Not wanting to waste too much more time dealing with someone who is either unable or unwilling to understand the issues, I’ll confine myself to the worst mistakes in Yves Smith’s latest post. She’s really grasping at straws at this point.

“The FDIC showing up on site and digging through records runs the very real risk of kicking off an even faster response than the Bear rumors did.”

Let me make this clear, yet again: the FDIC would already have permanent on-site personnel, under their Title I resolution plan authority. Since resolution plans are an ongoing process, the FDIC’s on-site personnel would already be routinely requesting the exact same type of information that they would be requesting during pre-resolution due diligence. So this would not have been a situation where there are no FDIC personnel at Lehman, and then suddenly a bunch of FDIC people show up, telegraphing the resolution. How many times does this need to be explained to Yves before she processes it?

“Dodd Frank has no force under English law. That means that the FDIC cannot prevent contract termination for agreements under English law. The FDIC and EoC can huff and puff all they want, but the US regulators do not have the power to overturn foreign statutes and case law.”

Neither I nor the FDIC ever said that Dodd-Frank has any force under English law. The FDIC explicitly stated, however, that it would have conditioned its P&A for the holding company on the acquirer’s acceptance of LBIE (Lehman’s UK broker-dealer). That does not require Dodd-Frank to have any force under English law. It would also mean that LBIE would not have had to file for bankruptcy in the UK (or “administration,” as they call it across the pond), which would have prevented the vast majority of contract terminations for contracts under English law. This is not that difficult to understand.

“Let’s assume that the FDIC had moved to resolve Lehman in March of 2008. What might a smart foreign creditor do? Well, if his agreement with Lehman was under English law, he could argue that the fact that Lehman was being resolved meant it was trading insolvent and it needed to put into administration now to protect him from exposure to further losses.”

Huh? Yves is confusing the start of the pre-resolution planning process (in March 2008) with the actual resolution (in September 2008) — an extremely basic distinction. The FDIC starting the pre-resolution planning process is not termination event, so no, foreign creditors could NOT have pre-emptively put LBIE into administration.

“And the critical point is that Barclays was NOT ready to buy Lehman, unless a liquidity backstop was in place. This has been widely misreported in the US, and EoC falls right into line with that bit of PR, blaming the FSA for killing the Barclays deal.”

This isn’t accurate — and the FSA paper (which is of dubious accuracy in the first place) doesn’t say what Yves claims it says. What prevented Barclays from buying Lehman was indeed the issue of a guarantee of Lehman’s trading obligations. But it wasn’t because they weren’t willing to guarantee Lehman’s trading obligations — that is, it wasn’t the economics of the deal. It was because in order to issue the guarantee, they needed the FSA to waive the UK’s Listing Rules, which required shareholder approval for such a guarantee. The FSA was unwilling to provide that waiver. But Barclays was willing to buy Lehman, contingent on the waiver from the FSA.

“We’ve said before that Economics of Contempt too often relies on slurs and rhetorical tricks, waving his credentials as a securities lawyer when he is on weak ground. His latest post is an extreme example of his reliance on distortions to cover for a bankrupt argument.”

Actually, I didn’t mention my credentials at all. Good try though.

As for which one of us “is simply not to be trusted,” I’m going to go out on a limb and say it’s the one who has made a series of basic legal and factual mistakes.


Anonymous said...

I understand that you're arguing, though not so much what you're arguing about.

Would it be asking too much to have you explain the difference between Yves Smith's being correct and your being correct. That is, what's the point? Why does it matter?

Steve said...

@Anonymous: If EoC's right, the Dodd-Frank "resolution mechanism" for an orderly winding-down of systemically important financial institutions (including non-banks) who are facing collapse, would be sufficient to prevent another Lehman-style failure. Thus Dodd-Frank regulations are strong enough.

If Yves is right, then Dodd-Frank is still too weak, and needs to be beefed up to adequately deal with TBTF institutions. Otherwise, another taxpayer-funded bailout of private TBTF shareholders will happen next time one of them teeters on failure.

Sarah said...

Steve- Thank you! That's a very helpful summation. It even makes it possible to draw some tentative conclusions of my own without having to agree with either party in this argument that the other side is an idiot.

Given the track record of the industry, I think it fairly likely that if the insiders think proposed regulation is adequate and outsiders don't, chances are pretty good the outsiders are right, irregardless of the specifics.

Anonymous said...

Sarah, what is odd here is that you think that there are "insiders" and "outsiders" in this sort of statist, corporatist and quasi-fascist schemer. Rather, there are "winners" and "losers" based, other than on mere brute animal luck, on political connections.

All one need do is look at how competitors gained from the destruction of Lehman and who their friends are. Witness Goldman Sachs or Morgan Stanley (or AIG or CITI for that matter).

But what s very strange is that you think that "outsiders'--read the "political class" and their "enperts", and most certainly not "the people"--have either some greater moral clarity and impulse, or competency than your so-called "insiders". It is a corrupt and power mad poltical class that is at the root of much of our problems.

Dodd and Frank? Seriously now, these people could not run a hot dog stand without a subsidy, and in fact have never had real, wealth producing jobs in their lives. They are corrupt politcal hacks. What real practical or moral insights do you think that they could possibly have? Let us all note that it is the idiocy of bankrolling government mandates through derivatives that got us here in the first place. Has it occurred to you that their votes are up for sale to the so-called "insiders" you so deplore? Your "outsiders" should not be allowed to "regulate" the sewage plant of a small town, let alone the American economy. To see this, all one need do is Schumer railing about "the integrity of the brand" of the NYSE as it is sold off to foreigners.

The solution is to get the regulatory state out of it all together, let people go broke and others go to jail. This wlll most swiftly provide moral clarity, beleve you me.

If the prme reason for New Deal era regulatory and "insurance" bodies such as the FDIC was to protect the "consumer" or the economy at large, then clearly they have failed, and this has been demonstrated over and over again since their inception. It is a ridiculous thing to be doing, and rather unconstitutional one as well. The state has no business here and its presense will only lead to mischief. Dodd-Frank will just make matters worse and lead to more corruption. It will also weaken American finacial firms.(As an aside, the federal government has no business "insuring" the "deposits" of anyone. This introduces profound moral hazard)

But that is not really the reason that such things exits at all, now is it?

Anonymous said...

Sarah, in a loose sense of the word both sides here are "insiders". Ms Smith was a corporate finance person at a 4th rate investment bank. Mr EoC works on the trading side. Generally the two sides don't get on.

As for this particular argument, the facts are not on Ms Smith's side - they usually are not- and whilst the resolution might not be adequate, it will not be for the "reasons" put forward by Ms Smith.


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