’ve been called back to debate only one bill,” said Senate Minority Leader Tom Kean, Jr. (R-Union). “This is one bill that has the potential to change that recovery estimate, if the cost estimates are right, form 10 completed projects to 9 completed projects.”
Project labor agreements disadvantage nonunion contractors through the imposition of burdensome rules similar to those faced by their unionized competitors. Under a PLA, nonunion contractors can be required to employ workers from union hiring halls, recruit trainees from union apprentice programs, and even collect union dues.
January 10, 2013 5:51 PM
The first thing that should be said about today's "qualified mortgage" rule is that it is just one of many new regulations the Consumer Financial Protection Bureau (CFPB) will issue under Dodd-Frank. Believe it or not, the 2,500 pages of Dodd-Frank contains both a "qualified mortgage" rule and a "qualified residential mortgage" rule, the latter of which has yet to be issued. And the powerful and unaccountable CFPB -- subject to a lawsuit by the Competitive Enterprise Institute, the 60 Plus Association, and the State National Bank of Big Spring (Texas), a community bank -- still has the incredibly broad power to ban a mortgage or any other financial product it deems "abusive."
The "qualified mortgage" regulation involves the types of mortgages banks and credit unions can issue with reasonable certainty they won't be sued. It's the proverbial cart that pulls the horse. Dodd-Frank massively increased the ability of borrowers to sue lenders not just for fraud and deception -- in which cases lenders should be held accountable -- but for not assessing correctly borrowers' own "ability to repay."
Never mind that in many cases, "predatory borrowers" lied about their own ability -- or willingness -- to repay; they weren't called "liar loans" for nothing! Never mind that through the purchases of Fannie Mae and Freddie Mac, through the insuring of l0w or no-down payment loans by the Federal Housing Administration (FHA), and through the mandates of the Community Reinvestment Act, the government encouraged loans to those who didn't have the ability to repay.
It's true that the rules issued today -- spelling out terms of loans that would give lenders a "safe harbor" or "rebuttable presumption" -- are not as inflexible as they could have been. Perhaps that's in part because the bureau is watching itself more due to the pending lawsuit.
January 7, 2013 2:20 PM
After numerous criticisms from U.S. community banks and lawmakers of both parties, the international committee in charge of the Basel III bank capital agreement just announced it is slightly revising the accord and delaying it for a couple more years. This action is welcome. If Basel had been implemented this year as written, it almost certainly would have thrown the U.S. and other economies into a recession more than going over the "fiscal cliff" ever would have.
But although the "Basel Cliff," as I have called it, may be averted for now, dangers still lurk in its implementation in the years to come. This is both because of the accord's wrongheaded bias in favor of sovereign debt, and because U.S. regulators have rushed headlong to push it through before congressional action that is almost certainly needed to ratify any complex international agreement of this size.
As I had written in The Daily Caller (I also wrote about Basel here at OpenMarket), although the stated purpose of Basel III is -- as it was of its two predecessors -- to "make the international banking system more stable," the accord is instead "likely to dramatically increase the costs of mortgages and small business loans while making the banking system less stable."
Under the twisted logic of Basel III as written, a U.S. community bank would have to put up two to three times as much capital against a home mortgage or small business loan even to a customer it had dealt with for years. Yet it could buy a teetering European bond with relative ease. And intentionally or not, because of its preference for sovereign debt to count towards bank capital, Basel III would act as a stealth bailout of profligate European governments.