Jamie Dimon Calls Basel III "Anti-American"

Tom Braithwaite in New York and Patrick Jenkins in London report JPMorgan Chases' CEO, Jamie Dimon, "was supportive of forcing banks to have more capital but argued that moves to impose an additional charge on the largest global banks went too far, particularly for American banks"  in an interview in the Financial Times.  Read why our favorite banker is always good copy.

He also answered some tough questions in another and was particularly critical of the strident narrative prevailing in Washington and the media about banks and the financial crisis in a third article.

All three stories articles are worth reading.

Sheila Bair, Financial Reform, and Fannie and Freddie: Of Sound and Fury

President Obama has signed into law the Dodd Frank financial reform law. 

The most needed provision of the new law is its authority to resolve failing non-banks procedures along the lines of the FDIC's bank failure resolution process when the non-bank poses systemic risk The FT's Tom Braithwaite interviews Sheila Bair, Chairman of the FDIC, in this video (10m 19sec) "about how she is going to implement the new powers that were given to her by the new legislation on financial reform."

In an unrelated(?) story, Congressman Issa has dug up some very interesting facts about two non-banks not covered by Dodd-Frank.  The Financial Times' Suzanne Kapner reports "Countrywide Financial made 153 “VIP” loans to Fannie Mae executives, in an effort to win goodwill from the giant mortgage finance company, according to a letter released on Tuesday by a US congressman.


"An additional 20 VIP loans were made to Freddie Mac employees, the other large government-sponsored buyer of home loans, according to the details released by Darrell Issa, a California Republican."

Senator Dodd was a recipient of two of Angelo's VIP loans.

Which brings us to the most interesting question about the financial reform package.  The President assures us this will end future bailouts.  Unfortunately, the President left the job of constructing a bill to Congress.  Congress gave us a 2,300 page rewrite of financial regulation and it contains is no solution to the Freddie Mac and Fannie Mae problem.  Here is the biggest sinkhole in the federal bailout and not a word!  I guess Congress did not want to mess with the Financial Industrial Complex.  Incidentally (?), Senator Dodd and President Obama were the two biggest recipients of campaign contributions from Fannie and Freddie sources.   Dr. Blair prudently sidestepped a question on this amazing omission.  Neil Murphy, an eminent banking authority, loved to ask "Other than that, Mrs. Lincoln, how was the play?"  I can hear him ask it again.

But do not worry!   Suzanne Kapner  writes, "Barney Frank, a Massachusetts Democrat, has said that he plans to start work on new legislation when Congress returns from its August recess. The White House is expected to submit plans for fixing the system by early next year."

"To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death."

Myron Scholes on Financial Innovation and Regulation

Myron Scholes is a Nobel Laureate for his work in financial innovation, the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business, and the chairman of Platinum Grove Asset Managemen. The seemingly esoteric mathematical model he and Fisher Black developed for pricing options is now checked on every trading floor and is used even by stogy accountants. The Economist interviews him on why innovation must lead, how markets should be regulated, and why taking huge risks became so comfortable going into the financial crisis.

Jamie Dimon, the boy from Queens, Mammon Among Friends' 2009 Banker of the Year, and hero of the financial crisis, has taken on Washington.   "Mr. Dimon Goes to Washington" Robin Sidel and Damian Paletta wrote last Wednesday that far from keeping a low profile in our bankerphobic time, "he's spent the past year launching his own campaign to stave off government proposals that would rein in profits, boost consumer protections and impose new fees."

Here is Robin Sidel discussing what they wrote with Kelly Evans and Evan Newmark.

Is Immunizing the U.S. Economy Against the Dutch Disease So Bad?

I have written that "Plain Vanilla Banks Must Wax and Wall Street Must Wane." The Wall Street Journal's David Weidner seems to think that is a bad idea, especially to the extent it is a policy goal of the Obama administration. In today's "The Perils of a Smaller Wall Street: Reforms Seek Smaller Pockets of Risk, but Globally, Big Firms Still Dominate," he notes there are now only two U.S. banks in the world's top ten (JPMorgan and Citi) and they are near the bottom.

How bad is it that we are no longer the Masters of the Universe? It is not that long ago that Japan had eight of the ten spots on that list. The result? The next ten years were a lost decade for the Japanese economy. Is this just another example of post hoc, ergo propter hoc (the logical fallacy of "after this, therefore because of this)? Japan had a bubble because of a huge overexpansion in credit, foreign financed after financial deregulation. Inflated capital led to overexpansion of banks and a monster bubble. Bubbles burst. Bubbles distort incentives and misallocate resources. Like inflation, bubbles are bad and are caused by bad policy.

The United States has suffered from a virulent form of the Dutch disease these last twenty years. As Wall Street has sucked in capital from all over the world, manufacturing has been hollowed out. As value added in the financial sector grew, our competitiveness waned.

The White House White Paper is largely ratifying reality. (See below and today's Eagle: "New financial rules explained.") The more prudent banks (JPMorgan, Intrust) will prosper. The others have been shrunk in true capitalist fashion. If the financial sector shrinks, so be it.

The White Paper Outlining Regulatory Reform

Yesterday in a series of public interviews and announcements, the administration in Washington put forth its proposed reform of U.S. financial regulation. The proposal itself is embodied in an 89 page White Paper, "Financial Regulatory Reform: A New Foundation." It is a combination of the "art of the possible," America's penchant for committees, and ratification of the de facto reality.

Otto von Bismark declared, "Politics is the art of the possible." President Obama is realistic about what he can get through Congress and what he can not. Simplifying and consolidating the patchwork quilt of prudential and financial services regulation would provoke a huge turf war that would stall this legislation and much of the rest of his agenda.

The Fed is a big winner. It gains authority to regulate any firm which is a systemic threat to the financial system. A GE Capital or an American Express could come under its prudential regulation if it is big enough and/or interrelated enough to be a source of systemic risk. The New Deal left investment banks largely outside the circle of prudential regulation. The financial crisis drove the main investment banks either out of business or into bank holding companies as permitted under Gramm-Leach-Bliley. Thus the remaining major investment banks are already under the Fed's regulation. Other large or potentially system threatening firms could be designated "Tier 1 Financial Holding Companies" (Tier 1 FHCs) even though they do not hold subsidiaries that issue deposits. Importantly the Fed will regulated these Tier 1 FHCs on a consolidated basis. Bear in mind that the Fed is the only agency that has the firepower to deal with systemically threatening businesses.

Although the Fed will be the prudential regulator for Tier 1 FHCs, it is not clear who will put up the capital for non banks that need to be resolved in a liquidation. It appears the Treasury is to resolve these situations, but will it require a prior Congressional appropriation such as TARP did?

It looks like Tier 1 FHCs will be required to hold to more stringent capital requirements. It is not clear whether that is more stringent that non Tier 1 FHCs or more stringent than pre-crisis requirements.

The Treasury will chair a Financial Services Oversight Council. The Office of Thrift Supervision disappears, but there will be a new Consumer Financial Protection Agency.

Securitization and such derivatives as Credit Default Swaps were at the heart of the financial crisis. Firms issuing securitized obligations will have to have some "skin" in the game much like European income bonds or the Federal Home Loan programs. Excellent idea!

The proposal calls for more comprehensive regulation of derivatives. I will need to dig into the details before I can determine how much beef there is in the rhetorical receipe. The Fed gains authority over "systemically important payment, clearing, and settlements systems."

The split in authority between the SEC and the CFTC continues, but the Financial Services Oversight Council can adjudicate disputes. Will it intervene when neither does its job? Remember Enron?

Some thoughts:

Bigger capital requirements on the big boys is effectively a tax on their ROE. It is not necessarily a bad thing that Wall Street shrinks and the small fry gain, but Wall Street has its lobbying clout to be delt with.

The proposal seems to call for a pullback from Basel II and greater capital requirements for risky assets. At the same time it calls for "a simple, non-risk based capital measure to limit the amount of leverage built up in the international financial system." This sounds like squareing the circle to me.

There is a call for less procyclical capital requirements. Spain is the star in this credit crisis. By adopting capital requirements that go up in a boom and are smoothed in a bust, Spain's banks (much like Brazil's) come out of the crisis is relatively good shape. Spain was not saved from a housing bubble, however. It would be impolite to point out that the Fed, the White Paper's big regulatory winner, caused the bubble in the first place.

There are considerable words about firm value accounting and transparancy. The White Paper requires that accounting be looked into again. I seem to remember that mark to market accounting was at the heart of the Enron debacle. Enron and WorldCom led to financial institutions' being subject to greater market to market accounting. Those commissioned to look into these issues will find the conflict between fair market accounting and banks' function of intermediation illiquid loans a difficult nut to crack.