Thursday, October 16, 2008

SocGen Affair

The October 20 issue of The New Yorker has a long (and frankly somewhat tedious) article by James Stewart detailing what is known to date about the Kerviel Affair. It is not available on line, unfortunately.

The Lehman Myth

The idea has taken hold in France--promoted first by Christine Lagarde and now relayed by Le Figaro--that Lehman was deliberately allowed to fail in order to set an example for the financial industry and put an end to the "moral hazard" critique addressed to the Fed, and, furthermore, that if this had not been done, the whole crisis of the last few weeks could have been averted. If Ben Bernanke is to be believed--and I, for one, believe him--this is not what happened. Here is a relevant excerpt from his testimony, which can be read in its entirety here:

Q: Many market participants I talk with think that the way Lehman was allowed to fail caused substantial damage to confidence and to the access to credit of other financial institutions. Do you think that criticism has some merit, and if so how might it have been done differently, and could it be done differently if there were a similar situation under the TARP?

Mr. Bernanke: So, Lehman was not allowed to fail that in the sense there was some choice being made. There was no mechanism, there was no option, there was no set of rules, there was no funding to allow us to address that situation. The Federal Reserve's ability to lend which was used in the Bear Stearns case, for example, requires that adequate collateral be posted so that we are not taking credit risk, we are lending against collateral. In this case that was impossible. There simply wasn't enough collateral to support the lending. From the Treasury's perspective, unlike the FDIC, deposit insurance fund, there were no funds, there was no option. We worked very hard over one of those famous weekends, with not only some potential acquirers of Lehman but we called together many of the leading CEOs of the private sector in New York to try to come to a solution. We didn't find one, and therefore we were unable to do what we wanted very much to do, which was to prevent the failure of the company.


Will the EU turn to Keynesian stimulus to stave off depression? Two articles appeared this morning, highly contrasting in tone, suggesting a divergence of views. Die Zeit portrays Sarkozy as in favor of an energetic next step, with Merkel still holding back, albeit now praising the rescue package about which she was formerly reticent. The picture is again one of Sarko leading, prodding, full of vigor and eager to do something, while Merkel remains cautious. Meanwhile, Le Monde says that the Eurogroup has "rejected" a stimulus plan but cites only the opinion of Jean-Claude Juncker, who appears not to have noticed that the Stability and Growth Pact is now a dead letter. His position--"Where will the money come from?"--harks back to the earlier clash between him and Sarkozy over the French budget deficit. Sarkozy, who always chafed against the limits imposed by the SGP, now plainly regards the emergency as having rendered them obsolete.

Indeed, Sarkozy recognizes what Merkel seems to have shut her eyes to: Europe, having offered massive guarantees to both depositors and lenders--guarantees that will remain credible only as long as they are not sorely tested--must now ensure that borrowers do not fail, that investor confidence does not crumble, that what Keynes termed "animal spirits" do not flag. Of the more than one trillion euros pledged thus far, only a small fraction involves up-front expenditure: the equity infusion to banks. The rest is in the nature of insurance, a sort of gigantic credit default swap, which, like too many other CDSs, cannot possibly be paid in case of systemic failure. Thus governments have now committed themselves, pace Merkel and Juncker, to making sure that systemic failure does not occur. The question is what form the stimulus will take, not whether it will occur, and it would be good if Europe could achieve coordination on that point as rapidly as it came to agreement on the insurance policy that made such coordination as inevitable as it is essential.

How "New" Is the New Anticapitalist Party?

To follow up Brent Whelan's first-person account of an NPA rally featuring Olivier Besancenot, here is Rue89's report on what's happening behind the scenes at the Nouveau Parti Anticapitaliste. The headquarters have been freshly painted, recruitment is up (especially among young public sector workers--recruits in the image of Besancenot), but the sudden "crisis of capitalism" has revived the revolutionary hopes inherited from the LCR. This is still a revolutionary party, says one spokesman. The Socialist Party is sufficiently worried about the NPA's improving prospects to have put in place an "LCR/NPA watchdog committee" headed by Daniel Vaillant, deputy mayor of the 18th arrdt. and Jospin confederate.

Hooting and Hollering

One feels a certain impatience with politics as usual when a real crisis is threatening to transform the world as we know it, but faiblesse oblige. Some fans at a soccer match hooted La Marseillaise. Sarko won't stand for it. Any more booing of the national anthem, he says, and the match must be canceled (at the risk of provoking a riot, no doubt, but the police are of course at the ready to crack heads and turn farce into tragedy). The Socialists, who refused to vote for the emergency bank rescue bill lest they be seen as holding the president's coat, don't mind holding his coat, shirt, hat, trousers, and shoes on this issue of evidently overweening national importance. Le Figaro is apoplectic, Le Parisien sees an "affair of state."

I am reminded of the 1968 Olympics. American athletes raised their clenched fists on the victors' stand in Mexico City, and to judge by the reaction in the States, you would have thought World War III had broken out. The root cause was the same. Minorities, feeling mistreated at home, seized one of the few occasions when their expression would have unquestionable public visibility to manifest their existence and their discontent. Having no use for the proprieties of normal political discourse, they were only too glad to be rapped on the knuckles by sputtering elders. The anger was proof they'd gotten under the skin of the martinets, which is precisely where angry young cut-ups want to be. Outrage and overreaction are hardly remedies, as anyone who has ever dealt with an adolescent (or been one) knows.

The politicians ought to stop their useless scolding and get back to the urgent business of the day. If the United States can stop talking about flags pinned (or not) to the lapels of candidates, France can stop yapping about jeering at soccer games.