Protesters from the “99 percent” movement marched on the Upper East Side of New York City Tuesday, planting themselves on a block between FAO Schwarz and Bloomingdale’s where high-profile members of New York’s moneyed elite live. (more…)
If the 5,000 plus demonstrators that marched to the Mortgage Bankers Assocation (MBA) annual meeting in Chicago on Monday are any indication, the city has had enough of the MBA. (more…)
From today’s Wall Street Journal:
Women are fading from the U.S. finance industry.
In the past 10 years, 141,000 women, or 2.6 percent of female workers in finance, left the industry. The ranks of men grew by 389,000 in that period, or 9.6 percent, according to a review of data provided by the federal Bureau of Labor Statistics. The shift runs counter to changes in the overall work force. The number of women in the U.S. labor market has grown by 4.1 percent in the past decade, outpacing a 0.5 percent increase in male workers. The difference is pronounced at brokerage firms, investment banks and asset-management companies. [...]
[Y]oung women are becoming more rare in the country’s banks, brokerage houses and insurance companies. Since 2000, the number of women between the ages of 20 and 35 working in finance has dropped by 315,000, or 16.5 percent, while the number of men in that age range grew by 93,000, or 7.3 percent.
From a round-up of studies showing women are better investors than men, as they are likely to have lower short-term returns but are much better at avoiding catastrophic losses:
Women made fewer investment mistakes and were less likely to repeat them — or at least to admit to survey takers that they repeated them. [Merrill Lynch] said its results showed 35 percent of women said they had held a losing investment too long, while among men it was 47 percent. The worst part: Of those who did it once, 48 percent of the women and 61 percent of the men admitted to doing it again.
Similar gender differences turned up on other issues: 13 percent of women and 24 percent of men said they had bought a hot investment without doing any research. The men were more likely to repeat that mistake. “Everyone makes mistakes,” said Hannah Grove, chief marketing officer of Merrill Lynch Investment Managers. “Successful investors learn from theirs.”
The numbers come from a telephone survey of 1,000 people with household incomes of at least $75,000 and investable assets of at least $75,000. They jibe with what other surveys and studies have found.
Terrance Odean, a University of California at Davis professor who also has studied the issue, found women earn slightly better returns because they trade less frequently. Men, he says, are overconfident. That showed up in the Merrill Lynch survey, too. Women were more likely to say they are not knowledgeable about investing and more likely to rely on a financial adviser. Other studies show men are more willing to take risks and invest more aggressively than women.
(Photo: Flickr Creative Commons/David Paul Ohmer)
This morning, a little, wonky blog post is creating a lot of controversy. Economics of Contempt writes:
Here’s a scary thought: Let’s say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to “break the buck,” which leads to another run on money market funds.
The Fed would be powerless to help. The Fed’s emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved “by the affirmative vote of not less than five members” of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama’s three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).
While I don’t expect this scenario to happen, it’s certainly not out of the realm of possibility. And if it did happen, the Fed would have to sit on the sidelines and watch the carnage unfold.
I understand that Senate floor time is scarce (really, I do), but this absolutely has to be at the top of the list. Yes, I know it would be time-consuming to overcome Sen. Shelby’s opposition, but you know what? Screw Shelby. This has to get done, and soon.
Let’s translate a bit. The worst of the financial crisis — not the whole recession, including housing and jobs and businesses and investment, just the part of the recession that really mucked up the United States’ big banks — hit in the fall of 2008. Lending markets seized. That did not just mean that banks could not give loans to homeowners or companies. It meant that banks had trouble loaning cash to one another.
The Federal Reserve recognized the credit crunch as a catastrophe, and immediately took extraordinary measures to prevent the equivalent of an old-fashioned bank run in the invisible interbank lending market. Out of thin air, the Fed created programs like the Term Asset Loan Facility, a $1 trillion fund to secure the asset-backed securitization market — a major source of financing for banks and other companies. The alphabet soup of emergency Fed programs, including TALF, helped to thaw credit markets and stabilize the banking system.
But, Economics of Contempt notes, due to the opposition of one senator — Richard Shelby (R-Ala.) — the Fed does not have enough seated members on its board to create such programs in a crisis. And Congress does not have the wherewithal or speed to create them itself. Granted, there’s no emergency on the horizon. But, given that the United States is suffering from, oh, possible disinflation, mass long-term unemployment and record high debts, now is hardly the time to short-staff the central bank.
At The New York Times, Sewell Chan has more details on the problem of vacancies in important economic positions.
(Photo: Lauren Victoria Burke/WDCpix.com)
Today, the Financial Crisis Inquiry Commission — the bipartisan panel examining the causes of the financial crisis that plunged the country into recession — is up with another round of hearings. The FCIC is due to complete a comprehensive report, à la the Pecora Commission that studied the 1929 crash, by Dec. 15. But The New York Times reports not all is well:
In May, the commission’s executive director was moved aside and succeeded by an economist from the Fed, a decision that drew criticism since the central bank is an object of the investigation because of its leading role in handling the crisis. In addition, five of the commission’s 14 senior staff members have resigned, including Matt Cooper, a journalist who was drafting the report.
Moreover, the commission’s chairman, Phil Angelides, and vice chairman, Bill Thomas, are finding it challenging to maintain support from all eight other commissioners. While squabbling within the panel has not broken into open dissent, several commissioners are divided over how much to blame specific individuals and banks, how and when to release the documents it has gathered and whether to make available testimony of government officials and bank executives it has interviewed privately.
In a joint interview by phone on Tuesday, Mr. Angelides, a Democrat, and Mr. Thomas, a Republican, said that the turnover’s effects had been exaggerated and that they were optimistic about a consensus.
“We’re doing our very best, and we will do our level best,” said Mr. Angelides. He said he had spoken recently with Thomas H. Kean, the former New Jersey governor who led the 9/11 Commission, which produced an acclaimed report that was a surprise best seller. “Several weeks out, they doubted whether they would get any kind of agreement on anything,” Mr. Angelides said.
The FCIC has always been something of a lame duck. It will complete its work months after the financial regulatory reform bill became law, and will have done little to help legislators draft the bill. Moreover, its report will come out after dozens of other books and reports on the financial crisis — long after government, journalism, economics and Wall Street itself got a handle on, if not a perfect understanding of, just what tipped banks into chaos.
That said, the FCIC is performing an enormously important function in demanding answers of the Wall Street titans responsible. It used its subpoena power, for instance, on Warren Buffett. And today, the FCIC is speaking with Dick Fuld, the now-reclusive former head of Lehman Brothers, whose spectacular collapse kicked off the worst of the credit crunch.
Despite the media and political attention paid to strategic default, we actually don’t know that much about it. The phenomenon is as old as the Great Depression, but has not been common in decades. We do not know how prevalent it has become. We do not know the extent to which the phenomenon is driven by new social acceptance. There is not even a commonly accepted definition of strategic default — what line separates “strategic defaulters,” who can still afford to pay the bank, from plain old defaulters, who cannot? A few thousand dollars in the bank? Any employment income at all?
Federal Reserve economists Neil Bhutta, Jane Dokko and Hui Shan have a new paper bringing the data to bear on those questions. They studied homebuyers from Arizona, California, Florida and Nevada — the states hit worst by the subprime bubble — who took out mortgages in 2006. All of the borrowers took out non-prime mortgages and put no money down. By September 2009, four in five had defaulted.
The study attempts to figure out which underwater homeowners defaulted “strategically,” and why. To do so, it adjudicates between two hypotheses for the motivation for default. The first is that “default occurs when a borrower’s equity falls sufficiently below some threshold amount and the borrower decides that the costs of paying back the mortgage outweigh the benefits of continuing to make payments and holding on to their home” — strategic default, or “the ruthless borrower” effect. The second is the “double trigger” hypothesis: When homeowners are underwater on their mortgage, “default occurs only when combined with a negative income shock,” like job loss or illness.
Here’s the summary of the findings:
After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home’s value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.
Additionally, it concludes:
Our results suggest that while strategic default is fairly common among deeply underwater borrowers, borrowers do not ruthlessly exercise the default option at relatively low levels of negative equity. About half of defaults occurring when equity is below -50 percent are strategic but when negative equity is above -10 percent, we find that the combination of negative equity and liquidity shocks or life events drives default. Our results therefore lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.
Essentially, if still employed and healthy, these homeowners with subprime mortgages did not walk away until they owed $161,000 on a $100,000 home — meaning they would owe the bank something like $61,000 in the case that they sold it. And four in five defaults came from “income shocks,” like job loss. This suggests to me the best way to deal with strategic default remains bolstering job growth and supporting cramdown in areas where home prices have fallen considerably.