Thursday, August 25, 2016

Change of guard at RBI

On the Saturday that Raghuram Rajan sent his letter to employees saying he would not be staying on after completing his term, I got a call from the correspondent of a foreign paper seeking my reaction. The correspondent told me that the name of Rajan's successor would be announced on Monday itself as the government wanted to ensure there was no uncertainty. I told him that was most unlikely- a process would have to be followed, including approval by the Cabinet Committee on Appointments. He insisted his information was from reliable sources.

Well, it's taken a while since then for the appointment to be announced. In the intervening period, the media speculation on the subject has been unbelievable. They said the appointment would happen by mid-April, soon after the PM returned from his visit to Africa. It didn't. Modi had told WSJ that the RBI governor's appointment was an administrative decision. Since the governor's term expired in early September, a decision would be taken close to that date. He has been true to his word. One hopes the media begins to take the PM more seriously hereafter.

As for the candidates, the front-runner kept changing every few days. Initially, it was said that it would be some internationally known economist of stature comparable to Rajan's. Perhaps Arvind Subramanian?.. he was well known and was also less hawkish than Rajan, so he had a great chance.  A little later, it was ...no, no, it would be a bureaucrat who was on the same wavelength as the government. Shaktikanta Das, Expenditure Secretary, emerged as a favourite. Further on, BREAKING NEWS....Arvind Panagariya was set to be named (never mind that he had Cabinet Minister rank and this would be a step down for him). 

A few days later, it Arundhati Bhattacharya's turn. Sorting out the banking mess was now the priority, hence a banker! Two other names entered the fray at some point, K V Kamath and Kaushik Basu. Then, one day, there was a buzz around Subir Gokarn... he had met Rajan and Das, so there must be something to it? (As though the government would first share the news with the RBI governor).

One is glad this silly game has ended. To give the media its due, Urjit Patel was always in contention although I don't recall his being cited as the hot favourite.

One thing is clear. The government runs a tight ship, so the media is pretty clueless on these matters. It also appears that a rigorous process has been followed. Two rounds of the Committee on Financial Sector appointments followed by discussions between the PM and the FM. This is as it should be. Due process must be followed in the case of high appointments, so all credit to the government for adhering to one.

After the announcement, the excitement moved to a dissection of the governor-designate. Would he continue Rajan's hawkish stance? Or would he be something of a dove? Neither, they said, he would be an owl!

The usual platitude was rolled out- there would be continuity with change, although it wasn't clear what would continue and what would change. One paper quoted government officials saying that they expected Patel to take a more "balanced" approach to inflation. Fighting inflation was, of course, a priority but he should not ignore growth.

The fact of the matter is that no governor has much of a choice on interest rates, now that the Monetary Policy Framework has articulated the inflation rate band (4 plus or minus two per cent) and also said that the indicator used would be CPI. The governor is also somewhat constrained by the proposed constitution of a Monetary Policy Committee. We are bound to have continuity in respect of monetary policy.

The more interesting question is whether there will change in respect of the banking sector. Patel does have the option of relaxing the accelerator on NPA recognition and giving PSBs and the corporate sector a bit of a breather. Whether he opts for this course or not depends on the view that he and the government will take on PSBs. It does appear that there is an effort on to shrink the market share of the PSBs by curbing their access to capital and hence their ability to lend. Even if this is the game plan, it would be unwise to push it at this point because then lending to the corporate sector and infrastructure will be stuck. That would not be good for the economy. One has to see whether pragmatism trumps ideology in the incoming governor's approach to PSBs.

There's just one other observation I'd like to make. Perhaps Rajan's biggest contribution, which has gone unheralded, is that he changed the stuffy, hierarchical culture of the RBI. He made himself accessible to staff at all levels (I was told they only needed to check with his secretary whether he was free and could walk in). Rajan himself did not hesitate to drop in at colleagues' offices, sometimes just for a casual chat. In more ways than one, he took away the aura of aloofness and inaccessibility attached to the governor's office (and now the governor's floor)- this was no small achievement in an organisation in which the governor had always been some distant God perched on the top floor.

In meetings, he was refreshingly free from airs of any kind, unfailingly polite and courteous and a good listener, as I can myself vouch for. This was not an affectation, it was a genuine something, just an aspect of the personality of a very cultured person. Perhaps, it helped that Rajan came from an academic background, not a bureaucratic one.

This was a great contribution because organisations are ultimately about team work, motivating and leading by example. In an organisation such as RBI, you cannot motivate through bonuses and stock options. You can only motivate by creating a culture where people feel respected and cared for. Three years is too short a period in which to bring about a radical change in culture but we must salute Rajan for his efforts.











Friday, August 19, 2016

Deutsche Bank whistle blower refuses SEC award

A former investment banker who blew the whistle on Deutsche Bank in a case involving wrong valuation of its derivatives portfolio has declined the $8.5 mn award given to him by SEC ( his ex-wife and lawyers have a claim on some of it).

In an article in the FT, he explains he's doing so because he's unhappy that the SEC let off senior executives of the bank:
But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims.
Meanwhile, top executives retired with multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet. It is therefore especially disappointing that in 2015, after a lengthy investigation helped by multiple whistleblowers, the SEC imposed a fine on Deutsche’s shareholders instead of the managers responsible.
Compare this outcome with a contemporaneous SEC enforcement action against the less connected executives of a smaller firm, Trinity Capital, and its subsidiary Los Alamos National Bank. The violations at Trinity seem similar to Deutsche, but orders of magnitude smaller. Five executives at Trinity were charged, the chief executive settled and paid a fine, and litigation continued against two senior officers. 
He explains that this happened because of the "revolving door" sydrome about which I have written often:
So why did the SEC not go after Deutsche’s executives? The most obvious concern is that Deutsche’s top lawyers “revolved” in and out of the SEC before, during and after the illegal activity at the bank. Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013. Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.
This goes beyond the typical revolving door story. In this case, top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing.
This is a classic case of regulatory capture. And because regulations will always be weak and will be undermined by crony capitalism, the idea that free markets can function efficiently, subject to their being regulated properly, will remain a myth.




Lehman Brothers should have been saved

One of the biggest controversies around the financial crisis of 2008 is about the decision to let the investment bank Lehman Brothers fail.

The moment that happened, it was as though somebody had dropped a bunker-busting bomb on a shaky and dilapidated building. The money market mutual funds, on whom the banks depended for short-term funds, withdrew their funding raising the prospect of the collapse of the financial system. It required a series of bailouts, including that of insurance giant AIG, and the guaranteeing of money market mutual funds' investment in banks, to rescue the system.

One argument trotted out at the time was that the US Treasury Secretary Hank Paulson wanted to send out a clear message on moral hazard to big players: no more rescues. However, since further rescues followed the failure of Lehman, that argument has worn thin. The official position since has been that the Fed simply could not provide liquidity to Lehman because it was not solvent and could not provide the necessary collateral. The Fed would violated the laws applicable to it had it tried to save Lehman.

Larry Ball of Johns Hopkins has done a brilliant analysis of the Lehman failure and he finds that the arguments don't stand up to scrutiny. He believes that Lehman was allowed to fail because the US Treasury and the Fed didn't quite anticipate the disastrous consequences that would follow. He also contends that the Fed has failed to provide the necessary documentation to substantiate its contention that Lehman wasn't solvent at the time.

More in my article in the Hindu, The cost of political interference

Tuesday, August 09, 2016

More on helicopter money

I wrote about the possible use of helicopter money in the UK in my last post. The question is asked: how different is helicopter money from Quantitative Easing. Helicopter money is the government financing its spending by borrowing from the central bank. This leads to an increase in the creation of money. In QE too, the central bank pumps money into the system by buying bonds from banks.

So, where is the difference? As an article in the Economist explains, QE is, in theory, subject to reversal. The central bank can sell back the bonds in the market. This, of course, has not happened with the QE we have since post the crisis of 2007. Helicopter money, on the other hand, is a permanent expansion in money supply. It can, therefore, be expected to have a more stimulatory effect.

The flip side is that the markets would view helicopter money unfavourably for precisely that reason. It is easy money for governments- it's just a matter of dipping one's hands into the central bank's till. This could easily lead to a sharp depreciation in the currency.

Friday, August 05, 2016

Helicopter money for the UK

'Helicopter money' is a policy option that is being urged seriously by serious economists. In its most literal form, it means dropping money from a helicopter. People who get the notes will go out and spend.This will boost aggregate demand, which is the policy objective today.

On the other hand, people may not spend the money, they may hoard it. For the UK, Robert Skidelsky favours other approaches that have been in the public domain:
The government should pay for, say, an investment programme not by issuing debt to the public but by borrowing from the central bank. This will increase the government’s deficit, but not the national debt, since a loan by the central bank to the government is not intended to be repaid. Thus the government acquires an asset but no corresponding liability.
However, this is only one possible form of helicopter money. Another way of achieving the desired increase in spending was suggested by the Swiss businessman, Silvio Gesell, in 1906. His idea was to give cash directly to households. But to give people an incentive to spend the money and not hoard it, there had to be a cost to holding on to it. In his scheme, unspent currency notes would have to be stamped each month by the post office, with a charge to the holder for stamping them. 
The combination of the two methods, Skidelsky believes, could be used to inject £100 bn into the British economy. This would, of course, be a repudiation of the austerity measures pursued by ex- Chancellor George Osborne.



Greek tragedy wrought by the IMF

So, Greece, which had paid higher yields than others in the Eurozone before it was created, could now borrow cheaply. The obverse of such borrowings was a widening current account deficit. Following the financial crisis of 2007, the markets became sensitive to sovereign risk. They sensed the possibility of sudden stops to capital flows that had financed large current account deficits. Yields on Greek sovereign bonds began to rise. Large amounts of Greek public debt were falling due. It became clear that some private creditors would not be willing to roll over debt and, even if they did, the government could not afford to borrow at the higher yields.

The IMF and the EU stepped in to organise a €110 bn bailout. The objective in any bailout must be to restore an economy to health. The Greece bailout has clearly failed to accomplish that. That's because IMF did not ensure that the terms of the bailout ensured sustainability of debt. This is astonishing because the IMF's rules required exceptional access to finance to be provided only after this condition was satisfied. How this norm and other norms were circumvented is a story that is well told by the IMF's Independent Evaluation Office, the IEO.

More on this in my article in the Wire, How the IMF bungled the Greek crisis

Wednesday, August 03, 2016

Did you know? Milosovic has been exonerated!

Would you believe it, the former Serbian President Slobodan Milosovic, widely reviled as a genocidal tyrant, has been exonerated by the International Criminal Tribunal for former Yugoslavia! I'm sure I'm among the vast numbers of people who had assumed that he had committed ghastly crimes that ended only with the liberation of Serbia through Nato bombing.

I guess we should have known better. This piece of disinformation was put out by the west and its obedient media and lives on long after Milosovic's death while still under trial. The exoneration is contained in the judgement that convicts the Bosnian Serb Radovan Karadzic, according to a terrific report in RT.com (on which I had my last post) by well-known journalist and Guardian contributor Neil Clark:
For the past twenty odd years, neocon commentators and 'liberal interventionist' pundits have been telling us at every possible opportunity, that Milosevic (a democratically elected leader in a country where over 20 political parties freely operated)  was an evil genocidal dictator who was to blame for ALL the deaths in the Balkans in the 1990s......
But the official narrative, just like the one that told us that in 2003, Iraq had WMDs which could be launched within 45 minutes, was a deceitful one, designed to justify a regime change-op which the Western elites had long desired.

The ICTY’s conclusion, that one of the most demonized figures of the modern era was innocent of the most heinous crimes he was accused of, really should have made headlines across the world. But it hasn‘t. Even the ICTY buried it, deep in its 2,590 page verdict in the trial of Bosnian Serb leader Radovan Karadzic who was convicted in March of genocide (at Srebrenica), war crimes and crimes against humanity. There was no official announcement or press conference regarding Milosevic‘s exoneration.

Clark  says that Nato put it out that Milosovic had perpetrated horrible crimes in Kosovo. This was proved false by a UN court in 2001. Then, Nato latched on to alleged crimes of his in Bosnia. This claim too has now been thrown out.

The Western propaganda machine has since found other targets: Afghanistan, Iraq, Libya, Assad, Putin:
Since then we’ve also had the NATO destruction of Libya, the country which had the highest living standards in the whole of Africa and the backing of violent 'rebels' to try and achieve ‘regime change’ in Syria.
You don’t have to be Sherlock Holmes to see a pattern here.Sinc
Before a US-led war or ‘humanitarian intervention’ against a targeted state, a number of lurid claims are made about the country‘s leader and its government. These claims receive maximum media coverage and are repeated ad nauseam on the basis that people will bound to think they’re true.
Later it transpires that the claims were either entirely false (like the Iraq WMD ones), unproven, or greatly exaggerated. But the news cycle has moved on focusing not on the exposure of the fraudulent claims made earlier but on the next aggressive/genocidal ‘New Hitler’ who needs to be dealt with.  In 1999 it was Milosevic; now it’s Assad and Putin.
You won't find such stories in the western mainstream media. That's why you should go to channels such as RT.


Sunday, July 31, 2016

RT: Russia's very effective counter to western propaganda

In the course of surfing the Net some time ago, I stumbled on RT, formerly Russia Today, which presents news and perspectives from a point of view (not necessarily Russian) different from that of the mainstream media.

It's easy to brand it an arm of Russian propaganda but I have found the news coverage sober and balanced and, what's important, it does present a refreshingly different perspective. RT is a must read for anybody wanting to arrive at a rounded assessment of international affairs in the face of the fare dished out by mainstream western media.

FT carries a fascinating interview with its editor, Margarita Simonyan.

Here's a telling quote:
“I don’t see why you have the nerve to think that you know better than anyone how to run the world, and who’s marginal in the world and who isn’t. You’ve made so many mistakes, you’ve started so many wars in the last few years, destroyed so many lives, killed so many people, created so many problems.”

Update: Here's a link to an NYT story on how RT is covering the presidential elections in the US. Its' worth pointing out that RT's correspondents and contributors are not just Russian- it hires locals. In the US, it has roped in former talk show host Larry King.

Saturday, July 30, 2016

The 'revolving door' in finance continues to revolve

Mervyn King, former Governor of the Bank of England, has taken up a position as a senior advisor to Citigroup, FT reports. See also this story in the FT. The FT report notes the following:
Lord King has repeatedly criticised banks and bankers in the wake of the financial crisis, both during his tenure as governor, up to 2013, and since. He has described bankers as “incompetent and greedy”. In 2009, he told a parliamentary committee that the “vast amounts of money beyond the dreams of ordinary people” paid to bankers had engendered a reckless culture in the City of London. A year earlier, he bemoaned as “unattractive” the fact that so many top graduates were drawn to the City rather than other more worthwhile careers.

King follows in the footsteps of former US Treasury Secretary who hopped on to Citigroup after his stint as Treasury Secretary. FT mentions other such instances in recent times:
  • Former EU President Jose Manuel Borroso has joined Goldman Sachs as chairman, a move that the French president Francois Hollande called "morally unacceptable"
  • Former British PM Tony Blair got a juicy $2 mn a year contract from JP Morgan
  • Former Fed Chairman Ben Bernanke took up an advisory position at Pimco, the bond trading house
Those who have served in government or with regulatory agencies are in demand for obvious reasons. They can iron out problems with regulators or they can make phone calls that open doors on the strength of the relationships they have acquired while in government. The problem this poses is two-fold. One, it's not healthy for an ex-regulator or government servant to use his contacts to sort out regulatory issues of a private party. Another, more critical issue is: what degree of independence can one expect of a regulator or government servant while in service when it comes to dealing with important financial institutions? Who would not want to curry favour in the knowledge that a heft contract awaits on retirement on exit?

Thus, the 'revolving door' syndrome poses a serious threat to the framing of laws and regulations. How do we deal with it? An outright it may not be an answer because it could prevent talent from coming into government or regulatory agencies. Many argue that since jobs in government or in regulation are not well paid, there is every justification for those who have done these jobs to encash their expertise in the private sector by taking up advisory roles or serving as 'independent' directors ( the use of quotes is deliberate).

It's worth noting that RBI governors in general have conducted themselves much better. Y V Reddy faded gracefully into retirement and D Subbarao preferred a Fellowship at NYU to private sector offers. I recall Dr Subbarao being quoted as saying that he found that the terms offered to him seemed to have more to do with his association with the RBI than with the nature of the assignment offered to him. C Rangarajan served the government in various capacities and steered clear of the private sector.

I suppose one way to deal with the revolving door problem would be to give regulators a substantial payment (say 100 per cent of their salary) for, say, three years after they have stepped down in exchange for their committing not to associate with the private sector at the time they take up positions in regulatory agencies. Again, some may not be willing to join even on these terms but at least this goes some way towards addressing the problem.