Tuesday, January 26, 2010

Bubble Rap

With yesterday marking the 50th anniversary of the invention of Bubble Wrap, we thought we'd turn to the subject of bubbles.

First, we wish Happy Birthday to Bubble Wrap and its manufacturer, the Sealed Air Corporation. The company was founded by Bubble Wrap's inventors, Marc Chavannes and Al Fielding in 1960, after the accidental discovery of how a product they originally designed as textured wallpaper could provide a new kind of cushioned packaging.

Yesterday was also the 10th anniversary of "Bubble Wrap Appreciation Day," and you can find related activities to enjoy all year long at http://www.bubblewrapfun.com/.

In "Pop" Culture Icon Turns 50," the company notes it ran a special gold color edition of the product yesterday. William V. Hickey, President and CEO of Sealed Air Corporation, stated, "We are thrilled to have the golden opportunity to celebrate 50 years of our hallmark brand, Bubble Wrap." He added, "We are honored to manufacture a product that not only serves to cushion fragile materials, but also provides the added benefit of helping to de-stress and bring smiles to the faces of people of all ages worldwide.”

NOTE: Hickey, an FEI member, shared with us:"I have found the FEI network to be a great benefit over the years."

Bubble Rap
Now, if only there was a bubble wrap that would have cushioned (and de-stressed) the U.S. and global economy from that other kind of bubble! In fact, economic bubbles (even the positive trending ones) tend to get a bad rap. On that note, I can't believe no one's written a song called "Bubble Rap," although I did find a song called "Bubble Wrap" by a British group called McFly.

Although there may be no true economic bubble wrap, various proposals are currently on the collective drawing boards of the Office of the President, the Halls of Congress, G-20 leaders and accounting standard-setters (FASB and the IASB), to try to prevent bubbles such as those tied to subprime mortgages which - when popped - contributed to a credit crisis.

Here's a sample of some recent actions and related developments:

President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein In Excesses and Protect Taxpayers (White House Press Release, January 21).

The President's plan has been widely described in the press as "The Volcker Plan," since its central points have been ascribed to former Fed Chairman Paul Volcker, Chair of the President's Economic Recovery Advisory Board (PERAB). The proposal, described by some as an antidote to "Too Big To Fail," and by others as a return to the Glass-Steagall Act, was hailed by some, including the New York Times' Gretchen Morgenson, in her article on Sunday, Resetting the Moral Compass.

"The White House is finally elevating the discourse on how best to rein in risky behavior at banks and protect beleagered taxpayers from future bailouts of Wall Street," Morgenson stated.

However, she also noted, "The proposal has its weaknesses. In the pantheon of risk taking at banks, it is hard to argue that proprietary trading involves substantially more peril than that inherent in commercial lending... And some may wonder why the proposal's spotlight is so trained on proprietary trading and hedge fund operations, since these were not where banks experienced their greatest losses during the crisis."

Some observers describe the plan as a return to the days of the Glass-Steagall Act, separating investment banking and commercial banking. In response to a question on that point, PERAB Chief Economist Austan Goolsby told a press briefing the proposal is not a return to Glass-Steagall.

Personally, (I remind you of the disclaimer in the right margin of this blog): having observed the Federal Reserve Board hearing in Feb. 1987 presided over by then-Fed Chairman Paul Volcker, at which the CEOs of Bankers Trust, Citigroup, and JP Morgan testified as to why they believed they should be permitted to engage in certain activities (initially, to a limited extent), which were prohibited by Glass-Steagall (I worked for Bankers Trust at the time), I can see how some observers view last week's proposal as hearkening to a return to Glass-Steagall.

In the accounting realm, the subjects of fair value accounting and disclosure, and potential moves to dynamic provisioning (or loan loss provisions for 'expected' rather than 'incurred' losses) have been in the news lately, as follows:

FASB Issues ASU 2010-06: Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements. (FASB)

Watchdog Says Global Accounting Plan Could Exacerbate Procyclicality (Rachel Sanderson, FT, 1/22, reporting on remarks of Lord Turner, Chairman of the U.K. Financial Services Authority.

Regulators Plan to Override IASB's Loan Loss Rule, Says FSA's Turner, (Duncan Wood, Risk Management magazine, via http://www.risk.net/.)

Finally, on the subject of bubbles, see Plenty of Blame to Go Around (Edward Chancellor's review of John Lanchester's book, "IOU: Why Everyone Owes Everyone and Nobody Can Pay," in the WSJ.)

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1 comment:

PPP Lusofonia said...

Lets get back to basics, to regular loans on regular balance sheets.
Let's put all the gross contingent or potential liabilities on the balance sheets of the counterparties involved.
This is essential to disentangle the daisy-chain and to promote deleveraging.
"Trojan swaps cum loans" evaded regulations all around, Basel, Maastricht, etc, often with the help of the accountants.