Front page headline of today's Wall Street Journal, "Geithner Banks on Private Cash."
When I first read that, I saw the word "banks" as a noun, and Geithner as an adjective. I tried to makle sense out of that: what kind of bank is a Geithner bank, anyway?
It took me a few seconds to mentally transform "banks" into a verb and read the headline as a sentence in which the Treasury Secretary's name is the subject.
Brad DeLong explains in Seeking Alpha that the gist of the plan is to make the US Treasury the world's biggest hedge fund investor.
As the plan unfolds we might have plenty of opportunity to discover what kind of institution might deserve the name "a Geithner Bank"!
Showing posts with label Timothy Geithner. Show all posts
Showing posts with label Timothy Geithner. Show all posts
Monday, March 23, 2009
Monday, January 26, 2009
Lowering the rating on US Treasury bonds.
Yesterday, after babbling along a bit about The New York Times, the new administration, etc., I ended up with a brief discussion of the credit rating agencies. I want to pursue that point today.
I wrote that "I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale."
The chairman of S&P's sovereign ratings committee, John Chambers, raised the issue of lowering that rating four months ago.
Now, ask yourself: does this really have deterrent value? Would it be devastating? I can imagine treasury Secy Geithner telling President Obama, "Our bonds will be just as valuable the day after their downgrade as they were the day before. There will still be the uninterrupted history, from Alexander Hamilton's day to my own, in which every payment has been made on every bond. Are there lots of other institutions with such a 200-year-plus track record? Let's not fear S&P. They can't make our bonds unattractive by calling them names."
But if Geithner gives such a speech to the Prez, won't it imply that markets can IN GENERAL look beyond the S&P rating (and the Moody's rating too) and reach rational conclusions about the instruments being rated?
Are the ratings agencies irrelevant, or are they important? If they are important enough to be worth regulating, aren't they important enough to be a serious threat to the marketability of bonds?
Obama might after all reply to Geithner in our imagined conversation in the Oval Office: "If we shouldn't fear S&P, it is because they don't really matter to the buyers of such instruments. But if they don't really matter, what is the point of regulating them?"
And that would be a very good question.
I wrote that "I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale."
The chairman of S&P's sovereign ratings committee, John Chambers, raised the issue of lowering that rating four months ago.
Now, ask yourself: does this really have deterrent value? Would it be devastating? I can imagine treasury Secy Geithner telling President Obama, "Our bonds will be just as valuable the day after their downgrade as they were the day before. There will still be the uninterrupted history, from Alexander Hamilton's day to my own, in which every payment has been made on every bond. Are there lots of other institutions with such a 200-year-plus track record? Let's not fear S&P. They can't make our bonds unattractive by calling them names."
But if Geithner gives such a speech to the Prez, won't it imply that markets can IN GENERAL look beyond the S&P rating (and the Moody's rating too) and reach rational conclusions about the instruments being rated?
Are the ratings agencies irrelevant, or are they important? If they are important enough to be worth regulating, aren't they important enough to be a serious threat to the marketability of bonds?
Obama might after all reply to Geithner in our imagined conversation in the Oval Office: "If we shouldn't fear S&P, it is because they don't really matter to the buyers of such instruments. But if they don't really matter, what is the point of regulating them?"
And that would be a very good question.
Sunday, January 25, 2009
The New York Times
A front page story in today's New York Times, by Stephen Labaton, onthe basis of "recent interviews with officials" and statements at the incoming crowd's confirmation hearings, tells us that the new administration will "move quickly to tighten the nation's financial regulatory system."
Both Mary Schapiro and Timothy Geithner -- the new heads of the SEC and the Treasury Department respectively -- say for example that they want to change the compensation model of credit rating agencies.
I'll link you to what I said about this issue in October in my other blog. If you don't feel like chasing that link, here's an incentive. Cows are involved.
But if even that incentive leaves you unmoved, here's the crucial (non-bovine) paragraph:
There is a powerful case to be made that the credit rating agencies have had an inherently conflict-prone business model, and that this has introduced an element of instability into the US financial system in recent years. In short, they're paid by the issuers they rate. If they rate an issuer's garbage AAA, that issuer will presumably give them repeat business. If they downgrade, the issuer has had the option of shopping around for a higher rating elsewhere. So there's been a race to the bottom, and anyone can get a AAA.
My own instinct, when faced with a perverse incentive structure of that sort, is to ask not "how soon can we get the government to prohibit this?" but raher, "what has the government done to encourage/empower this?"
In ther case of the CRAs and their compensation model, there are good answers to the latter question. But I don't like to become too predictable, so I won't pursue that. Consider it your homework assignment, dear reader.
Instead, I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale.
Mutual assured destruction. Just like the old Cold War.
Both Mary Schapiro and Timothy Geithner -- the new heads of the SEC and the Treasury Department respectively -- say for example that they want to change the compensation model of credit rating agencies.
I'll link you to what I said about this issue in October in my other blog. If you don't feel like chasing that link, here's an incentive. Cows are involved.
But if even that incentive leaves you unmoved, here's the crucial (non-bovine) paragraph:
There is a powerful case to be made that the credit rating agencies have had an inherently conflict-prone business model, and that this has introduced an element of instability into the US financial system in recent years. In short, they're paid by the issuers they rate. If they rate an issuer's garbage AAA, that issuer will presumably give them repeat business. If they downgrade, the issuer has had the option of shopping around for a higher rating elsewhere. So there's been a race to the bottom, and anyone can get a AAA.
My own instinct, when faced with a perverse incentive structure of that sort, is to ask not "how soon can we get the government to prohibit this?" but raher, "what has the government done to encourage/empower this?"
In ther case of the CRAs and their compensation model, there are good answers to the latter question. But I don't like to become too predictable, so I won't pursue that. Consider it your homework assignment, dear reader.
Instead, I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale.
Mutual assured destruction. Just like the old Cold War.
Wednesday, November 12, 2008
The next Treasury Secretary?
There's a good deal of speculation these days about the composition of the incoming Obama cabinet. It gets almost as much attention in the broadcast networks' news shows as the choice of a new White House puppy.
One intriuing bit of guesswork is that Timothy Geithner may be the next Treasury Secretary.
Geithner, who since November 2003 has been president of the New York Fed, would be a non-partisan choice, certain of Senate approval sans fireworks. He has held important posts under both the Clinton and the Bush (II) administrations, and is himself an avowed independent.
The New York Fed, institutionally, is the Wall Street annex of the federal reserve system itself. Though the brains of our central bank has to stay in Washington, it has to have both its eyes and its hands in southern Manhattan.
Geithner was profiled in the June issue of Portfolio, by Gary Weiss. In those innocent days, before the Lehman collapse, before the stock market panic of September and October that killed the McCain campaign and led to the nationalization of key financial firms -- before all of that, Weiss focused on Geithner's "informal brains trust," a group of Wall Street luminaries with whom he has been consulting.
These may also be figures of moment in Washington for all or some of the next four years: John Thain; Gerald Corrigan; Paul Volcker. No spring chickens in the group. John Thain is the reative youngster, at a spry 55 years. Volcker was the head of the Federal Reserve in the late Carter and early Reagan years, for goodness sake. Corrigan was Volcker's special assistant in those days.
If the Obama administration recruits its economic team from such a crowd, it will have made the decsion that the country needs some old wise white-haired heads around, for when those emergency calls come in at 3 AM from Greenwich, CT or the Isle of Man.
One intriuing bit of guesswork is that Timothy Geithner may be the next Treasury Secretary.
Geithner, who since November 2003 has been president of the New York Fed, would be a non-partisan choice, certain of Senate approval sans fireworks. He has held important posts under both the Clinton and the Bush (II) administrations, and is himself an avowed independent.
The New York Fed, institutionally, is the Wall Street annex of the federal reserve system itself. Though the brains of our central bank has to stay in Washington, it has to have both its eyes and its hands in southern Manhattan.
Geithner was profiled in the June issue of Portfolio, by Gary Weiss. In those innocent days, before the Lehman collapse, before the stock market panic of September and October that killed the McCain campaign and led to the nationalization of key financial firms -- before all of that, Weiss focused on Geithner's "informal brains trust," a group of Wall Street luminaries with whom he has been consulting.
These may also be figures of moment in Washington for all or some of the next four years: John Thain; Gerald Corrigan; Paul Volcker. No spring chickens in the group. John Thain is the reative youngster, at a spry 55 years. Volcker was the head of the Federal Reserve in the late Carter and early Reagan years, for goodness sake. Corrigan was Volcker's special assistant in those days.
If the Obama administration recruits its economic team from such a crowd, it will have made the decsion that the country needs some old wise white-haired heads around, for when those emergency calls come in at 3 AM from Greenwich, CT or the Isle of Man.
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