Tag: TMC

Not only did they go native, they were hand picked by the same bank CEO’s that sit on the Federal Reserve board of directors. This is great article of how that works from Prof William K. Black, associate professor of economics and law at the University of Missouri-Kansas City, who explains some more of the reasons the TBTF banks need to be broken into smaller pieces.

Embedded Examiners always married the Natives, but now their Bosses Do Hook Ups

Jessica Silver-Greenberg and Ben Protess have written an extraordinarily important column for the New York Times about embedded examiners at JPMorgan.

Embedded examiners’ are federal regulators whose normal work station is a desk at the bank.  We only embed examiners for systemically dangerous institutions (SDIs) – banks so large that they pose a systemic risk to global economy.

Embedded examiners do not work.  They get too close to the bank officers and employees.  In the regulatory ranks we called this “marrying the natives.”  Nothing works with SDIs – they are too big to manage, too big to fail, and too big to regulate.  A conventional bank examination, scaled up to size to fit an SDI the size of JPMorgan would have 500 examiners and take 18 months to “complete.”  (Obviously, when it takes that long to complete an examination it is impossible to “complete” an examination in any meaningful sense – by the time you’ve spent 18 months examining an SDI it can be a radically different bank.)  One cannot conduct an effective conventional bank examination of even a medium-sized bank on a “real time” basis because of the amount of new information pouring in every minute.  Conventional examinations examine a bank’s records and operations “as of” some date (typically the last quarter-end for which reports have been filed).  Embedding examiners is an effort at achieving an “early warning” system.  It has one virtue – it indicates that some senior regulator(s) recognized that they cannot rely on the bank’s own reports to determine whether it is steering toward trouble.

In fairness, twenty-five years ago the proponents of embedding recognize the severity of the “marrying the natives” problem.  They simply viewed embedding as the least bad manner of attempting the impossible – effectively regulating SDIs.  Here is the key passage of the NYT column.

   Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded in the nation’s largest bank. They are typically assigned to the departments undertaking the greatest risks, like the structured products trading desk. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in the unit’s offices in London or New York, according to current and former regulators who spoke only on condition of anonymity.

   Senior JPMorgan executives assured the bank’s watchdogs after the financial crisis that the chief investment office, with hundreds of billions in investments, was not taking risks that would be a cause for concern, people briefed on the matter said. Just weeks before the trading losses became public, bank officials also dismissed the worry of a senior New York Fed examiner about the mounting size of the bets, according to current Fed officials.

The authors of the article frame the issue as whether Jamie Dimon’s role as Director of the Federal Reserve Bank of New York poses a conflict of interest and could have led to the regulatory failure to place any examiners in the chief investment office (CIO).  The CIO appears to be the largest de facto hedge fund in the world.  (Note: “hedge fund” is a deliberately misleading term.  Entities called hedge funds typically speculate rather than hedge.  When I call the CIO a “hedge fund” I mean that it largely speculates and disingenuously calls its bets “hedges.”) [..]

SDIs are not simply dangerous, they are also inefficient.  Shrinking the SDIs to the point where they no longer posed a systemic risk would also increase their efficiency, make them small enough to regulate, and help recover our democracy.

SDIs that function as banks pose intolerable risks to the global economy.  SDIs that function as (thinly disguised) hedge funds should be far beyond the pale.  Conservative and libertarian philosophy rightly condemn providing enormous federal subsidies to a private entity whose senior officers claim any wins and socialize any severe losses.

No doubt the Obama administration will tout today’s news that unemployment has fallen .4% to 9.0% as an indication the US economy is improving. It will be quite a back aching twist of logic in the face of poor job growth of only 36,000 jobs in January far below expectations. So what’s really happening? David Dayen at FDL explains the drop in the face of such dismal job growth:

How does this happen? Well, January is always a month when the establishment survey gets revised. New population estimates get incorporated into the survey, and the seasonal adjustment factors get updated. So there is a difference in the January survey of 600,000 less unemployed people; that number is down to 13.9 million according to the BLS (Bureau of Labor Statistics).

Does this mean that those people got a job in this month? Not really. The employment/ population ratio rose slightly to 58.4%, and the labor force participation rate declined to 64.2%, the lowest rate since the early 1980s. Basically, the drop in the top line unemployment rate is entirely due to changes in the total population estimates and other adjustments.

The U-6, which counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts “marginally attached workers and those working part-time for economic reasons.” Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the “marginally attached workers” include those who have gotten discouraged and stopped looking, but still want to work, is currently 16.1%.

Another explanation of the job growth numbers is the horrendous weather across the country since late December:

January’s snowstorms probably had some effect on the anemic numbers, given that sectors like construction and transportation and warehousing shed jobs. The private sector added 50,000 jobs, so government layoffs, particularly at the state and local level, also restrained growth. Analysts had forecast an increase of about 145,000.

However, the real problem is what kind of jobs are being created, the number of people who have had to settle for part time employment as their job benefits run out and the number of jobless who are no longer counted in the numbers that are reported.

The other bad news is, this rate may not hold since austerity measures by the states and localities, facing huge budget deficits and no hope of relief from Congress, will most likely be laying off huge numbers of workers in attempts to salvage education and other vital programs.

President Barack Obama’s goal of driving the unemployment rate below 9 percent this year is threatened by state and local budget cuts that are likely to intensify as Federal stimulus money runs out.

Austerity measures may add as much as 0.25 percentage point to the unemployment rate this year, according to Mark Zandi, chief economist of Moody’s Analytics Inc.

“This could make the difference between ending 2011 with unemployment above or below 9 percent,” he said. “There’s no more serious drag on economic growth than the severe budget cutbacks at the state and local level.”