Moody's downgrade

Moody's has downgraded the senior debt and deposit ratings of 12 UK financial institutions, including Nationwide, RBS and Lloyds-TSB. See their reasoning here.

Moody's seems to believe that the UK government's commitment to have no further bank bailouts is credible. However, there is what economists call a time-inconsistency problem with this type of commitment. In other words, when it comes to the crunch, politicians will expediently go back on their verbal commitment.

The big mistake made by governments around the world during the 2008 crisis was to bail out the creditors of large financial institutions. It is okay reimbursing small retail depositors out of taxpayer funds, but it is something entirely different to bail out large creditors. In the parlance of the market, these creditors should have been forced to take a haircut - short back and sides all round! Unfortunately, that didn't happen, and as consequence, taxpayers in Western democracies will possibly face years of economic hardship. Social strife and political upheaval may even follow.

Apologies for all this doom and gloom on a Friday afternoon!

How Valuable Are Connections?

Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton have written a paper on whether firms connected to Timothy Geithner benefited from these connections. They do so by looking at how stocks of these firms reacted to the announcement that he was a nominee for Treasury Secretary in November 2008. They find that there were large abnormal returns for connected firms. Below is the paper's abstract and the full paper is available here . The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner's confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small ne...

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .

Bank Runs in Greece

Deposit withdrawals in Greece have been substantial over the past two years. However, the failure of Greece's politicians to form a coalition government has resulted in deposit withdrawals accelerating - click here and here for more on this. Depositors are rightly concerned about the exit of Greece from the euro and the subsequent devaluation of their deposits. The puzzle for me and many others is why are there so many deposits still remaining in the Greek banking system. One reason is that the Greek banking system is being kept alive by massive injections of money from the ECB. Will the ECB continue to support the Greek banking system in the face of a mass withdrawal of deposits? I doubt that there is the political will in Germany for this as the Bundesbank already has a huge exposure to Greece (as well as Spain and Italy) through the ECB's internal Target 2 system.

Finance: Past, Present and Future

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