A Word or Two On Nationalizing the Banks

The following is part of the conclusion of an excellent article by Simon Johnson and James Kwak in their Baseline Scenario.

As a result, the banks have largely preserved their existing management teams and bonus plans: on Wall Street, first-quarter accruals for bonuses returned to the levels of the glory years of 2006 and 2007. Creditors and counterparties have been kept whole, most notably through the AIG bailout. And shareholders have seen their share prices supported by the promise of sustained government support. The incentives we have ended up with are more similar to those of a nationalized system than those of a free market. Instead of state-owned coal mines run for the benefit of miners (the U.K. in the 1970s) or state-owned oil and gas companies run for the benefit of bureaucrats (the Soviet Union in the 1980s), we have state-backed banks in the U.S. run for the benefit of bankers and their creditors.

The smart economists in the Obama administration must know what is going on. But having insisted that large bank takeovers are tantamount to nationalization and therefore off the table, the administration is betting that the financial system will repair itself – or “earn their way out,” as StatsGuy put it.

This is possible. With the competition in both investment banking (Bear Stearns, Lehman) and mortgage lending (most of the specialist mortgage lenders) gone, the survivors all enjoy larger market shares and higher prices, contributing to their somewhat healthy profits in the first quarter. Even the large banks that receive the lowest grades in the stress tests will be given relatively cheap capital by the government; Treasury will use its resulting stakes to apply behind-the-scenes pressure to the banks (more government influence), but without taking decisive steps to clean up bank balance sheets. Instead, it will hope that the PPIP will do the trick, using cheap government financing.

But success is by no means certain. And we cannot know for how long the government will have to continue propping up weaker banks, at growing taxpayer cost, while they absorb funds that could otherwise help the economic recovery.

In the end, when a financial system is dominated by banks that are too big to fail – and they do fail – the only options are an FDIC-style takeover or the kind of public-private co-dependency that we see today. As far as the current crisis is concerned, the die is cast and the big banks won.

The Cheapest Insurance Around

The people who run the Securities Insurance Protection Corp. (SIPC) must have a strange definition of insurance. SIPC, which is privately run but owned by us, provides insurance for brokerage accounts. Each account is insured up to $500,000. So, if, for example, the Madoff brokerage went belly up, SIPC would cover some of the loss. As we know, this is not quite the case; this is probably due to the supposed size of the claim. But the fact that the annual insurance premium is the grand sum of $150 per year no matter who the brokerage firm is may have something to do with it, as well. Further, SIPC covers only cases where the broker did not serve as a proper custodian.

How SIPC managed to amass a fund of $1.7 billion charging these premiums baffles me, but that's what they claim their fund has. And they can get another $1 billion from us via the Treasury.

One more case of an agency that seems to have existed primarily to employ people.

He got a waiver, didn't he?

Stephen Friedman's resignation as chair of the NY Fed is just another case of the incestuous relationships in the world of government and finance. Not only was he a fairly large holder of Goldman stock while he was passing judgment on Goldman, but he bought still more stock while doing so. Does Bernanke or Geithner have any say in who is chosen as chair of a federal reserve bank? Shouldn't Bernanke?

We're getting screwed again.

A Test That Proves Nothing

This cartoon from the Washington Post expresses the opinions of Krugman, Stiglitz and who knows how many others.

Deeper and Deeper

GM's report on its Q1 results is bleak. Sales down 40%, net loss almost double that of Q1 2008, running through cash at twice the rate of Q4. Can bankruptcy be any closer?

Note that Geely Motors of China is interested in both Volvo and Saab.

I feel better

The 19 largest banks only need $75 billion to survive even nastier times than today. And, of course, the definition of those nastier times is spot on; we'll never see 10% unemployment. The fact that one of the banks, BofA, needs almost half that amount ($34 billion) doesn't worry me. The examiners are veritable seers in that they know just how to value those toxic assets that, until now, were impossible to value by anybody else. The frosting on the cake is that the banks agree with the results. Sure, they had to sit through some negotiating sessions. But, hey, they're regular guys and are looking our for the nation's welfare.

Every thing is fine.

New York City is not alone

In March I wrote of the 'rubber room', a place where teachers who have been accused of a wrongdoing assemble every day, do nothing but collect their pay and benefits. New York City is not alone. Los Angeles has its version of the rubber room. It's costing them $10,000,000 a year.

"We have the most moral army in the world,"

Those were the words of Ehud Barak with regards to the UN report on Israel's actions in Gaza. Here, courtesy of the BBC, is a summary of the findings:

Israeli army responsible in six cases in which UN property was damaged and UN staff and other civilians hurt or killed

No military activity was carried out from within UN premises in any of the incidents

Israeli military's actions "involved varying degrees of negligence or recklessness"

Israeli military took "inadequate" precautions to protect UN premises and civilians inside

Moving from $9,000,000 to $454,000,000 in a couple of months

When the AIG testimony before Congress began a couple of months ago, the CEO said that 2008 bonuses totaled $9,000,000. In March the AIG PR person said the number was $120,000,000. Last week AIG submitted a report to Congress which listed 2008 bonuses by division. The total was $454,000,000, or fifty times the original number.

Where will this story end?

Notes from Jane Arraf

Jane is a reporter for the Christian Science Monitor who has been reporting from Iraq off and on since the late 1990s. She writes of Her Iraq. Here are some excerpts:

It's so much safer now that sometimes it seems as if the violence that erupted here was a fevered dream and that the war is over. It isn't.

I sit next to a woman wearing black and an expression that suggests something terrible has recently happened. She lost her brother in a suicide bombing in January at a tribal reconciliation meeting when one of the sheikhs sent in his 14-year-old son to blow himself up.

And then there are currents so far below the surface that you only occasionally see the ripples – of a world where tribal justice trumps any court, where genies mentioned in the Koran can do more harm than men with guns, and where normal people make accommodations to survive in an abnormal society.

"Threats and violence have become the Iraqi way of life," says Nermeen. She takes precautions – not staying home alone, making sure she's not tailed – but believes the only list that determines when you die is that drawn by fate.

In my years going back and forth between Iraq and the US, I've become convinced that it's only distance that makes things look simple. The labels we use – Baathist, insurgent – don't mean nearly as much to Iraqis as they do to us. Even the Iraqis who returned from exile with their fixed ideas of wrong and right found themselves in uncertain territory. And those who lived here through Saddam find themselves strangers in their own country.

A Different View

Dean Baker is not your typical economist. For example, take his argument that top management and high-paying professions have been shielded from international competition for years, whereas manufacturing has not. If you believe this argument, then it makes a lot of sense for Chrysler to be looking for the low-price design and management talent at Fiat. But why didn't Chrysler look earlier? Why haven't other companies done so?

I agree with Baker that top management here has been grossly overpaid when compared with their counterparts around the world. However, I don't think management was shielded from competition. They did compete in trying to make sales against foreign competition. They did not have to compete to earn larger salaries because there was so little competition. They were all greedy and they had no problem getting top dollar from friendly, undemanding boards and complacent stockholders. And, to prove my point, they're still getting the big bucks even though many of their organizations are, in reality, bankrupt. Why is that?

An interesting sidelight: There was a big stink about the "Buy American manufacturing" clause in the stimulus bill, but there has been nary a peep about the fact that those who manage these investments must be headquartered in the U.S.A.

Hoenig again

Late last month I highlighted the Senate testimony of Thomas Hoenig, head of the KC Fed. He inveighed against the 'too big to fail' argument. He has expanded his case in a recent issue of the Financial Times. Herewith some excerpts with regard to the current policies:

● Certain companies have not been allowed to fail and, as a result, the moral hazard problem has substantially worsened. Capitalism is a process of failure and renewal, and a “too big to fail” policy undermines this renewal and makes the financial system and our economy less efficient.

● So-called “too big to fail” firms have been given a competitive advantage and, rather than being held accountable for their actions, they have actually been subsidised in becoming more economically and politically powerful.

● The US government has poured billions of dollars into these firms without a defined resolution process, adding to our national debt. While there will be some repayment, there also will be losses. The longer resolution is postponed, the greater the losses and the larger the debt burden.

● As these institutions are under repair, the Federal Reserve is making loans directly to specific sectors of the economy, causing the Fed to allocate credit and take on a fiscal as well as a monetary policy role. This is reflected in the fact that its balance sheet continues to swell, which may compromise the independence of the Federal Reserve and make it more difficult to contain inflation in the years to come.

● Failing effectively to resolve these non-viable firms has long-term consequences. We have entrenched these even larger, systemically important, “too big to fail” institutions into the economic system, assuring that past mistakes will be repeated.

Smarter Kindergarteners?

Those of you who have read some of my previous postings know that I am continually amazed at the changes in child-rearing that have taken place over the past forty or so years. These changes seem focused on the belief that we live in Lake Woebegone where all the children are above average. Thus, parents have to spend inordinate amounts of time, money and effort to ensure that their child becomes a star as soon as possible. The idea of kids playing unorganized ball or having truly free time and the opportunity to make minor mistakes is just not one for 21st century America. I know that this issue is not simply a parenting issue. Many of society's supposed bulwarks have also succumbed to these fads.

For example, a study of how time is spent in a typical LA kindergarten class found that these 4/5-year-olds spent five times as much time on "literacy" as on free play. Each day they spent 21 minutes on test preparation, but only 19 on free play. Yet, whatever advantage this extra testing gives vanishes by the time the kids reach fourth grade. And, to make matters worse, the time spent in the classroom is augmented by homework assignments given to these kids, which further impinges on the time available to just play around. Maybe the current economy will increase the opportunities for free play for kids.

Today's Nazis

This is one of the featured items on RJ Adams' Sparrow Chat. The speaker is and has been a friend of Israel and its leaders since its founding. He is disgusted with what Israel has become. His plea to the UK government to stop sending arms to Israel is even more relevant to us.

The Season Is Beginning Early

Last month the rumor on this island of Martha's Vineyard was that the first family would be spending their summer vacation in Oak Bluffs. This month the rumor is that Chelsea Clinton will be married in Chilmark.

Either event will be great for the Vineyard's economy.

Why bother having trials?

It looks as though Obama, the president, is overruling Obama, the candidate, by acknowledging that the military tribunal system may continue to be used with regards to Guantanamo detainees. Sure, they will be modified, but the detainees will probably not have many more rights than under Bush's version of the system.

This whole matter is starting to sound like a big game. Let's make this minor change in the rules. Let's try this one by the military and this one by a regular court. They seem to want to parse this issue indefinitely. Does the government have a strong case against these guys or not? Are we a nation of laws or not?

Topping Today's Hit Parade

Who's the socialist?

A quote from Barry Ritholz:

Which region is the true Socialist state?

-Europe has cradle to grave health care plans, generous unemployment benefits, and free or subsidized college costs.

-The US gives away public assets (oil, gas, mineral rights) for pennies on the dollar, has huge subsidies and tax breaks, and bails out reckless speculators.

It turns out that both regions are welfare states — only in Europe, the natural population (i.e., people) is the recipient, while in the US, the corporate population is the beneficiary.

At the same level as in 1971

In 1971 17-year-old high school students scored an average of 285 points on the National Assessment of Educational Progress reading test; in 2008 they scored 286. In the 1973 math test they scored 304; in 2008 306. Clearly, little progress is being made in the way we educate our kids.

Where there's a will, there is a way

Despite hundreds of police in attendance at an event that had been months in the planning, one person in a beat-up car managed to 'crash' Holland's Queens Day festivities and kill five people.

We do not torture

Talk about dancing around an issue! Here's Rice exchanging views with a Stanford student. A couple of points she makes:

• If it was authorized by the President, it did not violate the Conventions on Torture.
• We did not torture.
• The Red Cross did not accuse us of torture.

Regulating a Key Player

Bloomberg points out that hardly any of the talk about financial regulations mentions the rating agencies, yet they are a key player in the game. As the TARP IG said in his latest report, “The wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis.”

Is there a need for them? If so, we need to devise a better system to rate securities.

Due Diligence?

John Hempton of Bronte Capital has a series of articles about Paradigm Global Advisers that certainly raise questions about the organization, which just happens to be run by the son and brother of our Vice President, Joe Biden. Paradigm, a hedge fund of funds, has been in business with the Stanford Funds and Ponta Negra, the latest fund alleged to be a sham.

Hempton really goes deep on this, looking at SEC and other regulatory reports as well as court cases. He has been able to find a resume of a former senior marketing person for Paradigm; he also has dredged up various actions in which the mkrheter was censored and/or fined. He has analyzed web sites to a degree that he contends the sit's use of text embedded in pictures rather than simple text makes it impossible for Google to find the text.

He claims to have dug up a version of the Paradigm web site which made the Madoff claim of never a down year. He may be right as the current site of Paradigm certainly looks like a work in progress.

You could spend hours reviewing the posts and following the links on this topic that Hempton has made. All in all, it makes you question at least the intelligence and business acumen of Biden's relatives. Some will say it also raises questions about their integrity. But don't we all have skeletons in the family closet?

3 Cheers for Sheila Bair

In a speech on Monday she said, “Taxpayers should not be called on to foot the bill to support non-viable institutions because there is no orderly process for resolving them.” And she was talking about institutions of all sizes, including those that are supposedly too big to fail. She is pushing the "good bank, bad bank" idea and she thinks that the FDIC is equipped to do the job. Why shouldn't it be? It's been doing it since its inception.

If only Geithner were as clear, some of the uncertainty permeating the economy would be lifted.

At least they're asking

Citigroup is worried - and probably justifiably so - that they will lose some of the people who are actually making money for them. Those people work at Phibro, a commodities trading firm focusing on the energy market. Currently, all of their trading is for Citi's benefit. Their gains account for a large part of Citi's profit. The unit has, by and large, always been profitable, often hugely so. They don't really need Citi; Citi needs them. Without Phibro, Citi would have had even more disastrous numbers.

Anyway, Citi wants to pay the Phibro crew a bonus, which, under current government restrictions applicable to companies in which we have a large stake because we have given a lot of money to them, is difficult to do. So, Citi is asking Treasury before writing checks or issuing stock. This seems to be a case where a bonus is justified, but stock, rather than cash, would seem a better deal.

This week's essay from Dahr Jamail

Dahr Jamail keeps coming back to the relationship between the Maliki forces and the Sons of Iraq. After reviewing the slaughter of the weekend, Jamail inists that the cause is Maliki's attempt to wipe out the Sons of Iraq and our failure to pressure the government to stop attaching the Sons and hire them as part of the security forces, as was the deal.

A quote from Jamail: Make no mistake about it - there is a war on. The floodgates of hell have once again been opened.

Where's the proof?

John Thain, former head of Merrill Lynch, claims that all compensation decisions for Merrill people were agreed to in writing by Bank of America. And, it looks like he has proof of this. The Wall Street Journal claims to have seen a document which defined an agreement to pay up to $5.8 billion in bonuses (the final amount paid was $3.6 billion). Further, the agreement said that all compensation decisions would be made "in consultation" with BofA.

I wonder how this will play at tomorrow's BofA stockholder meeting?

Welcome to 21st Century Polling

It had to happen. According to Time magazine, the most influential person in the world is moot, otherwise known as the creator of 4channel.org. moot and his followers apparently figured out how to rig the vote. A nice use of hacking.

Down the Drain

Icelanders have the opportunity of helping the bankers who sank the country go down the drain.

They Knew Better

Many of the torture techniques that were used on the detainees were obtained from a military outfit that was called Survival, Evasion, Resistance, Escape. In 2002 this group sent a memo to the Pentagon's chief lawyer that, among other things, said, "The error inherent in this line of thinking is the assumption that, through torture, the interrogator can extract reliable and accurate information. History and a consideration of human behavior would appear to refute this assumption."

In 2004 the Inspector General for the CIA found no proof that the techniques stopped any imminent attacks.

Were Bush, Cheney etal aware of these memos?

The Sacred Trinity

Andrew Bacevich is sure to ruffle some feathers with his latest op-ed in the Boston Globe. The Sacred Trinity is comprised of our need for global power projection, global military presence, and global activism so that we can maintain global leadership. The thrust of his article is that Obama is still advocating the Sacred Trinity. His advocacy is largely accomplished by not questioning things, such as: what is the basic purpose of the military; why do we need military bases all over the world; why do we have to butt in on other country's business so often.

It is true that these questions are not being asked. But Obama finds himself in a very difficult spot with two wars going on and an economy that is in peril. However, it does seem to me that not much has changed in our strategy with regards to either Iraq or Afghanistan. The day when our troops come home seems as far away today s it did last year.

A Singing NYC Bus Driver

More on Mr. Dolan

A Comparison

ProPublica has published a comparison of the recently released torture memos and a Red Cross report of their interviews with prisoners. There are nine 'techniques' compared:

• Cramped Confinement
• Dietary Manipulation
• Facial Slap/ Abdominal Slap
• Nudity
• Sleep Deprivation
• Stress Positions
• Walling
• Waterboarding
• Water Dousing

This is what our country has done to 'protect' us. Is this the kind of protection we want? Do we just suck it up and move on? Can it - will it - happen again?

80 yesterday, 60 today

That's the number of people killed by suicide bombers in Iraq since yesterday. The attacks appear to be aimed at Shiites. Is this the start of the resurgence of the Sons of Iraq?

A Bureaucrat, Not a Leader

That's Gary Weiss' description of Timothy Geithner at Portfolio.com. Thus far, based on Geithner's actions or lack thereof, Weiss has a point. It looks as though Geithner has been a perpetual aide to some high-powered people. Some aides do blossom into leaders, some do not. Geithner seems to fit the latter bill.

We need someone who accepts reality, someone who does not let his loyalties blind him to taking actions that are desperately needed by the nation and the world. Brains alone are not what is needed now. You need leadership skills and courage. I doubt that Geithner will develop them.

Newcomer to the Vineyard

This newcomer to the Vineyard was born at the Allen Farm recently. The photo appeared in today's Vineyard Gazette.

Look Alikes

Many of us when we were very tiny tykes wanted to be just like our parents. Janet Cunliffe, age 50, wanted to be just like her daughter, Jane, age 29. So she spent about $25,000 changing her breasts, eyes, nose and lips. She even dresses like her daughter. Based on this photograph, did she get her money's worth? I don't think so.

A Different View from the Fed

Thomas Hoenig, President of the Fed of Kansas City, does not accept the "too big to fail" argument when he says, "actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost. Of particular concern to me is the fact that the financial support provided to firms considered ‘too big to fail’ provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds.” He believes that we should let capitalism work. Thos banks that are not viable should be closed.

Hoenig has been around long enough to know that "when the recession ends, old habits will reemerge." Thus, we need to start defining the new supervisory era now and we need to look not only at possible future regulations but at past regulations that worked well.

Giving Up?

Have the Sons of Iraq given up the hope that they will be integrated into the Iraqi security forces? Dahr Jamail thinks so. He cites specific attacks over a four day period and notes the rise in suicide bombings over the past month. Things are not loking up.

Telling it like it is

Michael Pomerleano is disgusted. In his view the financial "professionals" have failed. They got us into this mess and, in Pomerleano's words, "Treasury plans to rely on the same firms and people that were involved in leading to the crisis to get us out of it".

He contrasts our behavior during the S&L crisis with the almost lackadaisical approach currently favored by Geithner & Co. Again from Pomerleano

In the US, we are told that there are no culprits in the crisis. The attitude of the policy makers, regulators, bankers and traders involved in the crisis is virtually fatalistic, treating the crisis as an inevitable “force majeure”. All of them were observers and “no one saw it coming”. In short, the crisis is a Lemony Snicket’s “Series of Unfortunate Events”.

Read the article.

Innocent Until Proven Guilty

Trial by publicity or by one's peers? I wonder what your views on these issues are. I don't have to wonder about the views of Dan Conley, Suffolk County District Attorney.

This morning he announced the arrest of a suspect in the "Craigs' List" murder. Tonight he appeared on a local talk show hosted by Emily Rooney, daughter of Andy Rooney. Usually, her show deals with issues, not accusations. Tonight, it was a different show as, essentially, Conley was trying the accused on television. I wonder whether he would have done so if the crime had not received national attention.

The IG Does Not Seem Enthusiastic

Neil Barofsky, the Inspector General for the TARP, has issued his latest report. He does not give the Treasury an "A". It's doubtful that he'd even give a gentlemanly "C".

His first concern is with information, like how is our money being spent. The Treasury does not seem overly interested in the issue. Barofsky thinks that the risk of fraud with regard to the TALF and PPIF is fairly high. The Treasury's reliance on the credit agencies is particularly egregious as “The wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis.”

Talent Abounds

The furor over Susan Boyle brought back to mind my business trips of the 20th century. I was continually amazed at the musical talent I'd hear in out of the way places. Susan Boyle is really not an aberration. There are very many talented musicians around the world. Unfortunately, we'll never hear most of them as the business is truly one based on luck or connections.

Mean, Median, Mode

Those are the three ways of calculating 'averages'. Most of the time we use the mean. The mean is preferred by the Wall Street Journal in analyzing the lending being made by the largest banks to receive TARP money. The median is the method used by the Treasury in their analysis of the same data. The results look bad in both cases, but worse when using the mean.

No matter which method you prefer, lending is down. How soon it will go back up is anyone's guess.

Felons Need Not Apply

The army will no longer consider applicants who test positive for drugs or alcohol, or have adult felony convictions such as assault, arson and robbery.That's quite a turnaround from the recruiting problems the military has had over the past few years. And if you haven't graduated from high school, forget about joining up. It's mainly because of the crappy economy and the declining job prospects.

The Three Blind Mice Are Identified

The three trustees running AIG for us are Jill Considine, Chester Feldberg and Douglas Foshee. But should I have used the word 'running'? What have they done thus far other than collect their $100,000 stipend for meeting once a month and sitting in on a weekly conference call?

The hiring of these particular people was arranged by the NY Federal Reserve, the same organization from which Mr. Geithner has come. There was a time when that organization produced leaders, actually had plans and did things. Will we ever return to such a time?

AIG, Miracle Worker

Goldman Sachs and other 'too big to fail' financial institutions reported good Q1 results. Zero Hedge thinks AIG, using our money , had a lot to do with it. Basically, AIG settled deals with the institutions at quite favorable prices. They didn't buy just one deal, they bought a portfolio of deals. The question of due diligence never raised its head. Here's Zero Hedge's conclusion.

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

Getting Smarter As She Gets Older

"At 100, I have a mind that is superior — thanks to experience — than when I was 20," that's what Rita Levi Montalcini told her colleagues at the European Brain Research Institute's celebration of her upcoming 100th birthday. She's always had a superior mind. She shared the 1986 Nobel Prize in Medicine for her work on mechanisms that regulate the growth of cells and organs.

Questions the Press Should Ask

The Neiman Foundation’s site has a particularly interesting section entitled “Questions the Press Should Ask”. I’ve referred to it fairly often. The current questions concern Afghanistan but are based on questions raised by Mary McCarthy about Vietnam forty-odd years ago. In the opinion of Bill Astore, a retired Air Force lieutenant colonel, the questions are as relevant today as they were in our last 20^th century military folly. Here are excerpts from Astore’s article.

Questions for President Obama: Aren't we once again relying on the destructive power of technology to "solve" complex political and religious struggles? Aren't we yet again showing indifference to the human costs of war, especially when borne by non-Americans? Even though we're using far fewer bombs in the Af-Pak highlands than we did in Vietnam, aren't we still morally culpable when these "precision-guided munitions" miss their targets and instead claim innocents, or hit suspected "terrorists" who suddenly morph into wedding parties? In those cases, do we not seek false comfort in the phrase, C'est la guerre, or at least that modern equivalent: unavoidable collateral damage?

Questions for President Obama: Have you, like Vietnam-era presidents, pivoted toward yet another surge simply to avoid the label of "loser" in Afghanistan? And if the cost of victory (however defined) is hundreds, or even thousands, more American military casualties, hundreds of billions of additional dollars spent, and extensive collateral damage and blowback, will this "victory" not be a pyrrhic one, achieved at a price so dear as to be indistinguishable from defeat?

Questions for President Obama: In promising to send a new "surge" of State Department personnel and other civilians into Afghanistan, are you prepared as well to parse their words? Are you braced in case they sell you a false bill of goods, even if the sellers themselves, in their eagerness to speak fairy tales to power, continually ignore the Fantasyland nature of their tale?

Questions for President Obama: If your surge in Afghanistan fails, will you be able to de-escalate as quickly as you escalated? Or will the fact that you've put more troops in harm's way (with all their equipment and all the money that will go into new base and airfield and road construction), and committed more of your prestige to prevailing, make it even harder to consider leaving?

Questions for President Obama: Much has been written about an internal struggle within your administration over the wisdom of surging in Afghanistan. Now, you, too, have called for the setting of "benchmarks" for your new strategy's success. Are you wise enough to set them to capture the complexities of political realities on the ground rather than playing to American strengths? Are you capable of re-examining them, even when your advisors assure you that they are being achieved?

Questions for President Obama: Are you willing to listen to the common G.I. as well as to the generals who have your ear? Are you willing to insist on greater equity in burden-sharing, since once again most of the burden of Iraq and Afghanistan has fallen on "the silent part of society"? Are you able to recognize that the "best and brightest" in the corridors of power may not be the wisest exactly because they have so little to lose (and perhaps much to gain) from our "overseas contingency operations"?

Questions for President Obama: Rather than providing us with a war-winning edge, might our robot drones, satellite imagery, and all our other gadgetry of war seduce us into believing that we can "prevail" at a reasonable and sustainable cost? Indeed, do we think we should prevail precisely because our high-tech military brags of "full spectrum dominance"?

One bonus lesson from Mary McCarthy before we take our leave of her: Even now, we speak too often of "Bush's war" or, more recently, "Obama's war." Before we start chattering mindlessly about Iraq and Afghanistan as American tragedies, we would do well to recall what McCarthy had to say about the war in Vietnam: "There is something distasteful," she wrote, "in the very notion of approaching [Vietnam] as an American tragedy, whose protagonist is a great suffering Texan [President Lyndon Baines Johnson]."

Geithner may be stressed most of all

To publish the results of the bank stress tests or not is the question now facing Geithner etal. Some officials want publication, others do not. And, of course, just what would be published is apparently up in the air. Should this decision not have been taken before the tests were announced?

What these tests would be useful for is another matter. This is shaping up to be another questionable act by Timothy. Wouldn't it make more sense and be more palatable to just close down the bad banks?

Another Personnel Problem?

It looks like Steven Ratner, the auto czar, may have some problems. Word has it that he is being investigated for bribery. David Rothkopf has some tough words to say about the Obama administration's difficulties in staffing, especially in the financial area. He concludes

There are too many ties. There is too much in-breeding. There is too much Wall Street group-think. There is not a sufficient diversity of views. There is not a recognition that in times like these with the stakes and the costs to everyone so high, there can be no real or apparent conflict of interest of any time. Rattner, who has long aspired to high office, should have known that at Quadrangle. The economic team needs to get wise to it now.

This ties in with my earlier post today.

The more you learn, the more you wonder

We’ve all heard stories about insurance companies refusing to pay claims or trying to outwait you. So, it won’t be news to you that, even with claims made by or on behalf of civilian contractors to the military in Iraq and Afghanistan, insurance companies revert to form. There have been a fair number of claims from these contractors as 1,400 have died and 31,000 have been injured. But the insurance companies have initially rejected 44% of claims for serious physical injuries and more than half of all claims for psychological injuries. Perhaps, that’s why the business has been good for the companies; congressional investigators estimate that they have netted $600,000,000 on premiums of $1.5 billion. Not a bad profit margin.

But you may be glad to know that the company making the most money from this business is one in which you have an interest – AIG. And, as you might expect, a military audit found that AIG’s premiums were "unreasonably high and excessive." For example, AIG charged KBR $284 million in premiums for which they expect to pay $73 million in claims.

How low did this company sink?

Stiglitz seems to be getting more worried

I've referred to Joseph Stiglitz's writings often over the past few months. This interview with Bloomberg resonates with many of the concerns I have about the current plans to get out of this dire situation. It just does not seem that Geithner, Summers etal really want to face reality and close some banks plus they have been fairly inarticulate as to just what they are doing or are trying to do beyond save their friends and associates. Here's Stiglitz with regard to relationships: “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

A Very Intertwined World

That's the world of high finance. Today's example is Edward Liddy, the fellow serving as CEO of AIG for a mere $1 a year. It so happens that Mr. Liddy resigned from the Goldman Sachs board upon being nominated by Paulson, former head of Goldman, to head AIG. At the time Liddy owned 27,000 shares of Goldman. He still owns the stock which is worth today over $3,000,000.

You may recall that Goldman was one of the counterparties of AIG that was made whole via the TARP funds given to AIG. Did Liddy's relatioship to Goldman figure in this at all? At a minimum should Liddy have had to sell his Goldman stock before he became head of AIG?

You could call it progress

There is a hullabaloo in Saudi Arabia about a marriage contract between an 8-year-old girl and a 47-year-old man. The Human Rights Commission has come out against the marriage. The Justice Department is talking about enacting a law to make 15 the minimum age for marriage. Some Muslims believe child marriage is against the Koran.

Progress often moves very slowly, but clearly there are signs of positive change here.

They have to act fast

Goldman Sachs has made a big deal about their willingness - nay, eagerness - to pay back the $10 billion they got from the TARP. That's $10 billion they got directly; they got another $10 billion or more from the TARP's payout to AIG and hold $28 billion of bonds backed by the FDIC. Nothing has been said about returning these latter funds. Nor have they said that they would refuse to be saved by us once more should they have a reversal of fortune.

It looks like Goldman is pushing this now because they have a fear of new regulations which may further impact their ability to pay outrageous sums to their honchos. They've already started to stock the bonus pool. In the first quarter half of their revenues went into the pool. But why they fear that Geithner might do the right thing is beyond me as he has shown little inclination to join the new world; he prefers to try to rebuild the old.

The Lady Speaks

The Daily Show With Jon Stewart	M - Th 11p / 10c
Elizabeth Warren Pt. 1
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

Here's part 2

The Daily Show With Jon Stewart	M - Th 11p / 10c
Elizabeth Warren Pt. 2
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

124 Pages

That's the total number of pages in the four secret memos released today by the Justice Department. These memos were part of the argument advanced by Bush II to justify torture. The ACLU, which was very instrumental in getting the memos published, has copies of them on its site. Here are some comments from the head of the ACLU (emphasis mine):

"We have to look back before we can move forward as a nation. When crimes have been committed, the American legal system demands accountability. President Obama's assertion that there should not be prosecutions of government officials who may have committed crimes before a thorough investigation has been carried out is simply untenable. Enforcing the nation's laws should not be a political decision. These memos provide yet more incontrovertible evidence that Bush administration officials at the highest level of government authorized and gave legal blessings to acts of torture that violate domestic and international law," said Anthony D. Romero, Executive Director of the ACLU. "There can be no more excuses for putting off criminal investigations of officials who authorized torture, lawyers who justified it and interrogators who broke the law. No one is above the law, and the law must be equally enforced. Accountability is necessary for any functioning democracy and for restoring America's reputation at home and abroad."

Who will cash the check you sent yesterday to the IRS?

Most likely, the IRS will. However, that is not always the case. Your check probably went into a lock box at a bank. The lock box is managed by the bank, not the IRS. ABC reports that over the past few years a number of thefts of the checks in the lock box have occurred, in some cases a substantial amount of money has been stolen.

What are they trying to hide?

Massachusetts law requires a response within ten days of receiving a request for public information. For some reason the District Attorney of Middlesex County, perhaps the second largest county in the state, does not feel obligated to respond to a request from ProPublica or from the state of Massachusetts. Is this due to shoddy administrative practices? Or are they hiding something?

What else can go wrong?

The headline in a recent Wall Street Journal article reads "GM Recalls 1.5 Million Vehicles". The reason - they may catch on fire. No fires have been reported. Some of the recalled vehicles are ten years old. Some are not made anymore. But, hey, GM has its customers' interests at heart.

Our $12,000,000 investment in OneUnited Bank

Through the intercession of Barney Frank and Maxine Waters, OneUnited Bank was given $12,000,000 of TARP money last fall, despite the bank being subject to a cease and desist order from the FDIC because of a number of rules violations. In its application for TARP money, the bank wrote "Unlike majority banks, which principally focus on profit, the express mission of minority banks is to promote these underbanked, underprivileged communities." So, one would think the residents of these underbanked and underprivileged communities would be loaned some of our money. Some actually were. But, if the bank's record in 2007 is a guide (they issued 3 home mortgages that year) , not too many of these residents actually got any money.

The loans went to churches, owners of apartment buildings and such residents as Calvin Grimes who got $550,000 for a mortgage on his house here on the Vineyard. Other developers also got significant money from the minority-owned bank.

The bank has not been a sterling citizen. In addition to getting slammed by the FDIC, the bank had problems complying with the Community Investment Act, which the bank president calls outdated and "not a thinking man's tool."

It's not only the big banks that are not being good citizens.

Tapping a different profit source

Banks are not making much money today from derivatives and mortgage securities, so they've turned to the average (or not so average) Joe. BofA has doubled credit card fees. Citicorp is offering loans at 30% annual interest. Pacific Capital charges over 100% for loans in anticipation of tax refunds. Wells Fargo charges 120% for checking-account advance loans. All of these institutions have been advanced money by us.

Here's a chart from the Journal that shows what some of the TARP recipients have done with regard to raising fees.

Change we can believe in

Iraq doesn't seem to fit that motto, if you believe Dahr Jamail. He points out that Obama seems to be following the same path as Bush: an 'off-the-books' funding of the war, the belief in 'last gasps' and 'critical periods', the push for the Itaqis to 'take responsibility'. I can't see where he is wrong.

A Weird One

You probably know people who 'moonlight', i.e., work two jobs. You may even know someone who owns a business but also works for someone else at night. But do you know many college presidents who moonlight? I've never heard of one but Frank Rich claims that Larry Summers, while president of Harvard, worked for Taconic Capital Advisers, a hedge fund, from 2004 to 2006. Perhaps, this background made him worth $5+ million to DC Shaw last year.

It gets worse. At the same time Summers was working two jobs he castigated Cornel West for making a CD. And just recently Summers was touting a co-founder of Taconic as the person to run TARP.

Obama should be quite embarassed by his choice of Summers and Geithner. Where is the integrity he advocated as a candidate?

Words from a President

“Every gun that is fired, every warship launched, every rocket fired signifies a theft from those who hunger and are not fed, those who are cold and are not clothed….”
“A world that begins to witness the rebirth of trust among nations can find its way to a peace that is neither partial nor punitive…The first great step along this way must be the conclusion of an honorable armistice in Korea.” Dwight David Eisenhower when deciding to end the Korean War.

More of Warren's Views

The Boston Globe has excerpts from an interview with Elizabeth Warren, the head of the Congressional Oversight Panel. Her remarks are much more scathing than those in the recent report. Here are some of her comments:

It's frustrating because without a clearly articulated goal and identified metrics to determine whether the goal is being accomplished, it's almost impossible to tell if a program is successful.
__________________________________________________________

The major problem is that Treasury has not articulated its goals. And without that, we can't have a robust debate about whether they're headed in the right direction; instead, we're stuck with this more technical argument about the implementation of the [Term Asset-Backed Securities Loan Facility] or the details of the Capital Acquisition Program. And that misses the central question of, should we be subsidizing failing banks or liquidating them? When we acquire capital, should we exercise more control over the institutions that take the money or less control? Those are the central policy issues that the American public has a right to participate in.
__________________________________________________________

Anyone who thinks that they can take tens of billions of dollars of taxpayer money and continue to operate business as usual lives in a fantasy world that I don't understand. Culture clash? No! This is not a culture clash. This is not about taxpayers who don't get it. This is about people who think [in a] fantasy, that their world is prosperous and continues to create value that can be parsed out privately, when they are relying on huge subsidies from the taxpayer. It's just wrong!
__________________________________________________________

I believe that ultimately, the banks exist to serve the American people. Not vice versa. We cannot have a vibrant economy without a strong and reliable banking system, but it is impossible to save the banking system independently of saving the American family.
__________________________________________________________

There was a real focus on saving all of the institutions rather than a focus on saving enough of a system to keep it workable for the underlying economy.
__________________________________________________________

Every time I do the paperwork for the panel and note a $10 billion expenditure, I think about how many schools that might have built, how many hospitals that might have updated. Those dollars are not just ink on a page. They're real.
__________________________________________________________

The power of this panel is derived entirely from the voice of the American people. If they stay out of the policy debates, then Treasury can spend at will and reshape the American economy with no one in the room but insiders. If they are involved, the policies will look different.
__________________________________________________________

Would that she were running Treasury.

Deeper and Deeper

The news from Iraq is not getting better, it's getting worse. Suicide bombings are on the rise. It's is looking less and less likely that many of the Sunni Awakening Council members will be integrated into the Iraqi security forces. It looks as though there is an organized campaign to destroy those who were part of the Council. Whether it's by bombings, not paying them promptly or arresting the leaders, the bonds between the Council and the government are becoming quite frayed. How it will all end is anybody's guess.

"We project no losses."

That's the word of Sheila Bair, head of the FDIC, when talking about the role of the FDIC in Geithner's plan. She went on, “Our accountants have signed off on no net losses.” These comments remind Andrew Ross Sorkin of the comments of Joseph Cassano of AIG, “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.” What dream world is she living in?

The FDIC is exceeding the limits of their charter which says that they can risk $30 billion, but no more. Yet the FDIC is taking on a risk of $1 trillion under the Geithner plan. They are able to do this because they are valuing the loans on what they think they may lose. Huh? To quote Sorkin: "By this logic, though, the F.D.I.C. appears to have determined it can lend an unlimited amount of money to anyone so long as it believes, at least at the moment, that it won’t lose any money.'

Why isn't there any other comment on this potential liability to us? This is an outrage.

Kosher for Passover

That is not a beret on the dog; it's a yarmulke. Nor is the dog eating any old dog food, this particular dog food is made by Evanger's Dog and Cat Food Company and is certified by the Chicago Rabbinical Council as being “acceptable for use by those who observe Jewish law (free from any forbidden mixtures)”.

Some people just love their pets and want to share everything with them, including the celebration of the human's holidays. C'est la vie. Some are willing to pay $110 to have a $70 case of kosher dog food shipped to them in time for the holidays. Jedd passed this tidbit along to me as he knows that I constantly marvel at the lengths to which people will go with regard to their animals. I can understand treating the animals well and caring for them. But having dogs eat kosher food?

A Daily Occurence

Today's shooting is at a community college in Dearborn, Michigan. It looks as though a man shot a woman and then killed himself. How many have been killed this month in a shooting incident? Will we ever start doing something to stop the carnage?

A Bad Investment?

Poland has spent over $15,000,000 to build the largest elephant compound in Europe. The plan was to populate the compound primarily through breeding the first residents. Well, one member of the government, worried that one of the male elephants seems to prefer other male elephants, says, "We didn't pay 37 million zlotys (7.6 million pounds) for the largest elephant house in Europe to have a gay elephant live there."

The elephant is only ten years old. He still has a few years to go before he is sexually mature.

It doesn't sound right to me

The Boston Globe reports that two women have been arrested for defrauding insurance companies. How? By having funerals of imaginary people. True, one of the women worked for a mortuary company, but don't insurance companies like to see a death certificate issued by the municipal government?

Will you grant me amnesty now?

Mugabe's men are worried. He's 85 and won't be here much longer. Today, an opposing party is actually part of the government. These men have long practiced violence on their countrymen to support their lifestyle. Now, they sense that their day may be coming to an end and they are worried about being tried for their crimes. So, can you guess how they are going about winning friends and influencing people? You got it. The way they make friends is to kidnap them, beat them up and torture them.

Six Months In

The Congressional Oversight Panel issued another report on the TARP. Again, it does not enthusiastically back Geithner etal. The report questions the validity of the Treasury's view of the economy; they feel it's too rosy. Further, the report goes on, “All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets.” Which is not what Geithner is doing; he's letting the banks run the show. The fact that we're funding the operation seesm to mean little to him.

Some more excerpts :

• “Allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal.”

• The report also said that past successful financial rescues were accompanied by governments’ “willingness to hold management accountable by replacing -- and, in cases of criminal conduct, prosecuting -- failed managers.”

It takes time

Courtesy of Craig Newmark.

Insurance Companies Are Next to be Bailed Out

That's what the Journal says. There have been a number of articles questioning the viability of Hartford, Lincoln National and Gemworth. But it seems that Prudential has applied also. Who would have thought it would come to this? Clearly, it is more important to bail out the insurers, even though many of them thought they were smart enough to promise exorbitant returns on variable annuities, than the car companies.

If you need a break

Listen to the lyrics. There is a bright side to life.



But then you shouldn't read this article in the Wall Street Journal. We are still very vulnerable with today's Internet.

Rules for the Future?

Nassim Nicholas Taleb, who has promulgated the Black Swan theory, thinks he has them. Here's an edited version of his article in FT.com:

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail..

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it..

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

Name the year

From the Washington Post:

As Apache helicopter gunships cruised above Baghdad's Fadhil neighborhood, former Sunni insurgents fought from rooftops and street corners against American and Iraqi forces, according to witnesses, the Iraqi military and police. At least 15 people were wounded in the gunfights, which lasted several hours. By nightfall, the street fighters had taken five Iraqi soldiers hostage.

Because of the low numbers - 15 wounded, 0 deaths - you know it's not 2007. But it certainly sounds as though peace has yet to come to Iraq in any shape.

Tom Ricks has a few more comments on the success of the surge.

It's not only the U.S.

Other countries have weird practices. Japan, for example, has 'cat cafes', which are places at which you can have a cup of tea, pat - and maybe even bond with - a cat. As with similar places in this country, there are rules : " wear your cat-access pass around your neck at all times; no one under 5th grade may enter; cats too young to be held have scarves around their necks; do not hold or stroke a cat if it resists you; never wake a napping cat; bringing cat nip or cat food to the cafe is strictly forbidden."

My friends, Howard and Hedy, must be rolling over in their graves as they missed the opportunity to be star of the cat cafe.

Gaming the System

Lawrence Kotlikoff and Jeffrey Sachs have a somewhat wonkish article that illustrates how Wall Street can take advantage of the Geithner plan. The authors refer to the plan as the Geithner And Summers Plan or GASP. An appropriate name.

There are still more...

credit default swaps that AIG will have to 'unwind'. There are probably hundreds of billions that have to be dealt with. The question is will AIG be as complaisant about paying off these 'obligations' in full or will we the people, who own 80% of this company, have any say in this matter? It does not look that way to me.

We need an attitudinal shift...

on the part of Summers, Geithner etal. They've been so used to working for the money crowd, they may never understand that now they are working for us. How can Summers really question the doings of the hedge funds when he got $5+ million from one of them last year?

Today, McClatchy raises the issue of why Geithner did not try to negotiate a lower payment by AIG to its counterparties. The issue has been raised before. McClatchy is asking for only a 10 -15% discount. If it were your money and your deal, you would have started at 50%.

Would we be better or worse off if both of them left?

A Unique Mayor

It is a depression

at least according to Barry Eichengreen and Kevin O'Rourke and if you look at the world rather than just at the U.S. Here are a couple of charts to support their point of view.The first chart (on the left)shows industrial output for the world then (blue) and now (red). The second chart (on the right) shows the trajectory of the stock market. The third chart plots world trade volume. But don't despair. Our reaction to the problem is much faster than that in 1929.

From the horse's mouth

In late November 2007 Fitch Ratings issued a report entitled "The Impact of Poor
Underwriting Practices and Fraud in Subprime RMBS Performance". Here is an excerpt from the report summary:

In order to better understand the nature and impact of poor underwriting and fraud on subprime RMBS performance, Fitch analyzed a targeted sample of early defaults from 2006 Fitch-rated subprime RMBS. Fitch’s findings from this review include:
• Apparent fraud in the form of “occupancy misrepresentation.” The borrower’s stated intent was to occupy the property, but there is evidence in the loan files that this did not occur, and that it is likely that occupancy was never the true intent of the borrower.
• Poor or lack of underwriting relating to suspicious items on credit reports. The loan files of borrowers with very high FICO scores showed little evidence of a sound credit history but rather the borrowers appeared as “authorized” users of someone else’s credit.
• Incorrect calculation of debt-to-income ratios.
• Poor underwriting of “stated” income loans for reasonability of the indicated income.
• Substantial numbers of first-time homebuyers with questionable credit/income.
• In one instance, acknowledgement by the borrower of being the “straw buyer” in a property flipping scheme.

What the report does not say is how many of these loans received Fitch's top rating.

Pricing is the issue

Over the past months the FDIC has averaged a price of 56.3 cents when auctioning the assets of failed banks and 32 cents when auctioning the non-performing commercial loans held by these banks. Why would the Treasury use 86 cents as an example of how the Geithner plan might work?

The question is whether the banks will be willing to acknowledge reality. I doubt it and I also question whether Geithner and company will.

The Financial Times Also Raises the Issue

Last month after reflecting on Geithner's plan for toxic assets I wrote "But from what we've seen recently with regard to the ethics of Wall St. types, what prevents the bidders at these auctions from conspiring to set prices to minimize the possible loss to them? After all, we are putting up most of the money yet they will get a disproportionately larger share of the profits that may occur."

Here's a quote from FT.com,

This week, John Mack, Morgan Stanley’s chief executive, told staff the bank was considering how to become “one of the firms that can buy these assets and package them where your clients will have access to them”.

Goldman and JPMorgan did not comment, but bankers said they were considering buying toxic assets."