Topic: Finance, Banking & Monetary Policy

Bulgaria: Liquidate KTB, Now

The long-awaited audit of the Corporate Commercial Bank’s (KTB’s) assets has been released by the Bulgarian National Bank (BNB). In its wake, a debate has arisen about the future of the KTB: Should it be recapitalized? And if KTB is recapitalized, should the Bulgarian or the European authorities be responsible? However, it is clear from the results of the audit that, once the obscurity of the technocratic arguments is stripped away, there can be no debate. KTB should be liquidated as soon as possible, and whatever proceeds can be obtained in liquidation should be used to reimburse guarantees to depositors paid from the Bulgarian Deposit Insurance Fund (BDIF).

KTB should be liquidated because it is not, and apparently never has been, a commercial bank. Had KTB been operated according to commercial banking principles, it would be virtually impossible for KTB to destroy value on the scale witnessed by the independent auditors. As of September 30, 2014, the auditors estimate that 76% of the asset value in KTB’s non-financial loan portfolio, which accounts for 80% of KTB’s assets, has been lost.

Losing 76% on a commercial loan portfolio must be put into perspective. In making loans, commercial banks generally require a senior secured position. This means that in the event of default, the bank may take collateral from the borrower and use the proceeds from selling the collateral to recover the bank’s principal, prior to any other creditor. From 2003 to 2012, Standard and Poor’s found that European lenders recovered 78% of their principal, on average, from defaulted loans with these characteristics. Even where defaulted loans were not secured by collateral, European lenders averaged a 48% recovery rate. Compare these recovery rates to KTB’s pathetic implied recovery rate of 24%, and it becomes clear that KTB was not operating as a real bank.

The KTB audit report tells a story in which KTB blatantly ignored the basic pillars of commercial lending. According to the report, there is little evidence that initial loan underwriting and subsequent credit monitoring ever took place at KTB.

If KTB’s management were just grossly incompetent, it would be bad enough. But it appears they were also criminals. The BNB is forwarding the audit results to the Sofia City Prosecutor’s Office. The auditors state that KTB lied to and misled BNB banking supervisors, and engaged in transactions with no evident commercial purpose. The suspicion of criminal activity is just another reason why KTB should be liquidated, now.

Now More Than Ever, Courts Should Police Administrative Agencies

Under the Bush administration, the Labor Department interpreted a piece of the Fair Labor Standards Act as exempting mortgage-loan officers from eligibility for overtime pay. The Obama Labor Department didn’t see the law the same way, however, and issued a re-interpretation.

This was a worrying development for the Mortgage Bankers Association, which represents banks that relied on the original interpretation and whose interests were greatly affected by the re-interpretation, but were given neither notice nor the chance to comment on the change. The MBA thus sued the Labor Department, arguing that the re-interpretation violated the Administrative Procedure Act, the 1946 law that determined (among other things) the processes that agencies must go through when exercising their “interpretive” and “legislative” powers—that is, when they interpret laws and when they make their own regulations.

Under the APA, agencies have to give affected parties notice and the opportunity for comment when making legislative rules, but do not have to do so when they merely make interpretive rules. The MBA argued that the APA requires an agency to go through the notice-and-comment process when it changes its interpretation of a law or regulation to such a degree that it is effectively making a legislative rule.

The U.S. Court of Appeals for the D.C. Circuit agreed with the MBA, and now the Supreme Court has decided to review the case. The government argues that agencies are due deference when they change the application of a law through interpretive rules—so long as they come in the form of an interpretation—and that the courts don’t get a say regarding when this action becomes a legislative rulemaking.

Cato disagrees with the government’s position—if there’s anything our country needs, it’s not fewer checks on the administrative state—and has filed a brief supporting the MBA, joined by the Competitive Enterprise Institute and the Judicial Education Network, and with former White House Counsel Boyden Gray as co-counsel. In our brief, we examine the APA’s framers’ goal of rebutting the government’s assertion of administrative power. We argue that the boundary between “interpretive” and “legislative” rules is a blurry one that should be policed by the courts. The APA’s architects assumed that the courts would play such a role; they wouldn’t have made interpretive rulemaking so procedurally easy otherwise. Scholarly sources and legislative history agree that judicial review is necessary—for example, determining when “interpretive” flip-flopping necessitates greater due-process protection—to protect those whose livelihood depends on relying on and complying with agency interpretations.

In sum, our brief looks to history to make clear a few important points that only the government would dispute. In a time when more people’s lives are staked on administrative rulings than ever before, we shouldn’t weaken the APA’s due-process protections. This case boils down to the government’s desire for agencies to more easily exercise power and for the subjects of regulations to have a harder time challenging that awesome authority. We, with the APA’s framers, think it should be the other way around.

The Supreme Court will hear oral argument in Perez v. Mortgage Bankers Association on December 1.

This blogpost was coauthored by Cato legal associate Julio Colomba.

The Cost of Ebola and the Misery Index

For a clear snapshot of a country’s economic performance, a look at my misery index is particularly edifying. The misery index is simply the sum of the inflation rate, unemployment rate, and bank lending rate, minus per capita GDP growth. 

The epicenter of the Ebola crisis is Liberia. As the accompanying chart shows, the level of misery, as measured by the misery index, has decreased since Charles Taylor ruled Liberia.

That said, the index was still quite elevated, at 19.4, in 2012. Yes, 2012; that was the last year in which all the data required to calculate a misery index were available. This inability to collect and report basic economic data in a timely manner is bad news. It simply reflects the government’s lack of capacity to produce. If it can’t produce economic data, we can only imagine its capacity to produce public health services.

With Ebola wreaking havoc on Liberia (and neighboring countries), the level of misery is, unfortunately set to soar.

Falling Oil Prices Put Producers Between a Rock and a Hard Place

Over the last few months, the price of Brent crude oil lost over 20% of its value, dropping below $90 just yesterday and hitting its lowest level in over two years. In consequence, oil producers will no longer be able to rely on oil revenues to pay their bills. The fiscal break-even price – a metric that determines the price per barrel of oil required for a nation to balance its budget at current levels of production – puts the problem into perspective.

Using data from Bloomberg and Deutsche Bank, I prepared a chart showing the break-even prices for the world’s major oil producers and the price on Brent crude. Over the past six months, Brent crude fell far below the break-even price for eleven of the top oil producers in the world; Iran, Venezuela, Nigeria, and even Saudi Arabia can no longer finance their governments’ largess through oil revenues.

The combination of oil markets flying into a perfect storm and excessive government spending puts most of the world’s oil producers between a rock and a hard place, where they will stay for some time.

The 95 Percent Rule, Bulgaria, and the New York Times

Recent reportage in the New York Times reminded me of my 95 Percent Rule: “95 percent of what you read about economics and finance is either wrong or irrelevant.” In her piece on the Bulgarian elections, Mariana Ionova wrote:

“[Bulgaria’s] economy is growing at an annual rate of about 1.6 percent, but that is the slowest pace in the union, and about half the European average.”

These alleged facts aren’t even in the ballpark (see the accompanying chart). Bulgaria is neither the slowest growing economy in the European Union, nor is it growing at half the European average. In fact, Bulgaria is growing slightly faster than the European average.

Once again, the 95 Percent Rule rules.

E.U. Austerity, You Must Be Kidding

The leading political lights in Europe – Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists – from Nobelist Krugman on down – to carry their water.

But, with Greece’s public expenditures at 58.5% of GDP, and Italy’s and France’s at 50.6% and 57.1% of GDP, respectively – one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding. Even in the Unites States, where most agree that there is plenty of government largess, the government (federal, plus state and local) only accounts for a whopping 38.1% of GDP.

As Europe sinks under the weight of the State, it’s austerity, not anti-austerity, that should be on the menu.

Bulgaria’s October 5th Elections: A Flashback at the Economic Records

Bulgarians will go to the polls on October 5th to elect new members of its parliament and thus a new government. Before casting their votes, voters should reflect on the economic records of Bulgaria’s governments since 1995.

Every country aims to lower inflation, unemployment, and lending rates, while increasing gross domestic product (GDP) per capita. Through a simple sum of the former three rates, minus year-on-year per capita GDP growth, I constructed a misery index for each of Bulgaria’s six governments since 1995 (see the accompanying table).

Pages