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OpenMarket: Banking and Finance

  • CalPERS: Model Of Pension Dysfunction

    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.

  • Payback? Government Targets S&P And Egan-Jones, Not Moody's Or Fitch

    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.

  • Thrifty People Punished Yet Again By Obama Administration

    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.

  • New Jersey State Senate Pushes Union Giveaway in Project Labor Agreement Bill

    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.

  • Qualified Mortgage Rule Is One Of Many Dodd-Frank Boots To Drop

    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.

  • Basel III Cliff May Be Averted, But Dangers Still Loom For Main Street Banks

    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.

  • GM Stock Sale Doesn't End Damage Of Government Motors

    December 21, 2012 4:25 PM

    Below is my statement released today on the government's planned 15-month sale of its remaining General Motors stock:

    On Wednesday, the government announced a plan to sell its remaining stake in General Motors at an estimated loss to taxpayers of $12 billion. If the losses on General Motors Acceptance Corporation (GMAC) are included, the total probably rises to nearly $20 billion.

    It is good news the government is winding down its misguided involvement in Government Motors. It has announced an 15-month plan to divest its stock. It also is good news the auto industry is expanding – though most of the growth has been enjoyed by foreign automakers who have built plants in right-to-work Southern states and had nothing to do with the bailout.

    But there is nothing new or remarkable about businesses showing signs of improvement thanks to massive infusions of public dollars. We will never know how many small businesses may have survived, expanded or moved into more profitable lines of business had the government pursued a more pro-growth alternative to this massive government bailout. We hear a lot about jobs allegedly “saved or created” by this bailout. But in reality, we will never know how much farther along the road to recovery we might be if we had foregone this “investment” and lowered tax rates so entrepreneurs could invest, grow and hire.

  • Obama's Low-Quality College Bailout Will Fuel Skyrocketing Tuition

    December 12, 2012 9:19 AM

    We wrote earlier about perverse federal financial aid policies that encourage colleges to jack up tuition. Recently, the Obama administration came up with something even worse. It announced a new financial aid policy that will effectively bail out low-quality, high-tuition colleges and especially law schools at taxpayer expense, and encourage colleges and professional schools to increase tuition even more. These changes are the product of a revised income-based federal student loan repayment program that will go into effect starting Dec. 21.

    The revised "Pay as You Earn" program will allow eligible student-loan borrowers to cap monthly payments at 10 percent of discretionary income, and have their federal student loans forgiven after 20 years -- or just 10 years, if they go to work for the government. An earlier version of the program capped payments at 15 percent and offered forgiveness after 25 years. For students who foolishly attended third-rate but expensive colleges and law schools, this could wipe out part of their debt, at taxpayer expense, since their salaries in the low-paying jobs they end up with will be insufficient to pay off all of their massive debt in 20 years if they pay only 10 percent of their leftover income on repaying their student loans.

    In the short run, this will primarily benefit those students. But in the long run, the primary beneficiaries will be low-quality but expensive colleges and law schools, which will be able to raise college tuition through the roof, since no matter how much debt their students run up in college, it will be written off after 20 years. That will eliminate market-based price discipline for those colleges, resulting in even more rapid increases in tuition.

  • The Hostess Bankruptcy And The Threat Of A PBGC Bailout

    November 20, 2012 4:40 PM

    On Friday, November 16, Hostess Brands announced it was shutting down operations after the Bakers, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM), which rejected the company's last contract offer in September, announced it would go on strike. (Today, the two parties entered into a last-ditch negotiation effort today to avoid liquidation.)

    The same day, the Pension Benefit Guaranty Corporation (PBGC), the federally created agency that insures private sector pensions, announced that its deficit had increased from $26 billion to $34 billion over the past year.

    Then yesterday, Hostess announced that  it would pass off its pension liabilities to the PBGC.

    If this looks like an oncoming slow-motion train wreck, that's because it is -- and taxpayers are standing on the tracks.

    Hostess has about $2 billion in unfunded pension liabilities, which would add even more red ink to the PBGC's already strained books. If a growing number of companies shed their pension liabilities on to the PBGC -- a possibility given the American economy's continuing weakness -- the threat of a taxpayer bailout will only grow. AP's Marcy Gordon notes, "If the trend continues, the agency could struggle to pay benefits without an infusion of taxpayer funds."

  • The Basel Cliff -- Basel III's Poisonous Recipe For The Economy

    November 16, 2012 2:14 PM

    As if the "fiscal cliff," with its prospects of looming tax hikes, were not enough, big and small banks—and in turn consumers and businesses who rely on their credit—also face the "Basel cliff."

    The Basel cliff is not a mountain in Switzerland. It refers to meetings in Basel and elsewhere by international banking bureaucrats to develop the Basel III agreement for harmonizing international capital requirements. And if implemented as planned, it will dramatically increase the costs of mortgage and small business loans while, according to many experts, actually making the banking system less stable.

    The Basel Cliff is part of what Sen. Rob Portman (R-Ohio) and others have called the "regulatory cliff." In the year leading up to the election, the Obama administration put hundreds of regulations on hold.

    As I wrote in Forbes a couple weeks before the election, these regulatory delays may have spurred some slightly improved growth measures in 2012. Now, as CEI's Ryan Young reminds us, "in short run, it means a midnight rush of new rules is coming."

    But the Basel rules are unusual for a number of reasons: their extreme stringency, complexity, lack of accountability, and—in a sign of hope -- their unpopularity with both parties. The entire Maryland congressional delegation, mostly consisting of liberal Democrats such as House Majority Whip Steny Hoyer and House Budget Committee Ranking Member Chris Van Hollen, recently wrote to regulators from the Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.


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