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Friday, June 17, 2011

British Banking Regulation in the E.U.

Before the financial crisis of 2008, the British government was light on banking regulation compared to other E.U. state governments. Oddly, some Europeans imagined an “Anglo-American” connection or likeness, as the American states had been on a deregulation kick since Carter’s airline and thrift deregulatory laws in the late 1970s. Reagan and the second Bush in particular extenuated the movement, which applied to the entire U.S. common market. After the crisis, however, even as Republicans in the U.S. House of Representatives, which is commensurate to the E.U. Parliament, were still voicing support for still more deregulation as though 2008 had not happened, the regulatory tussle in the E.U. reflected the greater involvement of the state governments (i.e., the stronger federalism than the lop-sided variety in the U.S.), with the British government in particular pushing for stronger banking regulation—if not at the E.U. level, then in the state of Britain. “British officials are waging an increasingly aggressive fight to impose banking regulations as they see fit, even if they go further than rules elsewhere in the European Union,” according to The Wall Street Journal. From this quote, we can unpack two distinct though interrelating strains: a desire for tougher banking regulation and an anti-federalism wherein the state governments of the E.U. can go beyond the federal government in terms of the regulation. Both of these points are significant.

The complete essay is at Essays on Two Federal Empires.

Long Term Capital Management

By 1997, “after three years of strong profits for LTCM, the opportunities were drying up. There was too much money chasing the same investments. . . . In early 1998, LTMC decided to give a large portion of its capital back to its original investors because profitable opportunities were so hard to find. At the end of 1997, LTCM had nearly $7.5 billion under management, compared to $1 billion when it started, and it now returned $2.7 billion of that to investors. The partners also figured that they could, if necessary, simply leverage their portfolio further to compensate for the loss of capital, which would compound their personal gains. Greed was at the heart of what turned out to be a disastrous decision. . . . Unable to reproduce the returns of the first three years, LTCM took increasingly more risk, abandoning its purer arbitrage for the kinds of ‘directional’ investments Soros made and LTCM had so long disdained—such as trying to forecast interest rate and currency movements. More and more of these trades were unhedged.” Furthermore, “LTCM’s risk models—VAR and related statistical tools . . . –were misleading.” For example, diversification was little protection if there was a run on the banks. When Russia defaulted on August 17, 1997, LTCM’s hedges against its Russian investments were worthless. Furthermore, because all fixed income assets fell sharply in value, “diversification, it turned out, did not matter. The finely calculated relationships on which LTCM was built and which the firm always believed would hold started to come apart. VAR could  not account for such an unlikely but sweeping event—an event in which everyone wanted out at the same time and almost all investments fell significantly in price. The use of VAR itself precipitated much of the selling. Commercial banks under the jurisdiction of the Basel Agreements, which . . . set capital requirements based on the level of VAR (the lower the VAR, the lower the capital required), were forced to sell assets to raise capital.” LTCM lost $1.9 billion that August. Eventually, fourteen banks, organized by the Fed, put together loans of more than $3.5 billion to purchase 90 percent of the firm.” LTCM “did manage to sell down assets in an orderly fashion and by early 2000 it was essentially out of business” (Madrick, pp. 277-81).

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Amtrak’s Conflict of Interest

On June 15, 2011, U.S. House Republicans called for the breakup of Amtrak’s de facto monopoly of intercity and interstate passenger-rail transport in the United States. Specifically, Republican lawmakers proposed that the lucrative northeast routes be opened to private providers. For example, Richard Branson’s Virgin Trains had been seeking to provide service between Boston and Washington. Of course, letting one of the providers build and own the tracks even as other providers use the tracks would put that owner-provider in a conflict of interest in charging the other providers for their use of the track, so it would be preferable to have the U.S. Government supply the tracks and charge all of the private providers of train service.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Banks on Reserve Requirements: An Institutional Conflict of Interest

As regulators were getting close to an international agreement on how much additional capital large banks that are deemed too big to fail should hold. In 2010, international policy makers met in Basil and agreed to 7 percent. The Dodd-Frank law passed in that same year in the U.S. meant that the Federal Reserve Bank would have to “impose tougher capital standards on ‘systemically important financial institutions’,” according to The Wall Street Journal.  Hence, American officials wanted “to coordinate with global regulators so that U.S. firms aren’t put at a disadvantage.” Not wanting to divert more capital to protect themselves from losses, banks were busy lobbying the regulators to reject the proposed 2.0 to 2.5 percentage points above the 7 percent set at Basil.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Sunday, June 12, 2011

Stakeholder Management: Part IV (Property Rights)

Stakeholder theory can be interpreted as containing a series of prescriptive leaps in the direction of giving stakeholders a greater and greater share in the property rights of stockholders. The final leap issues in what can be called radical stakeholder theory, for it represents a fundamental challenge (or usurpation) of property rights. Perhaps the most astonishing thing about how stakeholder theory unfolds is its presumptuous claim that its prescriptiveness is merely description (i.e., pertaining to what is the case, rather than what is ideologically desired).

The full essay is at "The Stakeholder Subterfuge."