Tuesday, March 31, 2009

It Takes a Mogul to Sink a Business

Forget Detroit for five minutes (after you've watched Jon Stewart on Obama the car salesman). Newspapers are in huge trouble, and here's an entertaining yet tragic tale of the Chicago Sun-Times getting dragged down by imbecile leaders and their infinite needs. In this case, it was a bill for $117 million from former mogul Conrad Black and his circle's legal fees that threw them into bankruptcy.

You'll be glad to know that Conrad "said he was adapting well to life in a Florida jail, where he is teaching inmates history and learning to play the piano: 1In some respects, there is less intrusion here of the irritations of daily life than on the outside.'"

Saturday, March 28, 2009

Thank God for Government, Greenspan Said

Or should have said, though the most powerful prosletyzer for free markets has backtracked more than most.

I don't say it happily, but as I watch equity indexes fall by 3.5% - 5.0% all around the world because the White House refused a no-conditions bailout for GM and Chrysler, I note that the investor need for government bailout money has reached the state of undiluted panic when for a few hours they are forced to go without.

The banker calls for subsidy are an amazing thing.

Here is Roger Altman. Altman is now the CEO of Evercore Partners, a private equity firm, but is a veteran of 2 stints at Lehman Bros, including a 1980s term in which trading starting to take over Wall Street banking, a period at Blackstone, and time in the Carter and Clinton administrations. Call him a Rubin Democrat. Last week, he gave a 3-part interview at the Financial Times in which among other things he waved the flag for the PPIP, saying it will work (while making the reasonable point that it will take time to bring in a lot of bidders).

He also is pretty honest about the positions of the private parties. The sellers with problem loans or toxic assets might not want to sell at far below face value -- where the bids of the professional asset scavengers are likely to be -- because that locks their losses it, forces reporting as such, and can hurt confidence in them, making the hole even deeper from which they have to repay everybody including the government.

As for investors, Altman said,
I think there will be plenty of investor interest. Let's be honest. It's a heads you win, tails you don't lose proposition. And that's the way it needs to be, given the magnitude of this problem. I support that. . . We should all be up front about that. As Larry Summers often says, when markets overshoot, policy also has to overshoot. . . . It's a very strong offensive policy, . . . in terms of the size of the subsidies to the investors, but it has to be.
Adding these points together, we get the gov acting as patient subsidizer and patient free insurer for the private sector, with little hope for Mark Thoma's call to try it then end it quickly.

Anger and worry part 17:

Dean Baker is pissed and not bothering to hide it.

Or Krugman on Friday:
  • finance and insurance doubled their share of GDP from 4% to 8% since the late 1960s.
  • "financial wizards were lavishly rewarded for overseeing the process. But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption."
  • "I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try."
Moderate MacKenzie (FT) on the Public Private Investment Partnership (PPIP)
  • "the irony that the Treasury is relying on securitisation and leverage to resolve a banking crisis that is based on excessive borrowing and owning securitised assets"
  • plus it is not working: "The substantial rally in banking stocks has been accompanied by a far more tentative rebound in the various derivative indices for leveraged loans and subprime mortgages, which the PPIP is expected to grease."
  • "the peak in corporate and consumer bankruptcies for this current recession and ensuing torching of bank loans, is likely still to be a long way in the future."
  • enter nationalization: "For all its shortcomings, the PPIP may be an act of Kabuki theatre that moves us one step closer to knowing the full cost of Wall Street’s collective failure. That might then open the door to what has been an unpalatable prospect for regulators: the outright nationalisation of banks. In these circumstances, maybe everyone might at least agree with such an extreme outcome."
Finally a decent dish of economics and economists as having helped cause this crisis and now having nothing to say. Among other comments:
The scandal of modern economics is that these two false theories—rational expectations and the efficient market hypothesis—which are not only misleading but highly ideological, have become so dominant in academia (especially business schools), government and markets themselves. . . .
Why did such discredited theories flourish? Largely because they justified whatever outcomes the markets happened to decree—laissez-faire ideology, big salaries for top executives and billions in bonuses for traders. And, conveniently, these theories were regarded as the gold-standard by academic economists who won Nobel prizes.
Yes, on some level it's not that complicated.

Thursday, March 26, 2009

Land of the Living

Ha ha ha ho ho ho. no.

Finally I watched the second-to-last episode of Battlestar Galactia. It gets somewhere near Jump. Humanity spends much of the season finding new excuses to die. It's Hera, the human-cylon hybrid child - she's kidnapped, they have t go in to get her - SPOILER - lots of people has to die. The ships have to run with the blood of humans and cylons. Boomer gives Hera back to Athena and then Athena has to kill Boomer. The idiotic Baltar, the scientist who brought nuclear destruction to earth, is in good human-style elevated to the role of sage. The show ends with a deal between the old men. The ladies look on with the heads glowing with a heavenly light while Baltar babbles about the divine force greater than us all and dreams given to a chosen few - full on God-talk -
and Cavil, the Cylon leader (Dean Stockwell), stares at him with the contemptuous skepticism that Baltar utterly deserves. Guns Centurions guns guns guns strap on your gets. Get Your War On.

And then SPOILER Baltar the less stupid says something completely different and for once, intelligent.
What we call it doesn't matter. It's here. It exists. And our two destinies are intertwined in its force. . . . Good and evil -- we created those. You want to break the cycle. Break the cycle of death, birth, rebirth, destruction, escape, death. That's in our hands. In our hands only. It requires a leap of faith. Requires that we give in hope, not fear.
There's a trade. There's a deal.

The undead at the end:
"Everyone stand down."
"I'm as good as my word."
Cut, good. They didn't kill everybody. Hope.

Then they screwed it up with the finale.

The final five. SPOILER. The Chief gets knowledge of sin. Of course he has to kill the sinner. The Resurrection transfer is interrupted. The Cylons fall back into the pseudo-truth of the double cross. Guns blaze, people die, ship jumps. Jumps to (our) earth, and the human can start over.

Only they can't. The Prez dies. Kara makes herself disappear. The Chief vanishes to the northern isles. Everybody files into the African savanna of 150,000 years ago and the ships are flown by Sam the hybrid into the sun. The idea is supposed to be something about giving up science so we can have our souls. OK, but this is just about lying down in the green earth. Here the end of the series imagines nothing except a recurrence of the same - over 150 more millenia.

Pure death trip. Exhausted America. Taking a dive.

Some Good Things to Read

Treasury Sec. Tim Geithner called for reregulation of the funds and securities fabricators and other semi-banking institutions that were expressed deregulated by a Repub-Dims grasping combo back in the Clinton day and that blew up the economy. He said,
Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take. . . . We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.
Fighting words. No details. But right on! Let's party like it's 1999.

Or like the 2 tops guys at GDF Suez in France, who had a press conference to congratulate themselves on renouncing their stock options for a year, while Gangster-Prez Nicholas Sarko said stuff like "you can't make a donkey drink that isn't thirsty" so he's going to pass a law against options and bonuses for executives at companies supported by the public. He also said France hates success and the crisis has given us our freedom back, and more of the usual nonsense.

Meanwhile back in reality, the crisis shrank the US economy at an annualized 6.3% rate in the 4th quarter of 2008. And Jeffrey Sachs joined a growing number of mainstream economists hatin on the Geithner giveaway of taxpayer money to Wall Street

California voters are not as dumb as their leaders, and are ready to reject the transparently stupid Schwarzenegger idea of filling part of the budget deficit with securities backed by future lottery revenues. Happily, Arnold's popularity is down to 33% approval - which is 3 times higher than the approval rating of the state legislature.

  • Matt Taibbi's amazingly hostile but useful history of the A.I.G. scam. This is the US government as Hedge Fund, in which the taxpayers are increasingly indebted shareholders in a failing company.
  • Thomas Geoghegan's "“Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.” Read his interview on Democracy Now, then subscribe to Harpers to read the article (it's a good magazine). Geoghegan's crucial thesis: "the inability of people to raise their own wages and the incredible ease with which they could get credit instead helped create this flow of capital out of manufacturing and into finance."
  • Daniel Brook on payday lending - at 200-400%. On DN, Amy Goodman's intro points out, "In the early ’90s, there were fewer than 200 payday lending stores in the country. Today it’s a $40 billion industry with more than 22,000 stores. There are more payday lending stores than McDonald’s and Starbucks combined. As more Americans are living paycheck to paycheck [47%], the demand for payday loans is increasing.
There many great people like this on the beat, and there is therefore hope.

Wednesday, March 25, 2009

The Angry A.I.G. Banker

"Dear A.I.G I Quit!" My response: Good!

I had second thoughts after reading Jake DeSantis's letter resigning from A.I.G's infamous Financial Products unit. The part I recognize is the classic mid-level, middle-class anger of having severely overworked oneself and then getting the opposite of thanks. The combination of overwork and powerlessness blows up when you throw non-appreciation on it. It's detonating little pieces of organizations day after day all over the country, making their output lower and more painful for all. Nobody in charge seems to care.

But there is no good explanation for why Mr. D gets a $750,000 post-tax bonus. This is ten times the after-tax amount that a college professor might earn after twenty years on the job: she would work from age 50 to age 60 for the bonus Mr D got trying to detoxify his units CDO waste, and to little effect. He's the beneficiary of an absurd system that has sucked money out of every segment - higher ed, K-12, auto maunfacturing, agriculture -and into finance, segmenting the society and making it unable to function with decent equity or efficiency.

There is no truth in Mr D's sad lament: "I am blameless."

You quit, Mr D? Good! Don't forget to take the rest of A.I.G. with you.

Tuesday, March 24, 2009

Screwed by "Partnership" Again

The deep cultural issue with the plan-of-the-week for detoxing bank assets is the sad commentary it makes on the social attitudes of bankers overall. The Geithner plan is a "public-private partnership" that, like most PPPs, is skewed in favor of the private side. In this case, risk is 85-15 public-to-private, as not stated candidly by Treasury, but as calculated here and here, but the contracted profit split, if any, is 50-50.

Why the hell can't bankers rejoin society with a one-to-one risk-to-reward split? Every six-year-old on earth understands the concept of 50-50. Why not bankers? Why the double standard? Why always a bigger take for them than for everybody else? Why a bigger split for them NOW, when they have torpedoed the entire global economy and we could buy most of them for less than the bailout money they already have? Why now, when most of us want bankers to shut up, not to mention to cut these overpriced, grotesquely overpaid, unaffordable bankers out of the financial system, kind of like we should do with HMOs.

The answer is that unless their win is a lock, and their extra cut is guaranteed, the banks won't even show up.

The Obama administration is at least as eager to show the world's bankers that the US is "not Sweden" as they are to fix the economy. They believe that keeping bankers in charge is the prerequisite to fixing the economy. They know bankers, so they know this means that they have to give banks the farm they already foreclosed on once, after they rolled the farm's subprime mortgage into a toxic security they sold to your retirement fund.

Bankers wonder why they are being singled out. They have singled themselves out by demanding special deals before they are willing to roll out of bed - after they burned the house down, went next door, took over your bed, cashed in your insurance policy and asked you to sleep on your couch.

In the midst of this forlorn exchange of big economists about the plan, see Mark Thoma's comments about the privates getting " free insurance against downside risk." I wish he'd gone on to say that this is going to be an orgy of asset-flipping. People will own the toxic waste long enough to flip it to another sucker. If the Chinese government doesn't line up this time, who will? If there's no sucker in sight, no one will buy.

Why don't we just nationalize the banks? Answer 1: because Sweden did it once. Answer 2: because nationalizing banks would be cheap now. Citigroup's market capitalization is about $16.5 billion today. We've already given them three times that amount in bailout money ($50 billion). So we have to wait until nationalization will cost us everything, so the banks can have all the money.

Too cynical? Well a couple of trillion later, do we yet have a functioning banking system? How much more is it going to take?

All the dollars and cents you can make.

There's plenty of economic unworkability in this latest public-private skewed subsidy plan. If you need huge bribes of public money to get asset scavengers to buy toxic waste they won't touch with their own unsubsidized money, they why will these securities' "market value" float on their own?

But more deeply, at the cultural bottom, it will be impossible to fix an economic system that has been eroded by its own gross unfairness with another round of gross unfairness.

Sunday, March 22, 2009

Death-Spiral II

Warren Olney had another classic episode of To The Point last week, which I listened too while walking around Lyon's Fourviere hill on a sunny windy day, looking at the Saone far below, the orange, peach, pale pink buildings of Croix Rousse, the kids climbing nets in the the trees, and noticing how peacefully normal everything was and could underneath still actually be.

But Banker's normal. This Olney show is a must-listen. Each of the four guests is brutally frank, and the upshot is a portrait of a credit card industry
  1. whose profits rest on a portfolio of nasty tricks built into their relations with customers;
  2. that isn't actually profitable enough to have saved their underlying banks from massive government bailouts;
  3. that is cutting off the public even as it accepts public bailout money
  4. that is sending the economy into what guest Robert Manning calls a death-spiral - an 2000s boom that was floated on expanding credit and not higher wages loses its credit, forcing consumers to cut back, forcing production cuts, forcing layoffs, forcing further consumption cuts.
Death-trips. New equation for your T-shirt: Bankers = Death

And no that is not a call to do violence to bankers. That is a description of what bankers are doing to the economy and hence to us.

It would be nice if economists had some ideas about what to do. They are starting finally to admit that certain kinds of solidarity, sharing, and cooperation are normal - not all economic choice is maximization in the context of a prisoner's dilemma. But it would be good if their attempts to acknowledge injustice didn't end with chimpanzees throwing cucumbers.

At least we have Fr. Frank preaching hellfire. Same for Maureed Dowd, who's column today has an excellent Readers' Digest version of the banker's network inside the Obama administration - it explains a lot about the O-limits. Given how things are, hellfire is little more than financial knowledge itself. See Jon Stewart confronting Mad Money's Jim Cramer with Cramer's dishonest peddling of a fake ever-rising market that took Flat-Wage America on a ride the infamous CNBC's Santelli blamed FWA for. And note Stewart's theory of the Two Markets, which is his polite way of describing class war.

Saturday, March 21, 2009

Deeper and Dumber

The theme of the week was down, down, down, down.

Industrial production in the Euro-zone feel over 17% on an annualized basis in the month of January. In the U.S., mass layoffs continued to accelerate, and in California the unemployment rate hit 10.5% (12.5% for African Americans), up from 10.1% last month and 6.2% a year ago. The LA Times had a photo series on a Tent City under the powerlines outside of Sacramento that looked like a warm-up for the return of Dorothea Lange to the Depression camps of 1936. The number of unemployed in the UK hit the symbolically important 2 million level (6.5%), with predictions that it would soon be 3 million.

Down down we go, no end in fact in sight.

Then there were A.I.G's zombie hungers. These appear to have no end. The "insurance company" has an insatiable appetite for public bailout funds - at least $160 billion to date.

How much is $160 billion? It's enough to educate 18.4 million US children for one year, or about 1/3 of all schoolchildren in the United States.

AIG's Financial Products personnel, who bankrupted their company and everything else in sight, want their full bonuses ($165 million in the March round). How much is $165 million? It's enough to reverse this year's budget cut and enrollment freeze for the California State University, which has 450,000 students.

Congress was shocked, shocked, to hear that the bonuses would be paid and voted to tax them at bailed-out companies at 90%, even as Sen. Christopher Dodd of Connecticut, the state that had more hedge fund managers than it had dogs, said he inserted the bonus-protection clause at the request of the Obama administration.

Rembrandt came back to life for the occasion and painted this picture, entitled "House Finance Committee Covering its Meaty Behinds."

The economist Dean Baker wrote the best short overview of the AIG Saga. Everyone got mad as hell this week about at least one part of it- 85% in one poll were either "outraged" or "bothered" by the bonuses. Even some business journalists are mad as hell. Joe Nocera should be madder at A.I.G. than at Congress, but he gets at the main issue anyway:
There is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?
But there's also a fair amount of mental paralysis. NYT "Dealbook" columnist Andrew Ross Sorkin offered the most pathetic defense of paying the AIG bonuses. He wrote:
If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.
Gosh, I CAN imagine what it would be like. The business community would follow the rules established by the government as the duly-elected representatives of the public. The business "community" wouldn't be still trying to extort the public with money on the grounds that if we don't pay up everything will get worse.

The business community might, well, go back into BUSINESS. You know, go back to work, start making things again, designing and selling new goods and services, lending money, making old goods and services better. All the stuff that BUSINESS is supposed to do.

And the public wouldn't be standing around with its pants down watching Geithner et al. make payoffs with the Giant Government MasterCard.

Why isn't any of this happening? Why is Sorkin among others so dumb - by which I mean, unable to call for putting money to constructive uses rather than giving more away to the loons in finance?

A clue comes from what the pro-bonus people are actually defending. They are defending the entitlements of the financial community - the privileges of sheer position.

I say this because they are defending guaranteed bonuses - bonuses that used 2007 payouts to set a floor beneath 2008's (see Section 3.01(a) of the AIG contract). There wasn't actually a relation between the AIG bonus amount and actual financial results. Their was only the protection of a preestablished superior income position. This is feudalism, not "performance."

The same goes for the much bigger issue of the tens of billions for a 100% bailout of AIG's clients, as Nocera points out. Dean Baker's analysis (linked above) is particularly helpful and should be read by all. He asks:
1) Did the banks hold the underlying assets, or just the CDS?
2) Did the government have to buy back the underlying assets from the banks, or could it have waited to see what happened?
3) Could the support for the banks have been done directly, including some quid pro quo, without having AIG as an intermediary?
Baker's answers are no, no, and yes. These answers (you have to read the piece) lead Baker to observe this:
When the government lent hundreds of billions of dollars to the banks through TARP, it got preferred shares of stock in return, in addition to placing conditions on the banks’ conduct. By contrast, the government received absolutely nothing for the tens of billions of dollars that it passed on to the banks through AIG. It may have been desirable to ensure that AIG’s defaults did not lead to the collapse of the major banks that were its counterparties, but this could have been accomplished by directly giving these banks capital through TARP or some equivalent mechanism. . . .
Baker suggests that the government did not do this because it wanted "to preserve the international reputation of the U.S. financial industry."

This is probably right, but I would put it slightly differently: what Bernake, Geithner, et al. want to do is to preserve the international position of the U.S. financial industry. Their actions make sense (the 100% restoration prior to contract maturation dates, the propping up of AIG as the most expensive intermediary in world history, etc.) only as an attempt to keep the institutions in charge of the international finance system. That means in charge of their international relationships. It also means in charge of all economic decision-making in the U.S. This is a complete shut-out for the public - for public education about finance (see Nocera), and for a shift in the balance of decision rights from the financial industry to the public.

Obama-Geithner mean for the public to be shut out. Geithner himself told the NYT that "“It’s very important that we don’t look like there’s any intent of taking over or managing banks." Banks have to stay entirely in charge.

I'm afraid that the sovereignty of finance over the economy is more important to the Fed and Treasury than is the recovery of the economy itself.

Monday, March 16, 2009

A.I.G Client List

AIG did in fact release the list of clients who received large chunks of its government bailout money between September and December 2008. Leading the list: Goldman Sachs at nearly $13 billion: their former or current employees were involved in arranging the AIG bailout. Merrill Lynch got nearly $7 b and Bank of America over 5, meaning their now-combined entity absorbed over $12 billion. And Societe Generale of France and Deutsch Bank of Germany each recieved nearly $12 bllion, Barclay's $8.5 billion, and UBS of Switzerland another $5 bil. 70% of the total went to GS and then the two big French and German banks.

Sunday, March 15, 2009

Generation of Swine

In case you forgot what Hunter S. Thompson meant by swine back in the day, check out A.I.G. taking $180 billion of public money and then insisting it must pay $165 million in NEW bonuses (on top of $121 million already paid out this year), and pay them to the SAME GUYS that blew AIG up with credit default swaps among other things.

This is not zero accountability, it's inverse accountability: the worse we do to you, the more you pay to us.

It's gangsterism, on top of the extortion AIG has already exterted in saying if you don't give us 180 billion while letting us still run ourselves, we'll blow up the entire world financial system.

Bonus contracts that are still enforceable today must have said - you pay us even if our current gains create losses later, even if they put the whole company in the red, even if hell freezes over and the government gives us $180 billion, even if the US taxpayers gives us all the money in the United States. You still pay us.

Plague of locusts, rain of frogs. And Swine.

Supposedly the AIG CEO has pledged to reduce these "retention payments" by 30%.

The only option of course is to publish AIG's client list and then let it die.

Saturday, March 14, 2009

No So Fast Father

Fr. Frank declares the culture wars dead and American religious fundamentalism in decline. Well it's true for some. But anti-gay-marriage is going strong, Limbaugh is still strong enough to fight for the entire Republican party. The real goal of the culture wars was the destruction of the social majority's economic stability and their sense of political authority.

The war has abundantly succeeded. The middle classes, broadly speaking, spent 20 years shifting attention from work to investment, led their wages stay flat (the bottom 80-85%) while their focused on stock and housing prices, saw incomes for the top 1% triple and thought that was OK because their investments were booming too.

The past six months has been not so much a downturn as a liquidation. You saw yesterday's 10 year Dow Jones chart. If you bought and held a DJ index like all the gurus back the were saying you should ("safe as savings"), in 2009 you'd be . . .back to 1997. Another examples is the Petroleum Fund that Norway has successfully used to store the saving from their windfall oil profits, and to use it for social development and future needs. In the past few months, the fund has lost ten years of interest gains.

The culture wars attacked every kind of activism in the face of market forces - racial civil rights, queer activism, but also union pension fund pools (remember Gov. Schwarzenengger's attempt to convert the California state employees fund into a 401(k) through a special election in 2005)? We stuck between worlds - between Reaganism and some "new deal." The constructive use of government, the putting of socially-defined needs ahead of short-term market pricing, the steering of research funds towards specific goals: at each one of these efforts, we need to expect that the cultural guns will come up one more time.

Buffett: Get Your Story Straight!

While you're reviewing the events of the week, and find the not-so-surprising revelation from Grandmaster Buffett that the economy has "fallen off a cliff," remember that Grandmaster B was telling you to Buy Buy Buy in mid-October.

If you followed his advice at Dow Oct 20 2008, look what would have happened to you.

That's right - you'd have fallen off a cliff, with a nice shove from G'master Buffett.

My Capitalist Pals are much more levelheaded than the markets: "The notion that a single bank - even if it is Citigroup Inc. (C) - could single-handedly cause this kind of an upside rout on a leaked note from its embattled CEO is absurd." At the end of the 38% one-day boom, Citi was up to . . . $1.45 a share! - still the world's most famous penny stock.

About Bernie Madoff - the guilty plea is a cover story - noted indirectly in the NYT coverage. We don't know anything yet.

The best financial mourning line of the week comes from John Authers at the FT March 10:

"Perhaps the greatest reason for hope at present is that almost all hope seems to have been lost."

Monday, March 09, 2009

Burning Down the House

So so glad big pharma isn't hurting for money. Merck can spend $41.1 bil to buy other people's research rather than doing some themselves. Patents expiring - it's ok, we're rich, go buy some more. After all, we're funded by the US health care system!

Gerry pointed me to a contrasting document about Boeing's layoffs. Boeing's CEO wrote his employees as follows:
More than a few of you have written to me asking whether we could avoid layoffs altogether by not paying incentive awards this year or by freezing wages across the board," McNerney noted.

He said such actions would preserve some cash during the year and lessen the immediate impact on people, but "our judgment (and one shared by most major companies) is that they would put us at a competitive disadvantage."

Meaning in short that the layoffs are not forced by the downturn, but are an executive choice.

EVERYBODY should listen to this episode of Warren Olney's KCRW show "To the Point." "Could AIG Wreck the Economy?" Well yes, it already has. In this show you will hear:
  • Detroit News columnist Daniel Howes say the world auto industry is about to line up for government money.
  • A WSJ reporter (Michael Crittenden) say that in Senate hearings the Fed representative say that the identity of the companies getting tens of billions of public dollars must remain secret, to preserve the world banking system.
  • A former bank examiner, Mark Williams, agree that secrecy is essential because the public loans are actually permanently gone, and learning their destinations will destroy confidence.
  • A Venture Capitalist, Peter Cohan, attack the secrecy position in the name of democracy and market confidence.
  • Felix Salmon, a financial blogger, say the secrecy is protecting the fact that so much money went to AIG's clients in a) Europe and at b) Goldman Sachs, whose personnel were directly involved in designing the bailouts.
  • Everyone agree that we don't really know anything about where the money is or how much it's going to take or why it's costing so much.
It's three-hund-red-sixty-five-degrees.

In other words,

Saturday, March 07, 2009

Culture of Dive Bombing

Job losses in the graph look like the World War II movie where the Zero dives full-speed straight into the sea. This time, Zeros-R-Us.

There have been four major modern explanations for mass layoffs, and the accompanying article mixes together the last two. Mass layoffs:

1. result from acts of God or nature. There is nothing to do but wait and pray.

2. express the superior power of the capitalist class, which benefits itself by liquidating labor when it feels the need.

3. results from natural obscelencence, capitalism's creative destruction, and markets' natural genius for outing the old and lofting the new.

4. are an optional piece of business strategy. Business for Dummies.

(4) is a nice version of Marx's class struggle (2). This piece says, for example, "Layoffs are multiplying because of dysfunction in the financial system, which is prompting even healthy companies to shed workers and shut down operations out of concern they may soon lose access to credit."

In other words, even while they are still making money, companies choose to protect their credit rather than their workers.

The idea that this is just fine, that it is legal, ethical, and logical to fire employees can be fired as a precautionary measure, was carefully developed by decades of conservative activism and argument.

A preferred argument is (3), which says firing is simply an expression of natural transitioning to a higher order. A typical manifestation, again from this article:
“The decimation of employment in legacy American brands such as General Motors is a trend that’s likely to continue,” said Robert E. Hall, an economist at Stanford University’s Hoover Institution. “We have to stimulate the economy to create jobs in other areas.”
Oh, so the US isn't going to do transportation anymore?

(3) is the sum of all wisdom of the field we know as economics. This field has been a disaster, and someday there will be . . . the Corporate Inquisition.

In the meantime, journalists need to hear that (4) is not actually justitifed by (3) - there's nothing natural about mass layoffs as your one solution to economic problems, and to your own deep fears.

Friday, March 06, 2009

Answers and Insults

After you look at the data on another terrible month for US jobs, ponder one of the best compressed answers I've seen to the question of "what should we do," put to Robert Weissman of the Multinational Monitor. Then, after you've read the quotation below, look at Jon Stewart's great rip of CNBC's history of booster financial pseudo-journalism.

AMY GOODMAN: What are the recommendations that you make, Rob Weissman?
ROBERT WEISSMAN: Well, the first thing is that all these deregulatory moves ought to be repealed. But beyond that, we think it’s time for a big picture look at this stuff, and we’re worried that, although Wall Street is obviously on its heels right now, they are not—they are not absent from Washington. This lobbying activity is ongoing, including on a variety of small things being debated in Congress today. But in the big picture, we think there has to—we can’t just get mired down in some of these details.
The financial sector itself ought to be much smaller. In the preceding three or four years, the financial sector was taking about a third of all corporate profits in the United States. It was way too big relative to the rest of the economy. It shouldn’t be more than ten percent. So it should be shrunk down.
There is a range of activities that ought to be prohibited altogether. A lot of these exotic financial derivatives, which serve no social purpose, should be just banned. Any new instruments that are put on the market ought to be required to get pre-approval from government regulators, just the way a new pharmaceutical product has to get pre-approval, be shown to be safe and serve some social benefit before it’s allowed on the market.
We ought to erect again regulatory walls and barriers that prohibit institutions from doing different kinds of things. Banks ought not to be engaged in these exotic derivatives. They should not be putting taxpayer-insured money at risk in this kind of stuff. Consumers need to be directly empowered to organize themselves, so that they are a counterbalance to the influence of the commercial financial sector.
And I think we ought to have a financial transactions tax, a speculation tax, so we slow down the level of speculative activity. That kind of tax would be highly progressive, because it’s only rich people who are engaged in mass transactions on Wall Street. It would bring in a lot of money, have major social benefits.
And finally, I think if you look back over what happened in the last four or five years or the last decade, it’s clear that a huge amount of money was made on Wall Street, but the firms themselves are now in complete crisis. They’re needing the taxpayer money. Some of them are going bankrupt. They’re being merged out of existence. So the companies themselves destroyed themselves.
Why did they do that? What were the incentives that led them to take such crazy risks that they actually destroyed themselves? And it’s very hard to avoid looking at the way individual people were compensated. They got massive bonuses, sometimes five, ten, twenty times their regular compensation level, based on what they did in the previous year. So I think we have to have compensation caps, for sure, on executives and others. But even more importantly, the incentive mechanisms can’t be that they get paid on how they did that year, when they can manipulate it or they can benefit from a bubble. It has to be, any compensation incentives that are going to be in the form of bonuses have to be tracked to a very long-term performance by these companies.

Wednesday, March 04, 2009

All the Guilty Parties

To distract yourself from watching everything melt like the wicked witch, check out a nice write-up of the Credit Default Swap market and its tie to the AIG disaster by one of my capitalist pals. AIG execs, traders, the math guys, the rating agencies - it's a nice list, and in the process he explains how CDSs work.

Monday, March 02, 2009

The Black Hole that Swallowed All the Money

It has a name - A.I.G. Supposedly an insurance company, it announcd a $61.7 billion loss last quarter. That is half the GDP of New Zealand, and three times that of Iceland. Over the year, it lost almost $100 billion, or approximately one Peru or Kuwait. Why don't we measure US corporate losses in terms of their country equivalent? "GM lost One Kenya in 2008" (or $30 billion).

The US response was to give AIG even more money. The total is over $160 billion. This new round will disappear just as fast as the last batch.

Where does all the money go?

The CNBC guy says, "when do we get to the end of this"?

As I write the Dow is down 3.25% for the day.

Sunday, March 01, 2009

The Good Obama

Obama's speech to Congress last week got high political grades and lower economic ones. Even Ronald Reagan's Treasury secretary is worried about zombie banks, created by an aversion to even temporary nationalizaton that would consist of "a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road," which "could truly be historic folly." My capitalist pals make some good points about the weaknesses of his plan. And everyone seems worried about whether the current Treasury secretary Tim Geithner is right for the job.

It turns out that all those mortgage notes that were transferred in the securitization processes - well often they weren't actually transferred. Gretchen Morgenson has a good piece on how even the basic paperwork mechanisms broke down as the notes were wrapped like unfinished sausage and sold and resold:
On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.

With the sale set aside, Ms. Fernandez remains in the home. “We believe this loan was never assigned,” said Ray Garcia, the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.
The NYT has been covering white-collars laid-off in their 50s and tossed aside.

Meanwhile, Obama's good political moments are best when taken out of context of the mandatory triumphal tone.
  • The answers to our problems don't lie beyond our reach. They exist in our laboratories and our universities, in our fields and our factories, in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth.
There's a nice inclusion of all walks of society, I thought. And then Obama said:
  • The fact is, our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank.

    We have known for decades that our survival depends on finding new sources of energy, yet we import more oil today than ever before.

    The cost of health care eats up more and more of our savings each year, yet we keep delaying reform.

    Our children will compete for jobs in a global economy that too many of our schools do not prepare them for.

    And though all of these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before.

    In other words, we have lived through an era where too often short-term gains were prized over long-term prosperity, where we failed to look beyond the next payment, the next quarter, or the next election.

    A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future.
This was as direct attack on the Reagan- Clinton-Bush era as anyone could expect and on its most important feature - its rampant antiegalitarianism.

And then there was his explicit invocation of the destructive positioning of Wall Street and business leadership.
  • Now, I understand that, on any given day, Wall Street may be more comforted by an approach that gives bank bailouts with no strings attached and that holds nobody accountable for their reckless decisions, but such an approach won't solve the problem.
    And our goal is to quicken the day when we restart lending to the American people and American business and end this crisis once and for all. And I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer.

    This time -- this time, CEOs won't be able to use taxpayer money to pad their paychecks, or buy fancy drapes, or disappear on a private jet. Those days are over.
If those days are over, what are the new days? Money needs to arrive in employement offices and retraining centers and schools and colleges and businesses this week.