Monday, September 29, 2008

"enjoy every sandwich"

This morning, I received news that my good friend of 30 years, Keith Grinstein, had died suddenly and unexpectedly over the weekend. He was 48. I got the news by email and kept reading the email over and over again trying to figure out how I was mis-reading it. At some point I figured out reading it again wouldn’t change it. I was, and am, heartbroken.

I first met Keith when he was in high school and I was doing a summer internship with his father’s law firm. As a west coast kid, I was enthusiastic about my first year of law school back east. His father, a Yale alumnus, wanted me to share my enthusiasm for east coast schooling with his son, who at the time was trying to decide between Yale and Stanford. (I must have performed my assignment well because Keith went to Yale.) Later, for a couple of years in the ‘80’s we both lived in Manhattan Beach and traveled the world working together at the air cargo carrier, Flying Tigers. And, again, in the 90’s we both ended up working in Seattle for Craig McCaw. In recent years, I’ve maintained an office with his investment partnership, Second Avenue Partners.

Anyone who knew Keith would almost certainly recall his booming laughter as his most memorable trait. I was always envious of it. It was such a great laugh you couldn’t help but laugh with him. Our time together was inevitably spent trading wisecracks and other “witty repartee” about business, politics, friends and life. We probably got carried away at times (much to the distress of others in our company). But we loved it.

In all the years I knew him, he was never happier and sweeter than in the last few years since meeting his wife, Claire. His love for Claire magnified all his best qualities.

There were a lot of things I wanted to write today, but instead spent the day pretty much just taking stock of all the things I really appreciate in life. Gemma and I reaffirmed our love several times. I had a great cheeseburger and a couple of pints of ale with my good friend from childhood, Joseph Roberts. And then Gemma and I read to our daughters before they went to bed.

Lately, Keith had become just as obsessive as I am about the upcoming election. He was a lifelong Democrat. Like me, he had not been particularly political in the ‘90’s. (Peace and prosperity can lull you into contentment.) But that had changed over the Bush years. We typically exchanged a couple of emails a day over Obama’s prospects or other political gossip. He always sent a reply to my posts. He would have been bummed to miss out on Obama’s election and inauguration.

So, because I’m still somewhat in denial, I will just consider my future blog posts to be a continuation of my decades long dialogue with Keith and especially our recent shared obsession with Obama and the election. No doubt it would all be a lot more amusing if it were said in conversation with Keith. Even if it wasn’t, his laugh would have made me think it was.

Meanwhile, enjoy every sandwich.

Sunday, September 28, 2008

more palin

As one person commented on the Palin-Couric interview::
I’m still in shock over how terrible the Palin/Couric interview was. “Train wreck” is being charitable – it was more like a train derailing on a bridge, tumbling a thousand feet into a canyon and landing on a pile of old dynamite and gas drums. And then a jumbo jet crashed into the flaming wreckage. Followed by an earthquake that caused the whole mess to slide off a cliff into the sea, where the few miraculous survivors were eaten by sharks.

With that introduction, here is the latest Saturday Night Live take on the Palin interview:

The incredible thing is that the last bit on the economy was just Tina Fey reenacting the actual transcript of the Palin interview almost verbatim. Can you identify the actual Palin from the Tina Palin from the these two quotes? (Answer at the bottom of this post)

PALIN #1: "Like every American I'm speaking with, we're ill about this. We're saying, 'Hey, why bail out Fanny and Freddie and not me?' But ultimately what the bailout does is, help those that are concerned about the healthcare reform that is needed to help shore up our economy to's gotta be all about job creation, too. Also, too, shoring up our economy and putting Fannie and Freddy back on the right track and so healthcare reform and reducing taxes and reigning in spending...'cause Barack Obama, y'know...has got to accompany tax reductions and tax relief for Americans, also, having a dollar value meal at restaurants. That's gonna help. But one in five jobs being created today under the umbrella of job creation. That, you know...Also..."

PALIN #2: That’s why I say, I like every American I’m speaking with were ill about this position that we have been put in where it is the tax payers looking to bailout. But ultimately, what the bailout does is help those who are concerned about the health care reform that is needed to help shore up the economy– Helping the — Oh, it’s got to be about job creation too. Shoring up our economy and putting it back on the right track. So health care reform and reducing taxes and reining in spending has got to accompany tax reductions and tax relief for Americas. And trade we’ve got to see trade as opportunity, not as a competitive scary thing. But 1 in 5 jobs being created in the trade sector today. We’ve got to look at that as more opportunity. All those things under the umbrella of job creation. This bailout is a part of that.

While we're dealing with Palin, check out the trailer for the new film "Head of Skate":

Here is actual footage of Palin the beauty queen contestant in a Miss Alaska swimsuit competition:

Finally, here is the normally circumspect and soft-spoken Fareed Zakaria (editor of Newsweek International):

Will someone please put Sarah Palin out of her agony? Is it too much to ask that she come to realize that she wants, in that wonderful phrase in American politics, "to spend more time with her family"? …

… Some commentators, like CNN's Campbell Brown, have argued that it's sexist to keep Sarah Palin under wraps, as if she were a delicate flower who might wilt under
the bright lights of the modern media. But the more Palin talks, the more we see that it may not be sexism but common sense that's causing the McCain campaign to treat her like a time bomb.

Can we now admit the obvious? Sarah Palin is utterly unqualified to be vice president. She is a feisty, charismatic politician who has done some good things in Alaska. But she has never spent a day thinking about any important national or international issue, and this is a hell of a time to start. The next administration is going to face a set of challenges unlike any in recent memory. There is an ongoing military operation in Iraq that still costs $10 billion a month, a war against the Taliban in Afghanistan and Pakistan that is not going well and is not easily fixed. Iran, Russia and Venezuela present tough strategic challenges.

Domestically, the bailout and reform of the financial industry will take years and hundreds of billions of dollars. Health-care costs, unless curtailed, will bankrupt the
federal government. Social Security, immigration, collapsing infrastructure and
education are all going to get much worse if they are not handled soon.

And the American government is stretched to the limit. Between the Bush tax cuts,
homeland-security needs, Iraq, Afghanistan and the bailout, the budget is looking bleak. Plus, within a few years, the retirement of the baby boomers begins with its massive and rising costs (in the trillions).

Obviously these are very serious challenges and constraints. In these times, for John McCain to have chosen this person to be his running mate is fundamentally irresponsible. McCain says that he always puts country first. In this important case, it is simply not true.

[Answer: The actual Palin interview was #2.]

Friday, September 26, 2008

the bailout

[Click on image to enlarge.]

Visit This Modern World and the Salon cartoon archive.

Everything about this bailout sucks. Like most people, I’m pissed off.

But, on balance, I support it. Barely. (“It” being something along the lines of the bill Chris Dodd and Barney Frank have worked out, not what Paulson originally proposed.)

WTF? How could I support this monstrosity? Well, “support” might be too strong a word. Somewhere between "support" and “on the fence” might be more like it.

Let’s get a few things straight first.

I don’t trust anything this administration does or says. The likelihood that I would agree with the Bush administration on any matter of policy is less than random. Much, much less. Indeed, it would be an extraordinary coincidence were I to agree with George Bush about anything.

The manner in which this proposal was sprung on Congress and the American people would cause any sane person to assume it should be rejected out of hand without any further consideration. On the Friday a week before Congress is about to adjourn for a presidential election we’re told a massive bailout for Wall Street must be passed right now—after the administration has been telling us for months that everything is OK. On top of that, a White House spokesman
insisted earlier this week that the Poulson plan was not slapped together at the last minute but “had been drawn up as a contingency over previous months and weeks by administration officials.”

We’ve seen this picture before. In the immediate aftermath of 9-11 we had the monstrous “USA PATRIOT Act” foisted on an obedient Congress eager to demonstrate bipartisanship and national unity. That 342-page law enforcement wish list, which had obviously been in the works long before 9-11, was passed with virtually no debate. (It passed 98-1 in the Senate with only Feingold voting against it. It passed 357-66 in the House.)

Despite that bipartisan unity, Rove announced that the Republicans would use the “War on Terror” as a wedge issue for partisan gain in the 2002 midterm elections, which they did -- ruthlessly. In that spirit, in October of 2002, the Bush administration forced a vote on the “Authorization for Use of Force” in Iraq. After all, we wouldn’t want national unity at a time of war when there is partisan advantage to be gained. Republicans controlled Congress, but Democrats cowered in the face of accusations of weakness and insufficient patriotism. We know how that one turned out.

And, again, before the 2006 election, George Bush insisted to the American people that everything was going great in Iraq and we were “winning” – only to fire Donald Rumsfeld the day after the election.

Now, again, a national crisis demands immediate action before an election with no time for deliberation or consideration of alternatives. We have to trust them and act immediately. With no review of subsequent Treasury actions by any other agency or court of law and no Congressional oversight. A two and a half page grant of virtually unlimited discretion.

When Congressional Democrats insisted that any bailout plan include limits on executive compensation at participating firms and that the federal government get equity stakes in those firms,
we were told that those things would be bad. Insisting on an equity stake, “would limit participation in the program. Only failing banks would be willing to give the government stock in exchange for buying up their bad assets.” Huh??!! Why would we want to help banks that are not failing? Don’t take my word for it. Here is a direct quote from a White House spokesman:

With respect to executive pay, again, I'm not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them.

We “have to be careful how we deal with them”? How about NOT dealing with them? If they are “not weak or troubled” and are “very successful” then obviously let them fend for themselves. On the other hand, if they really need a bailout, then they can take whatever Congress decides to give them, including restrictions on executive compensation and an equity stake for the taxpayers putting up the money.

If we are going to socialize the downside, we need to socialize the upside, too.

Really, the logic of the bailout, as proposed by Paulson, has been puzzling from the start. As
I’ve noted before, Paul Krugman has done a good job critiquing that logic. I won’t repeat it here.

But Krugman now seems to be
coming around
to supporting the bailout as it has evolved through negotiations with Congress:

Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash.

It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can
let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.

So the grown-up thing is to do something to rescue the financial system. …

[T]he bipartisan “agreement on principles” released on Thursday looks a lot better than the original Paulson plan. In fact, it puts Mr. Paulson himself under much-needed adult supervision, calling for an oversight board “with cease and desist authority.” It also limits Mr. Paulson’s allowance: he only (only!) gets to use $250 billion right away.

Meanwhile, the agreement calls for limits on executive pay at firms that get
federal money. Most important, it “requires that any transaction include equity

As I’ve said before, I’m highly skeptical of anything I can’t understand at least at a high level of abstraction. I still don’t understand why Paulson and Bernanke proposed to buy troubled assets rather than inject equity into troubled financial institutions. Eventually, in Congressional testimony, Paulson suggested that the goal is “price discovery.” As I understand it, the argument is that there is insufficient liquidity in the markets to establish a true “market price” for a large volume of trouble assets. The Treasury, by buying up some of those assets, would establish a market price, everyone can mark their assets to market, confidence will be restored, financial institutions will trust again in the solvency of their counterparties, and everyone will start lending and borrowing again. That seems like quite a leap of faith to me.

Krugman shares that skepticism:

The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital. When he finally deigned to offer an explanation of his plan, Mr. Paulson argued that he could solve this problem through “price discovery” — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem. Never say never, I guess — but you don’t want to bet $700 billion on wishful thinking.

The odds are, instead, that the U.S. government will end up having to do what governments always do in financial crises: use taxpayers’ money to pump capital into the financial system. Under the original Paulson plan, the Treasury would probably
have done this by buying toxic waste for much more than it was worth — and gotten nothing in return. What taxpayers should get is what people who provide capital are entitled to: a share in ownership. And that’s what the equity sharing is about.

The Congressional plan, then, looks a lot better — a lot more adult — than the Paulson plan did. That said, it’s very short on detail, and the details are crucial. What prices will taxpayers pay to take over some of that toxic waste? How much equity will they get in return? Those numbers will make all the difference.

I still believe there are better approaches than the one on the table now. For example, James Galbraith laid out a
good alternative in a Washington Post op-ed yesterday. Simply put, Galbraith would just beef up the FDIC, raise the limits on the size of accounts that are insured by FDIC, and leave things to well-established procedures for dealing with troubled banks. This approach has been made more practical by the fact that all five major investment banks have now disappeared or been morphed into regular banks. Makes sense to me.

I’m sure there are other approaches that also make sense. But, alas, the option on the table seems to be the Dodd/Frank modification of the Paulson proposal.

How important is it that we act immediately? Again, I am skeptical. I would rather wait 40 days until after the election and review matters then. Different approaches could be developed and negotiated in the meantime so the new president-elect has some more say in the matter. Tragically, the sums involved, after squandering a trillion or two on the Iraq war, pretty much ensure that any other national priority will be starved of funding for a generation or more. And this is the most radical intervention in the financial markets since the Great Depression. The process could certainly benefit from greater deliberation.

This is where one has to take a leap of faith, one way or the other. Given the stakes involved, I’d rather wait and see. But if we get it wrong, and there is a real need to act immediately, we could face a financial meltdown that would hurt everyone, not just those who deserve it. It is a sad state of affairs when the insistence on the need for urgency expressed by president of the United States is actually a strong factor against taking urgent action. But there are people I trust in this process.
First and foremost, I trust Warren Buffett. He has already committed to giving his vast wealth to the Gates Foundation (without even his name on some venerable institution as his legacy). He is practical, lives relatively simply in Omaha, and is an Obama supporter. He is also the wisest counsel on financial matters I know and has been warning against exactly this scenario for years. He has called this an “economic Pearl Harbor.” That carries a lot of weight with me.

The world’s best bond manager, Bill Gross, in a Washington Post
op-ed on Wednesday, also expressed his view that this plan is needed. His lack of self-interest is much less apparent than with Buffett, but I have been reading his monthly Outlook pieces for years and I trust his values and judgment. He knows what he is talking about. (He is also an Obama supporter.)

Yesterday, I heard a long radio interview with Yale economist Robert Shiller who predicted both the dot-com meltdown (in his book “Irrational Exuberance”) and the current crisis. He, too, expressed the need for a bailout (and explictly endorses the term “bailout” as opposed to any other less inflammatory euphemisms). And, of course, I have previously cited Krugman’s reluctant path toward acceptance of some plan along the lines of the one currently on the table.

I think we are as a nation fortunate to have Ben Bernanke at the helm at the Fed right now. He is probably the pre-eminent academic scholar on the subject of the Great Depression and credit crises and he has had enough experience in the world of actual policy, both at the White House and at the Fed, to temper his academic background. Indeed, he is probably the only economist to survive contact with the Bush administration with his professional reputation and integrity intact. I hate to even think where we would be with Greenspan (perhaps the greatest culprit in this whole disaster) and John Snow (a political hack) at the helm right now. I am ambivalent about Paulson. He is unquestionably smart and knows this stuff. But he hasn’t shown particularly good judgment as Treasury secretary and his Wall Street background is a mixed blessing. We certainly need someone in charge right now who knows the financial markets intimately. But I fear his lifelong Wall Street affiliation creates too strong an institutional bias toward the needs of the financial community. In short, his experience is valuable but suspect.

Similarly, Chris Dodd is smart and experienced. In general, I like him, but he is too close to big financial interests for me to follow his lead without question. Barney Frank, on the other hand, I trust and I’m glad he is taking the lead in these negotiations in Congress.

So when I look for guidance from those I trust and respect on these matters, I (very reluctantly) come down on the side of accepting the need for quick action. I absolutely understand those who disagree – and disagree vehemently. Emotionally, that is where I am, too. How quick do we have to act? The failure of Washington Mutual yesterday – the biggest bank failure in US history – nudged me further toward accepting the need for action sooner rather than later.

To be clear, while the need for liquidity and confidence in the markets is the immediate crisis, I don’t believe liquidity and confidence are at the root of the problem. Fundamentally, the problem is one of valuation and solvency.
As I have written before, we have perhaps trillions of dollars in bad “assets” in the system that are going to have to be written down or written off over time. As that happens, a lot of firms and individuals are going to find that they are insolvent. And across every sector of our economy, we have a massive debt problem. The process of de-leveraging, assuming we get out of this crisis intact, is going to be a decades-long process and is going to involve a lot of pain. I fear the only way that de-leveraging is going to occur in an orderly manner is through a slow process of inflating our way out of it. And it will be a HUGE drag on growth in this country (and the world). The result is likely to be some form of stagflation (or, at the very least, stagnant economic growth).

This is all tragic. As I wrote above, the trillions squandered on this crisis and the Iraq war, as well as the trillions in debt resulting from Bush’s tax cuts, will ensure that every other national priority is starved of funds for a generation or more. President Obama will inherit a financial system in ruins, two wars, and massive debt, while also facing the urgent need to address the climate crisis, a dysfunctional health care “system” and a large number of other difficult and urgent needs. He will need our strong support, even if he stumbles at times along the way. Just as in Iraq, where we face no good options, the same can be said of the economy and many other challenges. As in this current crisis, there will be lot of choosing among bad options.

Finally, any bailout will result in some people and some firms being rescued from their own greed and stupidity. There will be bad actors – a lot of bad actors – who deserve to be punished harshly by the market who will instead benefit from the need to keep the economy functioning. But I learned a long time ago that, in life, you sometimes have to simply accept imperfect justice if the desire to see bad people and bad deeds punished would inflict greater harm on others who don’t deserve it. Or the flip side: Sometimes in pursuing a good thing for good people, bad people will also benefit. Perfect justice is not always attainable and sometimes attempts to pursue it only result in more harm or lost opportunities. This may be one of those instances where the actions required to prevent harm to many undeserving people with have the unavoidable “externality” of benefiting bad actors, too. I don’t like it. But I also understand that sometimes it is unavoidable except at a greater cost.

Bush deserves to preside over the full consequences of his disastrous policies. But the rest of us don’t.

Thursday, September 25, 2008

drama queen

On Tuesday, conservative columnist George Will had this to say about John McCain:

Under the pressure of the financial crisis, one presidential candidate is behaving like a flustered rookie playing in a league too high. It is not Barack Obama.

… For McCain, politics is always operatic, pitting people who agree with him against those who are "corrupt" or "betray the public's trust," two categories that seem to be exhaustive -- there are no other people.

Conservatives who insist that electing McCain is crucial usually start, and increasingly end, by saying he would make excellent judicial selections. But the more one sees of his impulsive, intensely personal reactions to people and events, the less confidence one has that he would select judges by calm reflection and clear principles, having neither patience nor aptitude for either.

It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?

I have previously documented some of McCain’s impulsive and inconsistent reactions to the financial crisis (“defeat evil! end greed!”).
McCain’s “dismaying temperament” under the pressure of events was on display yet again yesterday and today as he sought to make the financial crisis ALL ABOUT HIM.

Yesterday, McCain announced that he was “suspending his campaign” (although he continues to run attack ads in key battleground states, his campaign surrogates continue to fill the airwaves, his fundraising operations and campaign offices are all still up and operational, and he spent the day with his campaign manager –
so it is not really clear what he has “suspended”). He also proposed that tomorrow’s debate with Obama be postponed so that they could together solve the country’s financial crisis (more on that below). He tried to portray all of this as rising about partisan politics, but it was anything but. By pulling this stunt unilaterally rather than in concert with Obama, McCain was seeking to shift the agenda from a focus on the financial mess created by Republican antipathy to regulation to McCain’s own HEROIC LEADERSHIP in forging a political consensus behind a bailout plan. Bush became an accomplice in McCain’s ploy by inviting him and Obama to the White House today – an offer Obama, of course, couldn’t refuse.

Events began yesterday with Obama calling McCain at 8:30 in the morning to propose that they issue a joint statement on principles for any financial bailout plan. This was done privately so they could work something out and announce it together. Instead, McCain huddled with his advisors and made it … ALL ABOUT HIM (of course). In other words, Obama was attempting to privately orchestrate a bipartisan response, but McCain chose to unilaterally trumpet his own HEROIC LEADERSHIP. McCain is the White Knight who will ride into Washington and personally save the country from economic ruin. All while being “above politics” and “bipartisan”, of course.

The man is a megalomaniac. But there was also a shrewd calculation. McCain’s only hope of winning this election has been to distract from the issues – where voters prefer Obama by overwhelming margins – to a renewed culture war and a “small ball” focus on distractions like sex education and “lipstick on a pig.” (Palin is just one big bundle of distractions and the lightening rod for the culture war. No one serious about governance would even think of putting her in a position to become the most powerful person on the planet.) Apart from attacks on Obama, McCain’s campaign is built entirely on a narrative of his own HEROIC LEADERSHIP.

Of course, McCain cannot contribute substantively to the negotiation of the bailout plan. McCain does not have any particular expertise in economic or financial matters, nor has he ever even shown any particular interest in them. McCain is not on the Senate Finance Committee which, along with the House Financial Services Committee, is negotiating the bailout deal with Treasury secretary Paulson. The chairman of the Senate committee, Chris Dodd, said that he had not heard a peep from McCain all week (while Obama had been in contact with him throughout the week as well as with Paulson and Fed chairman Bernanke).

McCain is also not among the leadership of his own party in Congress. The actual leader of the Senate, Harry Reid, had
this to say about McCain’s stunt:

This is a critical time for our country. While I appreciate that both candidates have signaled their willingness to help, Congress and the Administration have a process in place to reach a solution to this unprecedented financial crisis.

I understand that the candidates are putting together a joint statement at Senator Obama’s suggestion. But it would not be helpful at this time to have them come back during these negotiations and risk injecting presidential politics into this process or distract important talks about the future of our nation’s economy. If that changes, we will call upon them. We need leadership; not a campaign photo op.

If there were ever a time for both candidates to hold a debate before the American people about this serious challenge, it is now.

The chairman of the House Financial Services Committee, Barney Frank (a law school classmate of mine, as it turns out – and one of the smartest and funniest guys you will ever meet), echoed that sentiment:

"All of sudden, now that we are on the verge of making a deal, John McCain here drops himself in to help us make a deal,” Frank said. He expressed fear that McCain, a U.S. senator from Arizona who has spent much of the year away from the Capitol campaigning, could end up slowing down work on the bill. The Massachusetts Democrat noted that a meeting on Capitol Hill on Thursday will be interrupted for a "photo op" at the White House with congressional Democrats and Republicans as well as Bush.

"We're trying to rescue the economy, not the McCain campaign," Frank said.

Earlier in the day Frank called McCain’s ploy, "the longest Hail Mary pass in the history of either football or Marys."

There is no small irony in McCain’s panicked return to Washington. For this entire Congress, has been the most absent Senator – by a long margin. He has missed 64% of all Senate votes. (The next most absent, Tim Johnson, who missed 48% of all votes, suffered a severe cerebral hemorrhage that almost took his life but eventually returned to outvote McCain.)

There have been 643 votes taken in the current Senate session: McCain has missed 412 of them. McCain has not voted in the Senate since April 8th. Since March, he has missed 109 of the last 110 votes. He missed votes on the GI Bill, energy policy, and in 2007 he missed "all 15 critical environmental votes in the Senate" -- giving him a 2007 rating of 0% from the League of Conservation Voters. Zero percent? I don't think that's fair. I think they should have given him an "incomplete", and told him that he had to stay for summer session if he wants to graduate from the Senate.

The infamous National Journal ranking that labeled Obama
the most “liberal” member of the Senate couldn’t even come up with a score for McCain because he had missed so many votes.

McCain has apparently had so little interest in the substance of the bailout proposal that as of Tuesday, four days after Paulson sent it up to the Hill, McCain admitted
he still hadn’t read it. AND IT IS ONLY TWO AND A HALF PAGES LONG!

As part of his stunt, McCain cancelled an appearance on the Letterman show last night. That was fine. But he made the mistake of lying to Letterman, saying that he couldn’t tape the show because he was “racing to the airport” to return to DC. In fact, during the taping of the Letterman show he was in another studio at CBS being interviewed by Katie Couric. It is not a good idea to lie to David Letterman.
Watch this collection of clips from last night’s show.

(That is the nine-minute version. It is worth watching. But if you are rushed, here is a
three-minute version.)

Like some kind of bi-polar Drama Queen, McCain has, in the course of a week, gone from assuring us that the economy is “fundamentally sound” to full-on, hair-on-fire panic mode. And, once again, McCain is pretending to be president, just like during the Georgia crisis this summer when he was egging on Saalkashvili in his taunting of Moscow and claiming to “speak for every American” in declaring, “
Today, we are all Georgians.” At the time I wrote that that episode demonstrated that McCain shouldn’t be allowed anywhere near the White House
. We are seeing his “operatic” temperament yet again in this farce.

Harold Meyerson has a great column on this in today’s Washington Post (“McCain’s Ploy”). It is well worth reading the entire thing. He concludes,

[McCain] cannot win on the strength of his positions. He can only win on the strength of his character. Problem is, McCain's character, as we have seen in his selection of Sarah Palin as his running mate, is heavy on decisiveness and weak on judgment. In this, despite his campaign's protestations, a McCain presidency would be very much an extension of George W. Bush’s. The president helped McCain out last night by inviting both candidates to Washington today to put their imprimatur on a deal that seemed near completion. At the risk of making McCain's gesture look less heroic, he also made it look less self-absorbed.

But self is McCain's selling point. He is either the man on horseback riding to the rescue, or he is nothing -- or, more precisely, the loser come November. Obama, Lord knows, has his flaws, but he does not seem to believe that the nation's crises are primarily about him.

There is another intriguing twist to this whole thing. McCain is seeking to “postpone” tomorrow’s debate until October 2 – which conveniently is when the vice presidential debate is scheduled to take place. It’s become abundantly clear that Palin is a full-on train wreck. The McCain campaign has not let her hold a single news conference since she was named to the ticket. (Even Dan Quayle held a press conference the day after he was nominated. Biden has held dozens since he was named.) They are doing everything they can to hide her from the press and won’t let her say a word without careful scripting and supervision. This is truly astounding. We are looking at the possibility of a virtual unknown being put in the position of becoming the most powerful person on the planet without holding a single press conference before the election. She is not yet VP and she is already in Cheney’s secure, undisclosed location as far as press access is concerned.

Do you think I’m exaggerating? Look what happened when they gave her an interview with Katie Couric. It is semi-coherent gibberish.

Watch this clip on the bailout.

And this one on sharing a border with Russia.

(You MUST watch these video clips – it is your patriotic duty. And then do everything possible to ensure she does not become a cancerous 72-year-old heartbeat from becoming president of the United States.)

If you were stuck with Palin as your VP nominee wouldn’t you everything you could to weasel your way out of her appearing unscripted on stage with Joe Biden for 90 minutes?

McCain believes the financial crisis doesn’t leave time for the presidential debate tomorrow night, but he has
scheduled interviews on all three major network (NBC, CBS, ABC) news programs tonight. And he appeared on CBS news last night.

Here are a few more pundit reactions:

Joe Klein:

John McCain faced another crisis yesterday--a political one, not the financial emergency he used as an excuse for his rash actions--and once again he overreacted. This is becoming a pattern (as is his "greatest crisis since..." formulation: yesterday, since World War II; previously--on Georgia--since the end of the cold war), and it is not very reassuring behavior in a potential President. …

… Obama's cool steadfastness has put him in the driver's seat on this one.

And that raises an interesting question: Why was McCain so quick to pull out of the debate? After all, with the momentum slightly in Obama's direction, he needed a game-changer--and foreign policy is, allegedly, his area of expertise. His peremptory actions yesterday was not the behavior of a confident man. It was the behavior of a man uncertain, despite all the macho bluster, about his chances in the most important theater of battle in any presidential campaign, one where gimmicks, diversions and untruths can be directly countered by his opponent. McCain may clean Obama's clock in the coming debates--but it seems entirely possible that the old fighter jock may be frightened that he's about to ditch another plane.

Matthew Yglesias:

WTF? You can’t just stop the presidential campaign — what does that even mean?

Meanwhile, I think walking and chewing gum at the same time is part of the president’s job.

Jack Cafferty:

He hasn't cast a vote in congress since April. I mean he's not gonna be working on the legislation. The debate is scheduled between the two men who want the job of running the country. I don't understand the logic of saying let's cancel the debate. ... The public wants to know which one of these men is capable of leading the country. They'll learn more about that by listening them have a debate about the issues.

Jonathan Chait:

It occurs to me that McCain's gambit is likely to delay the bailout negotiations, not speed them up. Why? Because now, if the administration and Congressional Republicans can't make a deal without undercutting McCain's claim that the negotiations are failing and a campaign suspension is needed to rescure them. All the reporting I've seen suggests a deal was in the works. Now it's going to be in limbo, unless Republicans are willing to kneecap their own candidate.

Joan Walsh:

I think Americans will see it for what it is, a political stunt. It makes McCain look cowardly, like he's not ready to mix it up with Obama, and like he's hiding from the perilous economic developments of the last few weeks.

Dan Balz:

The Republican presidential nominee is hoping that his abrupt decision ... will be seen as the kind of country-first, bipartisan leadership he believes Americans want. What he risks, if things don't go as he hopes, is a judgment by voters that his move was a reckless act by an impetuous and struggling politician that hardened partisan lines in Washington at just the wrong moment and complicated efforts to deal with the biggest financial crisis in more than half a century.

Chris Matthews:

John McCain is in trouble every time conditions prevail. And that's when he pulls a razzle-dazzle. McCain calls this move when he sees the voter going back to the default button.

"Fire Chris Cox!" "Bring in Gov. Palin!" "Call off the first night of the Republican convention!" Anything that changes the situation away from that default button where people naturally say, "When one administration fails, when one party fails, you try the other one."

We saw it again when he called Wednesday night calling for a delay of the debates, "I'm not going to the debates."


Our friend Tom Skerrit understands the plot. As a screenwriter and actor, he understands drama:


..'I'm going to Washington and won't debate until a viable economic policy is in place.'... or words to that effect. McCain goes to Washington, sits through a hearing this a.m. . Barney Frank announces tonight that the Republican Congress walked out when a policy was almost in place..... Drama!.

So, late tomorrow, early Saturday, over the weekend, there will, at last, be an agreement...

...that McCain has brokered...too late to debate, but, he's a 'hero'..... Drama!

McCain has, singlehandedly, saved America.....

Can it be so pedestrian as this... .Soap Opera?

Tuesday, September 23, 2008

financial weapons of mass destruction

Think the current financial meltdown due to wildly-reckless, unregulated speculative financial activity wasn’t foreseeable?

Here’s my hero (and Obama advisor) Warren Buffett over five years ago from the
2002 Berkshire Hathaway shareholders letter:


Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.

Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.

Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.

Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without
so much as a penny changing hands.

The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.

When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.

But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.

Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.

Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market
accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

Of course, both internal and outside auditors review the numbers, but that’s no easy job. For example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like
that, expert auditors could easily and honestly have widely varying opinions.

The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”

I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive "earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that
a company is downgraded because of general adversity and that its derivatives
instantly kick in with their requirement, imposing an unexpected and enormous
demand for cash collateral on the company. The need to meet this demand can
then throw the company into a liquidity crisis that may, in some cases, trigger
still more downgrades. It all becomes a spiral that can lead to a corporate

Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a
liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.

In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.

Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.

Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.

Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets.
In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for weeks, was far from a worst-case scenario.

One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the
purchase of a stock while Party B, without putting up any capital, agrees that at a
future date it will receive any gain or pay any loss that the bank realizes.

Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved
with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

(That’s why I am a shareholder of Berkshire Hathaway.)

Perspective on the
size of the problem with credit default swaps (just one kind of derivative):

[Click on image to enlarge.]

The current estimate is more in the $60 trillion to $70 trillion range.

By comparison, US gross domestic product is roughly $13.5 trillion. In other words, the credit default swap market is roughly FOUR TIMES the entire US GDP. It is equal to or larger than the ENTIRE WORLD GDP.

Do you think $700,000,000,000.00 is going to solve the problems of our financial system?

Monday, September 22, 2008

worst. president. ever.

On January 17, 2001, The Onion famously ran this faux story:

Bush: 'Our Long National Nightmare Of Peace And Prosperity Is Finally Over'

January 17, 2001
WASHINGTON, DC–Mere days from assuming the presidency and closing the door on eight years of Bill Clinton, president-elect George W. Bush assured the nation in a televised address Tuesday that "our long national nightmare of peace and prosperity is finally over."

"My fellow Americans," Bush said, "at long last, we have reached the end of the dark period in American history that will come to be known as the Clinton Era, eight long
years characterized by unprecedented economic expansion, a sharp decrease in crime, and sustained peace overseas. The time has come to put all of that behind us."

Bush swore to do "everything in [his] power" to undo the damage wrought by Clinton's two terms in office, including selling off the national parks to developers, going into massive debt to develop expensive and impractical weapons technologies, and passing sweeping budget cuts that drive the mentally ill out of hospitals and onto the street.

During the 40-minute speech, Bush also promised to bring an end to the severe war drought that plagued the nation under Clinton, assuring citizens that the U.S. will engage in at least one Gulf War-level armed conflict in the next four years.

"You better believe we're going to mix it up with somebody at some point during my administration," said Bush, who plans a 250 percent boost in military spending. "Unlike my predecessor, I am fully committed to putting soldiers in battle situations. Otherwise, what is the point of even having a military?" …

Remember those early days of the Bush administration when we all used to mock his stupidity and inability to string together a coherent sentence? (The last time a Bush joke struck me as remotely funny was right around the beginning of the Iraq war in March of 2003 – which hasn’t kept people from forwarding them to me for the past five years.) Almost eight years later, we now know that The Onion understated the future course of our country.

Worst. President. Ever.

Some of us have been saying that for a while. But now it is indisputable. Based on the Worst Foreign Policy Disaster in the nation’s history. (And if your right-wing brother-in-law is now claiming that the Iraq war was a “success,” ask him this: “Then why have over two million Iraqis fled their homeland as destitute refugees since we launched our war? There was no Berlin Wall keeping them in during the Saddam era. People vote with their feet.”) And the destruction of New Orleans. And almost four billion dollars in additional federal government debt. And eight years of exacerbating rather than addressing the global climate crisis. And the undermining of our country’s moral standing in the world through torture, secret prisons and the denial of the most fundamental underpinning of the Rule of Law, habeas corpus. Add your favorites to the list.

Now you can add the Worst Financial Crisis since the Great Depression. (Anyone can undertake the Worst Foreign Policy Disaster in the nation’s history. And the Worst Financial Crisis since the Great Depression … just a day’s work. But it takes a real Renaissance Man to pull off BOTH.)


A trillion dollars.

The Iraq war will end up costing one or two of those, depending on how we go about winding it up and how you account for it.

The cost of the financial crisis? To quote the MasterCard ad, “Priceless.” The figure currently being bandied about is $700,000,000,000.00. But who believes that? That is just the proposed addition to the over $400 billion already committed to various bail-outs to date. (When you include all the cash infusions and guarantees the federal government has assumed in the course of this crisis,
the price tag is already up to around $6,000,000,000,000.00 – that’s six trillion dollars.)

Financial Shock and Awe.

Worst. President. Ever.

And we still have four months to go.

And the REALLY scary thing? I think a McCain/Palin administration (I can’t believe I even wrote that) would be worse.

Sunday, September 21, 2008

authorization for the use of financial force

While I am a social liberal, when it comes to matters of economics and finance I like to think that I am non-ideological – at least to the best of my self-delusional ability, I strive to objectively comprehend economic reality. A friend describes himself as a “Warren Buffett Democrat.” I would concur. (It was Buffett, by the way, who referred to credit default swaps and other unregulated derivatives as “financial weapons of mass destruction.”)

Also, over the years I have come to the conclusion that, whatever the subject, if I try hard to comprehend something – at least at a high level of abstraction – and can’t, it probably doesn’t makes sense. (This generalization breaks down in areas like physics where the underlying phenomena exist in a space outside our experience of reality.) I studied economics and finance and have been a junkie of the subject for over 30 years, reading and thinking about events from that perspective. I don’t think it is conceit to say that I’m highly skeptical of any proposition in that field that I can’t comprehend after diligent study. I might not agree with it. But I should at least be able to understand it.

The last couple of days I have spent most of each day reading about the proposed bailout of the financial system. And I haven’t been able to fully grasp it in a way that I could explain to others -- which means I don’t really understand it or it doesn’t make sense. I have gotten the strong sense that a lot of people are in my position – including a lot of people I believe to be much more knowledgeable on the subject than I am. Experience teaches me to be highly skeptical in situations like this. I should be able to understand at least the concept in a way that makes sense (i.e., the proposed solution would – on it own terms – help solve the problem).

One conclusion I have come to: Any authority granted to the Treasury should lapse after six months. This bailout is, essentially, an Authorization for the Use of Financial Force. Congress is again being stampeded by fear into a radical grant of authority on the eve of an election – just like in 2002. The one thing that is absolutely clear to me is that a comprehensive new financial regulatory scheme is necessary (perhaps just an update – with real enforcement teeth – of the Depression-era reforms that served us so well for 70 years or so until the de-regulatory zealots got their way). That can’t be enacted in a week, and if a bailout is enacted without those reforms, Republicans will filibuster the necessary reforms regardless of who wins the White House in November. The Treasury authority – whatever it turns out to be – should expire in six months. If Republicans filibuster reforms, the authority lapses without any action required by Congress.

But that is a procedural issue. What about the substance? I finally found an explanation that makes sense to me, and it came from
Paul Krugman’s blog:

September 21, 2008, 11:12 am
Thinking the bailout through

What is this bailout supposed to do? Will it actually serve the purpose? What should
we be doing instead? Let’s talk.

First, a capsule analysis of the crisis.

1. It all starts with the bursting of the housing bubble. This has led to sharply increased rates of default and foreclosure, which has led to large losses on mortgage-backed securities.

2. The losses in MBS, in turn, have left the financial system undercapitalized — doubly so, because levels of leverage that were previously considered acceptable are no longer OK.

3. The financial system, in its efforts to deleverage, is contracting credit, placing
everyone who depends on credit under strain.

4. There’s also, to some extent, a vicious circle of deleveraging: as financial firms try to contract their balance sheets, they drive down the prices of assets, further reducing capital and forcing more deleveraging.

So where in this process does the Temporary Asset Relief Plan offer any, well, relief? The answer is that it possibly offers some respite in stage 4: the Treasury steps in to buy assets that the financial system is trying to sell, thereby hopefully mitigating the downward spiral of asset prices.

But the more I think about this, the more skeptical I get about the extent to which it’s a solution. Problems:

(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.

(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

September 21, 2008, 8:06 am
Authorization for the use of financial force

Brad DeLong beat me to it. Even if
you have full faith in Henry Paulson,
Intrade currently gives John McCain a 48 percent chance of being
president. Are you willing to give essentially unlimited discretion over the use
of $700 billion — with explicit protection against any review by Congress or the
courts — to Phil Gramm?

September 20, 2008, 4:46 pm
No deal

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

As I posted earlier today, it seems all too likely that a “fair price” for
mortgage-related assets will still
leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first,
protecting their depositors, then transferred their bad assets to the RTC. The
Swedes took over troubled banks, again protecting their depositors, before
transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems
doubtful — or if Treasury is going to be paying a huge premium, in effect
throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

A couple of other points.

I have been hearing a lot of folks in the past few days optimistically saying, “Once the markets settle down, and given some time to unwind things, the government might actually end up making money on this deal.” That sentiment is wrong on so many levels, most of which I don’t have time to explicate right now. But simply put: The current crisis is not fundamentally a liquidity crisis – inject some short-term liquidity into the system to restore confidence and everything will soon go back to functioning smoothly. This is a solvency problem. There are trillions of dollars of “assets” on the books at all levels of our economy – but particularly in the financial sector – that are worthless (or worth less) and need to be written off. And when they are, a lot of firms (and individuals) will be bankrupt. (Wall Street firms took on 20x – 50x leverage, which means a 2% to 5% decline in the value of their assets can make them insolvent. Overall, across most asset classes, the decline in value has been greater than that.) To take just one example, there are something like $60 trillion in credit default swaps in the system. (Credit default swaps are essentially an unregulated form of tradable bond insurance.) Because they are unregulated (thanks to Phil Gramm and his fellow de-regulatory ideologues – including his buddy John McCain) we don’t even really know for sure how much of that toxic material is out there. But it was the credit default swap counterparty risk that caused the Federal government to bail out AIG (to the extent one can really know these things, their CDS exposure was probably at least a half trillion dollars or so) – they were “too big to fail”. It is safe to say that the “counterparty risk” (i.e., the plain fact that the firms that wrote those instruments couldn’t back them up if they were called upon to do so – the exposure so vastly exceeds the capitalization of the issuers) is such that in this one area alone there are literally trillions of dollars of worthless “assets” on balance sheets that will eventually need to be written off. The proposed bailout plan can’t even begin to address that problem.

One thing should be clear: Like the Iraq war, there are no good solutions to extricating ourselves from this mess. Every approach is problematic. In another post I will offer my views on some of the politics of this crisis and some elements that should be included in any near-term approach to addressing the problem.

Saturday, September 20, 2008

president obama

McCain’s plan for the health care industry:
Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.

Banking deregulation as a model for health care reform. That’s a winning campaign theme.

Thursday, September 18, 2008

defeat evil! end greed!

"Evil must be defeated!" -- John McCain 8/16/08

"Enough is enough! We're going to put an end to greed!" -- John McCain 9/17/08

It's inspiring to know that John McCain has a plan to end greed. I just hope it doesn't distract him from his mission to defeat evil. Either way, it has to kick the shit out of whatever Barack Obama's got on the docket, with his empty words and pie-in-the-sky promises.

America's choice is clear. Barack Obama, a messianic egomaniac who thinks he's, like, our savior or something, or John McCain, who will defeat evil and put an end to greed.

John McCain will not only take on special interests and Washington insiders, he'll
fundamentally alter human nature. And without raising taxes, either. He'll lead us to a sort of martial nirvana where all other emotions are replaced with patriotism, and turn the United States into a shining, selfless, bipartisan cross between heaven and Sparta.


Dude’s going to end greed on Wall Street. Cool. And defeat evil. (Does that mean Vista is toast?)

On Monday morning, in the face of the bankruptcy of Lehman Brothers and the fire-sale acquisition of Merrill Lynch by Bank of American, John McCain declared:

“The fundamentals of our economy are strong.”

That didn’t go over really well. By Tuesday morning, he had

"Well, the economy's in crisis."

Dude was on a roll. Also on Tuesday he

"We cannot have the taxpayers bail out AIG or anybody else."

(You probably suspect what’s coming next.)

By Wednesday morning he was
supporting the bailout of AIG:

“[T]here are literally millions of people whose retirement, whose investment, whose insurance were at risk here.”

Last March, he told the
Wall Street Journal:

“I’m always for less regulation. … I am a fundamentally a deregulator.”

In May
he added that we cannot have, “more federal regulation, more government control of the economy."

And in July, when a report showed that the nation had shed 62,000 jobs the month before, McCain issued a statement warning: "We cannot . . . increase regulation."

he said, “We need strong and effective regulation …We need to change the way Washington and Wall Street does business.”

[His running mate (what’s her name?) said last week, "[T]oo often government is often the problem." Last night, appearing under the blistering spotlight of FOX News’ Sean Hannity, she affirmed, "Government can play a very, very appropriate role in the oversight.”]

On Tuesday, McCain’s top economic advisor, Douglas Holz-Eakin asserted that McCain’s chairmanship of the Senate Commerce Committee in the ‘90’s had resulted in the telecommunications revolution:

At a briefing for reporters yesterday morning, Douglas Holtz-Eakin held up his BlackBerry in an attempt to prove that his boss, the former chairman of the Senate Commerce Committee, has economic know-how.

"He did this," Holtz-Eakin informed them. "Telecommunications of the United States is a premier innovation in the past 15 years -- comes right through the Commerce
Committee -- so you're looking at the miracle John McCain helped create, and that's what he did."

That would appear to have been more of a diplomatic achievement than a victory for the American economy, as the Blackberry is made by the Canadian company, Research In Motion. (Fortunately, Al Gore had by that time already
invented the Internet.)


Before a crowd of roughly 14,000 residents of Las Vegas, … Sen. Barack Obama, D-Ill., Wednesday evening continued to mock Sen. John McCain, R-Ariz., as out of touch on the economy.

Proceeding through a litany of what he perceives to be McCain missteps, Obama mentioned that McCain had recently "bragged about how, as chairman of the Commerce Committee in the Senate, he had oversight of every part of the economy. Well, all I can say to Sen. McCain is … nice job."

Tuesday wasn’t a very good day for McCain. One of his chief flaks on the economy, former H-P CEO Carly Fiorina was asked:

"Do you think [Sarah Palin] has the experience to run a major company, like Hewlett Packard?"
"No, I don't," responded Fiorina.

And she is an expert on not being able to run H-P.

Later in the day, Fiorina “clarified” her statement:

"Well, I don't think John McCain could run a major corporation, I don't think Barack Obama could run a major corporation, I don't think Joe Biden could run a major corporation."

Apparently, this didn’t help. The McCain camp made it clear that Ms. Fiorina would no longer be a spokesperson for the campaign.

On Monday, Sarah Palin “blasted corporate executives who leave their company with a ‘golden parachute’ and pledged to ‘stop multimillion dollar payouts" to CEOs’. Carly Fiorina walked away with $45 million, including a $21.4 million severance package when she was dismissed by Hewlett Packard in 2005.”]

It hasn’t been a great week for McCain so far.

And he still has to defeat evil and end greed.