A lot of people are still furious at the big banks, and every positive earnings report and bonus announcement in the coming months will only stoke their fury. Here is an industry which virtually vaporized itself less than a year ago, which are among the living today only by virtue of taxpayer financing and risk-bearing, and much of which has bounced back to its old sharp-elbowed self while the public is still gasping for air and trying to figure out how massive bailout will ultimately be paid for – higher taxes, reduced spending or higher inflation. No wonder the public perception of bankers has eclipsed such perennial favorites as trial lawyers and insurance salesmen in the social pecking order.
From the book “Restoring Financial Stability: How to Repair a Failed System”. Section VII: International Coordination
Many of the policy recommendations being put forward to repair national financial architectures will prove to be ineffective – or at least their edge blunted – if there is a lack of international coordination among central banks and financial stability regulators in implementing them. This issue is important; although cross-border banking and financial flows are extensive, much of bank and financial supervision remains national. There is some consensus on prudential aspects of regulation such as capital requirements and their calculation, but there is hardly any consensus on the core set of principles driving the regulatory stance to providing guarantees and intervening in markets and banking sector.
From the book “Restoring Financial Stability: How to Repair a Failed System”. Section III: Governance, Incentives and Fair-value Accounting
The unprecedented government bailout of financial markets and firms in the current crisis has forced executive compensation in banking and finance into the open. As Paul Volcker noted last April, “The bright new financial system—for all its rich rewards and unimaginable wealth for some—has failed the test of the marketplace by repeatedly risking a cascading breakdown of the system as a whole.” Taxpayers wonder how highly paid banking “talent” could have been instrumental in creating a financial disaster of epic proportions. And having been forced to take equity stakes in most of the largest US and foreign financial firms and guarantee their debt, taxpayers naturally feel that they ought to have a say in how such people, now in publicly supported private institutions, get rewarded. The defenders of privately determined approaches to compensation in financial institutions might wish otherwise, but this is now a high-profile political issue in the US and elsewhere, inexorably intertwined with re-stabilization of the financial system.
From the book “Restoring Financial Stability: How to Repair a Failed System”. Section II: Financial Institutions
Deregulation in the 1990s gave rise to a new generation of what the Federal Reserve has called “large complex financial institutions” (LCFIs). These are huge private sector enterprises engaged in a broad array of financial services including commercial banking, investment banking, asset management and insurance. Banking regulators now generally regard them as too-big-to-fail (TBTF).
The expanding LCFI share of the US financial services market suggests that the beneficial effects of economies of scale and scope and related operating-efficiencies outweigh the costs of complexity, increased risk-exposure and conflicts of interest. But their record of massive credit write-offs, regulatory infractions, repeated legal settlements, and poor long-term share price performance suggest the opposite conclusion.
In 18 short, targeted and definitive White Papers – each tracing the core of the problem, the policy alternatives, and a specific course of action – 32 academics, combining a solid understanding of financial economics with the practice of modern finance, suggest solutions, in the public interest, to the central issues of today’s financial crisis.This overview contains the Executive Summaries of these White Papers, to be published in their entirety by John Wiley & Sons in March 2009 and will be posted here at RGE Monitor in the following days.
As 2008 was drawing to a close, we were reflecting on the dramatic and often unprecedented events of the past year in financial markets and the broader economy. Nothing like this had occurred in our lifetimes. In our academic world, few events had as much potential for providing us and our colleagues with a rich source of raw material for good research and teaching for a long time to come. This is the ultimate teachable moment and it is essential to teach it. We were in the middle of a financial and economic hurricane that was certain to leave behind massive financial and economic damage. It will eventually blow over, as all hurricanes do, but it is not too early to begin to think about what changes to the system can mitigate the damage and hopefully make future financial storms less likely.
The dramatic actions in the last few days of the European and American central banks and treasuries suggest the beginning of the end of the global debt crisis. Some of them, especially the partial nationalization of national banking systems and the unlimited government guarantees of financial contracts, are unprecedented in modern finance. More surprises are probably still to come. But it is not too early to think about what kind of global financial architecture will emerge after the dust settles – and what impact this may have on some of the key banks and financial centers. The basic functions of global banking and finance will continue, or course, but they are unlikely to return to business as usual anytime soon.
Now that the global debt crisis has destroyed many of the more respected and venerable institutions on Wall Street, and has caused more damage and dislocation to the wholesale financing industry than anything experienced in seventy-five years, the question is “what next?”. Lehman Brothers and Bear Stearns have disappeared, Merrill Lynch and Wachovia were forced […]
This is the peak of the hurricane season – and in its financial markets. Just as Hurricane Katrina devastated New Orleans a few years ago and Hurricane Ike recently swept over the Texas coast, Hurricane Mortgage-Debt has done a job on Wall Street, causing more damage and dislocation than anything experienced in seventy-five years. The […]
The recent announcement of credit lines and equity injections into the US government-sponsored enterprises Fannie Mae and Freddie Mac, who now hold or guarantee half of all US mortgages, is unprecedented and will unleash a torrent of debate. At their annual meeting ending on Monday 14 July in Glen Cove, NY, the Financial Economists Round […]
When the investment banking industry heaps praise on the Federal Reserve for creativity and statesmanship in stretching its traditional mandates in the recent financial market turbulence, it’s time for ordinary people to fasten their seat belts and hang on to their wallets. The Fed-brokered acquisition by JP Morgan Chase of Bear Stearns and its assumption […]