Internal Control, Valuation, Strategy

The Inspector General for the TARP has published his first report. Would you have guessed that the management of the program does not get an "A"? The biggest concerns are listed in my title above.

There really are few controls to ensure that our money is being spent and spent wisely. As for strategy, there is no portfolio management at all (how long should we hold these securities, what should the selling price be). Valuation of those securities purchased thus far seems to be out of whack as it looks like we got $78 billion less than we thought we had bought.

The valuation issue affects not only the past. The Fed will be spending another $600 billion buying up student loans, car loans and credit card debt. Who will value these securities? The same rating agencies who valued the CDOs.

If you don't want to read the 189 page report, read this.

The Iraqi Elections

Anthony Cordesman takes a preliminary look at the elections. Like most things about Iraq today, the results are uncertain. True Maliki 'won', but he did not get a majority in any of the nine provinces where the vote count is complete. The best he did was 38%, the worst 11%; maybe with the number of parties running, these results are not bad. The major Sunni party, the Islamic Supreme Council, did not do very well. In general, Cordesman is relatively pleased with the results, but there is always a 'however'.

However, there are many local areas where these results may lead to violence or divisive power struggles. These elections did not resolve any of the political uncertainties and potential sources of violence that Iraq must face in the coming year. They also lay the groundwork for practical struggles to see who controls positions, money, the police, and influence in virtually every province where a vote occurred.

The outcome will bring meaningful local representation to Iraq for the first time and may help put it on a more pragmatic political path. It is clear, however, that they are only the prelude to a year-long struggle going into the national elections and that there is only so long that the Arab-Kurdish issue can be kept on hold.

Many of those elected also have little or no real political experience or experience with governance. This is not a casual problem. Iraqi has dropped from a nation with an unspent budget surplus to a nation caught up in the global financial crisis and which will not get further major donations of foreign aid. Unemployment, poor government services, and infrastructure problems remain critical. The Iraqi government is the source of virtually all surplus income and is the direct or direct employer of roughly 70 percent of the jobs outside the agricultural sector. Iraqis have already shown they want strong leadership and care more about the quality of governance than the way that their government is chosen.

Addition and Guts

When I was a kid and the Senate consisted of 96 good and true men (they were all men then), a bill passed if 49 Senators (or a majority of those voting) voted for it. I guess I missed something that happened at the start of the 21st century - although 51 votes constitute a majority (as mathematics would have it), it now takes 60 votes to pass a bill.

Also when I was a kid, there were filibusters and the country did not wither away. In the 21st century one would think that a filibuster is the worst possible thing that could happen.

Here we are with the world around us sinking into economic ruin and these assholes are still playing politics. Where are the statesmen in the Senate? Where are the people with integrity? Where are the people who live up to their oath of office? Why has the Senate become a body made up of gutless wonders? They should all be impeached.

Another cost of the wars

Last year the Army had a record number of suicides and January is starting off very bad. It looks as though there were four times as many suicide this year as last. The length of the war and the resulting multiple deployments certainly has had an effect. But, it also appears as though the brass does not look kindly on soldiers seeking help with emotional problems.

Would you buy weapons from this guy?

He's Efraim Diveroli and he's an arms dealer who has managed to do quite well selling old, very old, ammunition from China to our government although the law says we won't buy Chinese ammunition. He was indicted last year on 83 counts of selling the Pentagon Chinese ammunition dressed up to look Albanian. His trial is coming up, yet it looks as though we taxpayers are still his customers. Only in America!

Bad Bank Proposal Is Really Bad

Last Fall the IMF issued a study of 124 banking crises. Some conclusions

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

To relief indebted corporates and households from financial stress and restore their balance sheets to health, intervention in the form of targeted debt relief programs to distressed borrowers and corporate restructuring programs appear most successful. Such programs will typically require public funds, and tend to be most successful when they are well-targeted with adequate safeguards attached.

A Musical View of the Economy and the World

Daschle Drops Out

It would have been better if Geithner had dropped out as losing Daschle is worse than losing Geithner. Geithner may be a mistake, Daschle wasn't.

Killefer Makes 3

First it was Geithner who didn't pay taxes, then Daschle, now it's Obama's nominee for Chief Performance Office, Nancy Killefer. However, where Geithner and Daschle owed thousands, Killefer owed only $947. She didn't pay unemployment tax for a household employee and, unlike the two men, Killefer had a lien placed on her house.

Will there be any more?

It took two months.....

...but the banks will finally appear before Congress next week.

Weapons or Energy?

Did you know that two-thirds of the Energy Department's budget goes to the maintenance of nuclear warheads? I certainly did not. Yet, Energy has 100,000 people involved in this task.

I would have thought that the Defense Department was in charge of all weapons. It makes no sense to me.

Looming Crisis at the Pentagon

That's the title of an essay by Chalmers Johnson that you have to read. Here's part of the introduction.

Given our economic crisis, the estimated trillion dollars we spend each year on the military and its weaponry is simply unsustainable. Even if present fiscal constraints no longer existed, we would still have misspent too much of our tax revenues on too few, overly expensive, overly complex weapons systems that leave us ill-prepared to defend the country in a real military emergency. We face a double crisis at the Pentagon: we can no longer afford the pretense of being the Earth's sole superpower, and we cannot afford to perpetuate a system in which the military-industrial complex makes its fortune off inferior, poorly designed weapons.

Sports Stadiums: The Next Victim?

Over the past several years there has been considerable talk of building new sports stadiums. In some cases, this talk has been backed up by money from companies eager to plaster their name all over a stadium. Among those companies are Citibank and Bank of America, two of our investments. Citibank signed a deal with the NY Mets whereby they would pay the Mets $20,000,000 a year for twenty years for the right to name the new Mets field. BofA will pay the Carolina Panthers $7,500,000 a year for rights to 'name' its stadium.

Should these deals be renegotiated or killled?

Bacevich on American Triumphalism

From a brief essay in Commonweal.

In short, after 9/11 President Bush put the triumphalist hypothesis to the test. As he left office, the results of that test clearly presented themselves. What we’ve learned is this: First, liberalism’s widely touted victory is at best incomplete. Especially in the Islamic world, a stubborn search for alternatives persists. Our insistence that others do things our way exacerbates the opposition we face. Second, unipolarity is a chimera, a dangerous refusal to acknowledge the world’s complexity. Third, to pursue global hegemony is to court bankruptcy. To persist in imagining otherwise will only hasten America’s decline. Fourth, although globalization may be real, the United States can neither direct its course nor fully insulate itself from its adverse effects.

Wanat, Afghanistan

Tom Ricks has a wonderful series of articles about a small battle in Afghanistan that can tell us a larger story about our efforts there. His final entry quotes an Army friend of his.

We are so very exposed in this land-locked country, with no infrastructure, not nearly enough enablers, not enough transport... it's frightening, really.

. . . [R]remind folks that this is an enemy that may in fact look more like Hezbollah in Lebanon 2006 than al Qaeda in Iraq. This is an enemy that apparently has no problem massing force in space and time, and is tactically proficient at understanding our weaknesses. My own view is that we have to employ a properly resourced COIN mission . . . while simultaneously ensuring that those folks out in the hinterland have all the enablers they need. A tough problem.

'Bad' Banks Will Make Things Worse For Us

Dean Baker has a couple of interesting points to make about the 'bad' bank proposal. I've already written about the difficulty of coming up with a fair price for these assets. Baker reminds us that, if we paid a fair price, banks' capital would likely be wiped out as we're looking to write off $2 trillion but the banks only have $1.4 trillion in capital, and some of that is goodwill, whose worth is nebulous especially in these times.

Because the problem of bad loans is not fully known, it is likely, in Baker's opinion, that the bad bank will be dealing with new bad loans for a long time.

Baker advocates nationalization of insolvent banks and nationalization today. "This is not interference with the market. It is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can't let them be tied up in bankruptcy proceedings for years."

He has a point. But, I suspect that Geithner and Summers don't agree. We'll be sorry if they don't.

Gaza - then and now

Elena Qliebo, an Oxfam worker living in Gaza, talks about Gaza twenty years ago and Gaza today.

It was summer 1987 and I had just returned from a refreshing morning swim in a turquoise, clean sea lapping on a deserted powdery beach. I picked some white sea-lillies before joining a family of close friends for a delicious breakfast of fresh green figs.

The family began to prepare lunch, which we later ate in the orchard. Gaza was full of fruit trees back then. One of the most poignant memories I have is the almost suffocating fragrance of orchards of orange blossoms when I first passed through Beit Hanoun, in northern Gaza, on my way to Gaza city.

As I look at what remains of Gaza now an apocalypse would describe the situation accurately. Much of Beit Hanoun's trees, orchards and greenery had already been levelled or uprooted during previous Israeli incursions. But now the foliage and orchards are only a memory.

People are mostly exhausted and bereft of hope. But the head of one agricultural association that I visited voiced cautious optimism that he might be able to export two million flower buds that were stored in refrigerators and had miraculously survived destruction.

I travelled to Beit Lahia, also in northern Gaza, recently to visit some of Oxfam's beneficiaries. The strawberry fields, chicken farms and cow pastures were gone. The stench of dead and decaying animals was choking.

Amongst the mountains of rubble that remained of homes, flattened either by F-16s or Merkava tanks, people were gingerly picking their way through, trying to salvage a few family items and attempting to clean away the debris.

Other residents were too numb to do anything, and just sat around in groups drinking tea. Even the dogs looked stunned, and instead of barking at us as they usually do when we pass, they just stared at us.

The worst hit areas appeared in one area of Jabalia refugee camp on the outskirts of Gaza city. It used to be a nice neighbourhood with double-storey homes and neatly paved roads. Two houses remain. Some people sat in tents while others sat on what remained of their homes.

Approximately 50,000 Gazans were displaced during the fighting. The UN relief agency UNRWA told me several days ago that about 14,000 people had tried to return home only to find there was nothing to return to.

These people are staying in temporary shelters as UNRWA and the World Food Programme (WFP) tries to bring a semblance of normality back to their shattered lives by providing temporary shelter, food and water. Schools that were damaged are being repainted and rebuilt in a bid to provide a less traumatic environment for children.

The destruction is overwhelming to the point where it is sometimes hard to know where to begin after basic necessities have been provided.

Aid is slowly coming in but a lot more is needed. I feel very grim about the future. There are so many people, breadwinners in particular, who are amputees and seriously maimed. They will forever be aid-dependent and unable to live normal lives or support their families.

A Tough January

Benedict XV did not have a good month, at least in the eyes of liberal Catholics. First, he un-excommunicated four bishops consecrated by LeFebvre, who was totally against Vatican II. Now he's made a bishop of a guy who believes that Katrina was God's retribution for the sinful people of New Orleans.

Private or Public?

Is the administration's attempt to preserve a private banking system although the public will be financing it fair to the new group of stockholders, we taxpayers? Paul Krugman would say no. I think he's right. We seem to be moving toward a system where we put up the money and the guys who failed will be running the show.

Krugman also raises the very difficult question of the valuation of bank's assets. He thinks that the administration might use computer models rather than the price these assets would fetch in the marketplace today. What's wrong with letting the markets decide the value?

To make the administration's leanings even more galling, the Washington Post makes the claim that “the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid” because “harsh limits could discourage some firms from asking for aid.” Which statement on its face is ludicrous.

Stopping Venality

Readers may recall that I have written fairly often about the changing mores of medical journals vis-a-vis the pharmaceutical companies. Part of the problem lies with the FDA, which has remained silent on the issue. However, in the waning days of Bush II, the FDA did speak up by issuing a "guidance" document which authorized drug companies to use articles in medical journals as part of their marketing arsenal.

The FDA did so despite protests by Republicans and Democrats in Congress, the VA, attorneys general of Illinois and Oregon, health advocacy groups, insurers and state prosecutors. Furthermore, in the past five years alone courts have awarded over $6 billion in suits against the drug companies for off-label marketing. Yet, our government thought this was a good idea. Will the new managers of the FDA rescind this "guidance" document? Will medical journals monitor the articles they print? Will pharmaceutical companies rein themselves in?