Statement of the Shadow Financial Regulatory Committee on Treasury Mismeasurement of the Costs of Federal Financial Stability Programs

On April 13, 2012, the US Department of the Treasury released new cost estimates for the Troubled Asset Relief Program (TARP) as part of a series of charts describing the combined impact of Treasury, Federal Reserve, and FDIC financial-stability programs. Looking principally at actual and projected contractual cash flows, the document concludes that: “Overall, the […]

Who’s on the Hook for Europe’s Losses, and for How Much?

What do you get when you mix politics with fundamental principles of economics and accounting?  The answer is politics. Both in the U.S. and in the euro zone, authorities seem willing to blame the weak economic recovery on weaknesses in bank, customer, and government balance sheets.  However, they are not willing to come clean about […]

Safety-Net Subsidies Keep “Toxic” Assets Illiquid

English is a metaphorical language. This leads most members of the press to welcome colorful phrases like government bailouts, zombie institutions, and toxic assets. As in a horror movie, the black magic of extensive bailout credit support creates zombie institutions that transcend their natural death from accumulated losses on soured business plans and feed ruthlessly upon the resources of taxpayers and competitors (Kane, 1989). As long as industry lobbying can persuade the government to continue “bailing,” safety-net managers can keep a huge herd of zombies on their feet. Other things equal, the size of the safety-net subsidy that a zombie firm enjoys increases with depth of the hole in its enterprise-contributed net worth and with the degree of counterparty, interest-rate, and default risk that it can manage to load into its portfolio. (The term “enterprise-contributed” is employed to underscore the need in valuing zombie stock to strip out the value of government support.).

Incentive Roots Of the Securitization Crisis and Its Early Mismanagement

The disastrous meltdown of structured securitization represents a dual failure of market discipline and government supervision. At every stage of the securitization process, incentive conflicts tempted private and government supervisors to short-cut and outsource duties of due diligence that they owed not only to one another, but to customers, investors, and taxpayers.

Statement of the Shadow Financial Regulatory Committee on The Need for More Transparency in Discretionary Financial Rescue Programs

In the midst of the current financial crisis, the U.S. has experienced numerous specific changes in regulatory rules and procedures and seen a proliferation of ad hoc and non-transparent programs. These actions have dramatically expanded the bounds of agency discretion and government control of financial institutions. Many members of the press and financial industry applauded agency heads for their creativity in acting promptly and forcefully to address emerging problems, despite the absence of evidence of the likely impacts of the policies adopted.

A Statement by The Financial Economists Roundtable drafted by a committee, chaired by Edward Kane and Richard Herring including Edward Altman and Charles Goodhart


During the last few decades, securitization has become a primary channel for enlarging financial markets and transferring credit risk from lenders to investors.  Outstanding issues of privately securitized assets peaked worldwide at just under $12 trillion in 2008.[1]

Statement of the Shadow Financial Regulatory Committee on Regulation of Short Selling

During the recent turmoil, short selling has been widely blamed by managers, the media and the Securities and Exchange Commission (SEC) for causing unwarranted declines in the value of financial institutions. The SEC has expressed its fear that false “rumors” might artificially reduce the stock price of financial services firms in particular. This triggered a […]

Statement of the Shadow Financial Regulatory Committee on The Future of the Government-Sponsored Enterprises

On September 7, the Treasury Department and the Federal Housing Finance Agency (FHFA) announced that the FHFA would take over both Fannie Mae and Freddie Mac (the GSEs) as a conservator for each company. As described by the FHFA, as a conservator it is empowered to put a company “in a sound and solvent condition.” […]

Who Should Bear Responsability For Mistakes Made in Assigning Credit Ratings To Securitized Debt?

In helping potential counterparties to assess the creditworthiness of individual bond issues, Credit Rating Organizations (CROs) earn profits by producing classificatory information that regulators find helpful and that investors and guarantors use to compare credit spreads on issues of risky debt. However, CRO revenues come not from the investor or regulatory side, but from fees […]