Credit Default Swaps and Control Rights

By Charles Davì

Megan McArdle asks, “Do We Hate Credit Default Swaps for The Wrong Reasons?” As Megan notes, blaming credit default swaps for all kinds of things is quite fashionable these days, since simply uttering the term makes commentators feel sophisticated. While this is itself a topic worthy of discussion, the more interesting point in Megan’s article concerns how credit defaults swaps affect the incentives of bondholders in the context of restructurings.

China Goes Continental

By Ranjan X. Roy

Asia’s answer to the yearly Davos gathering, the Boao Forum of Asia, ended last week with some choice words from Lou Jiwei, chairman of the China Investment Corporation (CIC), China’s primary sovereign wealth fund (SWF). Mr. Lou, in a tone ironic enough to satisfy even the snarkiest of us bloggers, indicated China’s intention to reexamine investment opportunities in Europe:

“I have to thank these European officials. They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again.”

The Art of the Banking Controversy

By Charles Davì

Now that we are well into the depths of a recession, banker-bashing is all the rage. In addition to being fashionable, these “arguments” have an air of credibility about them, given the dire context in which they are made. As a result, the debate over regulating the financial sector is being recontextualized by portraying Wall Street as little more than a vacuous pig-pen. This view is informed by a grand equivocation, which lumps together all of finance under one roof, somewhere on Wall Street, where bankers convene and discuss how they can further redirect the world’s resources towards their pockets. And the shapeless anger that follows from this view has consumed not only the main stream media, but bloggers as well.

Brad Delong takes the view that both compensation and profits in the financial sector are wholly unjustified. Matthew Yglesias agrees. Another even more dubious theory, also espoused by Matthew Yglesias, is that those in finance are morally inept. (You can find Conor Clarke’s response to Yglesias here). Together, Delong and Yglesias employ straw men, false dichotomies, equivocation, conflate coincidence and causation, and in general treat a complex subject with glib answers that suggest the authors have no concern with getting it right, or have just finished reading Schopenhauer’s, “The Art of Controversy.”

The Real Implications Of China’s Currency Policy

By Ranjan X. Roy

Yesterday, as Americans paid their taxes and partied like it was 1773, China took yet another action little noticed in the American media, but with major long term implications.  China finalized a deal with Argentina, arranging a $10.2bn currency swap of their respective currencies (70bn CNY/38bn ARS). While Michele Bachmann and the like were up in arms after Zhou Xiaochuan, Governor of the People’s Bank of China (PBoC), suggested that SDRs could potentially function as a new global reserve currency, this particular story appears to have garnered little attention from those paranoid of a “one world currency“. However, this development is of crucial strategic importance and should be recognized by US policymakers as a development that must be addressed, rather than proposing legislation that doesn’t even begin to make any sense.

The move will allow Argentineans to directly access Chinese Yuan for trade, rather than having to settle in US Dollars. Previously, as the USD has been the primary reserve currency for international trade, an importer would have to cross two “spreads”, first converting ARS to USD, and then the USD to CNY (just imagine having to go to the airport currency exchange twice just to buy a souvenir). The Argentine Central Bank is explaining the move as a “contingency plan to bolster liquidity amid the global financial crisis,” but this vague statement is better explained by Passport at Foreign Policy:

U.S. Foreclosure Mitigation: Too Little, Too Late? (Part 1)

By John Kiff^*

As U.S. home foreclosure rates rise to levels not seen since the Great Depression, government policy has consistently been too little, too late, and frankly, off target. In this series of posts, I’m going to do a fairly deep dive into the “end game” of the current mortgage crisis. (The “opening” and “middle games” have been well documented elsewhere – e.g., “Money for Nothing“.) In this first post, I’ll give a very broad-brush overview of the three government foreclosure mitigation programs that have been introduced since 2007. Then, I’ll talk about some of the reasons why they have failed (or are likely to fail).

FHASecure (introduced in 2007) and Hope for Homeowners (H4H, 2008) were designed to encourage lenders to write loans off in return for 90 to 97 percent of appraised home values. However, only about 4,000 loans were refinanced under FHASecure before it was closed down at the end of 2008, and less than 1,000 homeowners have applied for H4H short refinancings. These two programs failed largely because they left implementation to under resourced servicers, and placed almost all the writedown burden on the lenders and investors.

Michele Bachmann and SDRs

By Ranjan X. Roy

Michele Bachmann (R-MN), best known for her views on “re-education camps” and McCarthyism, recently introduced a “resolution that would bar the dollar from being replaced by any foreign currency,” in response to Chinese comments regarding the potential use of SDR’s as a global reserve currency.  When I paused to evaluate the resolution, visions of Freedom Fries danced through my head.

Rather than addressing the vital impact currency reserves and related policy have had on the current crisis and our future prosperity, Bachmann’s “legislation” was an absurd digression rooted in paranoia. Bachmann articulated her fears on the Glenn Beck show:

What that means is that all of the countries of the world would have a single currency. We would give up the dollar as our currency and we would just go with a one world currency. And now for the first time, we’re seeing major countries like China, India, Russia, countries like that, calling for a one world currency and they want this discussion to occur at the G20… Once you lose your economic freedom, you lose your political freedom. And then we are no more, as an exceptional nation, as we always have been. So this is imperative.

Central banks and monetary authorities globally have accumulated more than $6 trillion of currency reserves as of 2007, with 63.9% being held in USD. While the mechanics and history of reserve currencies are complicated, what is certain is the massive increase in USD reserves held by nations like China is a vital issue of economic policy that must be addressed to bring longer-term global prosperity into balance.