Saturday, October 4, 2008

A Seminal Event

I would like to put aside our partisan rancor here, as well as our sorrow concerning the fact that Chicago baseball players seem to have forgotten how to play the game, to remark on something truly important.

Concerning this matter, Douglas MacArthur said, "I shall return."

FDR said, "The only thing we have to fear is ... fear itself!"

Calvin Coolidge said, "You lose."

Ronald Reagan was heard to chuckle, and to say, "There you go again!"

George H. W. Bush commented, "Read my lips."

Bill Clinton said (accurately, this time), "I did not have sex with that woman."

Jesse Jackson said, "I'd like to cut his nuts off!"

John Kerry said, "Actually, I voted for this before I voted against it."

Dick Nixon said, "And you know what? We're gonna keep that little dog!"

What were they all talking about?

Happy birthday, eluzhun!

Friday, October 3, 2008

An Analog - for Pericles

Pericles, I am taking your challenge seriously, viz, to find "an analogue" to the Gwen Ifill travesty of having a direct financial interest in the outcome of the --well, not the debate, strictly speaking: I assume you meant the campaign in general.

Here's one, not perfect but I think you will agree it is suggestive:

Bob Schieffer moderated the third presidential debate between G. W Bush and John Kerry in 2004. Bob's brother, Tom, was a close friend of Bush, and was the U.S. Ambassador to Australia at the time of the debate. Of course, his personal relationship with Bush doubtless had nothing to do with his appointment; and given the incredibly hard duty in Canberra, the job was certainly no plum.

Did this give Schieffer a direct financial interest in the outocme? Well, presumably not --it is doubtful that his brother was supporting him.

Still ...

More to come, assuming I can find it.

No Joy in Mudville

Dodgers 10, Cubs 3.  Dodgers Lead NLDS 2-0.

Rays 6, Sox 4.  Rays lead ALDS 1-0.

Here's my favorite shot from the Rosh Hoshanah playoff game against the Twins.    

VP Debate: Open Thread

Here's an open thread for comments about last night's Vice Presidential Debate.  

Novice Needs Info

I note that sometimes when I click on a person's name or pseudonym, I get a screen with (very limited) information about who he is; other times I get nothing.
I conclude that this information is provided by the person himself.
How do I provide information about me?

Thursday, October 2, 2008


I turned to Shimby about 20 minutes ago and I said, "Wouldn't it be hilarious if Palin said something really stupid? Like nucular?" And lo and behold. She did. About 10 times. In fact she has not yet pronounced nuclear correctly.

Columbia School of Journalism: Ifill Violates Journalistic Ethics

No one ever accused the Columbia School of Journalism of being conservative. But it is, whether or not deservedly so, one of the the leading journalism schools in the nation. Yesterday, the Columbia Journalism Review states what should be obvious to anyone of principle: Ifill enjoys a direct financial interest in the outcome of the very proceeding over which she presides, and thus suffers from an irreconcilable conflict of interest.   
There appears, to us, to be a conflict in Ifill moderating tomorrow night’s vice presidential debate. Here’s why:

- Ifill’s upcoming book is called “The Breakthrough: Politics and Race in the Age of Obama.” It, apparently, “surveys the American political landscape, shedding new light on the impact of Barack Obama’s stunning presidential campaign and introducing the emerging young African American politicians [like Newark Mayor Corey Booker and Massachusetts Governor Deval Patrick] forging a bold new path to political power.”

- The book apparently will be published on January 20th, 2009, Inauguration Day.

- It stands to reason that a book with such a title would sell better if a certain person is inaugurated on that day.

We’ve also set aside several other related questions that are being raised in various places online, on cable, and elsewhere, including: why is this becoming a “thing” now, when Ifill’s book was reported on well before Ifill was selected as the moderator, and the McCain campaign might have raised this earlier if it bothered them? What about, say, CBS’s Bob Schieffer and his relationship to George W. Bush? Schieffer moderated a debate back in 2004. Etc. Much of that sounds like the usual political noise. But the financial part seems real. Gwen?

Cold War Begins

The nuclear deal with India has passed the Senate.

No one can place the beginning of a major power rivalry, but I think history will look back on this as a turning point.

The Horses' . . . Mouths

What they said:

House Financial Services Committee hearing, Sept. 10, 2003:

Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios . . . . Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?

House Financial Services Committee hearing, Sept. 25, 2003:

Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing . . . .

Senate Banking Committee, Oct. 16, 2003:

Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.

Senate Banking Committee, Feb. 24-25, 2004:

Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert? 

Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.  What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability . . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets . . . .

Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .

Senate Banking Committee, June 15, 2006:

Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.  I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be . . . . So let's not do nothing, and at the same time, let's not overreact . . .

Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here . . . .

Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.

Wednesday, October 1, 2008

Deja Vu All Over Again


Dodgers 7, Cubs 2.

Dodgers lead Division Series series 1-0.  Cubs lose home field advantage.

New York Times Shills for Ifill

The first defense is that the world (presumably including McCain) had notice of all this back in August. (Not a bad argument.) The second defense is that this will make Ifill less, not more, harsh with Palin, and so it should help, not hurt, McCain. (Probably also true.) The third defense is that only "conservative" websites have protested. (True, but sad, and, frankly, irrelevant if this is an actual ethical conflict, and it surely is.)  Fourth, we're told that a journalism spokesperson has concluded that,“I don’t necessarily see an absolute conflict of interest, it’s not like it’s his biography.” (We could write pages on how incoherent that sentence is, never mind the missing period or semicolon.  Imagine a law professor saying, "I don't see an absolute conflict; it's not like the prosecutor is writing the judge's biography.") And finally, we are told, notwithstanding this conflict, that she will be "honorable and fair." All this is reported as "news." Nykils, still see objectivity here? This reads more like an Obama press release. You know why? Because it is likely lifted from one that was generated in the last 24 hours to deal with the story. I am impressed with the Obama campaign. Nothing is permitted to linger for an instant. That, of course, is the campaign's job. It is the slavishness of the NYT that should be disturbing to candid citizens.  

Ifill's Book on Amazon

Product Description

In THE BREAKTHROUGH, veteran journalist Gwen Ifill surveys the American political landscape, shedding new light on the impact of Barack Obama’s stunning presidential campaign and introducing the emerging young African American politicians forging a bold new path to political power. 

Ifill argues that the Black political structure formed during the Civil Rights movement is giving way to a generation of men and women who are the direct beneficiaries of the struggles of the 1960s. She offers incisive, detailed profiles of such prominent leaders as Newark Mayor Cory Booker, Massachusetts Governor Deval Patrick, and U.S. Congressman Artur Davis of Alabama, and also covers up-and-coming figures from across the nation. Drawing on interviews with power brokers like Senator Obama, former Secretary of State Colin Powell, Vernon Jordan, the Reverend Jesse Jackson, and many others, as well as her own razor-sharp observations and analysis of such issues as generational conflict and the "black enough" conundrum, Ifill shows why this is a pivotal moment in American history. 

You have got to be kidding.  How much money do you think she loses if Obama doesn't, well, "break through" and usher in the "Age of Obama?" Now, Nykils, listen to the sound of the crickets coming from the mainstream media and tell me there is no bias in favor of an Obama presidency.  Does anyone really think this would not be the lead story everywhere if the shoe were on the other foot?   

Tin Foil Hat Moment of the Day

Apropos of our nation’s renewed interest in the competency of our national leaders, here’s one of my favorites:  Cynthia McKinney, Congresswoman from Georgia between 1993–2003 and 2005–2007, charges that the United States military used the cover of Hurricane Katrina to execute 5,000 undesirable American citizens. Let me repeat that: Congresswoman from 1993-3003 and again from 2005-2007.  

Update 3:28 p.m.: The video has been removed from YouTube.

The Great Schlep

The Great Schlep from The Great Schlep on Vimeo.

Overcoming Bias

Intrade and the Dow Drop

With today's snapback, the Dow lost 777 and regained 485.

As of this evening, Intrade says the probability of a bailout bill passing by Oct 31st is 85%.

(777-485)/(1-.85) = 1,946. So a bailout bill makes an expected difference of 2000 points on the Dow.

Of course this is a bogus calculation, but it's an interesting one. Not overwhelmingly on-topic for OB, but it involves prediction markets and I didn't see anyone else pointing it out. I hope the bailout fails decisively, so this calculation can be tested.

Tuesday, September 30, 2008

VP Debate Moderator Has Conflict of Interest, Financial Stake in Obama Presidency

The moderator of the VP debate has written a book on successful black politicians, including Senator Obama, to be published on inauguration day, in which she describes our times as the "Age of Obama." Of course, if Obama wins, she sells more books. In my profession, I would be disqualified as having a prima facie conflict of interest
The moderator of Thursday's vice presidential debate between Democrat Sen. Joe Biden and GOP Gov. Sarah Palin is writing a book, to come out about the time the next president takes the oath of office, to "shed new light" on Democratic candidate Barack Obama and other "emerging young African American politicians" who are "forging a bold new path to political power."

Gwen Ifill, of the Public Broadcasting Service program called "Washington Week," is promoting "The Breakthrough," in which she argues the "Black political structure" of the civil rights movement is giving way to men and women who have benefited from those struggles over racial equality.

Ifill declined to return a WND telephone message asking for a comment about her book project, and whether its success would be expected should Obama lose.

Gee, ya think?

Chicago White Sox 2008 Division Champions!

White Sox 1, Twins 0.  What an incredible game!  We sat ten rows in back of the Sox dugout, from where we had a perfect view of Cuddyar tagging from third on a fly to shallow center, Junior's bullet to Pierzinski, the dramatic collision at the plate, and Pierzinki holding on to the ball for the third out, keeping the Twins from scoring the go-ahead run.   

Our view of the post-game celebration, courtesy of the iPhone.   

From Russia with Love

Could not help but share. As you might know, everything is better in Russia. Including Obama supporters.

Petty and Pettier

If it was in the nation’s best interest to pass the bailout bill yesterday, then it was a betrayal of the public trust and the public weal for any congressmen not to vote for it for any reason, much less the petty reason that Nancy Pelosi was even pettier in her speech. Nevertheless, it is (charitably speaking) disappointing to hear her speech. Here it is. Judge for yourself. What's wrong with these people?

Here's a little background and context that is really disappointing.

Wandel Jugend

Matt Taibbi on Sarah Palin

This barnstorming article pulls no punches. While reading, it is nearly possible to feel Taibbi vomiting as he wrote. A gut wrenching and comedic review of contemporary Americana.

Update: The link to Taibbi's article has been fixed and goes properly to Rolling Stone's site now.

The Evolving Constitution

In 1964, the United Stated Supreme Court decided the landmark First Amendment case, New York Times v. Sullivan, 376 U.S. 254 (1964), in which the Court held that the public's interest in promoting "uninhibited, robust and wide-open" debate among citizens is so important that a heightened standard of malice should be required in order to defame (i.e., libel and slander) a public figure. Accordingly, since 1964, to be liable for defamation against a public figure (say, for example, a candidate for President of the United States), the public figure bears the burden of proving intentional falsehood or reckless disregard of the truth. Mere opinion or advocacy, or even quoting out of context, is insufficient.  As a practical matter, if you are a public figure, the Constitution affords you little, if any, protection against defamation. Now, if you are a former Constitutional law professor, it is safe to assume you know this. So why does Senator Obama launch a campaign in Missouri to file legal actions, including criminal complaints, against purveyors of allegedly misleading advertisements against him, especially where, as here, Senator Obama is no stranger to purveying such deceptive advertisements, at least according to the Obama-phillic New York Times?  I would like to ask this question:  What would the left-leaning members of this community think if the Republicans filed lawsuits against MoveOn, DailyKos and ThinkProgress for the inaccurate statements these sites publish?  If you are at all candid, this conduct should offend you very much. Either way, it sure offends the governor of Missouri. 

Shana Tova

Here's wishing a healthy, happy, peaceful, and prosperous year for you, your friends, and your family.  

Let He Who Is Without Sin . . .

Many today, including Senator Obama, reflexively opine that Republican "shredding" of regulations enabled the unsupervised greed that caused the current financial crisis. Perhaps the opposite is true--namely, that the political objectives of Democratic leaders incentivized lenders to make loans that they otherwise would not have made as rational profit maximizers. For years, influential Democrats, including and especially Christopher Dodd (D-CT), Chairman of the Senate Banking, Housing, and Urban Affairs Committee, encouraged sub-prime lending to promote the social and political goal of broadening access to affordable housing, and, in particular, encouraged Freddie and Fannie to incentivize private lenders to make loans that they would never have made but for artificial protections (i.e., insurance) against undue financial risk. Thomas Sowell explains:

Among the Congressional "leaders" invited to the White House to devise a bailout "solution" are the very people who have for years created the risks that have now come home to roost.

Five years ago, Barney Frank vouched for the "soundness" of Fannie Mae and Freddie Mac, and said "I do not see" any "possibility of serious financial losses to the treasury."

[No "possibility?"  He was surely being hyperbolic.  Ed.]

Moreover, he said that the federal government has "probably done too little rather than too much to push them to meet the goals of affordable housing."

Earlier this year, Senator Christopher Dodd praised Fannie Mae and Freddie Mac for "riding to the rescue" when other financial institutions were cutting back on mortgage loans. He too said that they "need to do more" to help subprime borrowers get better loans.

In other words, Congressman Frank and Senator Dodd wanted the government to push financial institutions to lend to people they would not lend to otherwise, because of the risk of default.

*   *   *

[T]he magic words "affordable housing" and the ugly word "redlining" led to politicians directing where loans and investments should go, with such things as the Community Reinvestment Act and various other coercions and threats.

The roots of this problem go back many years, but since the crisis to which all this led happened on George W. Bush's watch, that is enough for those who think in terms of talking points, without wanting to be confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac.

N. Gregory Mankiw, his Chairman of the Council of Economic Advisers, warned in February 2004 that expecting a government bailout if things go wrong "creates an incentive for a company to take on risk and enjoy the associated increase in return."

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: "The Federal Reserve is concerned" that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to "multiply the profitability of subsidized debt."

Chairman Greenspan added his voice to those urging Congress to create a "regulator with authority on a par with that of banking regulators" to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

The Great Breaking

Today we experienced the culmination of the "culture wars." For nearly 30 years we have seen prudent and thoughtful persons rejected from office because they were on the wrong side of 'guns, god, and gays.' We have seen a Republican party revolt in this time, with the ignorance over prudence crowd toppling the prudence over poverty crowd. Now, we will all be seen as both ignorant and impoverished. The Democratic party has little to be proud of in this moment of national failure. For these same 30 years, Democrats have mismanaged and fumbled their way through an attempt at combating their revolting counter-party. More often than not they submitted, supine, uncertain of what just happened. Election after election, principle after principle, the Democratic Party continued losing the same battles as its 'enemy' morphed and warped into what we are left with today.

Alas, today was about the revolt of 'teh dumb' of the past 30 years and the national failure we are left with. We have seen the effects of the culture war, and they are real. We have failed, as a citizenry, to properly and meaningfully vet our candidates for national office. We were pleased and comforted by their hollow, wooey, spiritual talk about souls, spirits, and sprites. We became single issue voters in many geographic areas, such that some lip service to abortion and Jeebus was sufficient to hold office. All the while, worthy candidates, who had studied the issues, who had complex understandings of the world, and who had difficulty reducing that complexity into "3 word answers" were passed over. Often, in all the brilliance of our contemporary system, such candidates were passed over before they ever got to run. They were deemed too effete, possibly unpatriotic, and definitely people "we" would shy away from "having a beer with."

Today, we witnessed the calamitous result. There were many reasons to oppose the operative details of this bailout plan. Some of these reasons were discussed here, on this blog. People far better versed on the topic discussed the complexities, benefits, and pitfalls of the plan at places like RGEMonitor, Naked Capitalism, Clusterstock, and elsewhere. Such reasons were never a matter of populist bullshit, and always a matter of asking the quesiton, "what is the most effective way to right this ship?" The legislators' show today demonstrated their lack of interest in effective, technocratic governance. Today, they demonstrated their total unpreparedness for the offices they hold.

The people who voted against today's bill did not raise any of the technical problems with the proposed bailout. We did not expect them to, they are not financiers. Rather, the people who voted against the bill failed to understand their roles as legislators. We did expect them to raise meaningful and insightful questions about the civics, philosophical nature, and political economy of the bailout. They did not. They are failures; we are failures.

For 30 or so years, the nation has been convinced that the 'whiz kids' of finance have made a system so complex, legislators cannot possibly begin to understand it. In part, this is because we, as a nation, have peddled a self-perpetuating myth that those in government cannot possibly understand anything at all, and we should not expect them to. In part, this is becasue of a broader trend of deference to the complicated, as the world becomes more specialized peole are more easily glazed over about the details of finance, genetics, information technology, or any other keynote contemporary field of study. We see the results of this phenomenon with credit-default swaps, stem cell research, net neutrality, and other ares of national importance.

Resultantly, today's elected officials have failed to recognize that even if this system is absurdly complex (it is not); They do not need to understand its operative details in order to understand their strategic role as legislators and their forces of authority upon it. They were assigned to uphold and protect the Constitution and citizenry of the United States. Prior legislators knew they did not need to comprehend particle physics to comprehend the Cold War. Prior legislators knew they did not need to comprehend effluvial dynamics to comprehend canal infrastructure's necessity to the national well being. Prior legislators knew they did not need to comprehend the complexities of environmental science to set aside public land for the national good. Yet, these legislators could not fathom that their ignorance of contemporary finance did not place a significant limit on their necessity to be effective administrators of the national well-being.

Comfort in dealing with the unknown grows from a confidence of having dealt with the known. The happy, prideful bipartisan know-nothings who make up today's legislators lack the self-confidence of the learned to face down the smart kids in the class. They did not have a role in understanding contemporary finance, they had a role in understanding civics. Yet, after 30 years of being bashed over the head with, 'the only thing you need to know about markets, is that less regulation is better regulation, money flows from rich to poor, and every tax cut is a good tax cut,' the legislators we are left with are irreperably harmed. I may be too young to remember such a time, but I know that an age of competence, prudence, and dilligence once existed (even if in part).

We are most certainly no longer in that age, and the self-reinforcing dumbditude has set in. It is extraordinarily difficult to remove 'teh dumb' once it has set in, and it does not benefit anyone. No one. At one point, it was thought that 'teh dumb' serves the interests of the wealthy and well connected. Ronald Reagan built the contemporary Republican party on this concept: the dumb for the wealthy! And it worked, for a time. Today, we may have seen where it breaks. The party of the wealthy and well connected does not fulfill its mission statement if it's full of know-nothing, fundagelicals, who, at the end of the day do not deliver for the wealthy and well-connected.

The point, of course, is that we have failed ourselves as a nation, and religiously motivated anti-intellectual nit-wits have led the way. We are now all in the balance, awaiting to see if we may pull ourselves out without irreperable losses. May we fight to never allow the pridefully ignorant into power ever again.


Monday, September 29, 2008


I wanted to call attention to the proposed "super-bond" solution. This solution, presented by John Hussman, solves many of the problems discussed in previous posts. It recapitalizes banks, it does not play any games with the nonsense regarding "price discovery" that actually debilitate such discovery by knowingly putting inflated bids into the market. And, this plan actually has the potential to re-compensate the lenders (taxpayers) with a mechanism recognizing the risks they've taken. Most of all, the 'super-bond' is relatively easy to over-see and administer as it fits in with the existing financial framework, is relatively simple, and thereby, transparent. Have a look at the link and poke some holes.

Iran, Again

More or less, Iran has nuclear capacity.

They are biding their time because they know the missle technology to deliver the weapon will take longer to develop than the weapon itself.

The decision remains, do we try to deal with this regime or try to topple it.

Hedge Invest, Invest in Hedge

I'm about to invest in a hedge trimmer!

Can someone possibly explain (better than wikipedia) the difference between an investment bank and a hedge fund. Don't they both buy stocks and hope those stocks, you know, go up in value?


What is a billion of anything anyway? The numbers thrown around in the press everyday become absolutely meaningless. 700B, 60B, 10M....
Thats' why scale diagrams are so phenomenally helpful in this case.

Marcy Kaptur for President

The real reason behind the mad rush

Extraordinary times

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:

Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);

Increased its “other assets” by about $80b (from $98.67b to $183.89b);

Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);

That works out to the provision of something like $370b of credit to the financial system in a two week period. That may be a bit too high: the outstanding stock of repos felll by $40b (from $126b to $ 86b), leaving a $330b net change in these line items. But that is still enormous.

The most that the IMF ever lent out to cash strapped emerging economies in a year?

$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).

The most the IMF ever lend out over two years?

$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)

This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.

And what have the rest of the world’s central banks done over this period?

There has been a lot of talk that central banks would abandon US assets because the perceived risk of holding dollars (and Treasuries) has gone up.

The custodial data though don’t provide much evidence to support this theory.

Over the last two weeks, the Fed’s custodial holdings have increased by over $40b, rising from $2394.7b to $2435.9b. Treasuries account for over $30b of the increase, but Agency holdings are rising as well. Chalk up one (minor) success for Paulson.

Right now, it seems like central banks are running into the safest US assets, not running away from the dollar. That of course could change. But it is hard to square a $20b weekly increase in the New York Fed’s custodial holdings with a story based on a fall in central bank demand for dollars. For that matter, it is hard to square the $425b increase in the New York Fed’s custodial holdings since last September with all the of the angst about the dollar’s status as a reserve currency.

If anything, the pace of growth in the Fed’s custodial holdings over the past two weeks strikes me as stronger than the likely pace of global reserve growth. That suggests to me that central banks are shifting funds out of the commercial banks (and money market funds) into Treasuries that can be held at the Fed’s custodial accounts. I would bet that central banks are shifting money to the BIS as well.

Remember, most central banks do not have a mandate to take credit losses. They can take currency losses — as currency risk is implicit in the notion of foreign exchange reserves. But having money in a bank that fails would be very hard for most to explain.

Note that all my data compares the data for the end of the reporting week, i.e the data for September 24 to the data for September 10.

UPDATE: I should have noted a fall in the Fed’s repos with the banks in my initial post. The changes in the Fed’s balance sheet are so large that I am not sure that I still know how to read the report, so please attach an error bar to the numbers above (apart from the numbers on the custodial holdings). I may have missed some additional credit extension, or some offsetting items. The basic story though is clearly true: the changes in the Fed’s “other loans” alone are enormous.


Also a great follow up post to this written by a guy who blogs by the alias of London Banker...

  1. London Banker Says:

    Excellent and timely, Brad. I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral.

    The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.

    The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

P.S. I also like london bankers latest post...


" (c) DIRECT PURCHASES.—If the Secretary deter
mines that use of a market mechanism under subsection
(b) is not feasible or appropriate, and the purposes of the
Act are best met through direct purchases from an individual
financial institution, the Secretary shall pursue additional
measures to ensure that prices paid for assets are
reasonable and reflect the underlying value of the asset. "

Isn't the use of these extreme measures indicative of the fact that the very opposite is the case! That by acting as the purchaser-of-crap-of-the-last-resort it is guaranteed that prices being paid for these assets are not reasonable and can't possibly reflect the intrinsic value of the assets (because if they did reflect the underlying value wouldn't someone else be interested in buying them too?) Or more importantly shouldn't it be determined that they are being purchased at a discount!

A Look at the Bailout

As Tony predicted here:
...Leonhardt addresses briefly, near the end of the article, the notion of limiting the pay of Wall Street executives who waddle up to the public trough. Good Luck: I bet the tax lawyers and accountants are salivating at the prospect (hell, having previously been one such tax accountant, I know they are)...
Sure enough, in conducting a first review of the proposed bailout, Clusterstock (all emphasis, both color and bold, is Clusterstock's) notes:
Executive compensation at bailed-out companies. Toothless: The plan ostensibly prohibits golden parachute payments to CEOs and other "C-level" execs at bailed-out companies. However, it really only prevents payments on severance deals that are struck AFTER the bailout (specifically, it prohibits these deals completely). There is nothing about cancelling (sic) the severance payments that the executives are ALREADY contractually entitled to. What this means in practice is that bailed-out companies will have trouble hiring the best talent...because why would you work at Bailed Out Company A when you could go across the street and get a fat severance deal? It also doesn't mean the companies can't pay their CEOs $500 million a year. IN ADDITION: There's another absurd section that makes all compensation above $500,000 for the three highest paid employees at the company not tax-deductible for the company. This is LUDICROUS. It means the company can pay the executives anything it wants and that the penalty for this will be exacted on the company and its shareholders. (Unless we're mistaken, Americans are furious that CEOs make $50 million a year for running companies into the ground, not that the $50 million is tax deductible).
The same article addresses, in part, the question asked here with the following (again, all emphasis remains theirs):
Equity/warrants: The Treasury MUST be granted warrants or debt instruments (senior debt) from public companies in exchange for more than $100 million of bailout money. No specific language on how significant this warrant or debt position must be, except that it must "provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation in the case of a warrant, or a reasonable interest rate premium, in the case of a debt instrument." AND...must provide additional protection against taxpayer losses. This is an important and just provision. The tension will be between the government wanting to take enough equity to offset the risk without scaring the bank away.
I am still not convinced that having an equity stake in an insolvent or nearly insolvent company is any form of assurance to taxpayers. I do, however, understand that it may be better than nothing. This whole plan is very clearly a start of things to come, and we'll be seeing more legislation coming through revising and expanding the government's role and authority to interact with corporations.

I hope someone here, maybe Percicles or Tony, can speak to the history of government's interaction with the corporation as individual relative to government's interaction with states as relative to the individual (specifically civil rights). There is clearly a role for regulation that has been fought for and well established, but this is no longer regulation, this is active participation. What can we expect from the future in judicial and legislative terms? Is the commerce clause sufficient Constitutional ammo for all of this, or will we see new arguments to protect these newfound and newly stated powers of government?

Also, mark-to-myth is placed under review and may be suspended. This can have enormous impact and we can all expect to hear more about it in the coming months:
VERY STRANGE AND POSSIBLY ALARMING: The SEC has the ability to suspend mark-to-market accounting for financial institutions when it thinks doing so is in the public interest. The SEC will also be launching a "study" of mark-to-market accounting. Mark-to-market has been fingered as one of the villains in this collapse. It isn't, but it sounds as though the SEC may have been persuaded that it is. Without mark-to-market, there's a lot more risk of a Japan-type scenario, where banks live in denial for years about how far up the creek they are.


Sunday, September 28, 2008

Wiping Out Community Banks

The most shocking line in this WSJ article has to be:
"Our bank has excellent earnings and a very clean loan portfolio," Mr. Allen says. "The only mistake we made was in owning U.S. government agencies."
The article is about small community banks who are seriously threatened by the government's failure to recognize the role GSE preferred stock played in the portfolios of organizations of all types and sizes. This particular piece was presaged by this Barron's piece from early September:
While most of the money-center banks continued to enjoy the benefits of a short-covering rally, shares of several regional names have suffered sharp losses in the session....In many cases, regional banks use the proceeds of the preferred dividends to maintain their required capital levels, meaning that the loss of that income stream could put their balance sheets at risk.
There are other problems as well. The WSJ piece discusses how the government has recognized an unfortunate scenario adding pain to the misery:
Banks also are seeking tax relief. Because of a quirk in tax law, the banks won't be able to deduct most of the losses on their Fannie and Freddie holdings on their federal taxes. The financial damages are considered "capital losses" for tax purposes -- meaning they can be used as a deduction only against capital gains earned by banks. But few community banks have meaningful capital gains to report. So, in the tentative agreement reached over the weekend in the massive financial bailout, Congress plans to let banks deduct the losses from ordinary income, cushioning the blow.
Roughly one month ago, this Financial Week article explored the risks posed to regional banks by the government's GSE takeover. The reality of failed banks of many shapes and sizes is now upon us. In fact, RGE Monitor reports:
Chris Whalen (RGE FinanceMonitor/IRA): number of US banks likely to fail by the year ended July 2009 (110) and total assets of said failed banks ($800 billion). Based on our work, four buckets seem to be visible: 1) large banks, 2) large regional banks, 3) specialized institutions and 4) community banks.
Certainly, organizations such as Lehman Brothers and a wide array of hedge funds are feeling pain for reasons other than owning GSE preferred stock, but there are many organizations that are suffering as a result of only this financial sin. A financial sin as unthinkable a sin one year ago as polygamy prior to the excommunication of Hyram Brown. For all of the talk about big risk takers and unwise lending, the vast majority of these small banks had extraordinarily conservative loan books and solid understanding of their clients and their clients' businesses. Yet, many will fail, be severly damaged, or be forced into the hands of others.

McCain and monkeys

I thought this was an interesting post and was just experiencing the same thing with my new rotation (it's in a monkey behavior lab). However I think they are drawing the wrong conclusions and McCain's lack of eye contact seems to just be a technique to unnerve his opponent. McCain doesn't even look in Obama's direction, thus, to my mind, expressing a lack of interest rather than submission. What I experienced with the monkeys was a somewhat different lack of eye contact. With the monkeys, they would trace an "aura" around your face, never making direct eye contact, but would certainly orient themselves towards you when you spoke, expressing interest. It seems McCain is just trying to put Obama off balance and distract him rather than actually feeling submissive. I've definitely avoided eye contact in a debate for this precise reason. If the person starts wondering why you aren't looking at them or if they are being boring then they might lose their train of thought. Not terribly certain if it works but its worth a shot and it allows you to focus on their words and not their non-verbal communications as well.

Or maybe he had to go to the bathroom, he is old after all...