Levine on Wall Street: Bailouts Past and Future
The best way to end too big to fail is not to fail
Here is a pretty sensible speech from New York Fed President William Dudley about the too big to fail problem in banking. He looks at three possible approaches: (1) a resolution mechanism to make big-bank failure less costly, (2) regulatory efforts to make big-bank failure less likely and (3) breaking up big banks altogether. He likes (1) as far as it goes, is not so into (3), and basically thinks that the focus should be on (2): finding ways to make banks safer and better capitalized, and forcing them to confront problems earlier with stress tests, careful planning, and good incentives in compensation. That seems about right to me. But it is notable that Dudley looks at too-big-to-fail banks and says, in effect: "Well, we can't make them smaller, and there's only so much we can do about making it okay for them to fail, so I guess we'd better put our efforts into not letting them fail." That is not precisely a solution to the too-big-to-fail problem.
Sometimes bailouts are good investments
Fannie Mae and Freddie Mac are basically owned by the U.S. government since their 2008 bailouts, though they have common and preferred stock holders who nurse some hope of getting their company back. But all Fannie's and Freddie's dividend payments go to the Treasury, and this December those payments will be $39 billion, leaving them within striking distance of repaying all the money Treasury gave them. This is a meaningless milestone: The bailout was never meant to be a zero-interest, pay-us-back-when-you-have-the-money sort of loan. (Pretty much nothing is meant to be that.) The bailout was risky, or at least unpleasant, and so it came with equity rights. The fact that it worked means that Treasury should get back way more than it put in.
Everyone understands this with private-sector deals -- nobody says "hey JPMorgan, you've made back the money you put into Bear Stearns, you should give Bear back to its former shareholders" -- but people sometimes get addled when it comes to governmental financing. To their surprising credit, no one in the government seems all that addled by the Frannie situation: " 'While I'm always glad when taxpayers see a return on investment, we can't forget that Fannie and Freddie wouldn't be earning one penny today without the government guaranteeing their transactions,' Republican Senator Bob Corker said in a statement."
UBS is spending $3.76 billion to buy out the Swiss National Bank's share of a fund set up in 2008 to take toxic assets off of UBS's books. (Delightfully, it's called the "StabFund.") The central bank has done well on the trade, making $1.6 billion in interest, but modestly admits that "attaining a profit was never an objective in its own right"; it was all about world-saving. The weird thing here is that laying out cash to buy (formerly) toxic assets "provides UBS with a timely boost to its capital and leverage ratios," adding 100 basis points to the core tier one capital ratio and 25 basis points to the leverage ratio. Nothing makes a bank safer like trading cash for illiquid toxic mortgage securities, apparently.
Do we come to your workplace and tell you how to fix a toilet ?
This is a story about an English plumber who thinks banking bonuses should be lower. However, "Some analysts say banking is different from other industries, including plumbing, and therefore needs different compensation arrangements." There is much to ponder here.
Not everyone is happy about the Twitter IPO
I am biased, since I used to work with the fine people at Goldman who managed Twitter's initial public offering, but I'd have to say its first day went pretty well: It priced above the range, opened up a lot but not too much, and traded pretty calmly all day, disappointing day-traders with its lack of volatility. But you should have all perspectives and one perspective is that of Fox News correspondent Charlie Gasparino, whose analysis of the company includes an inquiry into the prospects of doing physical harm to Twitter CEO Dick Costolo, or whatever his name is. There is much to ponder here too.
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Matthew S Levine at email@example.com