Link Farm

• A unified theory of Superman's powers
• Almost half the BofA executives scheduled for pay restrictions have already left.
  

Limiting Banker Pay

I'm not sure what to think of Ken Feinberg's restrictions on executive pay at firms that received extraordinary help from the government.  On the one hand, like everyone else, I'm outraged at the sight of bankers paying themselves big bonuses out of profits made on the backs of bailouts and implicit guarantees that they can't "pay back".  On the other hand, this doesn't touch the current worst offenders, who have paid back their TARP funds.  Restricting bonuses only at the companies in which we now have a gigantic stake is emotionally satisfying, but bankers aren't just talking their book when they complain that talent is getting poached from bonus-limited firms.  I know it's fashionable to believe that traders are all a bunch of lucky, arrogant idiots, but there is some skill involved, and firms that lose their top people will probably underperform.

So how much am I willing to pay, in tax dollars, to make this well-deserved gesture?  Some.  But the recession has lowered the amount I'm willing to spend on gestures.

I suppose there's always the hope that this will encourage firms still in hock to the government to work as hard as possible to pay us all back.  But it's not a hope I'm awfully confident in.

Looking Back at Lehman

I haven't yet opened Andrew Ross Sorkin's new book, but Yves Smith has, and walks us through some of the juicier details of the Lehman collapse:

But three things are striking about the Sorkin-provided details:

First, Fuld (and presumably the underlying business) was desperate as of early July. Sorkin has Fuld arranging for contacts to be made to possible buyers like Bank of America on a Saturday. Huh? He was clearly flailing about, yet not offering a price or deal terms commensurate with his obviously panicked state.

Second, Paulson and Geithner were aware of Fuld's desperation. The Wall Street Journal reported earlier that Fuld was calling Paulson almost daily (and suggested Paulson was somewhat puzzled). The Sorkin excerpt shows Fuld petitioning the Fed via Geithner to become a bank holding company:

Mr. Fuld's outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested an idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Mr. Cohen had explained, would make it easier for Lehman to borrow money from the Fed "just like Citigroup or JPMorgan."

Mr. Cohen, a 64-year-old, mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. Pacing in his hotel room in Philadelphia before the wedding of his niece that night, he joined the call between Lehman and the New York Fed.

"We're giving serious consideration to becoming a bank holding company," Mr. Fuld started out by saying. "We think it would put us in a much better place." He suggested that Lehman could use a small industrial bank it owned in Utah to take deposits to comply with the regulations.

Mr. Geithner, who was joined on the call by his general counsel, Tom Baxter, was apprehensive. "Have you considered all the implications?" he asked.

Mr. Baxter, who had cut short a trip to Martha's Vineyard to participate, walked through some of the requirements, which would transform Lehman's aggressive culture, minimizing risk and making it a more staid institution, in league with traditional banks.

Regardless of the technical issues, Mr. Geithner said, "I'm a little worried you could be seen as acting in desperation," and the signal that Lehman would send to the markets with such a move.

Mr. Fuld ended his call deflated. Later that evening, Mr. Fuld called Mr. Cohen, finding his lawyer in the waiting room of a hospital, attending to a cousin who had become ill at the wedding.

Yves here. If Geithner and his colleagues didn't get that Fuld was at the end of his rope, they were choosing to ignore an elephant in the room. Now they may have been completely unwilling to consider the petition and this was the easiest way to signal their opposition (taking Fuld through a long list of requirements, some of which presumably would have been pretty painful, was another message).

But this speaks to a question we have raised again and again: why was there no serious assessment of what a Lehman bankruptcy would mean? After Bear went down, everyone knew Lehman was next on the list, with Merrill and UBS also known to be wobbly. Why didn't the Fed, Treasury, and SEC together demand certain types of information from all big US regulated capital markets players (including JP Morgan and Goldman, perceived to be the healthiest, so as not to be singling out the weaker members of the herd?). This is a massive oversight. Relying on luck, which is what assuming all would be well after the Bear debacle, is no substitute for having a strategy. There was clear urgency in July. Even a month of assessment and evaluation of options (it probably would have taken two weeks to orchestrate the information requests among the agencies) would have been better than nothing. But the Freddie/Fannie unwind was moving to front burner, that probably consumed a lot of available bandwidth.

And we have the third, and peculiarly most obvious point to anyone who has had some exposure to deals, but one that Sorkin does not bring forward: what the hell was Fuld doing trying to negotiate his own deals? This is a mistake CEOs make all the time, and it never ceases to amaze me.

Reading between the lines of conversations I've had with Fed and Treasury officials--though they never quite actually say it--both were well aware that Lehman (and Merrill) were on the rocks.   They had also decided that they were not going to take any extraordinary measures to bail them out, because they believed that the banks were in the grip of a serious case of moral hazard.  Indeed, this is possibly the most plausible explanation of Dick Fuld's unwillingness to make the kinds of deals that could have kept his firm from a catastrophic collapse--he thought his BATNA* was a bailout-backed fire sale, not the implosion of the company and his own probable personal bankruptcy as his shareholders filed suit.

So Treasury and the Fed spent the time between Bear and Lehman building contingency plans for the bankruptcy, rather than working as hard as hard could be to ensure that one didn't happen.  Then Lehman's collapse had an effect no one had anticipated:  the Reserve Primary Fund, a money market fund that held a lot of Lehman's commercial paper, broke the buck, triggering a general run on the money markets that only stopped when the government stepped in to backstop the losses.  Most of their contingency plans worked as intended, which is why the Lehman bankruptcy wasn't an even bigger disaster.  But the run in the money markets made it clear (or at least, made them fear) that they just weren't capable of planning their way around the failure of a systemic institution; the markets were too complicated, and trouble forestalled in one sector would just pop up somewhere else.  After Lehman, they stopped trying to orchestrate an orderly transition, and started pumping as much money into the system as they could without much worrying about the effect that this might (did) eventually have on banker psychology.

You can argue about whether this was the right decision, and certainly the current banker attitude towards the resulting profits is pretty galling.  But ultimately, I think they made the right decision in both cases.  In September, moral hazard seemed like a huge problem that was actually making the crisis worse, and would certainly make the likelihood of another one much higher.  After September, we knew better, but there was no way to find that out ahead of time.  Once we did, though, it made sense to try to shepherd the system through the crisis, and reform it later. You can always slap down bankers at some later date (though whether we will, of course, remains an open question).  But the families that lose their homes when unemployment spikes to 15% and the banks collapse take a long time to get back on their feet.

* Best Alternative To Negotiated Agreement

What Does It Mean to Be Too Big to Fail?

Economics of Contempt has an almost undescribably good post up on the problem of "To Big to Fail" resolution proposals.  I was having dinner with a friend from business school last night, and we talked about this quite a bit--and the more we talked, the more complications we found.

The problem is that "too big to fail" isn't about the size of a bank's balance sheet; it's about how tightly coupled that balance sheet is with other institutions.  The FDIC can resolve even a huge conventional commercial bank, because as long as the loans are sold and the depositors paid off, that failure doesn't suddenly and massively impair other peoples' balance sheets.

(It may, down the road, if for example a huge portfolio of real estate loans is written down, which casts doubt on the value of the collateral securing the loan books of other banks.  But that's different from triggering a bank run.)

It is pretty clear to me that the Fed and Treasury decided to let Lehman (or whatever bank tottered next, rather) fail, pour encourager les autres--and that despite months of preparation, they didn't foresee the meltdown in the money markets that this failure touched off.  Hence all the subsequent bailouts: no one could be quite sure what the fallout from further failures might be.

But the degree to which a financial institution is tightly coupled with other parts of the financial markets is a lot harder to measure than its leverage ratio, its balance sheet, or any of the other metrics that we'd like to use to wrap these institutions up into a nice, tidy, too-small-to-fail package.  As Economics of Contempt points out, the weakest part of the administration's plan is its reliance on crude metrics like capital levels:

I think the administration focuses too much on capital levels as the relevant measure of a Tier 1 FHC's health. The biggest problem with the PCA regime applicable to commercial banks is that too often commercial banks can go from "well capitalized" to insolvent without ever triggering the PCA requirements. This problem is even worse for Tier 1 FHCs. Lehman had a Tier 1 capital ratio of 11% as of August 31, 2008 -- just two weeks before it filed for bankruptcy. Had Lehman been a commercial bank, it wouldn't have triggered the PCA requirements until it was far too late. The administration's proposal requires that the PCA triggers (which it calls "capital standards") include a risk-based capital requirement and a leverage ratio.

I would make the PCA triggers less focused on capital levels, and more focused on the conditions that make Tier 1 FHCs susceptible to modern-day bank runs. For example, I would make one of the PCA triggers contingent on the tenor of the Tier 1 FHC's overall liabilities. As of August 31, 2008, over half of Lehman's $211 billion tri-party repo book had a tenor of less than one week, which made it remarkably susceptible to a run in the repo markets -- which, of course, is exactly what happened. Lehman was also relying on roughly $12 billion (at least) of collateral from its prime brokerage clients to fund its day-to-day operating business. These conditions had persisted for several quarters before Lehman's bankruptcy.

The Fed should be required to take prompt corrective action once a Tier 1 FHC allows the tenor of, say, 20% of its overall liabilities, or 50% of its daily funding requirements, to drop below one week. (I just pulled those numbers out of the air; the Fed is in a much better position than I am to set then appropriate tenors and percentage of liabilities.) These are the kinds of PCA triggers that would be the most effective. A PCA regime focused on capital levels is unlikely to make much of an impact.

I'd add that overreliance on any metric is likely to cause problems, as well as solve them--I've heard fairly convincing arguments that the Value at Risk regulatory monoculture helped set the system up for catastrophic collapse.  One is wary of giving regulators too much discretion, of course, but at some level, at least at the margins, making good decisions about which institutions are in trouble is always going to require a degree of art as well as science.

Banker Bonuses in a Time of Crisis

Our own Clive Crook notes:

I think this FT leader is very good. First it says that public money underwrites the bonuses banks are getting ready to hand out. That is a familiar point but one that deserves to be emphasised. Then it puts its finger on something mentioned less often. These huge bonus pools are diverting funds that could be used to build capital, which the industry as a whole urgently needs to do.

I defended the banks paying bonuses that had already been agreed before the crisis.  But this really is ridiculous, and the banks should have known better, if only for PR reasons. If they get an ugly new regulation regime, they'll have only themselves to blame.  Whatever they really think, deep in their hearts, they're certainly doing their best to give the impression that they believe they are entitled to collect huge paychecks no matter what happens, and have the taxpayer pick up the tab for their mistakes.

Bear Raiders

Matt Taibbi is apparently back on the finance beat with a story on the collapse of Bear Stearns and Lehman that goes "deep into the weeds" of naked shorting.  It's not clear to me why, since the only academic paper I'm aware of that actually studied the question found that the volume of shorts and naked shorts intensified after the bad news that caused the stock to plummet, not before, and at any rate, was never done in a large enough volume to cause price declines of the magnitude that we saw.

Taibbi seems to be more worried about the moral offensiveness of the practice than its actual impact:

The real significance of the naked short-selling issue isn't so much the actual volume of the behavior, i.e. the concrete effect it has on the market and on individual companies -- and that has been significant, don't get me wrong -- but the fact that the practice is absurdly widespread and takes place right under the noses of the regulators, and really nothing is ever done about it.

It's the conspicuousness of the crime that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn't a better example of "regulatory capture," i.e. the phenomenon of regulators being captives of the industry they ostensibly regulate, than this issue.

There are much better examples of regulatory capture, even in the financial industry, such as the SEC's ban on shorting financial stocks last summer . . .  but that is neither here nor there.  Naked shorting has benefits as well as drawbacks--it enhances the efficiency of the market in price discovery, as well as its liquidity.  It is often done by exchange market makers who fill orders on the fly, and then hunt down the actual stock later, in order to keep orders flowing.  It is also, of course, hated by CEOs, who like to blame evil short sellers, rather than their own mismanagement, for driving down the stock price.

In theory, a "bear raid"--selling a flurry of shares in order to push the stock price into a downward spiral--is possible.  In practice, counterattacks are possible, making this a very risky strategy for shorts who can end up bankrupt if they can't find shares to buy at a reasonable price.  It's also difficult, with a large and liquid stock, to sell enough volume to permanently depress the price; your counterparties start wondering where you're getting all this stock to sell.  That's why, while there's pretty decent evidence that shorts, and naked shorts, can speed the mean-reversion of overpriced stocks, there's a lot less evidence--virtually none--that it can cause stocks to become underpriced for any length of time.

Even if there were evidence for successful bear raids, Lehman's creditors had ample reason to worry without a decline in the stock price.  By the time the volume spiked, Lehman's fate was already sealed; either they were going to find a buyer, they were going to get a bailout, or they were going to bankruptcy court.

So why should this be priority #1, or even #30, for the SEC?  Obviously, CEOs do not like any practice that speeds up negative price discovery in their stock, but this is not supposed to be the SEC's concern.  There's legitimate reason to punish people for failing to deliver--after all, they're in breach of contract.  But this is a problem for the contractees, or the exchange, not the SEC.

Update: Someone in the comments asks if I'm not conflating regular shorting and naked shorting.  Answer:  no; the paper I linked deals specifically with naked shorts, and finds that at least since the introduction of Regulation SHO in 2005, they have functioned primarily as a liquidity enhancer and a price discovery mechanism, rather than a market manipulation mechanism.

Our results are in sharp contrast with the extremely negative pre-conceptions that appear
to exist among media commentators and market regulators in relation to naked short-selling. While unregulated naked short-selling could be potentially manipulative, and the associated settlement failures could be somewhat disruptive to the smooth functioning of financial markets, the duly regulated naked short-selling that has existed after Regulation SHO appears to havebeen net beneficial for pricing efficiency and market liquidity, and Regulation SHO also appears to have successfully curbed the impact of manipulative naked shorting, and this reduction in the impact of manipulative naked shorting has continued through the 2008 financial crisis.

Thought For the Day

Felix Salmon on the FDIC's new proposal to raise money from healthy banks, rather than going to Treasury:

There's one more problem with the proposal, under which, according to the NYT, "the lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry." If the bonds are coming from the government, that's likely to mean they'll be treated as government debt, and it certainly means that there's an implicit government guarantee there. Once again, the FDIC is using government guarantees, rather than real cash, and pretending that doing so doesn't cost the government anything. We've done that too many times already -- including in the Bear, BofA, and Citi bailouts -- and we should be putting an end to such shenanigans.

Amen.  But I doubt this will change.  Government officials don't care about saving money as much as the appearance of saving money.  The odds are very good that by the time this government guarantee turns out to be expensive, Sheila Bair will not longer be around.

There Are No Villains in Financial Crises

Who led us into the financial crisis, and why?  Zubin Jelveh writes up some intriguing findings calling into question the notion that securitization was at the heart of the financial crisis:

Instead of a smooth curve, at certain FICO scores there are big jumps in the number of people with mortgages.

The reason? Rules of thumb observed by those in the mortgage industry for judging the chances a borrower will default. In the 1990's, Fannie and Freddie released research showing that about 50% of defaults are associated with borrowers who have FICO scores below 620. That happens to be where the biggest jump in the graph above takes place, suggesting that the industry looks far more kindly on a borrower with a score of 621 than a borrower with a nearly identical score of 619.

But who used this rule-of-thumb?

The economists -- Benjamin Keys, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig -- assert that securitizers followed the rule in deciding whether to buy a loan from an originator. Problem is, that meant the originator then knew he didn't have to spend much time vetting someone with a FICO score above 620, since there was a good chance the loan would be securitized and off his books. For the opposite reason, the originator would be more likely to put in the proper due diligence when considering lending to a borrower with a score below 620.

What we should then see is borrowers with FICOs just above 620 defaulting more often than nearly identical borrowers with scores just below 620. And lo and behold, when the economists looked at the data, that's exactly what they found.

Case closed, right? Not quite.

In a new paper, two Harvard PhD candidates -- Ryan Bubb and Alex Kaufman -- take an academic swipe at the big boys and point out the following: Although there is a big jump in mortgages at the 620 credit score, there isn't a commensurate jump in mortgages that get securitized at that score.

Meanwhile, Tyler Cowen points to some evidence that banker pay wasn't at fault, either:

This "executive compensation" theory of the crisis is now the keystone of the conventional wisdom, having been embraced by President Obama, the leaders of France and Germany, and virtually the entire financial press. But if anyone has evidence for the executive-compensation thesis, they have yet to produce it. It's a great theory. It "makes sense"--we all know how greedy bankers are! But is it true?

The evidence that has been produced suggests that it is false.

For one thing, bankers were often compensated in stock as well as with bonuses, and the value of this stock was wiped out because of the investments in question. Richard Fuld of Lehman Brothers lost $1 billion this way; Sanford Weill of Citigroup lost half that amount. A study by René Stulz and Rüdiger Fahlenbrach[3] showed that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock, suggesting that the bankers were simply ignorant of the risks their institutions were taking. Journalists' and insiders' books about individual banks[4] bear out this hypothesis: At Bear Stearns and Lehman Brothers, for example, the decision makers did not recognize the risks until it was too late, despite their personal investments in the banks' stock.

The evidence I presented in my latest article, which deals in part with banker pay, also suggests that banker pay doesn't cause risk; rather, as the financial system gets more complicated (and therefore riskier, because it's harder to properly understand), there are more profits to be earned, because the returns to knowledge/skill are higher. 

All of these papers suggest that the search for a villain behind the crisis will ultimately be fruitless.  There are two basic narratives of what happened.  The first is that bankers had bad incentives:  they took massive risks because the profits were so good in the up years that it was worth the risk of the bad, or because they could pass the risks onto some other sucker, or they thought Uncle Sugar would bail them out.  The other narrative is that bankers had bad information:  they didn't understand the risks they were taking.

I've always preferred narrative B, because Narrative A doesn't make much sense.  The CEOs of big banks lost vast sums of money, and their jobs, most of their social status, and so forth.  They held onto the worst tranches of their securities, which implies they didn't know how badly they were going to blow up.  Etc.

I find it vastly more plausible, if not so comforting, to believe that systems can occasionally produce bad results even if the incentives basically point in the right direction.  The FICO score revolution was valuable, but we took it too far.  The money sloshing around US markets disguised the problems, because people who got into trouble tapped their home equity, or in a pinch, sold the house at a tidy profit.  Everyone from borrowers to regulators was getting the same bad signal, that their behavior was much less risky than it actually was.

That doesn't mean that nothing can be done.  Maybe we decide we want a less complex financial system.  But it won't be because there's some villain manipulating everything into ruin; rather, we may decide that there are certain kinds of risks we can trust ourselves to handle.

I'm not sure that this would work, and I'm skeptical that it's a good idea.  But the more time we waste trying to figure out who did us wrong, the less quickly we will arrive at an actual solution.

Bank of America needs $35 billion

So Bank of America is officially the most screwed up bank in America.  The stress tests say that they need to raise $34 billion.  A number of people are all-aflutter because they reckon that the stress test results are a radical understatement of how much capital behemoths like BofA and Citi actually need to make themselves robust to the new environment.  On the other hand, it's going to be hard enough for BofA to raise $34 billion--how many assets can they quickly dispose of at fire sale prices?  They're sure not going to the capital markets.  What's the point of setting the bar above "unreachably high"?

I'm sure I'm about the only one who feels sorry for Ken Lewis, but really.  He bought Merrill under the twin prods of Paulson's appeals to his patriotism, and the implied threat that banks who made the Treasury secretary unhappy would have a very hard time of things going forward.   Realistically, Ken Lewis didn't have much choice.  Now it turns out that in that one moment, he steered his bank from powerhouse to poorhouse.

Paulson may have been right that this was necessary to save the system.  If that's true, Bank of America shareholders are undoubtedly better off than they would have been in a more catastrophic collapse.  On the other hand, we can't see that other, terrible world, and in this one, the BofA shareholders have been handed an unfair share of the bill for averting an apocalypse that didn't quite happen.  I expect Ken Lewis will soon decide he needs to retire so he can spend more time with his family . . . complaining about getting fired.

Ken Lewis Out At Bank of America?

Not exactly a surprise:  Bank of America shareholders have stripped him of his chairmanship.  I don't find it hard to believe that Ken Lewis genuinely believed that he was singlehandedly saving the US financial system--though it is also true that he probably couldn't have gotten out of the merger agreement by the time he (and Merrill) knew about the losses, even if he wanted to.  But that doesn't really matter.  If my husband sacrificed our child to save thousands of people, I might recognize, at some abstract level, that he had done the right thing.  But we wouldn't stay married.

Right now, Ken Lewis remains CEO--the board expressed unanimous support.  But at this point, it seems likely that it's only a matter of time.  (If it isn't, it will become a famous business school case on the Principal-Agent problem.)

It's hard to imagine that it wasn't long ago that Ken Lewis was the guy who was celebrated for transforming BofA into the 800 pound gorilla in the banking market.  Every time I read one of those glossy CEO profiles, I remember how many of them end this way.

Stressed!

Shockingly, the stress tests seem to indicate that Citibank and Bank of America need to raise capital; perhaps that's why I got a notice in the mail yesterday that my Bank of America credit card fees were going up.  I know, I know . . . you didn't see this coming.  None of us did.  You may be feeling that if Citibank and Bank of America can't pass the stress tests without more capital, there's no hope for any financial institution.  You may be pricing canned beans and ammunition.  You may be wondering if there's any point in going on.  This is what valium is for.

 What I'm not clear on is how this helped.  I think Bank of America and Citibank were well aware that they really needed some capital to steady their balance sheet.  Certainly, the rest of us weren't in any doubt.  But capital's sort of scarce right now--you may have read something about it in the papers. Announcing to the world that Bank of America and Citibank are kinda teetering doesn't seem likely to help them tap the capital markets.  It's yet another roundabout way of saying, "Hey, you know, I think we have to give you some more money."

The Worm Turns

John Thain claims that he told Bank of America everything before the merger, and had an agreement in writing to accelerate the bonuses.  Bank of America is sticking to its claims that he suckered them.  It should be pretty easy to resolve this one:  if he got it in writing, produce the document.

In related news, Porter Goss says that members of Congress who are indignantly claiming they knew nothing about waterboarding, etc. were fully briefed.  This may explain the lukewarm enthusiasm for a Truth Commission.  Question:  how do the grassroots supporters of such a commission feel about it if it brings down the Democratic Party?  The Democrats who signed off on this are still in power.  The Bush administration will be long gone.

Ken Lewis: Paulson Made Me Do It!

The accusations released by Cuomo are certainly explosive:  Ken Lewis claims that Paulson basically forced him to buy Merrill without disclosing its problems to shareholders.  If it hasn't, Paulson would have sacked him and his board.  Paulson confirms this, but claims that this was because Fed analysis showed that Bank of America had no grounds to back out of the deal.  The Fed is, thus far, silent.

Thoughts:

• I'm sure that Paulson and Bernanke made this threat.  I also think they thought they were acting in the best interest of everyone, possibly even including Bank of America shareholders.  Further, I think they may have been right.  Lehmann's demise was catastrophic enough; a second investment bank failure immediately on its heels might have made the disaster ten times worse. 
  
• But of course, there's no way to run the counterfactual.  This is deeply troubling, both because of the lack of transparency, and because a CEO was forced to screw his own shareholders.  But I'm not sure what would make it better.  If you have regulators, they have the ability to threaten their regulated companies outside of the public limelight.  Many of the things they make CEOs do will be against the interests of shareholders--witness the games the regulator has been playing with Fannie Mae and Freddie Mac's accounting.
  
• The political fallout will be limited unless Geithner is somehow involved in this mess.  But since Geithner was then the president of the New York Fed, that's not entirely out of the question.
• Bernanke can probably count on not having a second term.  That's no criticism of Bernanke--what has been done, what may well have had to be done, has been unpopular.  I don't see Obama displaying that kind of loyalty to someone he didn't appoint.
  

Banking, again

Ryan responds to my response to his response . . . oy.

Yes, there is fear that some banks may fail. But there are a lot of banks in the United States, and not all of them are Citigroup. So the issue here is not that no lending is available (and this was Megan's initial point -- that a lack of lending would reduce the multiplier on the stimulus). And the Treasury has taken steps to limit the negative competitive effect of propping up zombies, by throwing open TARP money to many, many financial institutions. Is there still an argument for more intervention, in particular, to find ways to wind down the systemically important insolvent banks? Absolutely! But I don't think it's absurd to say that such actions come with intolerable risks to the financial system.

Megan says I "slam" her by saying that she's looking for a way off the Obama train. My point was this -- she said she had buyer's remorse, and given the ludicrous ideas coming out of the GOP, and John McCain, that makes no sense, economically speaking. I don't know why someone focusing solely on the policies would write that, and so I concluded that Megan was focused on something other than just the policies. Which perhaps was improper. My bad! But still, it makes no sense.

I'm still not clear on what, exactly, the argument is here.  My take is that whether you simply let banks drizzle on forever with bad loans eating up good capital, or have a massive banking panic, a banking system that is substantially impaired will eat your stimulus.  A bank panic is, I think, worse, but that doesn't make a Japan-style debacle all right.  Impaired banks lend less.  The Japanese banks poured a lot of money into the crappy construction companies that owed them money, but they didn't lend to anyone else because they needed all their capital to service the toxic sludge already sloshing around their balance sheet.

To whatever extent fiscal stimulus worked in the Great Depression, it was working hand in hand with monetary and credit expansion.  Herbert Hoover ran a sizeable deficit in 1932 but the economy stayed in free fall until the bank holiday and the establishment of the FDIC.  Bank deposits are important, of course, but they're hardly the only thing we use banks for--otherwise we could just set up a postal savings system and let everyone lend to the government at 1%.  FDIC insurance doesn't work so well because it gives people their money; it works because it prevents bank runs.

Of course, now we have the FDIC--but we also have a much more complicated financial market, with a lot of remaining run potential.  Credit can--and indeed has--drained out of the system in a lot of places; the only real growth area is in lending to the Federal government at near-zero rates.  The commercial paper markets are finally settling into an uneasy new normalcy. The entire financial system is still very much afraid of the fallout of a collapse of CIti or BofA, and reserving accordingly.

No one wants to make long-term committments with this much uncertainty.  The stimulus doesn't erase the uncertainty; it just spends in spite of that. 

But when times are uncertain, and people are not totally budget constrained, the sensible action to take is to bung as much of that government money as possible into a bank account.  And as long as banks are desperately building up capital reserves at all costs for fear of another panic, that money is going to stay right there on the balance sheet, stolidly un-multiplying.  Whether they are building up those reserves against a panic, or against the sucking vortex of their previous bad loans, is sort of a secondary consideration.

As for the buyer's remorse remark, perhaps it was badly phrased.  I am still of the opinion that Obama was a better choice than McCain--but the terrifying pace of inactivity at the Treasury, combined with the administration's obvious focus on popular ideological activity rather than grasping nasty nettles like the banking system, is eroding that conviction.  Ryan is free to believe that this is perfectly irrational, that the Obama administration's near-ideal conduct in prioritizing stimulus over bank reform and indeed, staffing the Treasury, could not possibly give anyone but a secret Obama-hater any cause for alarm.  I must simply beg to differ.

Ask the editors: What difference does it make to the recession if Citibank and Bank of America fail?

Good question.  Here's a roundabout answer.

In some sense, all of history's progress from lives that were nasty, brutish and short to today's splendiferous buffet of iPhones, nine-month courses of physical therapy, and year-round fresh broccoli can be summed up in three words:  gains from trade.  We live better than a tribe of chimpanzees roaming through the primordial forest because we specialize and then exchange the fruits of our skills with each other.  Trade, as the ecoomists say, increases the size of the economic pie to be divided between us.

But trade introduces an element of uncertainty into our lives above and beyond the possibility that we will be eaten by something bigger than ourselves, or starve to death when the rains fail.  We still have to worry about those uncertainties, although the monsters now most likely to hasten our demise have four wheels and cost entirely too much to service.   But now we also have to worry about our trading partners.  In an advanced economy like the United States, that means millions of other people who are somehow involved in either making the things you buy, or buying the things you make.  We spend more and more of our energy trying to guess what is going on in their pointy little heads.  Since we haven't even met 99.9% of them, these guesses are necessarily somewhat imperfect.

Now, to finance.  Finance is, in most essentially, the way that we distribute gains from trade across space and time.  Money, by giving us a universal unit of account and medium of exchange permits us to make simple trades within large networks--it takes care of the tedious yet complicated business of swapping barter commodities around between myriad players until everyone has what they (think they) want.  Money has somehow, mysteriously, become the world's most sophisticated swap-meeter.

Credit allows us to time-shift those trades.  I give you something you want now in exchange for something I want later.  These days, that thing I want later is almost always money.

In modern America, financial institutions stand between the players and most of these transactions.

But remember, we're now not only guessing about droughts and hurricanes and monster trucks; we're also guessing about the ever-shifting desires of all the people we trade with.  If I lend you money to build widgets, I need to guess how great the demand for widgets will be, what other companies might try to beat you at your own game by making cheaper and better widgets, whether the government might decide it's in the public interest to outlaw widgets, whether you're likely to be the sort of fellow who runs his widget factory into the ground and runs off to Baja with his secretary, and so forth.  I also have to make guesses about the future value of money.  Will the government print to much of it?  How much of the stuff I actually want will this money buy when I get it?

As you probably notice when you look at your TD Waterhouse statement, sometimes we get those guesses very wrong.  When too many of us guess wrong at the same time, and it turns out that America doesn't actually need a Starbucks on every corner and seventeen varieties of social networking site, we get recessions.  So add to the list of things you worry about the possibility that you, and everyone around you, have guessed wrong about your future desires.

If you have ever known someone who guessed drastically wrong about their desire to spend the rest of their life with their spouse, you know that when excessive optimisim crashes, it usually overshoots on the downside.  And financial institutions, which are the collective repository of all of our guesses about the future, are often the locus of the economic equivalent of a nasty, nasty divorce.  We are currently enduring the Alec Baldwin and Kim Basinger of economic corrections.

All this is very interesting, I hear you cry, but what does that mean for Citibank and Bank of America?

Well, when credit markets contract, the time horizon of our trading also shrinks.  We start taking economic activity like Bill W. said--one day at a time.  Credit markets are already contracting because people have realized that they are not nearly as good at predicting the future as they thought they were, and had therefore better neither a borrower nor a lender be.

A major bank failure accelerates this process.  It's the difference between rolling slowly into your garage, and hurtling into it with the pedal to the metal. 

First, their credit disappears from the market, which shrinks the economic pie by making it more difficult to trade goods and services between our current and future selves.     The economic pie shrinks.

Second, the shrinkage of the current economic pie changes peoples' estimation of the future.  Much of economic forecasting is, after all, trend extrapolation.  To make matters worse, we are basically hard-wired to over-weight recent events when predicting what will happen next.

Third, the changed expectations shrink even further the amount of future trade that people are willing to do between current and future selves.  No one wants to defer consumption now and lend some business the money on the wan hope that Snozzleberry soda is the Next Big Thing.  The economic pie shrinks further.

This is all somewhat airy-fairy; perhaps you want to know exactly what will happen if Citibank and America will fail.  Will CDS markets blow up?  Insurance companies in receivership?  Bank runs across the land?

But as the Lehman bankruptcy illustrates, we have no idea exactly what will happen.   The Fed anticipated what might go wrong as best as it could, and actually did a pretty good job preventing those problems from getting out of hand.  But they didn't foresee that the bankruptcy would cause the failure of a smallish money-market fund, or that this would, in turn, cause the entire commercial paper market to lock up.  Where the credit contraction will occur is much harder to predict than the near-certainty that it will happen.

Bank of America unhires foreign MBAs

Apparently Congress' "buy American" clause in the bailout funds is having its desired effect:  Bank of America has rescinded its job offers to foreign MBAs.  I suspect that Bank of America is at least as motivated by a need to reduce headcount as it is by fear of Congress.  But cutting your recruitment based on country of origin, rather than skills and fit, does not seem like the most efficient way to do it.

As a committed free trader--and an MBA who went through the mass layoffs of the last recession--my sympathy is all with the MBAs.  These are people who mostly aren't eligible for scholarships or subsidized student loans; they've borrowed or spent close to $100,000 in America to get their degree, many of them in hopes of staying here.  They're intelligent, highly skilled, and promise to be net contributors to the tax system . . . so America kicks them in the teeth and sends them home without a job.

The problem of experts

Bill Gross of PIMCO thinks that we oughtn't to nationalize the banks because they're just too damn big and too damn complicated.  His argument (as highlighted by Clusterstock's John Carney) makes perfect sense to me:

I think Roubini, Dodd and Greenspan haven't thought this one through. The U.S. isn't Sweden, and not just because our blondes aren't au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders' interests. To go further, however, and "haircut" senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.

The problem is that seeing as he's a gigantic manager of bond funds, this is also the policy that will make Bill Gross best off.

This is, writ large, the problem faced by Geithner and Bernanke:  the people who know the most are those with the most to lose or gain by their actions.  If they do not talk to the experts, they will do something incredibly stupid through not having thought through the possible consequences.  If they do talk to the experts, their ears will be filled with advice that is both plausible and self-serving.  It needn't even be deliberate deception.  Anyone who's ever been moderately successful at sales knows how quickly you internalize the belief in the superior virtues of whatever it is that pays your commissions.

Writ larger, it is the problem faced by regulating a lucrative industry like finance:  the bankers always undersand more about what they're doing than the regulators.  There are more of them. They are paid lavishly to spend more hours at work.  And they will do their best to hire the most talented and experienced employees away from the regulatory agency, while the SEC cannot hope to lure a banker away from a million dollar pot of cash.  The brain drain tends to flow one way.  Listen to the SEC investigator complain that she couldn't possibly have discovered Madoff's crimes with the resources available to her, and you understand the thankless task we have handed our financial regulators.

I am concerned about the sudden consensus about nationalization--I haven't yet seen a good reason to believe that a tiny bank in a tiny nation like Sweden presents a good model for tackling the problems of the largest financial services company in the world.  But the fact that Bill Gross is worried about bondholders taking a loss makes me more inclined to favor the notion.  It's perverse, I know.

But seriously, folks

I sat here in front of my television and laughed at Maxine Waters, because her apparently random ramblings are a true spectacle.  One laughs because one can't cry.  But this woman is sitting on the House Financial Services Committee.  She is supposed to help craft the bills that govern our financial system.  And she clearly doesn't have the first shred of an inkling of a clue of how said financial system works.  Her questions had the air of someone who couldn't quite wrap her mind around the complexities of the E-Z Reader consumer activist pamphlets from which she had presumably cribbed them.

That's not really funny.  This is the crack talent that's supposed to reform the banking system into something more robust?  Imagine how you'd feel if any of the folks who didn't seem to grasp the distinction between Bank of America and State Street showed up to represent you at your closing.  Save everyone a lot of time and aggravation, and declare bankruptcy on the spot, hmmm?

John Thain ousted at Merrill Lynch

The FT reports:

John Thain was ousted on Thursday at Merrill Lynch, just three weeks after the brokerage firm was acquired by Bank of America. Mr Thain's departure came in a meeting with BofA chief executive Ken Lewis, who flew up to New York from Charlotte, North Carolina, for a face-to-face meeting.

This can hardly come as a huge shock to Mr. Thain.  It certainly isn't shocking to anyone who's ever spent more than five minutes in a corporation, or for that matter, a meeting of the Altar Society.  Someone had to go.  And if it wasn't Mr. Thain, it was going to be Ken Lewis.


I've actually developed quite a bit of sympathy for Mr. Thain.  After all, he didn't create the mess at Merrill Lynch; rather, he was brought in to clean up after Stan O'Neal's MBS binge led to predictable results--all over the trading floor.  Given the situation in the markets, and the balance sheet he was handed, I'm not sure how anyone could have expected Mr. Thain to do better at the core mission he was hired for:  taking care of his shareholders and employees.

Nonetheless, you could hardly expect BofA managers or shareholders to take a happy view of his doings, given that much of his hard labor ended up costing them money.  Besides, Ken Lewis needs someone to throw to the wolves running close behind the sleigh. 

Most people I've talked to think that regulators made Lewis an offer he couldn't refuse to get him to take on Merrill's toxic assets:  push the thing past shareholders, and he could be sure of the support of Treasury and the Fed in the coming financial chaos.   More than a few people of my acquaintance have suggested that taking this deal was not quite bright, knowing as he did that Treasury was very likely about to change hands.  But when the two most powerful men in American bank regulation come to you with a request, it's got to be awfully hard to say no, sorry, I'd really rather not.  Lehman, after all, shows what happens to those who didn't have Bernanke's and Paulson's backing when the chips were down.

But "making the best of a bad situation" is rarely enough to save CEO jobs.  I suspect that neither a good excuse, nor a substitute victim to feed shareholders, will provide Lewis much protection in the long run--if the shareholders don't get him, the nationalization probably will.

Who's next?

Economics of Contempt has the rights of it:

Now we know why the Obama administration asked President Bush to go ahead and request the remaining $350 billion of TARP funds: Bank of America needs another bailout. No details are available yet, but everyone's assuming that the BofA deal will be roughly similar to the deal Treasury struck with Citi in November. The Treasury has already committed the first $350 billion of TARP funds, so it's essentially committing money that it doesn't have yet. They'll get the money eventually, of course, though with tighter restrictions on its use.

This episode just goes to show that Treasury and Fed officials have to be really careful about what they say and do in public. Ever since the Lehman/AIG failures, there have been Treasury and Fed officials at every major bank, constantly monitoring their books. Everyone in the market knows this. So when the Obama administration asked President Bush to go ahead and request the second half of the TARP funds, rather than waiting until Obama is sworn in on Jan. 20, the market was seriously spooked. Everyone interpreted the move to mean that one of the major banks was in trouble again, and will need another bailout to survive. Since everyone knows that Treasury and Fed officials are constantly monitoring the major banks' books, the move to request the second half of the TARP funds sent a signal to the market that something is wrong at one of the major banks, and the problem is urgent (otherwise why not wait until after the inauguration to request the funds?).

As soon as Obama had Bush request the funds, the race was on to figure out which bank was in trouble. At first everyone thought it was Citi, since it had just announced plans to raise capital by breaking itself up, including spinning off Smith Barney in exchange for $3bn from Morgan Stanley. To give you a sense of the fear that gripped the market after the Obama administration's ominous move, CDS spreads on Citi jumped an unheard of 100bps today (spreads don't usually move more than 5-10bps in a single day). Deutsche Bank's announcement this morning that it had lost $6.3 billion in Q4 just added fuel to the fire.

Now we know that the bank that's in trouble is BofA, not Citi. It's now clear that the BofA Bailout 2.0 is the reason Obama had Bush request the rest of the TARP funds, but that just confirms that the market was right to interpret Obama's move as a signal that one of the major banks was in trouble.

Felix Salmon is calling for nationalisation:

I can't see a solution to this problem short of nationalizing both Citi and BofA, and summarily firing the hapless Vikram Pandit along with the overambitious Ken Lewis. Lewis thought he could buy his way out of trouble, by acquiring Merrill Lynch; instead, he was simply tying his own already-troubled institution to an even more troubled institution. Pandit, it's worth noting, tried the same hail-Mary technique, when he put together a deal to buy Wachovia, but that didn't last long.

Citigroup, at $3.50 a share, simply doesn't have the time to implement its new plan to get smaller slowly. And Bank of America, at $7.75 a share, doesn't have the capital needed to absorb Merrill Lynch. Both are now trading at option value: on the hope, essentially, that somehow equity holders won't be wiped out entirely. But they should indeed be wiped out, as part of a nationalization, along with preferred shareholders, including the government. TARP will show an immediate loss on its investments, which will serve as a salutary reminder for whoever's in charge of disbursing the second tranche.

Nationalization is a messy solution, and one which will make no one happy. But it's better than desperately trying to kick the ball down the field until the banks come back in a few weeks for even more money.

I'm tempted to agree.  One of the most valuable institutions to come out of the Great Depression was the FDIC, which is possibly the best regulator in the world at orderly winding up failed banks. 

The problem is, the FDIC was born in an era when branch banking laws meant most banks were very small, and grew up in an environment of small banking, and mostly stable banking.  It's good at dealing with failures, even big failures, in an environment of overall stability.  But what to do with gigantic bank failures in the current situation?  The FDIC's standard actions--wrap up the worst operations, sell off the remaining pieces, pay off depositors out of government coffers--are hard to pull off here.  Who is there with the capital to absorb the struggling operations of BofA and Citigroup? 

That leaves nationalization, or liquidation.  And a fire sale of two of the country's biggest banks would be, she said with dramatic understatement, very bad for the health of the financial system.  It's simply not strong enough to absorb the losses.

In the past few days, I've spoken to a few economics people who are feeling a little perkier about the economy's prospects.  I tend to think we're in a lull before the storm gets a second wind.

Invidious comparisons, part II

This post by Hilzoy illustrates a bizarre meme that seems oddly pervasive in parts of the blogosphere:

* The financial executives helped cause the present meltdown. Auto workers did not.

* The financial executives run their firms, and are responsible for their troubles. Auto workers and their union, by contrast, just got themselves a good deal by bargaining with management. That's their prerogative. I don't see that they're any more to blame for the problems of the Big Three than people who accept unduly large cash back bonuses on their new cars would be, had the Big Three miscalculated and given away more in cash-back bonuses than they could afford.

* Financial executives have just destroyed a tremendous amount of value and ruined the global economy. Auto workers have been busy creating useful things.

* In exchange for destroying value, financial executives get paid a whole lot more than auto workers. Orders of magnitude more. They even get multi-million dollar performance bonuses when their firms lose money! And their benefits are a lot more cushy: not just good health care but private jets and chauffeurs!

* Punishing financial executives helps reduce moral hazard. Punishing auto workers does not.

She forgot to add:  financial executives have been fired in large numbers and taking pay cuts that reduced their income to a fraction of what was expected six months ago.  Auto workers have not.  Financial firms are in the process of laying off hundreds of thousands of their best paid workers (50,000 at Citibank alone); auto firms are not. 

The shrinkage of the financial industry, and the vastly reduced pay prospects of its workers, seem entirely reasonable to me, though of course extremely sad for people who put themselves through expensive rounds of schooling in order to secure luxe jobs on Wall Street which have now disappeared leaving them broke and trying to sell the houses and cars they can no longer afford into a panicked local market. But I am fairly sure that the auto workers do not want the deal, as a class, that those rapacious financial executives have been given, which includes horrifying job insecurity, massive paycuts at the discretion of their managers, and for many or most of them, the knowledge that they will almost certainly never again earn a tenth of what they had set their lives up to expect.  Believe it or not, having your life ripped up in front of you and your industry destroyed, and all the plans you made fifteen years ago to build a secure future evaporate, doesn't get magically more fun because you've got an MBA. 

The majority of people who are getting canned right now didn't even, as the UAW workers had, get some small vote on how they would effect the shape of their industry.  Structured finance and investment funds are only a small part of what investment banks do.  Strufin and the mortgage desk are out on their ass, of course--but so are lots of people in M&A; and various investment banking groups that specialized in equity and corporate bonds and wouldn't have known a CDO if it bit them on the ass; corporate and muni bond traders; cap markets guys, and so forth.  All their markets dried up because of a credit crisis that they cannot even arguably be credited with creating.  It's no more fair that they have to sell their house, move in with the in-laws, and try to figure out what the hell they're qualified for, than that autoworkers have to.  Less, maybe, because the autoworkers have had a lot of warning that their companies are on shaky ground.  What sort of moral hazard are we reducing by destroying their lives?

That'll teach them to play by the rules all their lives, get a lot of education, and go to work for a bank!

Apparently the message we want to send is "Don't go look for a high-paying job; get a picturesque one."

No one in the financial industry declared that their salaries and perks weren't on the table until some vague and unspecified date in the future, as the UAW has.  Actually, from what I understand, the CEO of Lehman tried to, and he was rightly told to go piss up a rope.  The executives of the failed banks had a huge portion of their net worth tied up in said banks, and have now lost most of their assets.

That is not to say that we should feel excess sorrow for them, or try to preserve their jobs, or the gargantuan sums that they were paid five years ago.  The financial industry was bloated, the salaries out-of-whack with any possible real economic value they could be argued to have provided to anyone, and that will have to change--but we don't need the government to ensure that, because the industry is contracting rapidly, and the worst-hit parts are exactly the places that were most out of line with economic reality.  We might like to go back and seize everything they made over the last five years, but for various practical and legal reasons (and arguably even moral ones), we can't, so the pointless fantasizing isn't getting us much of anywhere.

Any CEOs who tried to pay themselves bonuses out of TARP are cretins who should not have been permitted to do so.  But aside from John Thain, who didn't create the mess at Merrill--he took over in December 2007 to clean up the destruction, and lost his job less than a year later when he had to merge the bank with BofA to save it--I'm not aware of any CEOs who have been paid any bonuses out of TARP.  That's not to say that there aren't any.  But the AP's infamous report on outrageous compensation mostly seems to be 2007 funds that we can't claw back because, er, they lost it all in the collapse, or stock options that will only pay off if the firm does well. 

In short, if the Detroit were given the deal that the financial industry has actually gotten, rather than the deal that they got in the pervasive blogger fantasy world where everyone in the industry is using government funds to continue exactly as they were before, Ron Gettlefinger would hardly be a happy man.  And I think that most of the people who Hilzoy thinks of as picking on the auto workers would be willing to accept a deal in which the Big Three got some funds in order to put its balance sheet back together, then started firing people at will until they were small enough to make a profit again.

Bank of America to buy Lehman?

This morning, the FT reports that BofA is considering a joint bid for Lehman with JC Flowers & Co. and the Chinese sovereign wealth fund. 

A forced sale of Lehman Brothers at a fire sale price appears to be the most likely option in the wake of the massive drop in Lehman's share price over the last few days, people familiar with the matter add. "The only question now is what price," says one person who has been in discussions with Lehman over possible asset sales as well as with regulators.

While the details of any proposal haven't yet been fully worked out, a bid from the BofA-led group may involve losses for holders of the debt as well as shareholders. That would be a dramatic departure from recent deals where holders of debt were saved even as shareholders suffered heavy losses.

Regulators will most probably remain on the sidelines, monitoring the situation but unwilling to offer any potential buyer the sort of guarantees that JP Morgan received in mid-March when it bought Bear Stearns.

Some thoughts:

• When it comes to the rumor mill, Felix Salmon had some very sage advice:

Today could quite possibly be the most rumorlicious in Wall Street history. Goldman's buying Lehman! No it isn't! The Fed's going to cut rates between meetings! Maybe a private-equity shop can help! Interestingly, Lehman stock has not been particularly volatile today, trading in a band between $4 and $5 all day. (OK, that's volatile on a percentage basis, but not on an absolute basis.) And the credit default swaps, too, seem to be keeping some grip on reality.

The fact is that anything could happen at this point, and the situation is very much up in the air. Lehman, with the help of the Fed, will probably muddle through today and tomorrow; I suspect that it won't exist in its present form come Monday morning. But the range of possible outcomes for shareholders and bondholders is enormous, and anybody playing in Lehman securities right now is a gambler, not an investor.

If you think you know something, you're wrong. Even Dick Fuld doesn't know what's going to happen: hell, he doesn't even know if he's going to have a job come Monday morning. Speculation and rumor can be fun, but they don't really achieve anything. So go back to your day job, safe in the knowledge that the game will have played itself out within a week, tops.

• It is best if this plays out without government intervention.  The capital markets need to convincingly demonstrate that they can handle these kinds of liquidations internally, both to shore up investor confidence, and to mitigate the moral hazard created by the Bear bailout.
• This is the first time we're hearing talk of creditors taking a haircut.  That's a pretty big step for what used to be a rock solid investment bank with a long and storied history.  I'm of two minds on this.  On the one hand, if you've got a liquidity problem, you probably don't want to make people more afraid to lend money.  On the other hand, stockholders were hardly the only ones who made foolish choices during the bubble; I don't even think they were the greater fools.  Wiping them out, while leaving the creditors whole, takes away the just and good lesson that people should now be learning about excessively loose credit standards.  Failure is nature's way of saying:  "Don't do that!"

Update:  Yves Smith has more.