Monday, February 23, 2009

Sacred Cows

As we enter the Year of the Ox, it is instructive to see whose ox is being gored.

Amidst all of her considerable posting goodness today, Yves Smith offered up this excellent piece, "Treasury Soliciting Bankruptcy Funding for GM, Chrysler" in which she says (my emphasis):

Let's see. Citigroup has gotten $45 billion of TARP funds, and backstops on a net of roughly $250 billion of crappy loans after Ciit's first loss and allowing for the split between Uncle Sam and Citi on the balance. And it is pretty unlikely that we have seen the end of Citi's funding needs.

GM and Chrysler, by contrast, have borrowed (un, loans are higher in priority than TARP-y equity) $17.4 billion and are seeking an additional $21.6 billion. So the total they want is less than that already handed to Citi, well less than what AIG received.

The Treasury is threatening to put the two car manufacturers into bankruptcy, and is moving forward in exploring feasibility. This may merely be high stakes poker, but the bluff looks pretty serious.

Do we see anywhere near as rough treatment for companies that not only drove themselves off the cliff, but are taking the economy with them? Ah, but of course. Who has given more to pols in DC, Wall Street or Detroit? Case solved.

I think it's a little more complicated than that, though Yves has put her finger squarely on the problem. Let's jump over to Barry Ritholtz who asked much the same question today from the opposite direction, "Why Bankruptcy For Autos But Not Banks?". He wants to find some silver lining in the cloud, mostly because he prefers cleaning out the stables to moving piles of horseshit around, but his honesty brings him up in the end (my emphasis):

The Obama administration is undergoing a battle between its own good instincts with those of its Treasury Secretary.

Away from Treasury, on the side of intelligence, new policies, a clean break from the Paulson/Bush plans — I believe during the campaign, it was called CHANGE — and inevitability, are prepackaged bankruptcies, clean balance sheets, and a fresh start. This is reflected in the Fed exploration of $40 billion in bankruptcy funding for GM.

On the side of more of the same, bad decision making, regulatory capture, worshiping sacred cows, and a hard-to-understand goal of saving the banks rather than the financial system, is the utterly absurd proposal to somehow spend 10X the market cap of Citigroup for a 40% stake in the apparently insolvent firm.

This is an accounting maneuver, a convertible preferred that greatly dilutes the common shares, and adds no new capital. Put on paper, it allows the leverage to look less egregious.

One can imagine an incredulous junior Treasury staffer — one who hasn’t been captured by the big banks, and is capable of basic arithmetic — saying the following:

"Explain this to me again: We put in many times the value of this company — we have already given them $45 billion dollars, and guaranteed almost $300 billion dollars worth of bad paper — and we get less than 50%? WTF? How the hell does THAT work?"

Its apparent that this sleight of hand doesn’t work to just about everyone except Tim Geithner (and a few others).

At the same time, an industry that had nothing to do with the current crisis is on the fast track to a healthy pre-packaged bankruptcy.

Moral Hazard aside, the different approaches reflect the relative importance of different sectors. Banks must be saved at all costs, but GM and Chrysler must go the bankruptcy route. The only explanation in treating the two industries so radically differently is an overt hostility to Unions on the part of many.

Moving a step away from Yves' blunt (and not innacurate) assessment that there is a financial quid pro quo at work here, what Barry gets to almost by accident is the class bias that has been present in the current administration since the primary campaigns began, the one I wrote about month after month last year. I think the situation is more nuanced than just hating unions, though that is certainly a major contributing factor, and has a great deal to do with Whole Foods Nation's disdain for the laboring class and its entirely too good opinion of the value of its own work in the cubicle cities and cool development spaces that symbolic analysts occupy.

Motor City vs. Wall Street.

There are two ways to look at the contest, neither of which are more right but each of which captures aspects of the contesting constituencies. One is of core political interest groups. Obama explicitly campaigned on a platform of throwing away "the old" base Democratic interst groups and of bringing new voters (i.e., constituents) into the mix. His economic policies, the attention to the financial industry, directly rewards the people who were most likely to compose that group, which is more than just the bankers and brokers. Any industry that, like the finance sector, delievers intangibles and/or goods inseparable from the professional services that support them is an industry where Obama supporters are over-represented. The constituencies that rejected him in the primaries and again in the general are more likely to be found in industries where the goods to be delivered can be divorced from the service and support provided. This is in accord with the argument Yves puts forward, where the people who bought you are the people who you serve.

The other way to view this is as a cultural argument, whereby the cultural losers, the people who have been falling further and further behind since the Movement Conservatives came to power with Reagan, are not seeing any change in the attitude that they are losers and need to be dismissed, pushed away, wiped out (get rid of the old junker car and get a Prius, why don't you?), while the cultural winners, the Masters of the Universe and the other hip and cool guys who know an Apple a day keeps the dull PC work away, are being treated as due the spoils of their electronic wars - trading shares and doing deals as though it is just another RPG, like World of Warcraft. The executives of the auto industry are not dumb and no doubt gave generously to open doors and bend ears with the new administration (and who will personally be just fine, no matter the economic fallout), yet they find themselves lumped together with their own lumpenproletariat manning the assembly lines in Detroit, determined to be unworthy of the care lavished on the people who created the crisis in the first place. This is more in keeping with Barry's claims about hatred of unions.

Clean creative class types get the benefit of the doubt, not just to preserve their stock values (and, btw, as a holder of some substantial retirement accounts, I really don't want to see their value trashed. Just sayin...) but to preserve their way of being in the world. They are presumed to be doing a good job, as befits members of the winner class.

The Bunkers and Bubbas who (it is imagined) live in the burned out cities and trashed trailers of sweaty America are told they will feel pain, their greedy unions having killed the goose and brought to a permanent end the golden eggs they never deserved in the first place. No health care for you, no seriously expanded public works projects which might employ you, penurous loans and enforced bankruptcies instead of bags of money and lavish bonuses for having screwed things up beyond hope of repair.

The sacred cows watch, chewing their cuds, while the oxen are turned into stew meat.


Sunday, February 22, 2009

Fine Distinctions

One of the second tier econo-bloggers I enjoy reading (second tier only in prominance, not in quality of thought, I hasten to add) is Steve Waldman of Interfluidity. His post from yesterday, "There's no reason for non-recourse" is a must read. He takes on the TALF and calls it for what it is - a lie. Key paragraphs (but please read it all, especially the afterthought), my emphasis throughout:

Does your head spin, acronym upon acronym, non-recourse, warranties, and covenants? Well, unspin it. The New York Fed is telling us, in plain and simple legalese, that it is planning to make a very generous gift to investors that participate in this program (and indirectly to the banks that sell assets to them). A non-recourse loan bundles an ordinary loan with an option to "put" the collateral back to the lender instead of paying off the loan. Sometimes this is not much of a gift: When a pawnbroker lends you half of what your Fender Stratocaster is worth, and the fact that you can surrender the guitar rather than pay off the loan is cold comfort. But if someone fronts you substantially all of what an asset is worth, and the value of that asset is uncertain and volatile, then the put option bundled into the "loan" becomes extraordinarily valuable. If the asset appreciates, you take the profits and "ka-ching!". If the asset falls in value, the lender takes the trash and eats the loss.

A near-the-money option is itself a valuable asset. Offering non-recourse loans to participants in the PPIF would directly contradict the program's goal of "allow[ing] private sector buyers to determine the price for... troubled... assets." Private sector buyers would not be pricing the assets themselves: they would be pricing a portfolio containing a troubled asset and a free, three-year put option, courtesy of the Fed. Depending on how much of the transaction the government is willing to finance, the value of the put option could represent a substantial fraction of the value of the asset being priced. This is a subsidy, that would be incorporated in the sales price of the asset and split by banks and private investors. It amounts to the government bribing investors to certify banks as more solvent than they are, by overvaluing bank assets in subsidized purchases.
We are all tired of the lies, Mr. Geithner. By all means, let nationalization be a last resort, and do all you can to offer liquidity to private parties willing to take both the upside and downside of speculating in questionable paper. But if you keep nationalizing the downside and privatizing the upside, it will not be very long at all before the public concludes that stress tests and market prices are just a sleight-of-hand for Davos man while he picks our pockets, again. Act fairly, and you may end up nationalizing the worst few of the larger banks. Keep up the games, and we will insist that you nationalize them all. It is getting hard to believe that there is a banker in the land who has not already robbed us. Eventually we will tire of drawing fine distinctions.

With every day that passes, it becomes more difficult to draw the "fine distinctions" Geithner et. al. want us to pretend exist between saving financial systems, which we need and is our proper concern, and saving their rich buddies' asses for their bad investments, which is not our concern even as their idiocy has become our problem. The dire warnings over the "moral hazard" of simply devaluing home loans made during the bubble no longer sound so convincing when we watch the deliberate moral hazard of protecting the prerogatives of Wall Street in lieu of enacting anything approaching a rational fix to the financial system.

Steve's formulation of nationalizing the downside and privitizing the upside captures the rotten heart of the various attempts to "fix" the financial implosion, from Paulson right through to Little Timmy. The intent is to protect the people who caused the implosion in the first place. This is the distinction that Little Timmy wants us to overlook by believing the lie that we are rescuing a system.

Leaving the details of the financial analysis to the excellent people in the field, what strikes me most in this mess is the lack of political distinctions, or, more to the point, an unwillingness to draw them. What you do not hear from the White House is a political vision, policy or standard that sets the ground rules for the enaction of an economic plan. It is all piecemeal, deal with the uproar of the day, reactive rather than programmatic. This also fits the way taxes, housing, the auto industry, etc., is being treated. The continued fluffing of the Republicans in the name of bipartisanship is another example of the deeper problem, which is a lack of an over arching political goal for the sake of which you act.

This is not so much ideology, though to be most effective it should be grounded in one. Example: The Movement Conservative obsession with killing Social Security (political goal) is grounded in their faith (ideology) that the New Deal was bad for the nation and must be dismantled. The goals of a political actor are what allows that actor to take advantage of political opportunities in creative ways, and acting on those opportunities are what change institutions and systems in fundamental ways. What has become clear in just one month, however, is that the Obama administration's sole political goal was getting him elected and that there is nothing more he really wishes to accomplish.

Thus, we are left with the economic policy (such as it is) being handed over to the crooks and liars who got us into this mess in the first place because there is no reason not to. There's nothing The Precious wants to do with the economy or the financial system (like expand the New Deal), so whatever Little Timmy and Gucci Gang want to do is fine by him. The political opportunity presented by the economic crisis, well documented by people like Krugman and Roubini, is being frittered away for lack of political vision.

Fine distinctions matter when political opportunities are at hand.


Friday, February 20, 2009

Hillary Knocking Them Dead in Asia

As I knew she would.

In the Hillary section in the righthand links, I have posted a link to the State Department's unfortunately named Dipnote blog, which is offering some great commentary on Hillary's rock star reception overseas. I am savoring this reporting after all of the crap the Blogger Boyz (and others) threw at her during the primaries and immediately after her name was floated for Secretary of State.

Take a little time to read the various posts from State Department personnel (and a post from Hillary herself) as inside commentary on the trip. To me, what comes through is the joy people are feeling at her presence. (For more complete coverage of the trip, be sure to check out the official news and transcipts on the State Department's site.) The other thing that comes through is the way in which Hillary is able to be both a formidable diplomat (see her responses to North Korea's blustering) and a very public ambassador, representing the nation to the world simply by who she is. She can go appear on the Indonesian youth TV show "Dahsyat", walk in a poor neighborhood of Jakarta, do many public appearances and private meetings in Tokyo, and make China absolutely giddy over her impending arrival. That post intrigued me the most, in great part because of the ever-so-diplomatic comparisons being drawn between our new Secretary and those before her:

Ben Moeling, the post's author, serves as the Deputy Political Chief at the U.S. Embassy in Beijing, China and Overall Control Officer for Secretary Clinton's Visit.

Secretary Clinton arrived in Beijing on a cold February night after a full day in Korea. Two senior officials from the Ministry of Foreign Affairs were on hand to greet her officially, but hundreds of millions of Chinese people were also eagerly tuned in. The Secretary, or "Xi-la-li" as everyone in China refers to her with a tone both of familiarity and respect, is famous in China. Speculation about her visit has been intense. Almost every Embassy officer, from vice consuls to the Charge d'Affaires, has received inquiries about her upcoming visit. Our Political, Economic, and Environment, Science, Technology and Health sections have been working for weeks with our Chinese counterparts on the arrangements. Finally, it's game day. The Embassy is ready. Press from all over the world have gathered. The Chinese government is giving her an exceptionally warm welcome, and tomorrow she will meet with the President, Premier, State Councilor and Foreign Minister.

The warm response to Secretary Clinton's first trip to China is literally overwhelming. Already, we've had to improvise. Our carefully arranged plan for her to meet the staff and families of U.S. Embassy employees had to be scrapped just yesterday because the number of RSVPs shot past the maximum occupancy of the venue we'd selected for the event. Despite the fact that the Secretary's only available window is late on a Saturday afternoon, 430 people have already said they plan to come back to the office to see her.

I have noticed an incredible energy in the team that has come together to plan and execute this visit. This is not my first "S visit," and I am used to working with dedicated and professional colleagues, but this is somehow different. Everyone is so deeply invested in the success of this visit, no matter how big his or her job. Dozens of people have come up to me and volunteered to assist. I am excited, proud (and a little awed) to be part of it myself. Tomorrow is going to be a big day in U.S.-China relations.

The embassy staff is turning out en masse to see her. She is called by her first name with endearment by ordinary people (and not just in China, I might add). The government is responding positively to her visit. They want her there. High and low alike are straining for an opportunity to see her.

And this is what sets her apart from previous secretaries. It is almost too easy to compare Hillary's ecstatic reception to the lack of such reaction to Condoleezza Rice or Colin Powell, but Madeleine Albright could not generate this response either. Bush had tried to use Karen Hughes as some kind of public figure for outreach, but only managed to demonstrate the moral black hole at the center of his regime.

This buzz, this palpable anticipation over Her arrival is what I was trying to identify in my posts from last November, The Politics of States and Against Conventional Wisdom. This is what I expected to see and why I wanted her to take the position.

No need to rely on hope here. This dame has got the goods and she delivers.


The Crisis of Credit

This is simply brilliant:

The Crisis of Credit - a brief and illuminating video

It hs been posted on a number of econo-blogs and deserves wide exposure. When you have a friend or family member who doesn't get what happened with the financial collapse and doesn't understand the difference between a CDO and a CDS, give them this link.

Come to think about it, maybe someone should send this to the administration so they can see just who the guilty players are in the current crisis.


Wednesday, February 04, 2009


I think that the banks have been investing wisely. Wall Street paid enormous amounts to put The Precious into the White House. They are getting their dividends now. Yves Smith of naked capitalism has been going hammer and tongs at the proposals coming out of the White House. Read the whole article, but here are some key points from his her recent post, The Bad Bank Assets Proposal: Even Worse Than You Imagined (my emphasis throughout):

Dear God, let's just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.

The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:
1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs

2. Has key elements that studies of financial crises have recommended against

3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).


What we have from Team Obama is a bigger abortion of a :"throw money at bad bank assets" plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited.

Those who remember the origin know that triage means focusing on the middle third of the wounded on the battlefield : leaving the goners to die, leaving those wounded but stable to fend for themselves for the moment (they were in good enough shape to wait to be transported or hold on to be treated later). The middle third, those in immediate danger but who might nevertheless be salvaged, got top priority.

The concept of "triage" recognizes that resources are limited, tough decision need to be made, and some are beyond any hope. But in Team Obama Newspeak, triage means everyone can be saved because resources are presumed to be unlimited:

So we the taxpayers are going to eat a ton of bank losses that should instead be borne first by stockholders and bondholders This program should be labeled the Pimco bailout plan, since the giant bond fund holds a lot of bank debt. That show what a fiction Obama's populism is. It's mere posturing and empty phrases. Look at where the dough goes, and it is going first and foremost to the big money end of town.

Now I do no labor under the delusion that there are cheap or easy ways out of our financial sinkhole. People are suffering, and we are only partway through the process of contraction and writeoffs. I heard of a suicide today, a jewelry dealer who was $400,000 in debt (also owed a lot of money but unable to collect) who threw himself off 10 West 47th Street (from someone else in the building, this is no urban legend). A tragedy, and a visible one, and there is plenty of less acute but no less real trauma afoot.

But Team Obama is taking the cowardly approach of distributing the costs among the most disenfranchised group in the process, namely the taxpayer, when there far more obvious and logical groups to take the hits. Shareholders and bondholders bought securities KNOWING there was the possibility of loss. A lot of big financial institutions have been on the ropes for over a year. A security holding is not a marriage. When conditions change, prudent investors reassess and adjust course accordingly. If anyone is long a lot of dodgy bank paper now, they have only themselves to blame. Any why are rank and file bankers still exempt from pay cuts when the workers in another failing US industry, autos, expected to take big hits?


The most amazing bit is the government acts as if it has no leverage. Look how Paulson sent teams in to inspect the accounts of Fannie and Freddie and put them into conservatorship. The reason it is obvious that this program is a crock is that it has ben cooked up in the complete and utter absence of any serious due diligence on the toxic holdings of the big banks.

As we discuss in a separate post, the one punitive element, executive comp restrictions, are mere window-dressing. Welcome to change you can believe in.
Ah, yes, the triumph of Whole Foods Nation, where we will all be progressive, exercise regularly and floss after every meal, where the Blogger Boyz will call the shots and rule the world with their mad posting skillz. Eh, not so much.

An inability to escape conventional wisdom, along with weak-kneed capitulation to the myth of "bipartisanship" combined with a lack of political vision is what Krugman warned us about as regards The Precious about this time last year and damn if the Shrill One wasn't right. Paul needs to change his name to Cassandra.

We are already 10% of the way through the first 100 days of the Obama administration (and I'm only counting business days, mind you) and we are watching him squander the political capital of the election.


PS - And the Shrill One welcome Yves Smith into the Ancient and Hermetic Order of the Shrill:

Shock and oy

Martin Wolf has it right:

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.

Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.

Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”.

You know, it was widely expected that Obama would have a stimulus plan ready to pass Congress even before his inauguration. That didn’t happen. We were told that this was because the economic team was working flat out on the financial rescue.

In fact, when it comes to bank rescue it’s hard to see much evidence that anything was accomplished during all that time; the team is still — still! — running ideas up the flagpole to see if anyone salutes. And the ideas look remarkably bad. (Welcome to the Ancient and Hermetic Order of the Shrill, Yves.)

Meanwhile, when it came to stimulus legislation, when Obama finally introduced his economic plan he immediately began negotiating with himself, preemptively offering concessions to the GOP, which voted against the plan anyway. (And Obama appears, in the name of bipartisanship, to have thrown away a Senate vote he may well need.)

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?