Further unraveling of law firm offers to (first year) law students, and offers to new (first week) bankers from private equity

Eric Budish writes with a pointer to a Business Insider story on the current unraveling of the market for new lawyers and big law firms.

Inside the 'Wild West' of law-school recruiting that has Big Law reeling in talent earlier and more aggressively than ever

"this year, some legal-industry professionals say the competition has gotten out of control.

"Latham & Watkins, which hires about 300 students a year for its 10-week summer program, has told law schools that it has made 2023 summer-job offers to so many students ahead of the traditional period for on-campus interviews, or OCI, that it expects to conduct fewer OCI interviews this year, three people familiar with the firm's strategy said.

"Other elite firms — including Weil, Skadden, and Davis Polk — have also been making large numbers of early offers. At Simpson Thacher, a partner said, "We probably did half our interviewing before the formal OCI process."

"Working at a law firm after a student's second year, or 2L, has long been a rite of passage for students bound for Big Law. "Summer associates" are paid about $4,000 a week at top firms and get the chance to do legal research, eat nice meals on the company's dime, and meet the people they'll likely be working with after graduation — because upwards of 90% of them get an offer to return full time.

...

"Some law students are now entering recruiting talks in the spring of their 1L year. School administrators say it's often the students who get the ball rolling by submitting résumés via a firm's website after meeting a partner at a school meet and greet.

...

"Stanford and the University of Pennsylvania still ban pre-OCI recruiting, their websites said. Other schools require pre-OCI offers to stay open until OCI, so a student can compare firms. But not all firms respect the rules, and students sometimes are afraid to invoke them, said David Diamond, an assistant dean at Northwestern University's Pritzker School of Law.

"We've seen situations where a student receives an offer, and the offer deadline follows our policy, but the offer is accompanied by a diversity scholarship, and the diversity scholarship expires before or during" OCI, Diamond said.

...

"Some people trace the boom in early recruiting to a 2019 decision by the NALP to scrap rules that limited firms from courting first-semester law students. The rules were replaced by nonbinding guidelines."

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And even more frenzied are the job offers that new bankers (in their first week(s) on the job) are getting from private equity firms:

Wall Street just kicked off an annual Hunger Games-style recruiting ritual for junior talent that has young bankers interviewing till 2 a.m. for jobs that don’t start until 2024. https://advance.lexis.com/api/document?collection=news&id=urn:contentItem:668V-4FD1-DXY7-W4MT-00000-00&context=1516831 

"As Insider reported on Tuesday, the frenzied process appears to have kicked off on Monday evening when recruiters for a handful of firms sent out blast emails to select junior bankers suggesting meetings ASAP — before the window of opportunity closes.

"The emails forced these young bankers — many of whom have just started their first Wall Street jobs at places like Goldman Sachs and Citi — to figure out ways to quietly leave their desks to interview for jobs that won't start until the fall of 2024. 

...

"In recent years, the PE recruiting process has moved earlier and earlier, from October to September, but never to late August, as it has done now. It's forcing firms to figure out how to interview candidates with no real job experience. "

Economic warfare: how to staff it?

 The Financial Times has a story about how the UK Ministry of Defense runs an economic warfare unit, which needs to be staffed differently than other military specialties. (The U.S. armed forces have very limited ability to recruit people with specialized skills from civilian occupations, except for doctors and lawyers.)

Secretive MoD ‘banking’ unit helps UK wage economic warfare. Taskforce set up to disrupt Isis six years ago turns its attention to new ‘grey zone’ threats such as cyber  by Helen Warrell 

"A taskforce of former bankers and financiers is helping the UK military sharpen its skills in economic warfare as a bulwark against growing threats including terrorism, cyber attacks and disinformation campaigns.

"The secretive unit — established by Britain’s Ministry of Defence six years ago to disrupt Isis’ commercial activities in Iraq and Syria — is staffed by a handful of former City professionals with expertise in commodity markets and international money flows.

...

"The taskforce, made up predominately of reservists with City experience, has worked with special forces, intelligence agencies and the army’s 77th Brigade information warfare unit to weaken adversaries by limiting their access to finance. 

...

"Bankers are able to enter the armed forces in a number of ways, from applying for a post as a military “regular” through the army’s officer selection board and undergoing training at Sandhurst, to working more flexibly in pro bono roles.

"The MoD is also considering reforms to its policies on reservists, including relaxing age and fitness requirements and bringing in a new “lateral” entry regime which would allow industry experts to transfer directly into senior military ranks rather than working their way up the hierarchy.

“We’re really not trying to throw middle-aged bankers out of the back of aircraft [on military operations],” the taskforce member explained. “It’s about using their professional skills.”

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See also 

Tuesday, December 1, 2020

The labor market that is the military: a report from the National Academies of Science, Engineering, and Medicine

Unraveling for consulting: recruiting for next summer has begun.

 Here's a (gated) story from Business Insider, saying that big consulting firms have already started recruiting college juniors for Summer 2022 internships.  The article points out that investment banks are already recruiting very early too, and suggest that this is the consulting firms' reaction.

Deadlines for summer 2022 internships at Big 3 giants like McKinsey, Bain, and BCG are already whizzing by. Here's why they've kicked off recruiting earlier than ever. Reed Alexander and Samantha Stokes 

 

 

Private equity job offers to young investment bankers unravel earlier this year, while investment banks try to stem their own unraveling

Two stories from the WSJ about unraveling, at different parts of the financial industry.

1. The WSJ has publishes this year's unraveling story earlier than last year's...

No Experience? No Problem. Private Equity Lures Newbie Bankers With $300,000 Offers.
Annual recruitment drive starts earlier this year as firms try to get a jump on preferred candidates

"An industrywide scramble is under way this week to hire young investment bankers.

"The instigator was Thoma Bravo LLC, which extended its first job offers this past weekend, according to people familiar with the matter. Word spread quickly to rivals, and by Monday interviews were under way at nearly every big firm, including Blackstone Group LP, Apollo Global Management LLC, Carlyle Group LP and TPG.

"Welcome to private equity’s annual recruitment, the frenzied window of interviews and fast-expiring job offers that firms use to fill their junior ranks. The candidates graduated college as recently as last spring and landed at Wall Street investment-banking desks just weeks ago.

"Those lucky enough to get offers will finish their two-year bank analyst programs and start at private-equity firms in the summer of 2020...
...
"Recruiting used to take place during the summer, once applicants had at least a year of experience under their belts. But it has crept earlier as firms try to get a jump on preferred candidates. In 2014, interviews began in February. Last year, recruiting started before Christmas. Applicants describe a frantic period of interviews and “exploding” offers that can expire in 24 hours or less.
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2. The investment banks also hire very early in students' college careers, and here's a story about an attempt to resist that urge (good luck with that):

 Goldman, JPMorgan Hit Pause on Intern Recruiting ‘Madness’
A push in recent years to move up application deadlines isn’t bringing in the kinds of candidates the banks need

"Two Wall Street investment banks are easing up in the race to hire their most junior employees.

"Goldman Sachs Group Inc.  and JPMorgan Chase & Co. won’t interview or extend summer internship offers to college sophomores this year and will go back to recruiting students in the fall of their junior year, executives said.

"It is a nod to a softer Wall Street, eager to cast off its sweatbox image to compete with perk-happy Silicon Valley. It is also an acknowledgment that a push in recent years to move up application deadlines isn’t bringing in the kinds of candidates banks need as they try to diversify their overwhelmingly white and male ranks.

“We were contributing to an environment that pressured students to choose rather than to explore,” said Dane Holmes, Goldman’s top human-resources executive. “I want people who want to be at Goldman Sachs, not people who felt they had to say yes to an offer.”

How banks support payday lenders and check cashing services by dissing their low income customers

Here's a story from the WSJ that I found disturbing (and which helps explain why many people choose to be "unbanked" and to patronize high-priced non-bank financial services):

Bank of America: No More Free Checking for Customers With Low Balances
eBanking customers switched into accounts that typically require direct deposit or a minimum balance to avoid $12 monthly fee

"Bank of America Corp. has eliminated a free checking account popular with some lower-income customers, requiring them to keep more money at the bank to avoid a monthly fee.

"This month, all remaining eBanking customers with the Charlotte, N.C., lender were switched into accounts that charge a $12 monthly fee unless the customer has a direct deposit of $250 or more or a minimum daily balance of $1,500. Some eBanking customers were switched over as early as 2015.

"Banks have long grappled with how to charge customers for basic checking services. The accounts are costly for banks to maintain, though they do bring in revenue through overdraft and other fees."
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Some previous posts about the other part of this market:

Friday, November 3, 2017

Payday lending and check cashing

Thursday, January 22, 2015

Payday loans

The private equity junior labor market continues to unravel

Eric Budish points me to the annual story, which seems to be published earlier each year, about the race for young talent in private equity:

Private Equity Prowls for Young Bankers Early in Frenetic Ritual
Job offers can ‘explode’ at midnight as buyout firms compete

"Junior analysts a few weeks on the job can now expect a flurry of emails from headhunters for some of the most prestigious private equity firms in the world. The jobs they’re being recruited for can pay more than $200,000 a year and won’t start until 2019. The battle to hire the best of them is fiercer, and more urgent, than ever.

"Buyout firms are tapping junior bankers earlier -- advancing the annual recruiting cycle, the industry’s biggest window of hiring, for the fifth consecutive year after an agreement to hold back fell apart.
...
"During the most recent cycle, formal interviews started in January...

"That was the earliest recruiting start ever -- about two weeks sooner than the previous year, and a full three months sooner than in 2013, when the major private equity firms stopped cooperating on timing after some broke out to recruit early.
...
"The majority of the mega-funds fill up their spots within 96 hours...
...
"Going forward, there’s no telling how much sooner the recruitment schedule will creep. But one effect is becoming permanent, said Grauer: candidates don’t have much work experience to discuss in their interviews anymore.

“I’d like to think we’ve gotten to a point where it doesn’t get earlier,” Grauer said, adding that interviewees today don’t often know what they want professionally in the long term. “The days when they were able to talk about all their transactions are gone.”

Usury and theology

At Aeon, Alex Mayyasi writes about the work of banker turned theologian David Miller:

Of money and morals
Moneylending has been taboo for most of human history. So how did usury stop being a sin and become respectable finance?

"Vedic law in Ancient India condemned usury, and rulers routinely capped interest rates from Ancient Mesopotamia to Ancient Greece. In Politics, Aristotle described usury as ‘the birth of money from money’, and claimed it was unnatural because money was sterile and should not ‘breed’.
...
"In the 4th century CE, Christian councils denounced the practice, and by 800, the emperor Charlemagne made the prohibition into law. Accounts of merchants and bankers in the Middle Ages frequently include expressions of anguish over their profits. In his Divine Comedy of the 14th century, the Italian poet Dante Alighieri put the usurers in the seventh circle of Hell..."

"The stigma against moneylending continued well into the 1500s. To understand it, think about your reaction to the idea of a bank making a loan to a business at a 5 per cent interest rate. No problem, right? Now compare that to how you’d feel if your mother lent you money on the same terms. In Biblical times, the typical loan was more like the second case – it wasn’t an arms-length transaction, but a charitable loan from a wealthy man to a neighbour who’d experienced misfortune or had nowhere else to turn. "

Unraveling of private equity recruiting

Can competition by speed play a big role in a market in which there's also a lot of competition by price? You bet it can. The NY Times has the story: A Mad Scramble for Young Bankers Wall Street Banks and Private Equity Firms Compete for Young Talent

"A battle is raging on Wall Street as never before, with powerful factions scrambling for control of a precious resource.

On one side are the giant investment banks, with names like Morgan Stanley and Goldman Sachs. Lined up against them, but also warring among themselves, are the giants of private equity — Kohlberg Kravis Roberts, Apollo Global Management and the Blackstone Group, to name just three. And the private-equity firms just happen to be the banks’ clients.

The prize they are fighting for is young talent.

This summer, dozens of junior bankers in their early to mid-20s will start jobs in private equity after spending their first two years out of college working at investment banks. Private-equity firms use billions of dollars of cash and plenty of debt to buy entire companies. They are seen by many young strivers as the next rung on an elite career ladder, promising higher status and more pay — around $300,000 a year, including salary and bonus, roughly double what a second-year banker might earn at Goldman.

But for junior bankers, who are known as analysts, securing such a job means stepping into the middle of a Wall Street struggle that has intensified since the financial crisis.

The whirlwind process of interviews, which this year started in February, far earlier than many in private equity had expected, requires analysts to sneak around and often miss work. It bears little resemblance to the orderly on-campus career fairs they attended in college.

...

To recruit young talent today, the private-equity firms make offers as long as 18 months before a job begins.

This timing is repellent to many bank executives, and not only because their workers are being poached. Promising to take a job with a particular firm can create a conflict of interest for an investment bank analyst, especially one assigned to work with private-equity firms on deals, bankers say.

Goldman Sachs, for example, requires junior workers to resign soon after accepting a job at a private-equity firm. Such a rule is at odds with private equity’s recruiting timeline, leaving many junior bankers to ignore it. And the recruiting process, despite a recent attempt to change it, has grown only more frenzied.

This year, on a Thursday night in February, a handful of investment bank analysts saw their cellphones light up. Amity Search Partners, a major recruiter, told the analysts to prepare to interview the next morning, for jobs that would start in summer 2015.

Already, these analysts — fresh graduates of elite universities who were only about six months into their first jobs on Wall Street — had attended cocktail events and breakfasts sponsored by private-equity firms. But now it had emerged that smaller firms were already interviewing. So one of the biggest players in private equity, Apollo Global Management, which had hired Amity, was quietly taking its own process to the next level, weeks earlier than its rivals had expected. (Representatives of Apollo and Amity declined to comment.)

Word spread quickly, sending other recruiters into strategy sessions that stretched into the wee hours. Recruiters are often paid fees equivalent to about a third of the first-year compensation of workers they place.

One private-equity firm, Silver Lake, scrambled to set up interviews for that afternoon. Kohlberg Kravis Roberts scheduled interviews for that Saturday.Bain Capital, which had planned a preliminary get-to-know-us event for Friday evening, received a number of cancellations from analysts already interviewing elsewhere.

The machine was in motion — a situation that made hardly anyone happy.

...

“It’s bad for the candidates because they have to make decisions really early,” Mr. Sheyner said. “It’s really bad for the banks. They just hired those people a few months ago. And it’s bad for private equity because they don’t have a track record to go on.”

...

Wall Street has tried before to bring some order to private-equity recruiting. The six major private-equity firms, after years of interviewing candidates far in advance, decided two years ago to wait.

The companies — Apollo, Bain, K.K.R., the Blackstone Group, TPG and the Carlyle Group — all chose to wait until January 2013 to recruit the workers who would start that summer, according to two people with direct knowledge of the situation, who would discuss private business matters only on condition of anonymity.

But the détente soon fell apart. Smaller private-equity firms had done their recruiting on the earlier schedule. The giants grew concerned that they might be missing out on the most desirable candidates.

...

In April 2013, the six biggest companies returned to their early schedules, and the next cycle began, with junior bankers getting offers to start in the summer of 2014.

...

Such policies have pushed recruiting further into the shadows. At Goldman, analysts whisper about the time in 2012 when the firm cracked down.

That year, certain analysts, whom Goldman believed had job offers from private-equity firms or hedge funds, were pulled into conference rooms and asked, point blank, about their employment plans, according to an analyst in that class and another person briefed on the matter.

“The majority of us lied,” the analyst said, insisting on anonymity so as not to damage his relationship with Goldman.

Goldman ended up dismissing several analysts who acknowledged they had accepted offers, sending ripples of anxiety through Wall Street’s junior ranks. The financial gossip blog Dealbreaker ran a post with the headline, “Goldman Sachs Does Not Look Kindly Upon First Year Analysts Who Plan In Advance.”

Microfinancial crisis

The NY Times reports India Microcredit Faces Collapse From Defaults

"India’s rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.
...
"Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit “social enterprises” that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia.


"But microfinance in pursuit of profits has led some microcredit companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. Some companies have more than doubled their revenues annually.

"Now some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy. "

Informal money transfer networks: "hawala"

The informal money transfer system known as Hawala (or hundi) is in the news with the arrest of three Pakistani men in New England who are believed to have provided funds to the Times Square bomber. The Boston Globe reports Possible ties to murky finance system examined
"An informal money-exchange network known as “hawala’’ — a centuries-old system that operates outside conventional banking networks — is at the center of the investigation into three Pakistanis arrested Thursday in Massachusetts and Maine with alleged ties to the suspect in the failed Times Square bomb plot, law enforcement officials said yesterday."
...
"Hawala, which originates from the Arabic word for change or transform, is a practice that predates modern banking systems and has been around for centuries. There are believed to be thousands of hawala brokers operating in the United States, and they are not necessarily operating outside US laws if they register with the US Department of Treasury. Many don’t, however, operating more like black-market, cash-based versions of Western Union.
Relying on an informal network of brokers who use designated couriers, the networks are used to transfer money in relatively small amounts in and out of developing nations where modern financial systems are scarce, such as in South Asia, the Middle East, and Africa. Transactions often can be completed within 24 hours and at a lower cost than a traditional wire transfer or bank draft that could take as long as a week and require official paperwork.
Hawaladars, as the brokers are known, often operate out of cash-intensive businesses such as restaurants, convenience stores, or gas stations, the officials said."

The informal nature of the transfers, which circumvent banks and regulated record keeping, and the fact that the broker on one end doesn't know the customer on the other end, have made the hawala system a concern for law enforcement involving money laundering. Here's a report from Interpol: The hawala alternative remittance system and its role in money laundering

Financial market design: the view from the Fed

Fed chairman Ben Bernanke, in a speech today (March 10) to the Council on Foreign Relations, after speaking of immediate steps to bail out financial institutions, talks about ways in which the financial markets might be redesigned in the longer term.

"At the same time that we are addressing such immediate challenges, it is not too soon for policymakers to begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future. We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this aim.
Today, I would like to talk about four key elements of such a strategy. First, we must address the problem of financial institutions that are deemed too big--or perhaps too interconnected--to fail. Second, we must strengthen what I will call the financial infrastructure--the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets--to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing."

Regarding the financial infrastructure, he mentions among other things that
"To help alleviate counterparty credit concerns, regulators are also encouraging the development of well-regulated and prudently managed central clearing counterparties for OTC trades. Just last week, we approved the application for membership in the Federal Reserve System of ICE Trust, a trust company that proposes to operate as a central counterparty and clearinghouse for CDS transactions. "

On the subject of clearinghouses, he goes on to say
"The Federal Reserve and other authorities also are focusing on enhancing the resilience of the triparty repurchase agreement (repo) market, in which the primary dealers and other major banks and broker-dealers obtain very large amounts of secured financing from money market mutual funds and other short-term, risk-averse sources of funding.
...
it may be worthwhile considering the costs and benefits of a central clearing system for this market, given the magnitude of exposures generated and the vital importance of the market to both dealers and investors. "

His comments on "procyclicality" e.g. on making sure that regulation of capital reserves don't cause banks to cut back lending just when credit needs to be loosened, are also worth reading. His concluding paragraph is a sober look at market design contemplated (as it often must be) in advance of reliable scientific knowledge, but in light of recent experience:

"Financial crises will continue to occur, as they have around the world for literally hundreds of years. Even with the sorts of actions I have outlined here today, it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system. Nonetheless, these steps should help make crises less frequent and less virulent, and so contribute to a better functioning national and global economy."

Student loans

"If Congress approves the plan, there will be no need to set subsidies because there will be no banks to subsidize. "

No no, not the current bank bailout (although it's easy to see how that sentence could be misinterpreted). In this case it refers to an auction the federal government is planning to hold to determine which lenders will be authorized to issue federally subsidized student loans: Education Dept. Forges Ahead With Student-Loan Auction. The idea is that banks would submit bids indicating how much federal subsidy they would require to issue student loans on agreed terms, and the lowest subsidies would win.

But "...by the time the auction process is complete, it could be moot. President Obama has called for abolishing the guaranteed-loan program altogether. If Congress approves the plan, there will be no need to set subsidies because there will be no banks to subsidize. "

TARP II

Lucian Bebchuk, the eminent law-and-economics lawyer/economist best known for his work on corporate governance, has just distributed a paper, How To Make TARP II Work.

Here is the Abstract:
"Treasury Secretary Geithner announced a plan, which the Treasury is willing to finance with up to $1 trillion of public funds, to partner with private capital to buy banks' "troubled assets." The Treasury has not yet settled on the plan's design, and its announcement has encountered substantial skepticism as to whether an effective plan for a public-private partnership in buying troubled assets can be worked out. This paper argues that, yes, it can. The paper also analyzes how the plan should be designed to contribute most to restarting the market for troubled assets at the least cost to taxpayers.

"The government's plan should focus on establishing a significant number of competing funds that will be privately managed and dedicated to buying troubled assets - not on creating one, large public-private aggregator bank. Establishing competing funds, I show, is necessary both to securing a well-functioning market for troubled assets and to keeping costs to taxpayers at a minimum.

"Each new fund will be partly financed with private capital, with the rest coming (say, in the form of non-recourse debt financing) from the government's Investment Fund planned by the Treasury. One important element of the proposed design is a competitive process in which private managers seeking to establish a fund participating in the program will submit bids as to what fraction of the fund's capital will be funded privately. The government will set the fraction of each participating fund's capital that must be financed with private money at the highest level that, given the received bids, will still enable establishing new funds with aggregate capital equal to the program's target level. Overall, I show that the proposed design will leverage private capital to the fullest extent possible and will provide the most effective and least costly mechanism for restarting the market for troubled assets. "

TARP auction: Bank of England version

My hotel in Maastricht is housed in an old (renovated) church, and it now has excellent internet connections, so I can blog a bit more than I expected.

Paul Klemperer has written a paper on auction design for England's version of the Troubled Asset Recovery Program. It is called
A New Auction for Substitutes: Central Bank Liquidity Auctions, the U.S. TARP, and Variable Product-Mix Auctions.

It describes a sealed bid auction, required because of the speed and interdependence of markets for financial products:
"a multi-stage auction was ruled out because bidders who had entered the highest bids early on might change their minds about wanting to be winners before the auction closed, and because the financial markets might themselves be influenced by the evolution of the auction, which magnifies the difficulties of bidding and invites manipulation."

The credit crisis and market design

The WSJ, in its Real Time Economics Blog and in a related story in their January 2 issue, raises some questions about how discussion of financial market regulation has turned into a discussion of market design (although that's not exactly the way they put it). They recount the poor reception given to Raghuram G. Rajan's 2005 presentation at the Fed's Jackson Hole conference in honor of Alan Greenspan. Prof. Rajan noted that banks' increased exposure to the securities markets would make them less able to serve as a source of credit in a crisis, and his concerns were, the story reports, met with disdain by those assembled. The blog summarizes the attitude at the time:

"The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them. "

The point of the market design movement, of course, is that markets aren't either "free" or non-existent. A better description is that markets have rules, and some rules work better than others, and the goal of regulators and others who shape the rules should be to find rules that enable markets to work better.

However the WSJ blog also quotes Professor Rajan on the difficulties facing academics who wish to offer opinions on compex issues of public policy:
"“Most academics are really reluctant to take part in the public dialog, because the public dialog requires you to have an opinion about things you can’t really be sure about,” says Mr. Rajan. “They fear talking about things where everything is not neatly nailed in a model. They stay away and let the charlatans occupy the high ground.” "


(The story notes that calls for sensible regulation and market design were met with condescension before the credit crisis, a condescension that is being reevaluated now. So perhaps now is the chance I've been waiting for to note that an anagram for MARKET DESIGN is NEGATED SMIRK :-)

Treasury abandons plans for reverse auction to purchase troubled assets

The Treasury announced today what had already become clear, which is that it has abandoned the initial plan to purchase troubled assets, in favor of buying equity in troubled companies: Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update

"As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again.
During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks. "

HT to Eric Budish (a market designer on the market)

Market for check cashing and payday loans

The NY Times has a nuanced article about the business and recent sale of a big check cashing chain: Check Cashers, Redeemed

"Selling to the poor is a tricky business. Poor people pay more for just about everything, from fresh groceries to banking; Prahalad, the economist, calls it the “poverty penalty.” They pay more for all kinds of reasons, but maybe most of all because mainstream firms decline to compete for their business. Nix has served customers that traditional financial institutions neglected, but he has also profited from that neglect. Whether he profited too much, charging poor communities what the market would bear — that’s a moral question as much as an economic one. And there’s no simple answer. "

The Federal Reserve’s Term Auction Facility

As the credit crisis unfolded, the Fed prepared to auction funds to banks. Among other design features (such as how expressive a bidding language to allow) they thought about adverse selection: they wanted to reduce the signal value "stigma" of participation.

The Federal Reserve’s Term Auction Facility
July 2008 Volume 14, Number 5
Authors: Olivier Armantier, Sandra Krieger, and James McAndrews

Abstract: "As liquidity conditions in the term funding markets grew increasingly strained in late 2007, the Federal Reserve began making funds available directly to banks through a new tool, the Term Auction Facility (TAF). The TAF provides term funding on a collateralized basis, at interest rates and amounts set by auction. The facility is designed to improve liquidity by making it easier for sound institutions to borrow when the markets are not operating efficiently."

Auction Design: "Once the Federal Reserve concluded that an auction format was an effective funding alternative, it added features aimed at ensuring the most efficient distribution of funds to banks with a high demand. In particular, the Fed established a minimum rate at which bids could be submitted that was set in a comparable, competitive market (rather than a penalty rate, which is set at a premium to existing market rates).This market-based minimum bid rate was likely to encourage participation and reduce any stigma associated with receiving auctioned funds, since banks would not necessarily signal an abnormally high demand by bidding. The Federal Reserve also chose a uniform-price (or single-price) auction rather than a discriminatory (pay-your-bid) auction in part to spur participation further. By using the uniform-price structure common in Treasury auctions, the Fed reasoned that banks would be more comfortable with bidding. Finally, to allow for the widest allocation of funds, the central bank imposed a cap on the bid amount corresponding to 10 percent of the auction size.
The Fed also imposed two important rules. First, based on its experience with option auctions in 1999, it would allow each bidder to make two rate-amount offers. This rule represents the Fed’s resolution of the trade-off associated with multiple rate-amount offers: as the number of offers increases, the auction becomes more complex, but participants are able to make bids that are more representative of their demand. Second, the central bank would require TAF participants to pledge collateral beyond the amount necessary to secure credit in the new facility. This rule was imposed to ensure that bidders in the new facility could still borrow through the discount window’s primary credit facility to meet unexpected overnight funding needs."

Credit Default Swaps: reducing counterparty risk

New York Fed Welcomes Further Industry Commitments on Over-the-Counter Derivatives

"The following areas constitute our central priorities for addressing both operational and market design concerns for OTC derivatives:
Institute a Central Counterparty (CCP) for Credit Default Swaps (CDS)...
Reduce Levels of Outstanding Trades via Portfolio Compression. Market participants continue to reduce the number of outstanding CDS trades through multilateral trade terminations (tear-ups)
Enhance Market Transparency.

HT to PrefBlog

Bank secrecy:

U.S. and Swiss law differ regarding U.S. citizens who keep accounts in Swiss banks that do business in the U.S., and an interesting game is afoot:
IRS, Justice Target Undisclosed Assets In Swiss Accounts

"Over the summer, the IRS won permission from a federal court to demand that UBS turn over the identities of an estimated 19,000 American clients who have failed to disclose their Swiss-based accounts on U.S. tax returns. It remains unclear what has or will come of that effort. Swiss law restricts the bank's ability to breach client confidentiality. Swiss law also gives clients the opportunity to oppose the release of their names through a judicial process that could slow any disclosures. "...

"James Nason, a spokesman for the Swiss Bankers Association, said, "UBS itself cannot decide to hand over client data because then it would be violating Swiss law." Any Swiss bank "waits for instructions from the Swiss authorities," Nason said, adding, "Switzerland doesn't allow fishing expeditions." ...

"Whether or not the Swiss officially give up clients' secrets, the U.S. government could have other ways of getting information. For example, bank employees have an incentive to expose tax evaders to the IRS, Skarlatos said, because whistle-blowers could receive 30 percent of the money they help the government collect. "