Fraud Ruling Against Wells Fargo in Minnesota Points to Widespread Abuses in Securities Lending Program – Yves Smith – A fraud and breach of fiduciary duty ruling against Wells Fargo in a major scandal in Minnesota may have much broader ramifications for this sanctimonious bank. The facts are not pretty. Wells Fargo, in its investment management operation, used securities lending to boost returns. But the returns it increased appeared to be only those of the bank. Institutional investors in various programs lost money as a result of this activity. Four Minnesota plaintiffs, including two of the state’s high profile charities, sued. A jury had already awarded the plaintiffs $29.9 million for fraud. A post trial ruling by the judge has added costs, interest, and reimbursement of fees that looks set to more than $15 million to the total. District Judge M. Michael Monahan concurred with the jury’s main findings: Wells Fargo breached its duty of full disclosure by not adequately disclosing that it was changing the risk profile of the securities lending program, that it breached its duty of impartiality by favoring certain participants over other participants, and that it breached its duty of loyalty by advancing the interest of the borrowing brokers to the detriment of the plaintiffs. What makes this ruling interesting is that although it set aside a minor part of the jury award, a $1.6 million issue, to be subject to a new trial, is that it was punitive as a result of the judge’s determination that the fraud was systematic. The basis for awarding attorneys’ fees? The bank is such a menace to society that having counsel root it out is a public service. From the Minneapolis Star Tribune.
Older Workers and the Phony Lump of Labor Fallacy – I have written two published scholarly articles examining the lump-of-labor fallacy claim and its history; the ONLY two scholarly articles published that have investigated the status of the claim. My conclusion is that the so-called fallacy is a canard, a fraud, a libel. There is no fallacy because, in the first place, people DO NOT assume a fixed amount of work. They may assume a given amount of unemployment, but in the face of persistent high levels of unemployment such an assumption is hardly "fallacious". Second, there is no "fallacy" in the sense of a canonical, demonstrated logical fallacy because economists who proclaim the fallacy are all over the map when it comes to explaining the "implicit" assumption of a fixed amount of work that they allege people make. Third, there is no economic fallacy, because the fallacy claim originated as a journalistic propaganda line that was only subsequently absorbed uncritically into economics textbooks. Fourth, there is no fallacy because modern accusations of the fallacy leave out a key component of the original — the heinous motive of the unions to restrict output so that they could impose their dictatorial socialistic will on honest, innocent hard-working employers. Without some sinister "ulterior design" to restrict output, the lump-of-labor fallacy claim is incoherent drivel. With it, it is a foaming-at-the-mouth, reactionary conspiracy theory.
Europe’s Financial Alchemy –– It is universally recognized that a key factor underlying the 2007-2008 financial crisis was the diffusion of collateralized debt obligations (CDOs), the infamous special-purpose vehicles that transformed lower-rated debt into highly rated debt. As these structures lost popularity on Wall Street, however, they gained popularity on the other side of the Atlantic. After all, the European Financial Stability Facility (EFSF), created by the eurozone countries last May, is the largest CDO ever created. As with CDOs, the EFSF was marketed as a way to reduce risk. Unfortunately, the outcome could be similar: the entire banking system sent into a tailspin. CDOs are a form of financial alchemy: special-purpose vehicles that buy the financial equivalent of lead (low-rated mortgaged-backed securities) and finance themselves mostly with the financial equivalent of gold (highly sought-after AAA bonds). This transformation is based on one sound principle and two shaky ones. The sound principle is excess collateral. If there is $120 of collateral guaranteeing a $100 bond, the bond is safer, no doubt. How much safer, however, depends upon the returns on the pool of bonds that compose the CDO.
The Making of International Monetary Reform – The run-up to the G-20’s summit in Seoul was marred by a series of currency controversies, bringing international monetary reform to the fore. Whereas French intentions to reform the international monetary system had initially been received skeptically, suddenly reform looks like the right priority at the right time. The task is anything but simple. The subject is abstruse. No one outside academia has taken any interest in it for the last 20 years. Accordingly, there are hardly any comprehensive proposals on the table. The United States, for which international monetary reform is synonymous with diminution of the dollar’s global role, is lukewarm. China, which launched the idea, is happy to see the discussion gaining momentum, but lacks precise ideas. As time is on its side, it sees no reason to hurry. Emerging countries hold a similar opinion: they want their current problems to be solved but are not ready to re-write the rules of the game. Japan is keen, but its views on regional monetary cooperation do not match China’s. And Europe is distracted more than ever with its internal crises.
Balance Sheet Recessions – Mark Thoma writes that we need to get better at responding to balance sheet recessions: I agree with the conclusion, but I actually disagree with this analysis. Imagine a recession that begins at a time when nominal interest rates are 9 percent. What’s the right response? Cut nominal interest rates to lower real interest rates and spur growth! Everyone knows that. And this analysis holds true whether or not you think it’s a balance sheet recession, since lower real interests rates are in fact a way of helping households. So if you enter the recession with high nominal rates, the prescription is the same whether or not it’s a “balance sheet recession.” Of course we entered the current recession at a time when pre-recession nominal interest rates weren’t high. That meant nominal interest rates went to zero while still leaving real interest rates higher than they should be. What to do about this has proven to be controversial. But that—the existence of controversy over how to handle the low nominal interest rate situation—is what’s different about this recession. I think the best thing we could do is helicopter drops of money onto households. But that’s not because of special features of a balance sheet recession, it strikes me as in general the best way to respond when the “conventional” monetary toolkit is out of tools