Basel liquidity rules, going neo-medieval

Basel liquidity rules, going neo-medieval – Can we talk a bit more about the scandal of Basel III allowing banks to give government bonds a zero risk weighting on their books? This time regarding Basel’s liquidity rules. Actually, can we talk about the related global shortage of AAA-rated assets and what that means for sovereign debt as well? Buried in recent regulations on Basel’s liquidity coverage ratio, we’ve found a few interesting new provisions on what are called Level 1 and Level 2 liquid assets. Banks have to hold enough of these to be able to withstand 30 days of net cash outflows under a stress scenario (think Lehman-level stress, bank runs, general end-times, etc). The provisions basically present a ‘post-sovereign’ view of acceptable assets, if you will, worthy of contrasting with those zero risk weights.

Down and Out on $250,000 a Year – By most measures, a $250,000 household income is substantial. It is six times the national average, and just 2.9 percent of couples earn that much or more. “For the average person in this country, a $250,000 household income is an unattainably high annual sum — they’ll never see it,” says Roberton Williams, an analyst at the Tax Policy Center, a nonpartisan think tank in Washington, D.C.  But just how flush is a family of four with a $250,000 income? Are they really “rich”? To find the answer, The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public school districts, using national data on spending. The bottom line: It’s not exactly easy street for our $250,000-a-year family, especially when it lives in high-tax areas on either coast.

Another Lie Conservatives Need To Explain. Government Employment – A constant meme one hears is how the government has been adding so many employees.  It’s just another example of the government ‘gone wild’ super meme of which this is a component.  The problem with this particular complaint is that it’s basically not true.   The number of government employees as a share of the population hasn’t risen since the mid-1970s.  We have more government employees because we have a bigger nation with more people. As an aside, the huge jump in employees that Republicans used this summer against Democrats in the mid-terms, came about because of the census hiring.  Now that those employees are gone, not a peep from Republicans.   The cynical ploy worked on the public.  And that’s what’s most important if you’re a Republican.

From Paul Krugman over at the New York Times. “Third, why has government employment grown over time? Because, um, we have a growing population. Here’s government employment as a share of the population:

Hellfire at Christmas? – The discussion was about what Al calls “the hellfire penalty” in both Christianity and Islam – “the notion that it is good and right to destroy/burn the souls of people for mere disbelief, and that disbelief itself is a kind of sin-crime, making disbelievers sinners/criminals.”  But this belief, as Al pointed out, does have very real effects.  It “demonizes nonbelievers,” he wrote, and can be used to see them as a threat to the security of the souls of the believers.  Violence against them can then be rationalized as a way of helping to save souls. (If that sounds obscene, consider an argument that has been used by Islamic extremists to excuse killing fellow Muslims in suicide attacks, including those killed on 9/11:  they are doing them a favor by ensuring that their souls go to heaven as martyrs.   Someone as cold-blooded as Carl Rove couldn’t have come up with a better rationale for “collateral damage.”  But then we’re all merely collateral damage to the fanatics, whose rationalizations for violence are both endlessly inventive and endlessly repetitive.  Remember the twisted logic of torturing witches?  If they survived, that meant they were really witches and so should be killed;  if they didn’t, that meant they were innocent and so had gone to heaven.

Embedded financial journalism at its worst – Today’s biggest financial news story was that the New York attorney-general is suing the accountancy firm Ernst & Young for fraud following its alleged role in the cooking the Lehman Brothers books in the years prior to the investment bank’s September 2008 collapse. I’d like to focus here on the way in which the Financial Times covered this momentous story. A Lex column on the fraud suit against E&Y, opened by saying:- Accountants, just about the only people not yet blamed for the banking crisis, are about to feel the heat. My initial reactions on reading this sentence was to this was to say “Hello…?!” and “What planet are these guys living on?

Bank Break Ins Leading to Litigation Yves Smith – Even though banks piously insist that every one of their foreclosure actions is fully justified, evidence in the court system continues to prove that claim to be false. We pointed out this sorry development in October, that of banks entering and changing the locks on homes they had not foreclosed upon. Per a report from the Sarasota Herald Tribune: The process of banks hiring people to break into homes, even when occupied, is just the latest oddity of the messy foreclosure crisis in Florida. Some property owners are reporting the break-ins to law enforcement as burglaries. Yet investigators consider the disputes a civil matter because the contractors do not display criminal intent.That essentially leaves the property owners without recourse… “It is vastly underreported; it is happening in counties all across the state,” said St. Petersburg foreclosure defense attorney Matt Weidner. “The more this occurs, the more prevalent it’s going to become.” The lack of willingness of the local police to deem destroying property and unauthorized entry as criminal acts leaves wronged parties with litigation as their only recourse. And some are filing suits.  Per the New York Times these suits likely represent only a small fraction of the actual cases of bank miscreance, since few of the victims are likely to have the financial wherewithall and intestinal fortitude to sue a bank.

How desperate can you get: EU places hopes on China to rescue euro  – China promises to support the eurozone “if necessary”, sending the euro temporarily higher; Reuters Breakingviews says China makes an unlikely Santa Claus for the eurozone – a Santa Claus who would soon face the ignomy of a public haircut; Moody’s place Portuguese government debt on a downgrade watch, due to the negative impact of austerity on growth; Peter Ehrlich takes a closer look at promises of closer Franco-German economic policy co-operation, and finds that there are no proposals in the drawers; Martin Wolf says the problem for the eurozone is not Germany’s pursuit of its perceived self-interest, but Germany’s inability to understand the nature of the crisis; Wolfgang Munchau says replacing Guido Westerwelle as FDP leader is a necessary condition for a revival of the party, but not a sufficient one; international speculators, meanwhile, are increasingly shorting the euro as they expect the crisis to go and on. [more]


On the Gutting of Financial Services Reform – Yves Smith – Bloomberg has a well done but disheartening account of the watering-down-to-meaninglessness of financial services industry reform, with the case example being Basel III. Basel III is the latest iteration of capital standards for banks, which is hoped to be implemented more or less true to form by various national bank regulators. Richard Smith has been ably covering the substance of this beat (see here and here for earlier posts) and the details are indeed more that a bit convoluted. However, Basel III has been touted in the US as the fix for the shortcomings in bank reforms such as Dodd Frank. As Treasury argues, if banks have more than enough capital, you have a lot of room for error on other fronts. But Basel III preserves too many bad ideas of its predecessor, Basel II, such as risk-weightings for various types of assets that lend themselves to gaming; along with risk weighting, a preservation of the problematic role of unreformed rating agencies; allowing big banks to use their own idiosyncratic and often widely varying risk metrics; an obsession with the asset side of the balance sheet, and not enough to the way that liabilities can also blow out when asset prices are under stress. Basel III thus preserves the architecture of Basel II. Andrew Haldane of the Bank of England described how regulation could best contend with a world of uncertainty, meaning risks that cannot be measured:

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