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What We’re Reading This Week

Libor Again

I am a little tired of seeing Libor manipulation fines, but even more tired of reading articles on Libor manipulation fines. Eric Schneiderman, the NY Attorney General, announced that Barclays will pay another $100 million in fines in a handful of U.S. states because of their Libor manipulation practices. I’m not tired of reading this because I think Barclays shouldn’t be fined. It’s just interesting how different groups come out of the proverbial woodwork to collect their money. Where does it stop? Barclays has now been fined 47 different times for the same crime. They received full immunity when they were originally fined by the European Commission due to their cooperation with the investigation, but the European Commission has no jurisdiction in the U.S. nor in the states that were affected by Barclay’s misconduct. Conceivably, Barclays could be tried by every government in the world. They probably won’t be fined by the Federal Reserve Bank of New York and the European Central Bank though. Every case against Barclays has unearthed the same incriminating emails, some of which were sent to people at both regulators as early as 2007. This is maybe why Barclays hasn’t faced any legal action from those groups – that would be a little awkward. This may be why so many other regulators are suing – they just feel bad they weren’t included in the scandal originally.


Fannie and Freddie

The Federal Housing Finance Agency (FHFA) released the results of the latest Fannie and Freddie stress tests and determined that even if the government needed to bail them out again, ownership of the agency is profitable. There has been a lot of noise recently on allowing Fannie and Freddie to be for profit companies again. Mat Levine, at Bloomberg, wrote a fun article about why this idea is so strange. The case for cutting these companies loose from the US government revolves around the fact that they do not currently retain their capital. When Fannie or Freddie make money, the government keeps it. So far, they have kept $246.7 billion since they bailed the agency out for $187.5 billion. Essentially, they have made $59.2 billion dollars and I feel like they sort of need it. Opponents to government ownership of these companies say that if Fannie or Freddie were to lose money, the US treasury would need to pay out of pocket to cover the loss. While this is true, it completely ignores the fact the government still has $59.2 billion extra dollars. The stress test showed that the government would need to give up roughly $49.2 billion in the event of a 2nd “bailout.” This would net the government a total of $10 billion, which isn’t bad. The argument comes mostly from Fannie and Freddie shareholders. There is a lot of outstanding stock in these companies that cannot be redeemed under the terms of the current conservatorship agreement – if the government released ownership, these shares could be sold for some value, possibly. There have even been lawsuits related to the bailout terms. As a nation, we never voted to permanently move the U.S. mortgage market to government control. The conservatorship is meant to be temporary. Also, by keeping Fannie and Freddie as separate entities the government has the unique opportunity to not include their debt in the national accounting. So to sum it up: the government has a revenue stream that also allows it to control housing policy and thus more of the economy, while not having to keep its pesky debt on the books. It sounds like a great deal. It also doesn’t stop a private corporation from creating a mortgage company that can buy or guarantee mortgages. So at the end of the day, it feels like a case of sour grapes from Fannie and Freddie stockholders. The United States Government bought a company that failed and is now enjoying some return on its investment.



Have owners of bitcoins come to the conclusion that their bitcoins will inevitably be stolen at some point? If I was asked to put your describe bitcoin to someone I would say, “You put bitcoins in an exchange and then someone takes them and you have less.” But where do the bitcoins come from? At this point I have to assume that they were stolen from someone else. Bitcoin enthusiasts will undoubtedly refute that claim but the number of bitcoin exchange hacks is staggering. And also, I don’t care. Please don’t email me about this article. Most recently, the exchange Bitfinex was hacked and suffered losses of $71 million, or 36% of inventory. My issue with Bitcoin is simple. It is meant to be the answer to the problems that many people have with our current monetary system. However, it is a very rudimentary version of our current monetary system and is doomed to repeat most, if not all of the same mistakes that we have made with currency throughout history. Their answer to hundreds of years of knowledge and experience is to ignore all of it and start over (seriously, if you like bitcoins, don’t email me about this article). For example, most bitcoin exchanges keep customers’ money in one account. This makes it very easy for people to hack in and have access to all the bitcoins! All of them! I remember watching Duck Tails as a child and having the same thought every time Scrooge McDuck lost his money, “Why does he keep all of his gold in one huge vault? If he’s so rich he should really have a lot of small vaults.” Clearly, I was not a very fun person to watch Duck Tails with, but that’s not the point. Bitfinex thought they had the answer, they would keep customer’s money in separate accounts! Well, this sort of worked out but then it didn’t. Instead of the central account loosing 36% of its bitcoins, 36% of customers lost 100% of their bitcoins and the rest lost 0% (roughly). Bitfinex thought that wasn’t fair and decided to spread the loss over the entire customer base anyway. Then, they issued a “token on the Omni protocol” to each customer (what?) that essentially works like an IOU. Bitcoin is already essentially a financial proxy but the Omni token is like a bitcoin proxy. I really like the idea of having a thing that represents your share of something that represents your share of something else. It does sound familiar though, kind of like a corporate bond maybe. You know, when you make some of your funds illiquid and the company slowly pays you back over time. Some bonds allow you to trade in your debt for shares of the company, but wait, Bitfinex does that too. The Omni token can be exchanged for shares of iFinex Inc., Bitfinex’s parent company. It’s also sort of how bankruptcy works, losses are shared by all creditors and equity is exchanged to make up for it. It’s fun to watch bitcoin slowly plod towards conclusions that are already established practices in the rest of the world. I’m not completely pessimistic, I think that there is hope in bitcoin; however, I just feel like more progress can be made if they were willing to build on the current system instead of ignoring it completely.


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