Germany is Europe’s healthiest economy, and one of the healthiest in the world. Yet, its largest bank appears to be in financial distress. The rumors that it might have to pay a settlement to the U.S. government similar to what U.S. banks have paid for the housing mortgage crisis sent the bank’s shares spiraling. The bank’s stock wasn’t doing to well before that news. This story goes into the background of what’s wrong at DB and what the long-term consequences might be.
“The European banking model may be broken,” says Peter Hahn, a professor at the London Institute of Banking & Finance. “The existing system isn’t working with low growth and zero-to-negative interest rates.” Rock-bottom rates have lowered banks’ cost of borrowing but also mean they are paid less on loans and investments.
The health of Deutsche Bank has implications far beyond Europe. With €1.8 trillion ($2 trillion) in assets, it raises capital and trades securities for clients in dozens of nations, including the U.S. In June the International Monetary Fund flagged Deutsche Bank as the biggest contributor to systemic risk among global banks.
In 2008 and 2009 the federal government bailed out and restructured the U.S. auto industry. The actions were controversial, but they didn’t receive a lot of attention from most people, because they were busy dealing with other aspects of the financial crisis. There’s a new documentary, based on a book, that provides details and some unconventional perspectives on the bailout.
“Live Another Day” picks up where “The Big Short” left off, showing how the housing crisis and the Lehman Brothers’ collapse led directly to the auto industry’s downfall.
By casting a new light on the saga, Burke and Pietri challenge conventional wisdom, including the widely held belief that Ford, by avoiding bankruptcy and a government bailout, was the better company. “People think Ford was smart,” said Pietri. “Ford was more messed up in 2007 than either GM or Chrysler. They just showed up at the bank teller’s window before the bank teller ran out of cash. If they’d waited six months, they would have ended up in the same situation” as GM and Chrysler.
The sudden bankruptcy filing of Lehman Brothers generally is considered the event that made the financial crisis as bad as it was. After that, many markets basically froze for days. Investors, businesses, and households were uncertain and cautious. All the government officials involved at the time have stated many times that there was nothing they legally could do. Neither the Treasury nor the Federal Reserve had the authority to rescue Lehman Brothers, and potential buyers were scared away by the state of Lehman Brothers.
A professor at Johns Hopkins now argues that the federal government had legal authority to save the company, and that the company had sufficient assets to back any loans from the Fed or Treasury. Here’s a video interview with the professor.
The paper, four years in the works, is unusual not just for the forcefulness of its argument — Ball calculates that Lehman had $131 billion worth of securities that would have been eligible to secure Federal Reserve loans and thereby keep the bank in business— but also in its methodology. Ball draws upon materials from the Lehman Brothers bankruptcy examiners’ report, the U.S. government’s financial crisis commission inquiry, news clippings, books and the like to help draw his conclusions.
Countrywide Mortgage Financial Corp. was very aggressive about lending money to home buyers leading up to the financial crisis. It closed loans and usually sold the loans to one of the government-sanctioned mortgage guarantee firms. Bank of America, which bought Countrywide to keep the financial crisis from becoming worse, settled a suit with the federal government over Countrywide’s lending practices by paying billions of dollars to the government. The government declined to file criminal charges against Angelo Mozilo, one of the founders of and the leader of Countrywide. But it did file a civil suit against Mozilo. Late Friday, the federal government quietly announced it was dropping the suit against Mozilo, without explanation.
The closure of the Mozilo case comes weeks after a federal appeals court reversed a 2013 Firrea ruling against Bank of America and Rebecca Mairone, the only executive of a major U.S. bank to be found liable for their part in the mortgage crisis.
Mairone, the former chief operating officer for a division of Countrywide, was found liable by Manhattan jury for misrepresenting the quality of mortgages her company sold to Fannie Mae and Freddie Mac.
The Justice Department claimed the bank and Countrywide generated thousands of defective loans and sold them to Fannie Mae and Freddie Mac, now under government control. Countrywide sold the loans to boost revenue in the tightening credit market in mid-2007, according to the government. The program became known as the High Speed Swim Lane, or HSSL — later nicknamed The Hustle.
A three-panel appeals panel in New York ruled in May that prosecutors failed to prove Mairone, and Bank of America, defrauded the government. The court threw out a $1 million fine against Mairone and a a $1.3 billion judgment against Bank of America.
The banks made a lot of headlines recently with disappointing earnings and also when most of them had their “living wills” rejected by regulators. This article argues that the post-crisis reforms in the U.S. has been inadequate and that U.S. banks still are a major risk to the economy and taxpayers. Better and stronger actions have been taken by some other countries.
The British regulators were less generous to banks during their rescues than ours were. Banks that received bailouts were barred from paying directors bonuses, subject to restrictions on executive pay, and required to continue lending to consumers and small businesses and in particular to help “people struggling with mortgage payments to stay in their homes.” The only similar measure in the US was minor restrictions on executive pay for TARP recipients.
The Bank of England and the FSA also pushed for more radical reforms than their U.S. counterparts did. They advocated strenuously for a breakup of banks along Glass-Steagall lines, separating retail banking and banking to small- and medium-size businesses from “wholesale” banking and investment banking.
John Taylor of Stanford has been a leading critic of the Fed’s role in creating the financial crisis and its actions afterward. In this blog post he summarizes the arguments against the Fed, including links to important research from others that pin a lot of responsibility on the Fed’s loose money before 2007.
Of course Ben Bernanke is not the only central banker who disagrees with this research. In an article “Alan Greenspan: What Went Wrong” in the Wall Street Journal Alexandra Wolfe reported that Greenspan told her that he disagreed with my 2007 paper, though she also reported that I stood by the paper and said that “Other economists have corroborated the findings” and “the results are quite robust.”
Several years ago in comments on a paper I gave at the Bank for International Settlements, Ken Rogoff said (pp. 29-31) that “John Taylor’s critiques of post-2000 ultra-loose monetary policies are well known and have been widely discussed. His ideas are a subject of ongoing research, with no firm conclusion as yet.” When you add what has been done since Ken spoke to what was done before–amounting to about a decade of research, I’d say there’s a very firm conclusion now.
It’s common to complain that regulators and many professional investors missed the problems that led to the financial crisis. But the financial media also were missing in action. In fact, many were helping to create the crisis by hyping the very activities that would lead to the collapse. This post is an interview with a researcher who is examining how and why the financial media failed in the years leading up to the crisis.
What changed between these early investigations of proto-subprime practices and the failure of financial media to spot similar frauds that took place on Wall Street and across America in the years prior to the crash? The answer Starkman offers is complex. It consists of a toxic mix between regulatory failure, a complete collapse of the business model of journalism, and the enormous growth of financial institutions. A lot of it, though, has to do with the conflict between two different strains of journalism—access reporting and accountability reporting—and the latter’s growing prevalence in recent years. “Access reporting tells readers what powerful actors say, while accountability reporting tells readers what they do,” Starkman explains in his book.
Business journalism, at its root, emphasizes access. In the years prior to the financial crisis, according to Starkman, access became its be-all and end-all. Since then, he adds, little has changed.
Many people complain that no executives went to prison after the financial crisis. In past financial crises, a number of executives would spend time in jail. The new blog of the Stigler Center at the University of Chicago Booth School of Business has a series of pieces examining the decline in prosecutions of businesses and their executives. This post is an interview with award-winning reporter Jesse Eisenberg, who is writing a book on the topic. It’s a much better take than what you’ll hear from politicians or read in the media.
Over the last 15 years or so, prosecutors have lost a lot of tools that they used to combat corporate crime. For instance, one of the things they had was a charge they used to convict Jeffrey Skilling and Ken Lay—the two top corporate executives from Enron—called “honest services fraud.” The Supreme Court overturned that and threw out the charge, and as a result, a lot of prosecutions of top corporate executives got thrown out as well.
That’s a small example of the kind of tools that prosecutors were losing. Nothing was particularly cataclysmic, but there was a slow erosion. There were resource shifts as well: the FBI, which is charged with investigating these kind of cases, shifted away from white collar crime to domestic and international terrorism, and that affected the skill set.
Two new books seek to explain why economic growth has been so low since the financial crisis and is likely to remain low. This post reviews both books. In one book, economist Robert Gordon explains how productivity has declined in recent years and isn’t likely to increase, which lowers growth. In the other book, Mohammed El-Erian talks about policymakers have abdicated their duties, leaving only monetary policy to propel growth and prevent recessions.
The central thesis of El-Erian’s new book is that in a world where debt-financed fiscal policy has nearly hit its limit in the major developed economies for political or economic reasons, monetary policy has become “the only game in town” as a policy measure used to stimulate economic growth which has several short-run benefits for the economy and but long-term costs to financial stability.
In El-Erian’s judgment, unconventional monetary policy measures such as quantitative easing long-term asset purchases have been a helpful tool to reduce unemployment when ailing economies were at their bottom, but many of the world developed economies have since turned a corner. The point is that economic policymakers should have a balanced, coordinated policy response, something absent up to this point.
Former Treasury Secretary and President of the New York Fed, Timothy Geithner, has a two-part course on the financial crisis on Coursera. This link is a summary and review of the part of the course on housing. While the author says he has new and increased respect for Geithner after reviewing the courses, he also remains critical of the government’s actions before and during the crisis.
Unlike with the financial institutions, it seems the goal here was to punish homeowners even if it made the banks worse off by increasing the number of foreclosures and thereby lowering home prices even more.
It seemed, for whatever reason, that what I’ll call the Geithner Rule, ‘Ya gotta bail out everybody to save the world’ wasn’t applied much in housing.
And remember, many of the mortgages the banks foreclosed on were guaranteed. The foreclosing banks didn’t absorb the majority of those losses.
Too bad their weren’t guarantee programs for homeowners as well as for bankers.