A Jersey Lesson in Voter Fraud. By Thomas Fleming

A Jersey Lesson in Voter Fraud. By Thomas Fleming
My grandmother died there in 1940. She voted Democratic for the next 10 years.The Wall Street Journal, February 6, 2013, on page A11
http://online.wsj.com/article/SB10001424127887323829504578272250730580018.html

Some youthful memories were stirred by the news this week that the president plans to use his State of the Union speech next Tuesday to urge Congress to make voter registration and ballot-casting easier. Like Mr. Obama, I come from a city with a colorful history of political corruption and vote fraud.

The president's town is Chicago, mine is Jersey City. Both were solidly Democratic in the 1930s and '40s, and their mayors were close friends. At one point in the early '30s, Jersey City's Frank Hague called Chicago's Ed Kelly to say he needed $2 million as soon as possible to survive a coming election. According to my father—one of Boss Hague's right-hand men—a dapper fellow who had taken an overnight train arrived at Jersey City's City Hall the next morning, suitcase in hand, cash inside.

Those were the days when it was glorious to be a Democrat. As a historian, I give talks from time to time. In a recent one, called "Us Against Them," I said it was we Irish and our Italian, Polish and other ethnic allies against "the dirty rotten stinking WASP Protestant Republicans of New Jersey." By thus demeaning the opposition, we had clear consciences as we rolled up killer majorities using tactics that had little to do with the election laws.

My grandmother Mary Dolan died in 1940. But she voted Democratic for the next 10 years. An election bureau official came to our door one time and asked if Mrs. Dolan was still living in our house. "She's upstairs taking a nap," I replied. Satisfied, he left.

Thousands of other ghosts cast similar ballots every Election Day in Jersey City. Another technique was the use of "floaters," tough Irishmen imported from New York who voted five, six and even 10 times at various polling places.

Equally effective was cash-per-vote. On more than one Election Day, my father called the ward's chief bookmaker to tell him: "I need 10 grand by one o'clock." He always got it, and his ward had a formidable Democratic majority when the polls closed.

Other times, as the clock ticked into the wee hours, word would often arrive in the polling places that the dirty rotten stinking WASP Protestant Republicans had built up a commanding lead in South Jersey, where "Nucky" Johnson (currently being immortalized on TV in HBO's "Boardwalk Empire") had a small Republican machine in Atlantic City.

By dawn, tens of thousands of hitherto unknown Jersey City ballots would be counted and another Democratic governor or senator would be in office, and the Democratic presidential candidate would benefit as well. Things in Chicago were no different, Boss Hague would remark after returning from one of his frequent visits.

I have to laugh when I hear current-day Democrats not only lobbying against voter-identification laws but campaigning to make voting even easier than it already is. More laughable is the idea of dressing up the matter as a civil-rights issue.

My youthful outlook on life—that anything goes against the rotten stinking WASP Protestant Republicans—evaporated while I served in the U.S. Navy in World War II. In that conflict, millions of people like me acquired a new understanding of what it meant to be an American.

Later I became a historian of this nation's early years—and I can assure President Obama that no founding father would tolerate the idea of unidentified voters. These men understood the possibility and the reality of political corruption. They knew it might erupt at any time within a city or state.

The president's party—which is still my party—has inspired countless Americans by looking out for the less fortunate. No doubt that instinct motivated Mr. Obama in his years as a community organizer in Chicago. Such caring can still be a force, but that force, and the Democratic Party, will be constantly soiled and corrupted if the right and the privilege to vote becomes an easily manipulated joke.

Mr. Fleming is a former president of the Society of American Historians.

Liquidity and Transparency in Bank Risk Management. By Lev Ratnovski

Liquidity and Transparency in Bank Risk Management. By Lev Ratnovski
IMF Working Paper No. 13/16
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40258.0

Summary: Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

Conclusion

The paper emphasized that both liquidity buffers and — in a novel perspective — bank transparency (better communication that enhances access to external refinancing) are important in bank liquidity risk management. In a liquidity event, a liquidity buffer can cover small withdrawals with certainty. Transparency allows the bank to refinance large withdrawals too, but it is not always effective. Banks may choose insufficient liquidity and transparency; the optimal policy response is constrained by the fact that bank transparency is not verifiable.

The paper offers important policy implications, particularly for the ongoing liquidity regulation debate. The results caution that the focus on liquidity requirements needs to be complemented by measures to improve bank transparency and access to market refinancing. Without such measures, liquidity requirements may not achieve the full potential of improvements in social welfare, and under some conditions may have unintended effects. We also highlight the need for better corporate governance as a way to improve bank transparency, and the scope to use net stable funding ratios to increase the effectiveness of liquidity requirements.

Q&A session with a Japanese citizen on contemporary politics

The comments of a Japanese citizens on politics and our questions:

[...]

- what do supporters of Tokyo's governor say about him? I always read comments against him, but he wins the elections, so there are lots of (silent) supporters.

our present PM Shinzo Abe is supported by citizens pretty well so far. he showed a policy for economics called "Abenomics" lately. then even though nothing's done yet just show it to us, stock prises' been rising and rising, curency rate's been much better (Yen got too much strong and international exporting companies as even Sony, Panasonic or Toyota were getting big loss for these 3 years).

also, his strategy of international is evaluated. former government always compromised to Chinese or Korean's unreasonable accusations just for economical reasons. but he is trying to build a strong relationships between South-east Asian countries, Australia, India and Russia. especially SE Asian countries welcome this because they've been threatened by Chinese forces, they've actually wanted Japan to have leadership against China.

he seems doing very fine now.

i have to say many of japanese medias have big problems... many people in medias are kind of "traitor". they pick up "noisy minority" and show it just like the majority to give Japan bad names to the world... it's fine if their opinions are to make things better, but just critisise. it will be too long if i explain this.

Question: what do supporters of nuclear arms say? I always read assurances about the Japanese not wanting the A-bomb, but from time to time some politician says that Japan is considering protecting herself (against North Korea and China)

i think there are not many supporters of nuclear arms. some polititians and scholars are saying to discuss it. because almost all of Japanese has a sort of allergy for nuclear weapons (it comes from trauma of WW2) and even discussions are taboo. indeed, even though we have been aimed by Chinese and maybe Korean A-missiles. so they are claiming to get out of trauma now. also they say even only discussion will be a detterent to the countries. (personally i agree with them, we don't need to have it, but it's nonsense not to even talk). recently it seems peoples who agree with it has been increasing.

PM Abe is trying to have a good relationship between US, but on the other hand, trying to protect ourself with proper forces. and it's generally supported by majority (at least it seems so to me). almost all of people likes US better than China in politics, but lately people started to think stand by ourselvs.

actually now is the turning point of Japan after WW2 i think...

if you want to understand how Japanese are, it might be important to understand "Shinto". it's a domestic thoughts/philosophy of Japan, quite religious but not religion. it says we have 8 million gods in our land - god of fire, god of wood, god of sea, god of marrige, god of traffic, god of study... so we should thank to everything, be good and respect others. it is the base of moral of Japanese, we are brought up with it by our parents. it's easy to accept other religion for Shinto, because any god or buddha of other religions can be one of the god. (Japanese buddism are a lot influenced and mixed with Shinto). our Tenno (emperor) is regarded as offspring of the god. http://en.wikipedia.org/wiki/Shinto

last year, South Korean president insulted Tenno, then all of Japanese citizens got angry, (i have never seen such angry Japanese ever!), i understood Tenno is the symbol of this country and Shinto at the moment.

sorry it's getting out of focus.

[...]

take care,

[...]

---
Remember Ozawa: "If Japan desires, it can possess thousands of nuclear warheads." 2009. https://www.bipartisanalliance.com/2009/06/remember-ozawa-if-japan-desires-it-can.html

Are there clear affinities of Communism with Fascism?

Political philosopher John N. Gray on liberals' totalitarian temptation
Times Literary Supplement, Jan 02, 2013:

One of the features that distinguished Bolshevism from Tsarism was the insistence of Lenin and his followers on the need for a complete overhaul of society. Old-fashioned despots may modernize in piecemeal fashion if doing so seems necessary to maintain their power, but they do not aim at remaking society on a new model, still less at fashioning a new type of humanity. Communist regimes engaged in mass killing in order to achieve these transformations, and paradoxically it is this essentially totalitarian ambition that has appealed to liberals. Here as elsewhere, the commonplace distinction between utopianism and meliorism is less than fundamental. In its predominant forms, liberalism has been in recent times a version of the religion of humanity, and with rare exceptions— [Bertrand] Russell is one of the few that come to mind—liberals have seen the Communist experiment as a hyperbolic expression of their own project of improvement; if the experiment failed, its casualties were incurred for the sake of a progressive cause. To think otherwise—to admit the possibility that the millions who were judged to be less than fully human suffered and died for nothing—would be to question the idea that history is a story of continuing human advance, which for liberals today is an article of faith. That is why, despite all evidence to the contrary, so many of them continue to deny Communism's clear affinities with Fascism. Blindness to the true nature of Communism is an inability to accept that radical evil can come from the pursuit of progress.

John Gray is professor emeritus at the London School of Economics

Relying on financial models to set loan-loss reserves could hurt small banks and their customers

Bank Reform Takes One Flawed Step Forward. By Eugene A Ludwig and Paul A Volcker
Relying on financial models to set loan-loss reserves could hurt small banks and their customers.The Wall Street Journal
January 18, 2013, on page A15
http://online.wsj.com/article/SB10001424127887323468604578245421482083936.html

The Financial Accounting Standards Board finished 2012 on a high note, issuing a draft new rule to change the way banks build reserves against losses on loans. It is a major step forward from our current system. Still, FASB's proposed rule is flawed conceptually and in its application, and in itself it cannot achieve the international consistency that is desirable.

The good news: The board recognizes that its existing rules on the Allocation for Loan and Lease Losses may have worsened the 2008 financial crisis. These rules limited bank reserves to those that are already "incurred." This all but ensures that banks' rainy day funds will be too skinny, particularly in periods when credit markets are under stress. Worse yet, limiting loss estimates to events that have already occurred makes the allowance for loan and lease losses procyclical—reported earnings are too high in good times and losses hit hardest in bad times.

The FASB's draft proposal to reform these rules incorporates what is known as the "Current Expected Credit Loss Model." It is meant to expand reserves to reflect losses that are expected over the life of the loan, and it is a big improvement over the existing regime. But as it stands, the proposal could create risks for the financial system.

In an effort to ensure that everything is "auditable," the proposal ties the loan-loss reserve to what the accounting profession will decide is an acceptable "model." While the proposal is well-intentioned and makes clear that various models can be used, this model-driven approach is dangerous.

Modeling by its very nature is backward looking. It would push bankers to address only risks that are readily and historically quantifiable. It would discourage them from acting on forward-looking but less well-defined risks, like broader economic trends, that can be just as damaging.

A focus on modeling also unnecessarily favors large institutions. Banks with smaller loan books and more hands-on experience have some advantages when setting their reserves. But what community bank has a sufficient data set, a team of "modelers," or complex statistical analysis software on hand? The FASB proposal could hurt small banks and their customers.

That is not to say that some quantitative models have no place in establishing reserves. Some institutions may choose to use models, even slavishly. But this should not be a requirement, unless experience and judgment lead the bank's prudential regulator to think otherwise.

There are other ways to go about setting reserves. A bank can follow a rigorous, board-approved process, for example by drawing on well-documented reviews from its CEO, chief credit officer, and the credit committee of the board of directors. The assumptions used in these judgmental reviews can be audited by regulators and outside accountants, and implementation of the process itself can be audited. This approach can be honest and effective without relying entirely on mathematical models.

The FASB proposal may have at least one smaller-scale but serious flaw. Although the text is unclear, the proposal appears to base reserves on cash flows above all other credit factors, such as collateral. We understand that this is not what was intended, and that "cash flows" is meant to include monies derived from collateral liquidation too. If this is the case, the language should be clarified.

While we do believe it is critical to allow bankers to use their expertise in estimating losses for reserve purposes, we also believe it is critical that they disclose to regulators and the public both the methodology they employ to set reserves and the quarter-by-quarter decisions on reserves they actually make. That way investors can follow a bank's net revenue picture before and after loan reserves are set aside, and the methods they use to establish these reserves.

It would be highly desirable to have one international rule in this area, as with accounting standards in the financial services area generally. The International Accounting Standards Board is preparing a new standard for bank reserves. Both the FASB and the IASB approaches will be open to comment. The goal should be to achieve consistency along the broad lines opened by the FASB proposal.

In sum, the FASB's draft proposal is a positive step. But it will require revision so that small banks are not put at a disadvantage, and so that all banks can employ rational and effective methods to set aside their rainy day funds.

Mr. Ludwig, CEO of Promontory Financial Group, was comptroller of the currency from 1993 to 1998. Mr. Volcker was chairman of the Federal Reserve System from 1979-1987.

Incentive Audits: A New Approach to Financial Regulation

Incentive Audits: A New Approach to Financial Regulation. By Martin Cihak
World Bank Blogs, Jan 14, 2012
http://blogs.worldbank.org/allaboutfinance/incentive-audits-a-new-approach-to-financial-regulation

Economists often disagree on policy advice. If you ask 10 of them, you may get 10 different answers, or more. But from time to time, economists actually do agree. One such area of agreement relates to the role of incentives in the financial sector. A large and growing literature points to misaligned incentives playing a key role in the run-up to the global financial crisis. In a recent paper, co-authored with Barry Johnston, we propose to address the incentive breakdowns head-on by performing “incentive audits”.

The global financial crisis has highlighted the destructive impact of misaligned incentives in the financial sector. This includes bank managers’ incentives to boost short-term profits and create banks that are “too big to fail”, regulators’ incentives to forebear and withhold information from other regulators in stressful times, credit rating agencies’ incentives to keep issuing high ratings for subprime assets, and so on. Of course, incentives play an important role in many economic activities, not just the financial ones. But nowhere are they as prominent, and nowhere can their impact get as damaging as in the financial sector, due to its leverage, interconnectedness, and systemic importance. A large body of recent literature examines these issues in depth. For example, Caprio, Demirgüç-Kunt and Kane (2008) show that incentive conflicts explain how securitization went wrong and why credit ratings proved so inaccurate; Barth, Caprio and Levine (2012) highlight incentive failures in regulatory authorities. Incentives were not the only factor – they were accentuated by problems of insufficient information, herd behavior, and so on – but breakdowns in incentives had clearly a central role in the run-up to the crisis.

Despite the broad agreement among economists, the focus of financial sector regulation and supervision has often been on other things, leaving incentives to be addressed indirectly at best. At the global level, substantial efforts have been devoted to issues such as calibrating risk weights to calculate banks’ minimum capital requirements. Numerous outside observers have called for more concerted efforts to address the incentive breakdowns that led to the crisis (e.g., LSE 2010; Squam Lake Working Group 2010; and Beck 2010). At the individual country level, regulatory changes have taken place in recent years, but in-depth analyses show a major scope to better address incentive problems (see Čihák, Demirgüç-Kunt, Martínez Pería, and Mohseni 2012, based on data from the World Bank’s 2011–12 Bank Regulation and Supervision Survey). The World Bank’s 2013 Global Financial Development Report also called for more vigorous steps to address incentive issues, rather than leaving them as an afterthought.

In a recent paper, joint with Barry Johnston, we propose a pragmatic approach to re-orienting financial regulation to have at its core addressing incentives on an ongoing basis. The paper, which of course represents our views and not necessarily those of the World Bank, proposes “incentive audits” as a tool to help in identifying incentive misalignments in the financial sector. The paper is an extended version of an earlier piece recognized by the International Centre for Financial Regulation and the Financial Times among top essays on “what good regulation should look like“.
The incentive audit approach aims to address systemic risk buildup directly at its source. While traditional, regulation-based approaches focus on building up capital and liquidity buffers in financial institutions, the incentive-based approach seeks to identify and correct distortions and frictions that contribute to the buildup of excessive risk. It goes beyond the symptoms to their source. For example, the buildup of massive risk concentrations before the crisis could be attributed to information gaps that prevented the assessment of exposures and network risks, to incentive failures in the monitoring of the risks due to conflicts of interest and moral hazard, and to regulatory incentives that encouraged risk transfers. Building up buffers can help, but to address systemic risk effectively, it is crucial to tackle the underlying incentives that give rise to it. Focusing on increasingly complex capital and liquidity charges has the danger of creating incentives for circumvention, and can run into limited capacity for implementation and enforcement. In the incentive-based approach, more emphasis is given on methods for identifying incentive failures resulting in systemic risk. The remedies go beyond narrowly defined prudential tools and include also other measures, such as elimination of tax incentives that encourage excessive borrowing.

What would an incentive audit involve? It would entail an analysis of structural and organizational features that affect incentives to conduct and monitor financial transactions. It would comprise a sequenced set of analyses proceeding from higher level questions on market structure, government safety nets and legal and regulatory framework, to progressively more detailed questions aimed at identifying the incentives that motivate and guide financial decisions (Figure 1). This sequenced approach enables drilling down and identifying factors leading to market failures and excessive risk taking.

The incentive audit is a novel concept, but analysis of incentives has been done. One example is the report of a parliamentary commission examining the roots of the Icelandic financial crisis. The report (Special Investigation Commission 2010) notes the rapid growth of Icelandic banks as a major contributor of the crisis. It documents the underlying “strong incentives for growth”, which included the banks’ incentive schemes and the high leverage of their owners. It maps out the network of conflicting interests of the key owners, who were also the largest debtors of these banks. Another example of work that is close to an incentive audit is the analysis by Calomiris (2011). He examines incentive failures in the U.S. financial market, and identifies a subset of reforms that are “incentive-robust,” that is, they improve market incentives, market discipline, and incentives of regulators and supervisors by making rules and their enforcement more transparent, increasing credibility and accountability. These examples illustrate that an incentive audit is doable and useful.

Who would perform incentive audits? Our paper offers some suggestions. The governance of the institution performing the audits is important--its own incentives to act need to be appropriately aligned. Also, to be effective, incentive audits would have to be performed regularly, and their outcomes would have to be used to address incentive issues by adapting regulation, supervision, and other measures. In Iceland, the analysis of incentives was a part of a “post mortem” on the crisis, but it is feasible to do such analysis ex-ante. Indeed, much of the information used in the above mentioned report was available even before the crisis. The Commission had modest resources, illustrating that incentive audits need not be very costly or overly complicated to perform. As the Commission’s report points out, “it should have been clear to the supervisory authorities that such incentives existed and that there was reason for concern,” but supervisors “did not keep up with the rapid changes in the banks’ practices”. Instead of examining the reasons for the changes, the supervisors took comfort in banks’ capital ratios exceeding a statutory minimum and appearing robust in narrowly-defined stress tests (Čihák and Ong 2010).

An incentive audit needs to be complemented by other tools. It needs to be combined with quantitative risk assessment and with assessments of the regulatory, supervisory, and crisis preparedness frameworks. The audit provides an organizing framework, putting the identification and correction of incentive misalignments front and center.

Incentive audits are not a panacea, of course. Financial markets suffer from issues that go beyond misaligned incentives, such as limited rationality, herd behavior and so on. But better identifying and addressing incentive misalignments is a key practical step, and the incentive audits can help.

References
Barth, James, Gerard Caprio, and Ross Levine. 2012. Guardians of Finance: Making Regulators Work for Us, MIT Press.
Beck, Thorsten (ed). 2010. Future of Banking. Centre for Economic Policy Research (CEPR). Published by vox.eu.
Caprio, Gerard, Asli Demirgüç-Kunt, and Edward J. Kane. 2010. “The 2007 Meltdown in Structured Securitization: Searching for Lessons, not Scapegoats.” World Bank Research Observer 25 (1): 125-55.
Calomiris, Charles. 2011. Incentive‐Robust Financial Reform, Cato Journal  31 (3): 561–589.
Čihák, Martin, Asli Demirgüç-Kunt, Maria Soledad Martínez Pería, and Amin Mohseni. 2012. “Banking Regulation and Supervision around the World: Crisis Update.” Policy Research Working Paper 6286, World Bank, Washington, DC.
Čihák, Martin, Asli Demirgüç-Kunt, and R. Barry Johnston. 2013. “Incentive Audits: A New Approach to Financial Regulation.” Policy Research Working Paper 6308, World Bank, Washington, DC.
Čihák, Martin, and Li Lian Ong. 2010. “Of Runes and Sagas: Perspectives on Liquidity Stress Testing Using an Iceland Example.” Working Paper 10/156, IMF, Washington, DC.
London School of Economics. 2010. The Future of Finance: The LSE Report. London: London School of Economics.
Special Investigation Commission. 2010. Report on the collapse of the three main banks in Iceland. Icelandic Parliament, April 12.
Squam Lake Working Group. 2010. Regulation of Executive Compensation in Financial Services. Squam Lake Working Group on Financial Regulation
World Bank. 2012. Global Financial Development Report 2013: Rethinking the Role of the State in Finance, World Bank, Washington DC.

BCBS Principles for effective risk data aggregation and risk reporting

BCBS Principles for effective risk data aggregation and risk reporting
January 2013
http://www.bis.org/publ/bcbs239.htm

The financial crisis that began in 2007 revealed that many banks, including global systemically important banks (G-SIBs), were unable to aggregate risk exposures and identify concentrations fully, quickly and accurately. This meant that banks' ability to take risk decisions in a timely fashion was seriously impaired with wide-ranging consequences for the banks themselves and for the stability of the financial system as a whole.

The Basel Committee's Principles for effective risk data aggregation will strengthen banks' risk data aggregation capabilities and internal risk reporting practices. Implementation of the principles will strengthen risk management at banks - in particular, G-SIBs - thereby enhancing their ability to cope with stress and crisis situations.

An earlier version of the principles published today was issued for consultation in June 2012. The Committee wishes to thank those who provided feedback and comments as these were instrumental in revising and finalising the principles.

Objectives (excerpted):

The adoption of these Principles will enable fundamental improvements to the management of banks. The Principles are expected to support a bank’s efforts to:

• Enhance the infrastructure for reporting key information, particularly that used by the board and senior management to identify, monitor and manage risks;
• Improve the decision-making process throughout the banking organisation;
• Enhance the management of information across legal entities, while facilitating a comprehensive assessment of risk exposures at the global consolidated level;
• Reduce the probability and severity of losses resulting from risk management weaknesses;
• Improve the speed at which information is available and hence decisions can be made; and
• Improve the organisation’s quality of strategic planning and the ability to manage the risk of new products and services.

Capital Requirements for Over-the-Counter Derivatives Central Counterparties

Capital Requirements for Over-the-Counter Derivatives Central Counterparties. By Li Lin and Jay Surti
IMF Working Paper No. 13/3, January 08, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40220.0

Summary: The central counterparties dominating the market for the clearing of over-the-counter interest rate and credit derivatives are globally systemic. Employing methodologies similar to the calculation of banks’ capital requirements against trading book exposures, this paper assesses the sensitivity of central counterparties’ required risk buffers, or capital requirements, to a range of model inputs. We find them to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail events, and the ability—or lack thereof—to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from having prudential authorities adopt a more prescriptive approach to for central counterparties’ risk buffers, in line with recent enhancements to the capital regime for banks.

ISBN: 9781475535501
ISSN: 2227-8885
Stock No: WPIEA2013003