Bob Pozen » Financial Times

How to keep politics out of rating agency reform [FT]

Bob Pozen — Thu, 13 May 2010 17:13:21 +0000

By requiring a neutral third party to select the rating agency, Congress would significantly improve the quality of bond ratings relied on by small institutions and individual investors. Yet this approach avoids excessive political influence on the ratings process by limiting the government’s role to the minimum necessary to avoid ratings shopping.

A better fail-safe than CoCo bonds [FT]

Bob Pozen — Wed, 21 Apr 2010 16:00:18 +0000

CoCo with its mandatory conversion presents the unappetising combination of bond returns with equity-type risk. Sub-debt with an option to convert offers bond risks with the potential for equity-type returns. Which one would you choose?

How to design a fair bank tax [Financial Times]

Bob Pozen — Wed, 24 Mar 2010 23:09:20 +0000

It is unfair to impose a bank tax on all financial institutions with over $50bn in assets regardless of whether they received any direct federal assistance during the financial crisis. Congress should raise roughly the same amount by imposing the tax only on the very large financial institutions that received direct federal assistance and it should base the size of the tax on the amount of that assistance.

America’s budget deficit needs bipartisan action [FT]

Bob Pozen — Tue, 02 Mar 2010 18:32:51 +0000

Although a bipartisan agreement will be hard to achieve in the current Washington environment, both parties should recognise that a package of entitlement reforms is less dangerous than an explosion of US interest rates in the coming years.

Financial crisis served up with relish [Financial Times]

Bob Pozen — Mon, 01 Feb 2010 21:55:07 +0000

By John Plender. After two and a half years of relentless financial pounding, the crisis literature is becoming mountainous. To command the weary reviewer’s attention, any new book on the aberrations of the financial community has to have a clear focus and make a compelling case. In Too Big To Save? Robert Pozen, chairman of mutual fund group MFS Investment Management and a former vice-chairman of Fidelity Investments, pulls off the trick.

Lessons for the American housing market [Financial Times]

Bob Pozen — Wed, 27 Jan 2010 03:10:25 +0000

American subsidies are justified as necessary to promote home ownership in the US. Indeed, the rate of home ownership in the US rose to 68 per cent by 2006. Yet, without these governmental subsidies, the rate of home ownership in Canada also rose to 68 per cent in 2006. This comparison suggests that the large American subsidies for home purchases have led to higher home prices in the US rather than significant increases in the rate of US home ownership.

A mistake that will make banks riskier [Financial Times]

Bob Pozen — Tue, 12 Jan 2010 13:28:43 +0000

If Glass-Steagall were reinstated, we would be recreating the short-term funding weakness that forced Bear Stearns and Lehman Brothers into insolvency.

How to restore confidence in loan securitisation [FT]

Bob Pozen — Tue, 15 Dec 2009 20:18:37 +0000

By Robert Pozen. On Monday, President Barack Obama pressed 12 large US banks – all recipients of federal assistance – to increase their lending to businesses and consumers. In fact, during the third quarter of 2009, total loans at US banks fell by $210bn (€144bn, £129bn), or 3 per cent, the biggest quarterly decline since 1984.

Give credit to create jobs – but only where it’s due [FT]

Bob Pozen — Tue, 03 Nov 2009 21:34:15 +0000

In short, while any tax credit for new jobs is bound to involve some unnecessary government expenditure, a proper design can substantially restrict the ability of employers to game the system. Moreover, the cost of the tax credit can be dramatically reduced to the extent that the new jobs go to workers currently drawing unemployment benefits. It makes more sense to incentivise companies to hire the unemployed than to pay those same people not to work.

The US unemployment rate is now close to 10 per cent and likely to stay that high all through 2010. Even if the economy begins to recover, job growth tends to be a lagging indicator. This is why the Obama administration is considering a tax credit for employers adding new jobs next year.

However, such a tax credit faces opposition on two grounds. First, employers may game the system to obtain tax credits for workers they would have hired anyway. Second, the cost of the tax credits may seem daunting in a time of rising budget deficits. Both critiques can be largely satisfied by proper design of a tax credit for new jobs.

To reduce gaming of the system, Congress should set as a baseline the level of a company’s full-time employment on September 30 2009. To obtain the tax credit, a business would have to show full-time employment increased from that base. By setting the baseline in the past, Congress would avoid companies delaying the hiring of new workers or firing workers in order to rehire them to obtain the tax credit.

The tax credit should not be available to companies established after September 30 2009. It is simply too hard to differentiate between truly new companies and those created through spin-offs or other clever manoeuvres.

If one company acquires another, the baseline for the combined entity should be the sum of the baselines of the two. This tax credit should not be available to the combined entity if the acquisition resulted in a net reduction in jobs. On the other hand, if a part-time worker goes full-time, that should count as an increase in the company’s full-time employment.

Of course, employers who planned to hire workers may do so earlier in order to obtain the tax credit. To this extent, the tax credit will accelerate the hiring of new workers, rather than actually create jobs. But accelerated hiring is still a significant benefit in a period when job growth is lagging economic growth.

On the cost issue, a tax credit equal to 15 per cent of a worker’s yearly wages (up to a maximum of $100,000 a year) should be sufficient to persuade some employers on the fence to hire new workers. Let us assume that the tax credit led to the hiring of 1m workers with average annual wages of $48,000. The total cost of this credit would be $7.2bn, $7,200 per worker.

But Congress could cut the cost of the tax credit dramatically by adding one condition – that half of the new workers hired by any company under the tax credit be currently drawing unemployment benefits. This condition would obviously constrain an employer’s selection of new workers. On the other hand, a company could choose from millions of unemployed people for half its new workers, and the other half could be recruited from any source.

This condition would reduce the overall cost of a tax credit for 1m workers by $3bn, to $4.2bn. Here is how that cost reduction would be achieved:

Unemployment benefits usually extend for only 26 weeks, and are financed by employer contributions to a state fund. In 2009, Congress financed a 33-week extension of unemployment benefits in most states and will surely continue this extension in 2010. A worker earning $48,000 would generally be eligible for unemployment benefits at 50 per cent of his or her wages. That means at least $24,000.

Let us assume conservatively that a new tax credit cuts only 13 weeks off the average unemployment period of newly hired workers. That would save $6,000 on average per worker

Assume further that 500,000 of the 1m new workers hired under the tax credit came from the ranks of the unemployed. At $6,000 per worker, that would translate into a $3bn saving in unemployment benefits.

The writer is chairman of MFS Investment Management, senior lecturer at Harvard Business School and author of the forthcoming book Too Big To Save?

Chatter about a New Global Currency Is Overblown [The Financial Times]

Bob Pozen — Thu, 30 Jul 2009 01:40:46 +0000

SDRs have less potential than suggested by China. They could not become a viable global currency in their present form. Swaps with the IMF for SDRs would provide central banks with a convenient way to diversify their portfolios without depressing the market for US dollars. However, these swaps would have to be of limited volume because they effectively transfer the risk of dollar depreciation from central banks to the IMF.

original article: Chatter about a New Global Currency Is Overblown