Levine on Wall Street: Information versus knowledge versus speed

A second feature is that the SCA accrues to shareholders as long as the bank is solvent, but it accrues to the regulator—rather than the bank’s creditors—in case the bank is insolvent and there isn’t an industry-wide rescue of banks. That is, in case of idiosyncratic failures, bank creditors are forced to take losses. The fact that creditors don’t benefit from the SCA in that case means that creditors have enough skin in the game to discipline banks.

Dual sovereigns

Should Credit Suisse be investigated over and over again for helping Americans evade U.S. taxes? Think about all the laws that tax evasion violated or, better, all the regulators’ turf that it trod on.

The IRS, obviously, but the SEC got in on the action too, and now New York financial regulator Benjamin Lawsky “will examine whether Credit Suisse lied to New York authorities about engineering tax shelters,” because the main crime in the world is lying to authorities. (I guess some New York state taxes were probably evaded too?)

What is your model for this? I think it starts with the idea that many, though not all, regulators are ambitious to expand their profiles, and so will compete with each other to bring bigger and faster and noisier investigations of high-profile, intuitively unappealing behavior, whether or not it is actually related to their core regulatory mandate.

This is good if you think there should be more investigations, and particularly if you think that the most obvious agency to investigate, here probably the IRS, is not so ambitious and needs prodding from the Lawskys of the world. On the other hand it’s probably exhausting if you are Credit Suisse, and it does not exactly contribute much to the clarity or certainty of the law. Asset quality reviewing isn’t free

“It’s an economic stimulus package for auditors,” complains a banker about the European Central Bank’s asset quality review, and you probably need a better model than that. Every regulation imposes compliance costs on the regulated, and “compliance costs” means in part (though not exclusively) “paying money to people who help you comply.”

But that is socially beneficial spending, one hopes. Anyway, the auditors and for some reason BlackRock are making out like socially beneficial bandits, or, at least, they “stand to reap about 400 million euros.” Meanwhile BlackRock is conducting “its most sweeping managerial overhaul in years,” so far without any stories of hilarious Pimco-style dysfunction.

Bonds are contracts

“Sears is getting rid of all the good stuff and leaving bondholders with the underperforming assets,” says an analyst about Sears Holdings’ spinoff of Lands’ End and other businesses. The classical theory says that Sears has fiduciary duties to its shareholders to maximize their returns, but has no such duties to its bondholders and so should take as much value from them as it can, to give it to the shareholders.

This is constrained by the contractual provisions of the bonds, and by the desire to avoid alienating bondholders so as to maintain access to the capital markets, but in some sense if your bondholders aren’t complaining you’re doing it wrong. Meanwhile, any 30-year bond is a leap of faith but, sure, a 30-year bond sold by a private equity firm that is still run by its original founders is especially faith-based.

Things happen

Is Jérôme Kerviel the poorest person in the world? How do you board a train? Brian Moynihan is underpaid, and before you snicker, ask yourself how much you’d want to take his job. Gerald Hassell is overpaid, though, apparently. Hedge funds still aren’t advertising. A previous Michael Lewis character is back in the news. “The plant also produces babies you can repot for underlings.”