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Alt Banking’s opinion piece about too-big-to-fail was published yesterday in FT Alphaville.

Woohoo!

I suffer from a lack of imagination.

I have been so inculcated in the necessary complexity of finance and banking, that I’ve lost touch with some basic, simple realities. I have been brainwashed by the half-assed and lame attempts at regulation by the elements of the Dodd-Frank bill, losing myself in the details of the Volcker Rule for example,  and I’ve lost the forest for the trees. I’m spending my time furiously figuring out how to allow banks to have all of their goodies (CDS, derivatives, repos, etc.), but not let them eat so much they get themselves (and us) sick.

Sometimes you need imagination to be boring.

Luckily, there was an op-ed article in the New York Times yesterday which served as a wake-up call. The article is called “Bring Back Boring Banks” and it’s written by Amar Bhide. I kind of feel like quoting the entire article, since it’s all so good, but I’ll make do with this part (emphasis mine):

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

This is what we need to do. Thank you Amar Bhide, for having the clarity to say it.

Footnoted needs your vote on the most outrageous handout to executives in 2011. Here are the candidates:

• MF Global agreeing to pay then-CEO Jon Corzine a $1.5 million retention bonus months before the company imploded.
• Clear Channel Media Holdings paying $3 million a year to a company controlled by Bob Pittman so that Pittman can fly in a Mystere Falcon 900 that Pittman owns for both business and personal use.
• Leo Apotheker collecting around $25 million in severance and other benefits from Hewlett-Packard, including relocation back to France or Belgium after less than a year on the job.
• IBM’s outgoing CEO Samuel Palmisano becoming eligible for as much as $170 million in retirement benefits, just by waiting until he was past 60 to announce his retirement.
• Nabors Industries agreeing to pay outgoing CEO Eugene Isenberg $100 million in severance on his way out the door.

Vote here.

Also, please read a letter to Jamie Dimon that I enjoyed, from the Reformed Broker blog. From the letter:

So please, do us all a favor and come to the realization that the loathing you feel from your fellow Americans has nothing to do with your “success” or your “wealth” and it has everything to do with the fact that your wealth and success have come at a cost to the rest of us.  No one wants your money or opportunities, what they want is the same chance that their parents had to attain these things for themselves.  You are viewed, and rightfully so, as part of the machine that has removed this chance for many – and that is what they hate.

My friend Jordan Ellenberg has a really excellent blog post over at Quomodocumque, which is one of my favorite blogs in that it combines hard-core math nerdiness with funny observations about how much the Baltimore Orioles stink (among other things).

In his post he talks about an anti-#OWS article called “The Occupy movement has it all wrong”, by Larry Kaufman, recently published in a Madison, WI newspaper called Isthmus.

Specifically, in that article, Kaufman tries to use the old saying “a rising tide lifts all boats” to argue that most people (in fact, 81% of them) are better off than their parents were. What’s awesome about Jordan is that he goes to the source, a Scott Winship article, and susses out the extent to which that figure is true. Turns out it’s kind of true with a certain way of weighting numbers depending on how many kids there are in the family and because so many women have started working in the past 40 years. Jordan’s conclusion:

So yes:  almost all present adults have more money than their parents did.  And how did they accomplish this?  By having one or two kids instead of three or four, and by sending both parents to work outside the home.  Now it can’t be denied that a society in which most familes have two income-earning parents, and the business-hours care of young children is outsourced to daycare and preschool, is more productive from the economic point of view.   And I, who grew up with a single sibling and two working parents and went to plenty of preschool, find it downright wholesome.  But it is not the kind of development political conservatives typically celebrate.

Another thing that Jordan tears apart from the article is that the original source specifically pointed out stuff that Kaufman seems to have missed, given his political agenda:

Winship also emphasizes the finding that children in Canada and Western Europe have an easier time moving out of poverty than Americans do.  This part is absent from Kaufmann’s piece.  Maybe he didn’t have the space.  Maybe it’s because a comparison with higher-tax economies would make some trouble for his confident conclusion: “the punitive redistribution policies favored by Occupy Madison will divert capital away from productive initiatives that enhance growth and earnings opportunities for all, while doing nothing to build the stable families and “bottom-up” capabilities that are particularly important for helping the poorest Americans escape poverty.”

When the Isthmus is running a more doctrinaire GOP line on poverty than the National Review, the alternative press has arrived at a very strange place indeed.

Go, Jordan!

Let’s go back to that phrase “a rising tide lifts all boats”. It was the basis of Kaufman’s argument, and as Jordan points out was a pretty weak basis, in that the lift was arguable gotten only through sacrifice. But my question is, is that a valid argument to make anyway?

Let’s examine this metaphor a bit. When we think about it positively, and imagine something like the housing bubble which elevated many people’s net worth (ignoring the people who weren’t home owners at all during that time), we can see why “a rising tide lifts all boats” is a good thing: we want the generic imaginary person to do well, and we’re all happy for them to do well.

However, if we turn that phrase around in a negative moment, it’s really not clearly a good perspective. Let’s try it: “an ebbing tide lowers all boats”. Take the example of a housing crash analogously to the above. Firstly it’s not true, since for those people who couldn’t afford housing in the bubble, a more reasonable housing market is a good thing (for some reason people keep forgetting this). Secondly, when we are thinking about lowered boats we worry about those people whose boats are lowered. Who are those people? How much have they lost? Will they be okay?

The answers are, they are the people who were barely able to own the house in the good times. They’ve lost everything. They aren’t okay.

It’s a nearly vapid phrase when you think about it, but it’s used by conservatives a lot to justify policies that only work well in good times.

I’d argue that the real question we should be asking isn’t whether we are all sailing away in boats but how much risk we take on as individuals. I will go into this further in another post, but the gist is that, instead of the unit of measurement being assumed to be dollars, I’d like to reframe the concept of economic health in terms of a unit of risk. Risk is harder to measure than dollars, and there are lots of different kinds of risk, but even so it’s a worthy exercise.

For example, in the housing boom we had people who could barely afford a house get into ridiculous mortgage contracts, with resetting usurious interest rates. They were taking on enormous amounts of risk, in this case risk of being foreclosed on and losing their home. By contrast, people who were well-off at the start of the housing boom are for the most part still well off. There was very little risk for them.

I’d like to offer up an alternative phrase which would capture the risk perspective. Something like, “we should make sure everyone’s boats are water tight and firmly moored to the pier”. Not nearly as catchy, I know. But to make for it I’m linking to this related video called I’m On a Boat. I’ve actually been looking for excuses to link to this for a while. Here’s a kind of awesome picture from the video:

At the Alternative Banking working group we are working on publicly commenting on the proposed Volcker Rule. Check out this blog post which addresses the exemption for repos. Keeping in mind that repos brought down MF Global a few weeks ago, this is a hot topic.

Here’s another hot topic, at least to me. Who has a copy of Volcker’s original 3-page letter? The published rumor has it that he wrote a 3-page letter to Obama outlining the goal of the regulation, but I can’t find it anywhere. I do have this quote from Volcker about the proposed 550 page behemoth (taken from a New York Times article):

“I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.” – Volcker

Also from the New York Times, a column of Simon Johnson’s on the Volcker rule and what it’s missing.

If anyone knows how to get their hands on the original letter, please tell me, I’d really love to see it. Maybe someone knows Volcker and can just ask him for a copy?

Here’s an internal Fed blog describing an internal Fed report which proposes that we tie banker bonuses to the CDS spread of the bank. The crux of the idea:

Under our scheme, a high or increasing CDS spread would translate into a lower cash bonus, and vice versa. For banks that do not have a liquid CDS market, the bonus could be tied to the institution’s borrowing cost as proxied by the debt spread. However, the CDS spread has the benefit of being market based, and can be chosen optimally. It is the closest analogue a bank has to a stock price—it is the market price of credit risk. If CEO deferred compensation were tied directly to the bank’s own CDS spread, bank executives would have a direct financial exposure to the bank’s underlying risk and would have an incentive to reduce risk that does not enhance the value of the enterprise.

It’s an interesting idea and I’ll think about it more. I have two concerns off the bat though. First, the blog (I didn’t read the paper) acts like CDS can be honestly taken as a proxy for likeliness to default. However in the real world everything is juiceable. So this scheme will give people more incentives to push for, among other things, fraudulent accounting to avoid looking risky. My second concern is an add-on to the first: the insiders, who benefit directly from low CDS spread, will have very direct reasons to perpetuate such accounting fraud. Somehow I’d love to see (if possible) a scheme put forth where insiders have incentives to ferret out and expose fraud.

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A beautiful post about the metamovement of which OWS is a part, by Umair Haque. A piece:

In a sense, that sentiment is the common thread behind each and every movement in the Metamovement — a sense of grievous injustice, not merely at the rich getting richer, but at the loss of human agency and sovereignty over one’s own fate that is the deeper human price of it.

He links to We Are the 99 Percent. Check it out if you haven’t already seen it.

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Interfluidity blogs about how yes, the bankers really were bailed out. Big time. Great points, here is my favorite part:

Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control.

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Next, read this Newsweek article if you’re still wondering what Mayor Bloomberg’s personal incentives are for letting OWS complain about crony capitalism and the power of lobbyists. The scariest part:

Let’s say a lobbyist for a coal company wants to squash any legislation that affects his employer’s mining operations. He logs onto BGov.com (the cost is $5,700 per year) and is automatically alerted to breaking news of a just-introduced energy bill. The data drill-down begins. BGov shows the lobbyist how similar legislation has fared, what subcommittee the new bill will face and when, who the key congressmen are, and how they have voted in the past. The lobbyist calls up information on the swing vote’s upcoming election contest: it’s competitive, and the congressman is behind in fundraising. Lists of major donors—who might be induced to contribute or, better yet, place a call to the officeholder himself—are a click away. These political pressure points and a thousand more are how lobbyists make their mark, and Bloomberg thinks BGov can deliver them faster than the competition.

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Finally, a very nice blog about the Alternative Banking group and David Graeber by Joe Sucher. Here’s an excerpt:

I know the usual naysayers will nay say until they are blue in the face about changing the so-called system. “It will never happen, never will, so let’s wait for things to settle down and go back to business as usual.” These folks, I’d venture to say, may be exhibiting a fundamental crisis of imagination.

I remember an elderly immigrant anarchist reminded me (when I was naysaying) that if you were to tell a 14^th century European serf, that some time in the next few hundred years, they’d actually have the ability to cast a vote that mattered, no doubt you’d be met with a blank stare. The thought just wouldn’t compute.

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updated: Jesse Eisenger of Propublica wrote this interesting article in DealBook, where he talks about the insiders on the Street who are frustrated by the rampant corruption. I agree with a lot he says but he clearly needs to join us at an Alternative Banking group meeting:

It’s progress that these sentiments now come regularly from people who work in finance. This is an unheralded triumph of the Occupy Wall Street movement. It’s also an opportunity to reach out to make common cause with native informants.

It’s also a failure. One notable absence in this crisis and its aftermath was a great statesman from the financial industry who would publicly embrace reform that mattered. Instead, mere months after the trillions had flowed from taxpayers and the Federal Reserve, they were back defending their prerogatives and fighting any regulations or changes to their business.

Perhaps a major reason so few in this secret confederacy speak out is that they are as flummoxed about practical solutions as the rest of us. They don’t know where to begin.

Um, there are plenty of very good places to begin. It’s a question of politics, not of solutions. Start with the very basics: enforce the rules that already exist. Give the SEC some balls. We’ll go from there. Sheesh!