Monday morning:
That about sums it up.
by John Cole| 26 Comments
This post is in: Open Threads
by DougJ| 148 Comments
This post is in: Open Threads
A lot of knowledgeable people point to the bankruptcy of Lehman as the moment when the financial crisis turned into a near-panic. The reason is not that Lehman had a particularly large market cap, but that it controlled over $600 billion in assets and had a similar amount of debt. That meant a fire sale for certain types of assets and a lot of jilted creditors.
The upshot of the jilted creditors was that banks became afraid to loan money to each other because they weren’t sure they could get it back (Lehman’s liquidation was extremely disorganized, as one might expect from a $600 billion fire sale). That’s what freezes credit markets and that’s what makes the government so afraid of other bank failures. As Josh Marshall points out, what “nationalization” might really be about is organized liquidations:
The idea has never been to nationalize the banking sector as a matter of on-going national policy. It’s more like a highly structured and customized form of moving these institutions through Chapter 11 bankruptcy. In fact, we have a whole system in place for how this is done by the FDIC.
A friend of mine who’s a senior manager at a hedge fund wrote to me about this a few weeks ago (this is long, but I found it worth reading):
Imagine the panic among regular consumers if this FDIC insurance did not exist! Bank runs would most likely be weekly in the current environment. The government thought up a solution, and it is working great right now.
The government fixed the bank to consumer confidence issue, now it needs to fix the bank to bank confidence issue. What is effectively happening right now is that the way we are “fixing” the bank to bank confidence issue is we are just giving banks money. It’s moronic and stone-age in its methodology compared to the relative cheapness of the FDIC insurance scheme. We need a way to ensure that if a bank has a dealing with another bank, that a bank CAN go bankrupt and the other banks or hedge funds can quickly regain any assets they had stored with that bank.
The CEOs of a lot of banks oppose this. Why? Well, if your parents decided that your out-of-control spending and poor investment choices were likely to bankrupt you as a person but decided that they should just give you money, would you argue? Would you turn to your parents and say, “look, I don’t think you should give me money, just create an easy way for me to go bankrupt and I’ll be fine.” Of course not. The CEO’s of major banks WANT to be too big to fail, they want the government’s money. They don’t want a way that they can easily go bankrupt, lose their jobs and their pensions and their stocks, and slide into irrelevancy. Yet, this is exactly what taxpayers need. A way that a bank can go bankrupt seamlessly and the financial system stays afloat.
So, how do we ensure that a bank can go under seamlessly? Simple, just look at what happens when a bank goes under. When Lehman went under, every bank or hedge funds suddenly had any asset they had with Lehman effectively seized by an army of PriceWaterhouseCoopers administrators. Would you want your money in their hands? Of course, they immediately took the option that would keep themselves employed and money pouring into the hands of PWC for as long as possible – they tied up all assets and told all hedge funds and banks that they would have to make a legal claim to regain their assets and which assets were returned would be handled in court. Imagine the effects if you banked at Citibank, and if Citibank went under the policy was “you can’t get your money back, and if you want any of it you have to file a court claim.” Well, you can imagine the response, which was that every bank stopped having any difficult transactional dealing with any other bank, and fear gripped the market. Most figure they’ll get 15% of their assets back, and maybe not for years. Hence your current credit crisis.
As soon as a bank goes under, the federal government needs to step in and tell PWC or other consulting firms to go away and try to bill someone else a few million dollars a day. Over the next three weeks, while the federal government is in charge, employees may not leave, they must show to their job, and they must unwind every trade, and that is their only function. Valuations of these trades will be established by a third-party governmental group, which will effectively ask banks to value each other’s positions (without telling each bank which counterparty they are valuing and which way, buy or sell, they are valuing). All unwind transactions will be reported and recorded, collateral will be settled and returned where appropriate, the federal government will daily fund the unwinds and be first in line at the end of the three weeks to get assets.
Is it perfect? No. Is it far better than now? Absolutely. You currently have financial amateurs (PWC) who are also legal experts running a bankruptcy of Lehman. They are concerned with being perfectly fair, all the while they are running up a bill that will be in the hundreds of millions of dollars. Other banks and hedge funds don’t want fair, they want 95% accurate and right now. Which would you rather have if you had $10,000 at Citibank and they went under? Would you rather have a two year legal process that promised that all investors would be treated roughly the same way with whatever was left over while a big consulting firm soaked up millions in fees or would you rather get $9,200 right now and be done with it?
The only way to solve this bank to bank and bank to fund credit crisis is to do what we did many years ago with the bank to consumer crisis – minimize the impact of bankruptcy on the customer. Who cares about the equity or bondholders of the company, they come second. Confidence will return only when the effects of bankruptcy are minimized. Printing money and giving it to banks only means the banks will keep the money for themselves because the core fear – bankruptcy of a counterparty – is still there and hence will only marginally ease the credit crisis.
The unfortunate truth is that: (1) this is not a “liquidity crisis”, these banks aren’t solvent, (2) it’s unlikely that we’ll be able to nationalize them, then sell them back at a profit a la Sweden, and (3) we can’t let a few big banks hold our entire system hostage.
Update: Roubini suggests something similar here except with the banks being stripped of their bad assets (which would be held by the Treasury), made solvent, and then later reprivatized.
by DougJ| 192 Comments
This post is in: Science & Technology
This stuff is starting to scare me:
The pace of global warming is likely to be much faster than recent predictions, because industrial greenhouse gas emissions have increased more quickly than expected and higher temperatures are triggering self-reinforcing feedback mechanisms in global ecosystems, scientists said Saturday.
“We are basically looking now at a future climate that’s beyond anything we’ve considered seriously in climate model simulations,” Christopher Field, founding director of the Carnegie Institution’s Department of Global Ecology at Stanford University, said at the annual meeting of the American Association for the Advancement of Science.
[….]Unexpectedly large amounts of carbon dioxide are being released into the atmosphere as the result of “feedback loops” that are speeding up natural processes. Prominent among these, evidence indicates, is a cycle in which higher temperatures are beginning to melt the arctic permafrost, which could release hundreds of billions of tons of carbon and methane into the atmosphere, said several scientists on a panel at the meeting.
The permafrost holds 1 trillion tons of carbon, and as much as 10 percent of that could be released this century, Field said. Melting permafrost also releases methane, which is 25 times more potent a greenhouse gas than carbon dioxide.
All that said, I live in a cold climate so I could use a global warming, I don’t eat California produce anyway, it would be a mistake to act until some of our coastal cites are underwater, and I wonder how they know it’s really permafrost when it’s only been frozen for 6000 years tops, given the age of the earth.
by DougJ| 29 Comments
If you feel like you’re hearing more from Newt Gingrich these days, it may be more than just a bad case of tinnitus (via):
[Rep. Eric] Cantor said he had studied Mr. Gingrich’s years in power and had been in regular touch with him as he sought to help his party find the right tone and message. Indeed, one of Mr. Gingrich’s leading victories in unifying his caucus against Mr. Clinton’s package of tax increases to balance the budget in 1993 has been echoed in the events of the last few weeks. “I talk to Newt on a regular basis because he was in the position that we are in: in the extreme minority,” he said.
Yglesias explains exactly why Gingrichism can be good politically but bad in terms of what I like to call “reality”:
In Washington, coverage of politics is dominated by politics rather than the policy consequences of politics. Thus, because of the outcome of the 1994 elections, Gingrich’s 93-94 tactics are held to have been a great success. But it’s important to be clear—those tactics included lockstep opposition to a Clinton economic program whose opponents set it would wreck the economy, but in fact laid the groundwork for years of prosperity. Gingrich’s success in blocking health care reform has been a small but persistent drag on the economy whose negative impact has compounded each and every year for the past fifteen years and has led to the preventable deaths of thousands and thousands of people at a minimum. Politics is politics and I understand that, but anyone who looks to that era as something to be emulated is dangerously indifferent to the real-world implications of congressional behavior.
I tend to think that this may be exactly why Washington is indeed wired for Republicanism: like Republicans, much of the media likes politics but finds their real-world implications distasteful to contemplate.
Speaking of Newt, it’s hard for me to shake this piece Joe Klein wrote about him:
It’s almost always a joy listening to Gingrich when he’s on a tear. And he’s almost always on a tear of some sort….Gingrich was certainly wild with ideas last week, flicking them off at warp speed, like a dog shaking himself clean after romping through a pond.
[….]But there was always another side to Newt. He was an intellectually honest policy wonk with an appetite for taking on the most important issues facing society—poverty, education, health care, national security, the environment….
by Tim F| 84 Comments
This post is in: Domestic Politics
Surprise good news in the TARP bill that President Obama just signed. I could get used to this.
A provision buried deep inside the $787 billion economic stimulus bill would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department.
The provision, inserted by Senate Democrats over the objections of the Obama administration, is aimed at companies that have received financial bailout funds. It would prohibit cash bonuses and almost all other incentive compensation for the five most senior officers and the 20 highest-paid executives at large companies that receive money under the Treasury’s Troubled Asset Relief Program, or TARP.
Speaking as a trained biologist, that is to say with about the econ training of a table lamp, awarding performance bonuses to the executives of companies that need rescue by the TARP fund seems to invalidate the idea that bonuses are based on performance at all. If compensation scaled with results in any meaningful way then what most executives deserve right now is a beating. Last month has proved if anything that “bonuses” are just another type of unaccounted compensation that executives will pay themselves if they have to raid the bank’s last stack of C-notes to do it.
If we learned anything from the last year, it is that paying top executives lavish salaries with guaranteed bonuses and ridiculous perks DOES NOT WORK. A casual glance at recent history shows that as superstar executive salaries increased over time their decisions got progressively stupider. So arguments like this from Obama’s advisors strike me mostly as knee-jerk conservatism, in the Buckleyan sense of standing athwart change and shouting ‘stop.’
“These rules will not work,” James F. Reda, an independent compensation consultant, said on Friday. “Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”
If you think about it, neither of the advisor’s worst case scenarios even sounds particularly bad. Regarding (b), it makes sense that Navy captains who run a ship aground never command again. The middle ranks have enough qualified candidates that the Navy doesn’t need to trust a guy who already left one ocean vessel with its keel exposed.
Advisor concern (a) strikes me as just as baffling. He apparently worries that low pay will drive executives to either not ask for TARP funds that their firms don’t need, or they will pay back the loans in a rush. Is there any particular reason why this guy is worrying about these things, rather than hoping for them? The TARP program looks like last-ditch life support to us; to bankers it looks like a giant free-money trough. Anything that incentivizes firms to only come for help that they need, you know, the way we meant for the funds to be used, seems like a rather good idea. The government wastes money and there are more rescue funds for firms that really need it. The other scary possibility is that firms will feel obliged to pay back the funds faster. Uh, great?
The only way to make sense out of the unnamed advisors’ concerns is to think that executives will perversely starve their banks of TARP funds to the point that the banks die and, falling into a smoking hole in the ground, dragging down the rest of the baking sector with a gravity well of leverage. If major banks were run like Zimbabwe maybe, but largish corporations have shareholders and a board. It could be naive idealism speaking, but I like to think that a CEO who condemned his firm for such obviously selfish reasons would be chased out of the building with sticks and torches.
We will see if I am wrong, obviously. Maybe a bunch of pissed off CEOs will destroy their own companies because the government took away their third house in the Hamptons. Somehow I doubt it.
by John Cole| 78 Comments
This post is in: Politics, Republican Stupidity, Clown Shoes
The SNL opening skit last night poked fun at the House GOP echo chamber:
From that Frank Rich column we linked in the earlier post today:
The stimulus battle was more of the same. “This town talks to itself and whips itself into a frenzy with its own theories that are completely at odds with what the rest of America is thinking,” he says. Once the frenzy got going, it didn’t matter that most polls showed support for Obama and his economic package: “If you watched cable TV, you’d see our support was plummeting, we were in trouble. It was almost like living in a parallel universe.”
For Axelrod, the moral is “not just that Washington is too insular but that the American people are a lot smarter than people in Washington think.”
Here’s a third moral: Overdosing on this culture can be fatal. Because Republicans are isolated in that parallel universe and believe all the noise in its echo chamber, they are now as out of touch with reality as the “inevitable” Clinton campaign was before it got clobbered in Iowa. The G.O.P. doesn’t recognize that it emerged from the stimulus battle even worse off than when it started. That obliviousness gives the president the opening to win more ambitious policy victories than last week’s. Having checked the box on attempted bipartisanship, Obama can now move in for the kill.
But, you say- “Surely their unanimous no votes in the house and their unified opposition must be paying dividends!” Via the GOS, some polling data:
I honestly have never seen a party go so far out of their way to marginalize themselves, and folks who study groupthink are going to look at the last few months as a veritable gold mine. Why the Republicans have decided to, in the middle of numerous crises, ignore the outcome of an election and run headlong against a popular new President into opposition for opposition sake is beyond me.
And look, there are very legitimate reasons to oppose the stimulus bill. No one knows if it will work, and the Joe Biden gaffe that the chattering classes were worked up about a few weeks ago was a gaffe precisely because it contained a lot of truth. While I have no idea where Joe was getting his numbers, the fact is that no one knows if the stimulus bill will work, and similarly, adding 800 billion in debt should be hard. Things are looking so bad there is no way to know whether or not this bill will change the cycle we seem to be stuck in, and an argument could be made that the real game is the Geithner plan, which to date has not inspired much confidence. The current stimulus bill does have a lot of spending, but from what I understand, much of it is in the form of padding the fall.
Additionally, spending that kind of money shouldn’t be easy, and an opposition that didn’t spend every day running around yelling ‘No’ and ‘Tax cuts’ probably could have built a more effective case against the stimulus bill. Sadly, that would have required counter proposals and arguments that didn’t start and end with tax cuts. But it is the way the Republicans are going about opposition that is so ridiculous. Their unified vote is so transparently just political gamesmanship, especially when you consider that immediately after the vote, Republicans were issuing press releases touting the benefits of the bill for their district.
But, for whatever reason, the GOP simply can not figure it out. Michael Steele, the new RNC chairman is busy telling everyone there is absolutely no reason for anyone to trust the GOP, while the rest of them are spending their time running around comparing themselves to the Taliban. The reason Steele felt compelled to announce that the GOP can not be trusted is because everyone agrees they can not be trusted. He was merely stating the obvious. Rather than try to build trust, though, rather than sit back and take a breather, compose themselves, and plot a way forward for both the country and the GOP, the Washington Republicans seem intent on committing seppuku. Instead of rebranding themselves and putting forth an alternate vision, they seem to think that unified obstructionism based on the hope that things get worse is the real way forward for them. And they don’t realize that everyone sees through it.
The Rich piece notes that not all Republicans are on board the crazy train, and points to Charlie Crist and others. Fair enough, but I would also point to someone else who, despite being mocked by this website and others, seems to have figured things out and is keeping a low profile- Sarah Palin. She refused to be allowed to serve as a leader against the opposition, and seemed to play it both ways. She also removed herself from a high profile appearance at CPAC, choosing to stay at home and govern. After a disastrous couple month post-election media blitz, she seems to have figured out that keeping a low profile right now makes the most sense.
Say what you want about Sarah Palin, but she seems to be smarter than the rest of the GOP. I don’t know if it is because she is not stuck in the DC GOP cocoon, or because she has solid political instincts, or because the states are hurting so bad that she knows her state needs the help from the stimulus bill, but it is clear she has decided to not wed herself to the DC republicans. That says something, doesn’t it?
*** Update ***
This Brownstein interview with President Obama seems to suggest Obama understands the drill:
Obama said the near-unanimous Republican opposition, after all his meetings with GOP legislators, would not discourage him from reaching out again on other issues. “Going forward, each and every time we’ve got an initiative, I am going to go to both Democrats and Republicans and I’m going to say, ‘Here is my best argument for why we need to do this. I want to listen to your counterarguments, if you’ve got better ideas, present them, we will incorporate them into any plans that we make and we are willing to compromise on certain issues that are important to one side or the other in order to get stuff done,'” he said.
Cooperation on the economic agenda, he suggested, may have been unusually difficult because it “touched on… one of the core differences between Democrats and Republicans” — whether tax cuts or public spending can best stimulate growth. He predicted there may be greater opportunity for cooperation on issues such as the budget, entitlements and foreign policy. And if he keeps reaching out, he speculated, Republicans may face “some countervailing pressures” from the public “to work in a more constructive way.” White House aides suggest that regardless of how congressional Republicans react on upcoming issues, Obama will pursue alliances with Republican governors and Republican-leaning business groups and leaders.
Yet while promising to continue to seek peace with congressional Republicans, Obama also made clear he’s prepared for the alternative. “I am an eternal optimist [but] that doesn’t mean I’m a sap,” he said pointedly. “So my goal is to assume the best but prepare for a whole range of different possibilities in terms of how Congress reacts.”
***In such comments, and his remarks about his willingness to work with or without Republican support in Congress, Obama may be revealing much about his conception of leadership. He was insistent that a president’s responsibility is to resist the daily (if not hourly) scorekeeping of the modern political and media system and keep his eye on the horizon.
Obama seems perfectly content to keep extending olive branches, incorporating the Republican’s ideas when they are good, and then allowing them to get no credit for anything as they marginalize themselves while he “pals around” with Republican governors like Charlie Crist.
Out of Ideas, Out of Their Minds, and Out of TouchPost + Comments (78)
by John Cole| 87 Comments
This post is in: Open Threads
If you want some things to entertain you, you can go read Frank Rich doing a victory lap, or you can check out the complete list of conservative movies at NRO. Did you know that the Incredibles, Ghostbusters and Forrest Gump were conservative epics? I know! Me either!
Now 300, with the over the top HoYay and men running around in their knickers, I can see how that plays to the Larry Craig crowd. At any rate, have at it.