This is a guest post by FogOfWar:
CUNA (a trade industry group for credit unions) just announced that at least 650,000 customers and USD $4.5 Billion have switched from banks to credit unions in the last five weeks. I think this is a pretty impressive showing for the lead up to “Bank Transfer Day”, and, as posted before, am a supporter of the CU transfers. A few quick points on the announcement:
Are those numbers driven by “Move Your Money” or BofA’s $5 Debit Fee?
A little of both, I suspect, and there’s no hard survey data (that I know of) splitting it out. The two points aren’t completely separate, as one of the points of “move your money” (at least in my mind) is to let people know that credit unions generally have lower fees than large commercial banks & it often makes financial sense to shift your account over regardless of your political views on “Too Big To Fail (TBTF)”.
So is 4.5 Billion a lot or a little?
It isn’t a big number in the scope of overall deposits, but it’s a really big number for transfers in just one month. For scale, the total deposits in all 11,000+ CUs nationwide are somewhere around $800Bn, and that’s roughly 10% of the total deposits in the US. So $4Bn (to make the math easy) is a 0.5% increase in deposits for CUs and somewhere around a 0.05% reduction in the deposit base of US banks in the aggregate. I suspect the transfers are concentrated in the large “final four” banks (BAC, JPM, C, WFC which, if memory serves, account for somewhere around 40% of deposits), so the reduction might be closer to 0.10% for the TBTF quartet.
Wait, those seem like really small percentages—why do you think this matters?
Well, because it’s a greater increase in deposits in one month than credit unions (in aggregate) got in the entirety of last year (and last year was a good year for CUs in which they saw their market share increase). People (rightly) don’t change their checking accounts lightly (there’s a lot of “stickiness” to having direct deposit/ATM cards/etc.—in short it’s a pain in the ass to change your financial institution), so this is a pretty impressive number of people and amount of deposits in this span of time.
Also (and this will play out over time), this could be the start of a trend. Certainly there seems to be a large uptick in discussion of “move your money”, and, as the idea percolates around there’s a lag between thought an action, so this well could be a slow build.
“A Slow Deliberative Walk Away from the TBTF Banks.”
Another important point is that, in fact, you really don’t want too many people moving their accounts in a short period of time for two reasons. First, a rush of people all removing their deposits at the same time is, in fact, a “run on the bank”. This is destructive for a host of reasons—in particular it can cause the institution on which there’s been a run to go into bankruptcy (regardless of whether that bank is otherwise solvent), and, let’s not forget, we the taxpayer are ultimately on the hook for the deposits of bankrupt commercial banks through the FDIC, which is funded by bank fees but backed by the full faith and credit of the taxpayer (and a BofA bankruptcy might put that backstop to the test). So, much as I disagree with many of the decisions of the mega banks, I don’t want the “move your money” campaign to be a catalyst for their insolvency proceedings.
Instead, what I’d really like to see is a slow steady whittling down of their deposit base, and thus their overall size, until they are no longer considered “to big to fail” and thus pose no danger to the taxpayers, as they will be free to make good or bad decisions and live or die, respectively, by them. In short, I’d like to see a “slow deliberative walk away from the TBTF banks” playing out over the course of the next 2-3 years.
The other reason is that credit union’s can only take deposits at a certain pace without running into issues with their own capital buffers and operations. This is a slightly technical issue, but with a substantive point behind it. In essence, absorbing a large growth in new deposits takes some time, not just from an operational perspective (ramping up staff, at a certain point opening new branches and ATMs), but also because more capital needs to be accumulated to provide a safety buffer for the additional deposits that have been taken on. From this perspective, the $4.5 Bn in 5 weeks is a “goldilocks” level—not to much to overheat, not too little to be a rounding error, but just right (OK, actually think it could be 2-3 times the pace without overheating, but everyone else loves to use that hackneyed “goldilocks” metaphor and I just felt peer pressure to frame it that way).
I read that it won’t have an impact on the banks—is that true?
In a word, “total fucking bullshit”. The deposit base is the skeleton of a bank—it’s what holds the whole thing together. Deposits are steady (essentially) free money. Money that can be deployed wherever the bank finds interesting at the moment: loans to customers, speculative exotic derivatives, new branches, foreign investment, whatever. Moreover, if retail deposits mean so little to banks, then why in the world do they spend so much advertising coin chasing them? Generally for profit institutions advertise for products that are profitable to them, not one’s that are irrelevant. QED.
That’s true over the long term. It is worth noting, however, that at this exact moment in time the banks are flush with cash sitting idle on deposit with the fed. http://www.cnbc.com/id/44019510/Bank_of_New_York_Puts_Charge_on_Cash_Deposits Which, by the way, makes it perfect timing for the “move your money” campaign. As I said before, I really don’t want a “run” on the banks, and the fact that banks are flush with cash currently means they’re relatively safe in the immediate moment from a loss of deposits.
But the real reason you’re still seeing Chase commercials on TV even though they’re flush with cash doing nothing at the Fed, is that Chase knows that most people rarely change their primary checking accounts. The accounts that are moving over now are (statistically) gone for good. Later, when that flush cash at the Fed is no more and the banks want the easy money of a wide retail deposit base, they’ll find it very difficult to bring those people back. Not because credit unions are really awesome, just because people really don’t like switching accounts—BofA has to spend a lot of energy to bring in a new account from another institution and doesn’t actually care if it brings it in from lower east side people’s or from Citibank (money is fungible).
Lastly, and perhaps most important, the primary checking account is the primary point of entry to our financial lives. Big banks like the free money you give them on deposits, but equally much they like the chance to have your credit card business, your mortgage and car loan business, your insurance business, your investing business and possibly your retirement and college savings business. All that ancillary business can be (and very much is) statistically quantified on a per-account average basis. All those cross-sells add up over time to big numbers.
I’m excited about the meeting from yesterday and I’m trying to help coordinate next steps. As before, the caliber of the people and the conversation was inspiring – people from all over the place, with so many different background and perspectives. Really exciting! At the same time, we were left with a bunch of open questions and issues; we could really use your help!
The group was quite large, on the order of 55 or 60 people, and after some deliberation we split into two groups: Carne’s group went to the other side of the room to discuss a true alternative banking system, and quite a few of us stayed on the first side of the room to discuss problems with our current system and incremental (but not minor) changes to improve it.
We discussed, (not in this order) how the financial system can be divided into four parts, according to FogOfWar:
- Traditional Banking: taking deposits, checking accounts, CDs, making loans/mortgages, credit cards, debit cards, banks, Thrifts, Credit Unions, Payday Lenders
- Investment Funds: collecting money from investors and making investment in the capital markets: 401(k), 403(b), IRAs, pension funds, mutual funds, index funds, hedge funds (also money market funds with a big asterisk)
- Investment Banking: traditionally two categories: I-banking (giving advice to companies on raising money in the capital markets, M&A, etc), and broker/dealer activities (making trades on behalf of clients and market making) including derivatives
- Insurance: pooling risks amongst large statistical pools to spread large losses into smaller, manageable premiums. Home insurance, life insurance, car insurance, etc.
We also talked about the power grid, how the capital markets and the players in the capital markets control the small businesses which leads to what we see today, with people feeling disempowered from their own money and their own business. We talked about the shadow banking system, politics and the power of lobbyists, and about how we might be able to effect change on the state level by trying to influence where pensions are being invested. We also heard from a fantastic woman who helped form the Dodd-Frank bill and is an expert on the FDIC and various other regulators and understands where their vested interests lie (this line of thought makes me want to write a post on an idea my friend has of paying SEC lawyers on commission, in reaction to the Citigroup – SEC debacle).
[We will write the minutes of the meeting soon, hopefully; the above is just my recollection. Please comment if I've missed something.]
It was all very stimulating, and made me want to draw a bunch of visuals to help with the (very large) educational background required to really tackle these problems. Visuals like this or this would also help me prepare for my upcoming Open Forum this Friday.
At the end, Carne invited us to form a separate group from Alternative Banking, which makes sense as we are on the one hand quite large for his office and on the other hand interested in improving the current system more than a completely alternative one. That leaves us with a bunch of things to do though:
- Formally create a new working group through #OWS
- Choose a name
- Choose a representative to go to the #OWS meetings and explain our activities
- Find a place to meet
- Find a way to communicate
Also from FogOfWar; see also this post where FoW discusses “Why Credit Unions?”:
This is a guest post by FogOfWar. See also the “Credit Unions in NYC flyer“.
Moving your money from a megabank to a credit union or community development bank makes for a good sound bite, but is it really an action that can have an impact in the right direction? I think so (although the matter is not free from doubt), and thought it would be worthwhile to lay out thoughts on the subject as a follow-up to the “What is a Credit Union?” post.
I’ll focus this discussion on credit unions, rather than community development banks or smaller locally owned banks as that’s where my knowledge lies.
Credit Unions are not Too Big To Fail
A quick google search indicates the largest credit union in America is Navy FCU with $34Bn in assets. (Internationally, it may be the Dutch Rabobank, although I’ve never gotten a good handle on whether Rabo is still a cooperative or not.) Individual credit unions fail regularly, just like individual banks, but there isn’t one CU that’s in danger of crashing the entire financial system in the same manner as BAC, C, JPM or WF.
During the 2008 crisis and aftermath the only credit unions that got a federal bailout were the corporate credit unions. There’s a good article about that here. The corporate credit unions definitely got into trouble buying structured products and I don’t want to gloss this fact over. There’s a split between the retail credit unions, who are going to have to pay for these mistakes, and the corporate credit unions which made the bad investments as well as the NCUA, who was asleep at the switch when the corporate CUs were making that investment. Also worth noting that the NCUA has filed suit against the banks for selling crap product to the corporate CUs.
The corporate credit union bailout was small proportionate to the overall credit union size. $30 bn of gov’t backed bonds equates to $270 bn proportionate for banks—less than ½ of the official state of TARP and a small fraction of the overall size of the taxpayer support given to the large (non-CU) banks indirectly through TAF, TSLF, PDFC, TARP, TALF, etc.,… (see this for an explanation of term).
All in all, I’d say CUs come out somewhat ahead by this measure.
Volker Rule/Glass Steagall
Unlike commercial banks, credit unions never revoked the Glass Steagall act and remained segmented as “pure” traditional banking entities. This means that CUs don’t mingle traditional banking (deposits, checking accounts, loans to customers), with investment banking activities (IPOs, M&A advisory) or derivatives trading or sales desks, let alone prop desk frontrunning of client information.
There’s a lot of ink out there on Volker and Glass Steagall. In short, it seems like a good idea, if not sufficient as a complete solution, to keep traditional banking segmented from investment banking and proprietary trading. The core point is that trading risk should not infect the core banking business putting it (and the taxpayer standing behind the federal deposit insurance) at risk. Very good recent example of this here.
CUs come out dramatically ahead on this measure.
Lobbying—just as bad?
There was a time I can remember when CUNA and NAFCU just went up to the hill to remind Congress that they existed and defend against the ABA’s occasional attempts to change the tax status of CUs. It seems times have, rather unfortunately, changed.
Regrettably, no advantage to Credit Unions here.
Part 2 will talk about investments in local communities, democratic control (the good, the bad and the ugly) and securitization/mortgage transfers.
This is a guest post by FogOfWar:
There’s been a call (associated with the “Occupy Wall Street” movement) for consumers to move their bank accounts from large TBTF banks into local credit unions. Nov. 5th is the target date. This is a similar message to one Arianna Huffington gave a few years back.
The above inspire a quick post on the subject of “What is a Credit Union and why is it different from a mega-bank?”
What can I do at a Credit Union?
Pretty much all the same stuff you can do at a bank. They have checking accounts (although they call them “share accounts”, it’s the same thing), savings accounts, CDs, credit cards, debit cards, auto loans, mortgages, lines of credit. All of the stuff a normal bank offers. Some of the smaller CUs (just like some of the smaller banks) don’t offer everything, but it’s substantially the same.
The only difference in services is that you generally can’t make investments (stocks, bonds, etc.) through your credit union. IMHO, this isn’t much of a downside, as the brokers associated with major banks generally aren’t as good as the standalone retail brokers (like Fidelity, Vanguard, TIAA-CREF, etc.)
The other difference is that you can’t just walk off the street and open a credit union account; you have to be eligible in their “field of membership” (more on that below).
How are the rates?
It varies, but in general you’ll get better rates at a credit union than at a bank (certainly than at a megabank). An easy way to check is to look at your checking account statement now (or call your bank) and see what the APY is (Annual Percentage Yield), and then check the credit union to see the APY on their basic share draft account.
There are credit unions with sucky rates out there (often the really small ones—they have a lot of operational costs), but I’ve usually found that I get better rates on savings and better rates on loans from a CU.
What’s the real difference?
The real difference is ownership. Banks are owned by outside investors—usually people who own the stock for a big bank—and they need to pay those owners a profit in the form of dividends (or share repurchases which are economically equivalent). Credit Unions are owned by their depositors (called “members”). That’s why the “checking account” is called a “share account”—you own a “share” (another name for stock) in the credit union. The board of directors is elected at an annual meeting, one person, one vote. BoD members are not paid for serving on the board.
This also explains why Credit Unions can offer better rates: they don’t have to pay a profit to their stockholders, instead that “profit” is returned back to you, the owners. Note that CUs are also exempt from corporate tax, and this makes some difference, but IMHO, it’s the absence of needing to pay dividends that really gives CUs the ability to pay better rates to their customer/owners.
Am I supporting the community when I deposit with a Credit Union?
There’s a good argument that yes, you are. Credit Union’s make loans back to the people in their membership. So the money you put on deposit is being leant back to people in the community of the credit union. Credit unions don’t trade derivatives or run speculative investment books. By and large they make loans to members and then hold on to those loans (i.e., they don’t “securitize” those loans out to other people).
For those who know the movie It’s a Wonderful Life, it’s a pretty good description of how a credit union can work within a community. Technically the movie describes a Thrift (somewhat similar), but it could just as easily been about a CU.
Who is eligible to join a Credit Union?
Each credit union has a “field of membership”. Some are employment-based, so you are eligible if you or an immediate family member works at a certain place. For example, NBC has a credit union for its NY employees. Note that NBC does not own the credit union, the CU is owned by its members (one person, one vote), it’s just that the credit union is there for NBC employees.
Some credit unions are associational. A good example of this is church credit unions (which are pretty common). There are also Community Development Credit Unions, which are set in lower-income areas and anyone in the area can join (Lower East Side People’s FCU is a good example).
There are a number of educational credit unions—these vary, but often faculty, students, employees and alumni are all eligible to join. Again, note that the university does not own the credit union—the CU is owned by the members—it’s just the prerequisite to join that particular credit union.
How do I find a credit union I can join?
There are some “credit union locators” online, but the one’s I’ve seen kinda suck. I’d say try a Google search. So if you live in Boise, I’d search for “Boise Credit Unions”. You can also try www.ncua.gov, which will give you all the credit unions in a particular area. I tend to like the larger credit unions (at least $20m in assets), as they tend to have hit a size where they’re operationally more together (making mistakes on your money is no fun).
You can also ask at the HR department at your job “hey, does working here make me eligible to join a credit union?” If they say “no”, you can say “why not? Is anyone working on having us join up with a good CU?”
Are there any downsides?
There aren’t a lot of ATMs, so every time you need cash & use a bank ATM, you’ll be paying that ridiculous fee. This can definitely suck, although one way around it is to have a debit card and take cash back all the time when you buy stuff (there’s no charge for taking cash back on a debit card—it’s just a question of whether the merchant lets you do it, and most supermarkets and drug stores do).
Also, this makes depositing paper checks a pain in the ass: you actually have to put them in an envelope and mail them to the credit union. How did society function before we had the internet?
Also, if it’s a work credit union, you can check to see if they have a branch at your office—this can make things a lot easier.
Anyway, that’s a quick rundown. Sure I missed something, but I’ll drop it in the comments if I remember later.
Here’s a flyer I made for OWS which contains information on a few credit unions in New York City:
This is a guest post by FogOfWar.
I was originally going to lead with a tongue-in-cheek comment (later in the post now), but then the NYPD did something colossally stupid. If you haven’t seen it, here’s the video from this last weekend. It pretty much speaks for itself.
There’s a lot to be said about freedom of expression and police overreaction. I’ve been to see the protests a number of times, and they’ve never been violent and in fact seem pretty well trained in the confines of freedom of assembly in the US legal system. Using mace against an imminent threat of violence is OK for the police, but the video seems to show no threatening moves made at all (and it runs for a good period before the police attack so it wasn’t edited out).
I’d suggest the NYPD be shown the following video (taken from the protests in Greece) to demonstrate when things reach a level where force might be an appropriate response. Note that the crowd is attacking with sticks, Molotov cocktails and a fucking bowling ball. In contrast, the NYPD appears to be pepper spraying people for just holding signs and walking down the street. What the fuck?
There are maybe a few hundred people consistently protesting at “Occupy Wall Street” for about 10 days now. It’s got a definite crunchy vibe to the center. Drumming and Mohawks are mandatory:
But also a (growing?) contingent of more mainstream participants like this one:
Here’s a crowd shot for scale:
And some people painting signs:
And then of course, there’s the dreaded “consensus circle”:
It’s hard to tell what they really want to happen—this was up at one of the information booths (but then down the next time I went):
Misspelled “derivatives”, and there are some things on that list that are spot on and then others that are just weird and irrelevant (DTC? Really?). I don’t think you can hold that against them though. I work in the industry, and I’ve been spending the last three years thinking about this stuff and I still find it confusing and hard to come up with a cohesive plan of what I think should be done. At least these people are doing something, even if it’s a bit incoherent at times.
I have to end with my all time favorite sign from the protest. Someone was looking for good cardboard and inadvertently came up with the following:
“Delicious pizza to pay off the taxpayers”. Now that’s a slogan I think we can all rally behind!
FogOfWar kindly wrote a guest post for me while I was on vacation:
There’s an economic crisis going on around us, and periodically one hears people suggesting that we go back to the gold standard. It’s a pretty complicated issue, and I don’t really have an answer to the “gold standard debate”–just probing questions and a lingering feeling that the chattering class has been dismissive when they should be seriously inquisitive. I think this dismissiveness is driven by the fact that Ron Paul is the leading political proponent of the gold standard and competing currencies, and he’s (1) a traditional conservative libertarian (a bit in the Goldwater vein); and (2) a bit of a wingnut.
Aristotle would be ashamed— the validity of an argument does not depend upon the person making the argument, but upon whether the ideas contained are valid or invalid. Andrew Sullivan recently linked to this article by Barry Eichengreen, claiming that it’s “a lucid explanation of why calls to go back to the gold standard are so misguided.” In fact, it’s a fairly serious examination of the gold standard (ultimately coming down “nay”), which is a welcome relief from the flippant and arrogant dismissiveness one usually sees from economic pundits.
As with many edited articles, I recommend skipping the first page and a half (begin from the paragraph starting “For this libertarian infatuation with the gold standard…”). Here’s how I think the article should have begun:
[T]he period leading up to the 2008 crisis displayed a number of specific characteristics associated with the Austrian theory of the business cycle. The engine of instability, according to members of the Austrian School, is the procyclical behavior of the banking system. In boom times, exuberant bankers aggressively expand their balance sheets, more so when an accommodating central bank, unrestrained by the disciplines of the gold standard, funds their investments at low cost. Their excessive credit creation encourages reckless consumption and investment, fueling inflation and asset-price bubbles. It distorts the makeup of spending toward interest-rate-sensitive items like housing.
But the longer the asset-price inflation in question is allowed to run, the more likely it becomes that the stock of sound investment projects is depleted and that significant amounts of finance come to be allocated in unsound ways. At some point, inevitably, those unsound investments are revealed as such. Euphoria then gives way to panic. Leveraging gives way to deleveraging. The entire financial edifice comes crashing down.
This schema bears more than a passing to the events of the last two decades.
First, I would reword that last sentence as follows: This schema bear a striking resemblance to the events of the last two decades. Moreover, I would add, in light of this data, one might ask not why fringe candidate Ron Paul is calling for examination of a return to the gold standard, but rather why this view is considered to be on the fringe rather than at the center of debate. There are a number of reasons to believe that a return to the gold standard might not have the desired effect, although that certainly begs the question of what can be done to prevent future crisis on the order of 2008.
I’d place myself in the camp of “not convinced that the gold standard is the answer, but think it would be really hard to fuck up the economy as bad as the Fed did over the last 20 years even if you were trying, so maybe it’s an idea that deserves some real thought.”
Here’s another key paragraph:
Society, in its wisdom, has concluded that inflicting intense pain upon innocent bystanders through a long period of high unemployment [by allowing bubbles to work themselves out as Austrians advocate] is not the best way of discouraging irrational exuberance in financial markets. Nor is precipitating a depression the most expeditious way of cleansing bank and corporate balance sheets. Better is to stabilize the level of economic activity and encourage the strong expansion of the economy. This enables banks and firms to grow out from under their bad debts. In this way, the mistaken investments of the past eventually become inconsequential. While there may indeed be a problem of moral hazard, it is best left for the future, when it can be addressed by imposing more rigorous regulatory restraints on the banking and financial systems.
This gets to the crux of Eichengreen’s argument, but consider the following points:
- The “help” proposed by Keynsians in fact might make things worse in the long term (not out of malice, but the road to hell is paved with good intentions) by dragging out the inevitable consequences of misallocation during the bubble. In essence, this is a ‘rip the band-aid’ off argument. I think I’ve seen some historical analysis that the total damage done from a bank-solvency driven recession is, in fact, worse over time if extended rather than allowing banks to fail and recapitalize (Sweden vs. Japan).
- “… nor is precipitating a depression…” It’s taken as an article of faith that we would have been in a depression if not for the stimulus package, but I’m skeptical. This is and will always be a theoretical “what if” analysis, conducted by economists who have a cognitive bias in favor of a certain answer (and, for those working in government, a President who needs to juke the stats to get reelected).
- “While there may indeed be a problem of moral hazard it is best left for the future, when it can be addressed by imposing more rigorous regulatory restraints on the banking and financial system.” Whaaaaaaaaat? This is where Keynesians lose me. The sentence is so hopelessly naïve that it undermines the entire argument. Take your nose out of your input-driven models for a minute and take a look around and ask yourself how good a track record bank regulators have at imposing “more rigorous regulatory restraints” during boom times; major new regulatory changes only have political will during a crisis (Securities Act of ’33, Exchange Act of ’34, Glass-Steagall in ’34). I’m not going to argue the relative benefits of economic models when the theory is premised on a factual event that’s very likely not going to happen.
Here’s a paragraph I liked:
Bank lending was strongly procyclical in the late nineteenth and early twentieth centuries, gold convertibility or not. There were repeated booms and busts, not infrequently culminating in financial crises. Indeed, such crises were especially prevalent in the United States, which was not only on the gold standard but didn’t yet have a central bank to organize bailouts.
The problem, then as now, was the intrinsic instability of fractional-reserve banking.
This is a really good point; I don’t have an answer and it ties in to a lot of deep questions about the structure of the banking system and “what is money”. I do like that it’s being discussed, and I’d love to hear views (educated and layman alike) on “so if the gold standard won’t work and the Fed fucked things up so bad, what do you suggest?”
Lastly, here’s the end of the piece:
For a solution to this instability, Hayek himself ultimately looked not to the gold standard but to the rise of private monies that might compete with the government’s own. Private issuers, he argued, would have an interest in keeping the purchasing power of their monies stable, for otherwise there would be no market for them. The central bank would then have no option but to do likewise, since private parties now had alternatives guaranteed to hold their value.
Abstract and idealistic, one might say. On the other hand, maybe the Tea Party should look for monetary salvation not to the gold standard but to private monies like Bitcoin.
I don’t have an answer to the many questions raised here, but they’ve been on my mind a lot. Any thoughts?
I’m back from vacation, and the sweet smell of blog has been calling to me. Big time. I’m too tired from Long Island Expressway driving to make a real post now, but I have a few things to throw your way tonight:
First, I’m completely loving all of the wonderful comments I continue to receive from you, my wonderful readers. I’m particularly impressed with the accounting explanation on my recent post about the IASP and what “level 3″ assets are. Here is a link to the awesome comments, which has really turned into a conversation between sometimes guest blogger FogOfWar and real-life accountant GMHurley who knows his shit. Very cool and educational.
Second, my friend and R programmer Daniel Krasner has finally buckled and started a blog of his very own, here. It’s a resource for data miners, R or python programmers, people working or wanting to work at start-ups, and thoughtful entrepreneurs. In his most recent post he considers how smart people have crappy ideas and how to focus on developing good ones.
Finally, over vacation I’ve been reading anarchist David Graeber‘s new book about debt, and readers, I think I’m in love. In a purely intellectual and/or spiritual way, of course, but man. That guy can really rile me up. I’ll write more about his book soon.
This is a guest post by FogOfWar
In Biblical style, Elizabeth Warren (EW) was not nominated to head the CFPB (Consumer Financial Protection Bureau). Having spearheaded the movement to create the institution, pushed to make it part of the otherwise-generally-useless* Dodd Frank “Financial Reform” Bill, and spent the better part of the last two years staffing the actual CFPB and moving it into gear, she has now been deemed too controversial by what passes for a President these days.
One of my favorite EW quotes: “My first choice is a strong consumer agency. My second choice is no agency at all and plenty of blood and teeth left on the floor.” This still remains to be seen, as opposition to the CPFB (and filibuster threats to any appointment to head the Bureau) remains in the face of nominee Richard Cordray. In fact, if one were inclined to be an Obama apologist (I gave up apologizing for Obama right about here), one might view the Warren-Cordray switch as a potentially brilliant tactical maneuver, with the emphasis on “potentially”. If the opposition to the CPFB took its persona in EW, then sidestepping her personally to get the agency up and running would be worthwhile, particularly as Cordray seems at least as assertively pro-consumer as EW (a bank lobbyist described him as “Elizabeth Warren without the charm”).
Barney Frank believes gender bias played a role. Maybe yes, maybe no and the Cordray confirmation will give some evidence to that question. I suspect the Republican opposition isn’t stupid and knows that Cordray will run a good agency. If that’s right then passing over EW doesn’t really serve any purpose.
Hard to tell what a public figure is really like, but my sense is EW doesn’t have any ego attached to running the agency personally. And what she does next is really up to her, I mean who really cares what we think she should do?
Wait—this is a blog! Our Raison d’être is practically making suggestions that no one will listen to, so let’s go…
1. Run for Congress
The biggest idea floated around. Yves Smith thinks it’s a terrible idea. I’m not entirely convinced—there are many ways to make a difference in this world, and being one minority member of a large and powerful body, and thus moving the body incrementally in the right direction can be a very good thing.
Two questions though: can she win (a few early stage polls seemed to indicate no, but do early stage polls really have much predictive value on final election results? Cathy? Fivethirtyeight?), and on which party platform would she run (I vote for running as an Independent)? Any thoughts from the ground from our MA-registered voters?
2. The “Al Gore” option
EW could continue to advocate, lecture and write outside of political office. She’s good television and would be free to speak without the gag order of elected office. Definitely something to be said for this option. Just realized pulling links for this post that EW was the person from the movie “Maxed Out”. Part of me thinks “damn that was effective and she should do more of that because it was so effective” and part of me thinks “wait, that movie came out in 2006 and no one listened and no one will listen”, and then the other part goes “but it can happen—you’ve actually seen social perceptions change in the wake of Al Gore (and yes, lots and lots of other people, but sparks do matter) with real and deep impacts.”
3. The “Colin Powell” option
Y’now, being in the public light kinda sucks ass. Colin Powell passed up a run for President, and largely retired to private life, and doesn’t seem to have any complaints about it. One legitimate option is to say “I did my part, you guys fight the good fight & I’m going to hang out with my grandkids on the beach.”
Any other suggestions?
*-Paul Volker deserves a parallel post of equal length for pushing the Volker Rule through this legislation and similarly receiving the thanks of being sidelined by the TBTF bank-capital-must-increase-even-if-the-peasants-have-to-eat-cake crowd.
FogOfWar and I have compiled a short list of weekend reading for you that you may enjoy:
- What’s the right way to think about China’s economy?
- Is Japan’s “lost decades” a media myth?
- Can I hear a FUCK YEAH for Elizabeth Warren? I feel a follow-up post coming on how much she rocks.
- Get ready to be depressed by how few natural resources there really are.
- This essay really pins Robert Rubin to the wall in a totally awesome way. I will add more in another post.
- The Republicans are holding the entire nation for ransom over the possibility of default. Is it all political posturing? Or is it for the sake of the insanely shitty idea of a tax repatriation holiday? Here’s another article about this crappy idea; when Bloomberg makes you out as a selfish bastard then you know you’re a truly selfish bastard. I’m convinced that the politicians (and union leaders) arguing for this are just counting on the average person not understanding the actual issues well enough to know how evil it is (and how much kickback they must be getting). Another example of asymmetric information that really gets my goat.
- I think it’s fair to say we all need a little more of this in our lives.
This is a co-post with FogOfWar.
Here’s an interesting article about how many board of directors for S&P500 companies consist entirely of men. Turns out it’s 47. Well, but we’d expect there to be some number of boards (out of 500) which consist entirely of men even if half of the overall set of board members are women. So the natural question arises, what is the most likely actual proportion of women given this number 47 out of 500?
In fact we know that many people are on multiple boards but for the sake of this discussion let’s assume that there’s a line of board seekers standing outside waiting to get in, and that we will randomly distribute them to boards as they walk inside, and we are wondering how many of them are women given that we end up with 47 all-men boards out of 500. Also, let’s assume there are 8 slots per board, which is of course a guess but we can see how robust that guess is by changing it at the end.
By the way, I can think of two arguments as to why the simplification that nobody is on multiple boards argument might skew the results. On the one hand, we all know it’s an old boys network so there are a bunch of connections that a few select men enjoy which puts them on a bunch of boards, which probably means the average number of boards that a man is on, who is on at least one board, is pretty large. On the other hand, it’s also well-known that, in order to seem like you’re diverse and modern, companies are trying to get at least a token woman on their board, and for some reason consider the task of finding a qualified woman really difficult. Thus I imagine it’s quite likely that once a woman has been invited to be on a board, and she’s magically dubbed “qualified,” then approximately 200 other boards will immediately invite that same woman to be on their board (“Oh my god, they’ve actually found a qualified woman!”). In other words I imagine that the average number of boards a given woman is on, assuming she’s on one, is probably even higher than for men, so our simplifying assumptions will in the end be overestimating the number of women on boards. But this is just a guess.
Now that I’ve written that argument down, I realize another reason our calculation below will be overestimating women is this concept of tokenism- once a board has one woman they may think their job is done, so to speak, in the diversity department. I’m wishing I could really get my hands on the sizes and composition of each board and see how many of them have exactly one woman (and compare that to what you’d expect with random placement). This could potentially prove (in the sense of providing statistically significant evidence for) a culture of tokenism. If anyone reading this knows how to get their hands on that data, please write!
Now to the calculation. Assuming, once more, that each board member is on exactly one board and that there are 8 people (randomly distributed) per board, what is the most likely percentage of overall women given that we are seeing 47 all-male boards out of 500? This boils down to a biased coin problem (with the two sides labeld “F” and “M” for female and male) where we are looking for the bias. For each board we flip the coin 8 times and see how many “F”s we get and how many “M”s we get and that gives us our board.
First, what would the expected number of all-male boards be if the coin is unbiased? Since expectation is additive and we are modeling the boards as independent, we just need to figure out the probability that one board is all-male and multiply by 500. But for an unbiased coin that boils down to (1/2)^8 = 0.39%, so after multiplying by 500 we get 1.95, in other words we’d expect 2 all-male boards. So the numbers are definitely telling us that we should not be expecting 50% women. What is the most likely number of women then? In this case we work backwards: we know the answer is 47, so divide that by 500 to get 0.094, and now find the probability p of the biased coin landing on F so that all-maleness has probability 0.094. This is another way of saying that (1-p)^8 = 0.094, or that 1-p is 0.744, the eighth root of 0.094. So our best guess is p = 25.6%. Here’s a table with other numbers depending on the assumed size of the boards:
If anyone reading this has a good sense of the distribution of the size of boards for the S&P500, please write or comment, so I can improve our estimates.
FogOfWar has kindly offered the background below on the OTC market and an analogy with the bond market, inspired by this recent article describing the latest round of watering-down of derivatives regulations. The bottomline for me is that whenever you see people using the phrases “needlessly tying up capital that would otherwise be used to create jobs and grow the economy,” “would damage America,” or especially an emphasis on “U.S. firms,” it probably means they are trying to engender a local nationalistic fervor to camouflage a very basic greedy instinct. Here’s the background:
OTC derivatives, by definition, are not traded on an open exchange, but are entered into between two parties in a private transaction. We can use JPMorgan and United Airlines as a running example. United has some risk it has that it wants to hedge. Or maybe some banker has convinced United that they should be hedging a risk that they didn’t know they had until the banker showed up to tell them about it.
For some simple things, United could just go to an exchange (a stock market, but not limited to stocks). So, for example, United could buy a future on oil prices to lock in its cost of oil over the next year. The problem is that there actually aren’t that many different contracts traded on exchanges, and the risks don’t usually fit neatly into the contracts that are there to buy. There’s a whole chapter on how to get a best-possible hedge in this situation in Derivatives 101 (and probably a whole class after that and people who make a living doing it in real life). So you could ‘dirty hedge’ (do an imperfect hedge), or you could go to JPMorgan and ask for an exact hedge.
JPMorgan is happy to give you the hedge and either delta hedge out the risk and/or match against offsetting risk they have on their books (or even use the opportunity to take a speculative position they were thinking about anyway). The key point is that JPMorgan quotes you a price, but it isn’t a price on a transparent market–it’s just whatever price they think you’ll pay. If United is smart, they’ll farm out the hedging for a bunch of bids from different banks and try to get the best price, but they’ll never actually know if they got ripped off or not, because they don’t see how much it actually costs JPMorgan to cover that risk internally.
There are some areas where the hedges are common enough and enough people offer them OTC that the profit margins are pretty low (simple interest rate swaps are a good example). However, there is also a lot of money to be made from ripping off dumb customers like United when they wander outside of these areas into other areas where they get crap pricing. This is how derivatives trading desks make their bonus.
And that’s why JPMorgan cares about this legislation. They want to keep ripping off the United Airlines of the world, and if the government makes United go to an actual exchange with open prices, there’ll be competition and the profit margin will shrink. Adding a margin requirement is a bit more wonky, but at the end JPMorgan doesn’t like it because it might drive United to an exchange and away from an OTC derivatives trade with JPMorgan.
It may go without saying, but Jamie Dimon, JPMorgan, GS, BofA, etc. do not give a shit whatsoever about United, Shell, Alcoa, or any other corporate. They just want the profits from their OTC derivatives trading desk to keep rolling in–profits that come off the backs of their customers–and they’ll say whatever garbage they think Congress and the Agencies will swallow to keep the trades rolling.
Felix Salmon wrote all this up a ways back when Barney Frank was caving to the investment banks and putting the end-user exception into Dodd-Frank to begin with. That was around the time my opinion of Barney Frank went from “rock star” to “big fat pussy”. The history (Salmon honed in on this) tells the story in the world of bond trading–what follows is a very general overview from memory:
Once upon a time, if a corporate wanted to buy bonds, they went to their investment bank. They didn’t see exchange-listed prices, and maybe they got a few quotes to try to get good pricing, but at the end of the day, much like the OTC derivatives market described above, they either had to take a price offered by a bank or not.
Then the government came in and said bonds should be traded on open exchanges (with bid and ask prices available for participants to see). The banks said it would destroy the market, they said the corporates would suffer, they said the markets would move overseas, they probably said it would “hurt America” to do this. All of exactly the same horse shit Jamie Dimon and the banks are saying now about moving derivatives to exchanges.
Well, bond trading got moved to exchanges and exactly none of the things the banks warned about actually happened. Instead, the thing all of the banks were secretly fearing did happen: customers got good execution at lower prices and bank profit margins in the bond business slowly collapsed over time to a fraction of what they were back in the OTC-bond days. Go figure.
I’m delighted to have my first guest blogger!
“FogOfWar” (named after the documentary) is someone I’ve known for some time who comes from a mathy background, with a detour through accounting, tax & law winding up in banking (not as a quant). FOW & I have jammed finance policy many times and we tend to agree on a lot of things–I hope it will bring a “what really happens on the ground” perspective to thoughts about modeling as well as some useful insight into some of the technical rules (like accounting) that can matter a lot. Here’s his post:
The NYT ran an article on tax repatriation yesterday. Often, as someone in the industry, these articles can be infuriating for their lack of accuracy, misdirection or imprecision. In this case, however, my hat is off to the NYT for some damn fine traditional journalism. They’ve taken a fairly complicated issue (one I happen to know more than a little about), understood the core points in play and laid them out in an interesting, informative and readable article. Yes, it really is as bad as they make it out to be.
The “repatriation holiday” makes my vague-and-unofficial list of “10 worst tax ideas out there”. Unfortunately, every bad idea ultimately finds its way to Congress & this one is back for seconds. The NYT article lays out the case well, but here’s are two additional reasons on why this idea seems to have lasting appeal, which come in the form of catchy phrases:
“The money is trapped overseas”
We all know what “money”, “trapped” and “overseas” mean, and we can form an immediate idea of how this would be a bad thing, and how freeing that trapped money and bringing it back to the US would be good for the economy. Thus we get the inference: “The money is trapped overseas, and if we could bring it back it would create jobs.” Unfortunately, the second half of the second sentence is completely false. A more accurate sentence would be “The money is trapped overseas, and if we could bring it back corporations would pay slightly larger dividends this year, but not create any jobs or invest in any US plants that weren’t already in their strategic planning.” Doesn’t have quite the same ring to it…
Not nearly as catchy as the first phrase, and uses two words for which most people don’t have a quick definition (at least not when paired together). Relevant, however, and a quick wonkish example with illustrate the thrust:
Let’s take a hypothetical US company, called (just to pick a name at random) “Lehman Holdings”. Lehman Holdings has assets claimed at $900 on its books and debt of $800. Lehman Holdings also owns 100% of another company, who we’ll call “Lehman UK”, which has assets claimed at $100 on its books and no debt. So, at first blush, one might think that Lehman has a 20% equity buffer: $1,000 of assets and $800 of debt (or a 4:1 debt ratio). This is nice easy math, which happens to be wrong in practice. The hidden assumption is that the people who loaned Lehman Holdings $800 can get access to all $1,000 of assets. They certainly can access the $900 of assets (or whatever they’re worth by the time bankruptcy hits), but the UK subsidiary is subject to UK bankruptcy rules, not US bankruptcy rules. Thus, when US creditors try to pull the $100 of assets out of the UK, they may find it’s more difficult than they anticipated (international bankruptcy gets sticky fast). Perhaps they could sell the stock of the subsidiary, but in real life that would involve untangling a whole host of interconnected contractual arrangements between Lehman Holdings and Lehman UK, which could take years. Not to mention the fact that to pull the $100 back, they’d have to pay ($35) in US taxes, so really there may be only $65 net to work with (other facts could zero out the tax bill). Probably in the end they can get the $100 of assets ($65 post taxes), but it can mean a significant time delay, and when you’re dealing with an imminent default, delay in action can translate to financial loss.
So, for all of these reasons, having $100 in a subsidiary isn’t worth quite the same thing as having $100 in the parent company. The fancy name for this is “structural subordination”, a term used by the credit rating agencies. So, if you’re a tech or pharma company with many billions of USD in your tax-shelter Irish/Dutch/Singapore subsidiaries, this can become a problem for your credit rating (which can impact your cost of borrowing). It’s probably not the primary reason for the lobbying efforts on tax repatriation, but it is definitely a factor, as the ($35) in tax is what’s preventing Holdings in the above example from pulling the $100 out of UK.