Monthly Archives: February 2009

The Treasury’s deal with RBS under the Asset Protection Scheme is even more disadvantageous to the tax payer than I had feared.  The government will insure £325 bn of RBS toxic assets, with a first loss for RBS of only 6 percent (£19.5), and with RBS taking only 10 percent of any loss in excess of the first loss limit.  The fee paid by RBS is just two percent of the amount insured (£ 6.5 bn), much lower than the market (and I) had anticipated, and it is paid in RBS B shares.  This means that if and when RBS goes bust, an event that is not altogether unlikely, the cumulative value of the insurance fees already paid to the government will be zero.

The UK government has offered, under its asset protection scheme (APS), to guarantee (or insure) up to £600 bn worth of toxic assets held by British banks- up to £300 bn for RBS and up to £250 -£300 bn for the Lloyds Banking Group.  Barclays may be waiting in the wings.  The APS insures the banks (that is, their CEOs, shareholders, junior and senior unsecured creditors other than retail depositors – already covered by deposit guarantees up to £50.000 – and staff) against losses on these toxic assets over and above a certain deductible or ‘first loss’ for the bank.

There is ample precedent for this kind of guarantee scheme.  In the US, the Fed, the FDIC and the US Treasury have guaranteed a large chunk ($300 bn) of toxic assets of CItigroup.  In the Netherlands, the Dutch state insured a portfolio of $39 bn (face value) worth of securitised US Alt-A mortgages held by ING.

Like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive to the tax payer.  Apart from that it is great.  There also are superior alternatives available: full nationalisation and, best of breed, the ‘good bank’ solution.

This post contains the comments I made at the 6th Annual Conference: Emerging from the Financial Crisis, held at the Center on Capitalism and Society at Columbia University, on February 20.  It contains 22 points, two for each of the 12 disciples, minus Judas Iskariot, who is otherwise engaged, buying silver futures.

1.      It is necessary, for political economy reasons, to rush new comprehensive regulation of the financial sector.  While it would be better, holding constant the likelihood of the measures being adopted and implemented, not to act in haste, there is now a unique window of opportunity – a period of extraordinary politics, in the words of Balcerowicz – to actually get the thorough regulatory reform we need.  The reason is that the private financial sector is on its uppers – down and out – and will not be able to put together much of a fight, let alone its usual boom-time massive lobbying effort to veto radical measures.  It is better to over-regulate now and subsequently to correct the mistakes than to risk another era of self-regulation and soft-touch under-regulation of financial markets, instruments and institutions.

My ‘Good Bank’ proposal (see (1), (2), (3), and (4), and related proposals by Joseph Stiglitz, George Soros and Paul Romer) appears to be getting some attention if not yet traction in a number of European capitals and in Washington.  There are a couple of questions about the proposal that crop up regularly, and I would like to address these here.  They are (1)  how do you set up a good bank, and (2) would not the senior unsecured creditors of the old bad bank be likely to take a hit under your proposal?

My friend professor Uwe E. Reinhardt of Princeton University presented ECONOMIC TRENDS IN U.S HEALTH CARE: Implications for Investors, at  J.P. Morgan’s annual healthcare conference on Tuesday, January 13 2009.  The first half of the presentation (46 slides!) deals with macroeconomic and financial issues in Uwe’s inimitable style – equal portions of wit and insight.  The second half deals with the embarrassing mess known as health care in the US.

I warmly recommend a perusal of the whole enchilada.

The Obama administration today unveiled the Homeowner Affordability and Stability Plan – measures to help financially challenged homeowners to avoid foreclosures.  The program has three key components.  The first is $75 bn of Federal government money to subsidise the modification of home loans (I believe $50bn of this was already in Treasury Secretary Geithner’s earlier announcements on the Financial Stability Plan).  The Federal government is also making an additional $200 bn of capital available to Fannie Mae and Freddie Mac, so they can expand their mortgage lending and guarantee activities.  The second is to “Institute Clear and Consistent Guidelines for Loan Modifications”: a standardized framework for dealing with troubled mortgages.  The third is an overhaul of bankruptcy laws to allow judges to force the writedown of principal on mortgages for bankrupt homeowners or to force lenders to reduce mortgage rates.

When Iceland’s banking system and currency collapsed last September, a key component of the emergency package that was introduced under the auspices of the IMF were controls on capital outflows, implemented through rigorous foreign exchange controls.  This made sense.  The currency was in free fall.  The foreign exchange markets had seized up.  There was no level of domestic interest rates the Central Bank of Iceland (which had zero credibility at this stage) could set that would induce domestic and foreign investors to hold on to their Icelandic kroner rather than converting them into euro, US dollars, sterling or any other serious convertible currency.

Capital controls in CEE

Iceland is about to have company.  The most likely candidates for the imminent imposition of capital controls are in Central and Eastern Europe (CEE) and among the CIS countries.  We can expect to see capital controls imposed even by some of the EU members from Eastern Europe that have not yet adopted the euro as their currency (the Baltics, Bulgaria, the Czech Republic, Hungary, Poland, and Romania).

Soon, DV, I shall be able to monitor once again the entire comment flow to my Maverecon blog.  Instead of being able to do everything (posting and monitoring) from a single template, as under the ancien régime, I will have to log into separate websites for posting and for monitoring.  A minor example of technical regress, of the kind often encountered when activities and formats are centralised and standardised without consulting, let alone listening to, those on the periphery who will be affected by the proposed centralisation.

But anyway, I will be blogging away again presently, most likely from the US where I will be spending the rest of the week.  Being an academic definitely beats working for a living.

Around February 6, FT.com introduced a change in the template through which I submit my posts to Maverecon.  This caused me to lose any vestige of editorial control over the comments submitted to my blog.  All I see is what you see – the comments actually published after vetting/filtering by FT.com.

Until the status quo ante is restored, and I can see the entire flow of comments that have been submitted, I will not post to Maverecon.  My personal comment-vetting policy is rather more permissive than that of FT.com – I have never knowingly turned down a comment.  I understand that the FT has to worry about lawsuits, and that it has policies against personal attacks/abuse etc. in any publication and on any website that carries its name.  Naturally, our interests and positions are not perfectly aligned.  By agreeing to move my blog to FT.com, I agreed to abide by a certain code.

But I need the information to be able to argue my side of the ‘what can be published’ issue.  Until I can see the entire flow of comments – good, bad and ugly – I am not even aware of what has been filtered out.  So until my information base is restored, I will take a break from posting.

I had been planning to blog today on US Treasury Secretary Timothy Geithner’s proposals for saving/reviving financial intermediation in the USA.  However, picking through the entrails of this multi-faceted, surprisingly incomplete, seriously underfunded, occasionally well-designed but mostly inadequate, counterproductive and unnecessarily moral-hazard-creating set of proposals was just too depressing.  I will wait till I am at my parents’ home this weekend, mollified and mellowed by my father’s good claret, before I review the Geithnerbharata.  But as a four-finger exercise before the main concert, I shall discuss here the second Dutch government bail-out of ING.  Many of the issues involved in and principles raised by this deeply unfortunate exercise also are central to the Geithnerbharata.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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