Rolling US Economy Into The Shitbin Thread

which, as an NJer who has watched this guy for 9 years now, i can say is typical corzine BS: i.e., talking out of both sides of his mouth and pleasing no-one.

Re. Messing with the status quo: weaning our economy off financial services, for instance. At least off such a heavy reliance on them. They are not healthy for democracy, since democracy requires an informed voter base, and it is hard (by design) to understand how these instruments work, both in theory and as implemented in practice.

Thinking about that as I read this:

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

So many things occur to me from this article (mostly questions).

Yeah, I don't think Obama = Phil Gramm. I don't think he's going to enable more of this nonsense. But does he have the power to roll back the power of the financial services industry as it already exists? I'm not yet confident that he does.

Obama's right: politics is about us, not him. We've got to get our shit together and solve the problem ourselves, by pushing for change. Only under that condition can a US president justly take on the plutocrats.

more like gaythner

Damn; that Rolling Stone article is so involved that I'm actually outlining it. But it's worth the effort. Thanks for linking to it.

he's been working on it for months. the timing of its appearance is pretty perfect

er guyz

http://www.nytimes.com/2009/03/21/business/21bank.html

I think that plan has been discussed for months. It's a smallbore solution to a much bigger problem, but the Obama Admin. may know that. FWIW, I don't like the idea, since it bets on the market rebounding sometime in the foreseeable future (since, in all likelihood as I understand it, the banks will take a haircut on their toxic assets, but not a huge one).

Wow @ that Rolling Stone article. Even with the outline I made of it, my head is spinning.

Here's the key concluding paragraph, which echoes a theme discussed here recently:

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

Now I've got to GOOGLE those shadow entities that the Fed recently created to pump government money into private hands, with little or no transparency: The Term Auction Facility; the Term Securities Lending Facility; the Primary Dealer Credit Facility; the Commercial Paper Funding Facility; the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; a Money Market Investor Funding Facility; three facilities called Maiden Lane I, II and III, designed to aid bailout recipients like Bear Stearns and AIG.

Ah, on second thought, maybe I'll GOOGLE tomorrow.

a steaming pile of shit

The more I think about this "public-private partnership" idea, the more I dislike it. Basically, it means we're privatizing any gains in these troubled assets, and nationalizing any losses. That is, if the toxic assets purchased do rise in value and become net profitable, the private investors that bought the assets -- using taxpayer money for up to 85% of the purchase price -- they get the benefits, and all the government/taxpayers get is a return of the principal (eventually) plus the interest payments on these "low-interest loans." So that's a great deal for the investors.

By contrast, if the assets do not rise in value (or if their value continues to plummet), the investors can default on the loans. And the government/taxpayers get . . . what? The toxic asset? That's cold comfort. Some other secured collateral posted by the investors? I haven't heard that. So again, that's a great deal for the investors. For taxpayers? Not so much.

And buried in the NYT article as "stage three" of the plan is a reference to the Treasury's plan to expand lending through the Term Asset-Backed Securities Loan Facility, which is one of the shadow programs that the Rolling Stone article says have abruptly replaced "repo agreements" as the means by which the Fed controls and regulates the market. Wiki has an entry on TABSLF.

Paul Krugman hates the Geithner Plan.

Whenever I try to show all messages on this thread - and only this thread - my internet disconnects itself. Anyone else?

nm i just had to turn images off

What I want to see is more analysis of whether Treasury's plan will work, i.e., resolve the bank's horrible balance-sheet problems. If it does, I would be more inclined to accept, as Krugman puts it, the "heads I win, tails you lose" nature of this "public-private partnership" plan. I'm pretty sure the answer is that it won't work.

The moral hazard is simply astounding.

And then I start thinking about the fucking fees that private investment will collect running deals through this plan and it makes me want to throw up.

Christ, that Rolling Stone article is scary even if you ignore Taibbi's overheated prose.

Yep. It's helping me understand the CDO/CDS/deregulation axis, tho.

You guys also might wanna read House of Cards, the book that recently came out about the Bear Stearns debacle. It's flat out awesome.

The more I think about this "public-private partnership" idea, the more I dislike it. Basically, it means we're privatizing any gains in these troubled assets, and nationalizing any losses.

exactly. remember when socializing the risks and privatizing the profits was considered part of the problem? now it looks like it's being offered as official policy. all so they can pretend this stuff is a functional, private enterprise system.

wow nobody but nobody likes this plan.

this comment on the Naked Capitalism blog seems to sum it up

Since Geithner will let the banks buy and sell at auctions, he guaranteeing that the banks will overpay in buying assets from each other because it helps them to swap old trash for new trash at inflated bids.

Before each bank has old trash, and after they've got new trash plus cash plus non-recourse debt secured by the new trash. The auction is a complete charade. The banks are effectively trading trash assets with each other, and Geithner is pretending it is an auction as an excuse to give them 50%-100% undercollateralized non-recourse loans, which are obviously a handout to the extent of the undercolateralization.

Co-sign on value of RS article, though the multiple side mentions of meth heads and bald men suggests that Taibbi may have had a strange, troubled past.

Or our nation's strange, troubled future.

wow nobody but nobody likes this plan.

No. Bankers should love it. They get to unload their toxic assets at something between book and market value, keep their management structures, and live to bank another day. The investors should also love it, for reasons set forth above. And -- if the Obama Admin. is right, and the toxic assets will, sometime soon, show a net profit over the price they command at auction now -- everyone should love it. But that last possibility seems very unlikely.

toxic assets will show a net profit over the price they command at auction now... seems very unlikely

I agree, with one reservation. If the value of the dollar is sufficiently undermined by rapid inflation, or hyperinflation, then the asset prices in inflated dollars could be nominally higher, although far less in constant dollars.

Ahhh, I need to figure out this whole "inflation, hyperinflation, deflation, the dollar's relative value" business.

Krugman explains his objection to Obama's bank plan.

Krugman makes perfect sense to me there, though I admittedly have a hard time following some of the fine points of the crisis. But I do know that at the bottom of a very complicated mess of investment products is a very simple fact of housing prices that are still too high in many places. They only reached that level because of inflated credit and unrealistic expectations, and now there's a glut, and prices are out of whack with incomes, especially as they are now decreasing as unemployment rises. No matter how complex the products, if these homes and the mortgages on them are at the bottom of it all, no plan that relies on propping up the prices of homes or related assets can work.

at the bottom of a very complicated mess of investment products is a very simple fact of housing prices that are still too high in many places

That's a big part of it. But those CDOs are a big part of the problem, too, and they contain a hodgepodge of assets (of which home mortgages are one). To me, that means the problem is also largely consumer debt. And on that, see the very scary "Twin Peaks" theory, drawing a parallel between the ration of household debt to GDP in 2007 and 1929. All of this raises another problem. Obama keeps saying the problem is the freezing of the credit market, but unfreezing those markets might only spark a new wave of the kind of unsustainable consumer spending that got us to this point. In other words, the solution to one problem (banking/credit market) might exacerbate the other problem (consumer debt), and that's a bad place to be.

Right. The the "solution" cannot be an attempt to get us back to where we were before.

xpost

Here's the simplified way I like to think about the deflation, inflation, hyperinflation question.

This whole collapse revolves around bad debt. Not just bad debt, but hopelessly toxic debt, debt that will never be repaid under any sane economic conditions, because the collateral for this debt was so laughably inadequate, or so tangibly non-existant, that only a bleeding fool would have loaned the money and only a worse fool would attempt to repay it.

During the bubble, these damn-fool assets were accepted as real. Consequently, they brought into existance a very large bubble of money. Real money, because it was treated as and accepted as real money. Much of that money has now disappeared, because no one is accepting these assets as anything but a reeking pile of horseshit. For good reasons I might add.

Now, what the Federal Reserve and the Treasury and the Congress are trying to do boils down to this: they are trying to create economic conditions that would allow all these bad debts to be repaid, or substantially repaid, by the debtors. In doing so, they hope create conditions where these toxic debts become only mildly toxic, so the economy can digest them with only mildly toxic effects, a stomach ache instead of convulsions.

They wish.

In essence, all the efforts of the Federal Reserve and the US government up until now have been trying to reverse a situation where sanity has replaced insanity, so that we can get back to a comfortable level of insanity again. The only way to repay these debts is to create a bubble of money of a similar size to the bubble that disappeared lately. Except there is one difference: now the markets know the real economy has no assets to back up this new bubble of money. To the markets this will look like funny money.

The way to replace the bubble of vanished money is through government borrowing and the Federal Reserve buying up assets. They are doing both of these. So far so good. The question then becomes, how much of this funny money do you replace?

Generally speaking, allowing the old bubble of money to vanish completely would result in deflation. Replacing the entire bubble of money with equally fictitious money will result in hyperinflation. Replacing some smaller amount of the vanished money, say 35% of it, will result in inflation with very high unemployment. If you were forced to choose, this last alternative is probably the best of some sorry-ass choices.

The political part of this equation is also pretty simple.

As the government borrows and spends more money, what does it spend it on? Bonuses for AIG employees? Paying off bad gambling debts? Assistance for the victims of the bad economy? Roads and bridges? Congress will decide these things, in negotiation with the Obama administration. Lucky us.

If you have been paying attention, one of the hallmarks of the government and Federal Reserve policy has been to hand money directly to banks and institutions like AIG, with few strings. OTOH, what they want to do for ordinary people is "make more credit available" to us, so we can go further into debt to the banks and car companies. Lucky us.

The last thing to know is that the Federal Reserve is not subject to politics in the ordinary way, but only through the Congress changing its charter, which this Congress would not do, not ever. And they can print as much new money as they like. And Ben Bernancke is on record as being willing to do almost anything to avert a deflationary cycle, including dropping money from helicopters. Who do you think he wil drop the money on? Morgan Bank, or you and me?

wow, that's an interesting post. what do you think we should do instead?

It won't happen, because the voters of the USA will not be able to sort out who is handing them the straight dope, and who is selling them snake oil, and too many of the representatives they have in Congress are merely mouthpieces for the interests of big business -- and financial institutions are very, very big business.

But since you ask, the essence of the matter is deciding who loses. No one wins.

First, I would treat the failed banks as failed banks. So, the shareholders would be the first losers. Their shares will go to zero. I would close the failed banks and try to segregate their assets into three piles: good, bad, and wtf-do-we-have-here?

The bad assest will be trashcanned.

The good assets would belong to a new, smaller, reorganized bank under new management and the bank would reopen for business. Bondholders of the bank would be offered a return that is commensurate with the bank's new balance sheet, which would be pennies on the dollar.

The wtf assets would need to be segregated into a national "bad" bank, awaiting some idea of wtf they might be worth.

Next, the federal government should be concentrating on assisting the victims of the bad economy and rebuilding infrastructure. Not propping up zombie banks. Food stamps should be expanded. Ditto for unemployment benefits, education, and medicaid. If the feds are going to have to add to the debt, the money should go into the real economy, and to people and jobs, not banks and financial paper.

There should be a new government entity to deal with all the houses that are in foreclosure, or approaching foreclosure. It would need broad powers, a clear mandate, and the imperative to disappear in 5 or 6 years.

The Fed is still going to have to print money and buy assets with it. It should concentrate on supporting the Federal budget and buying Treasury bonds, and this support should be limited, so the US Treasury must maintain itself worthy of credit from the marketplace, not just the Fed.

Of course, there need to be much stricter oversight of banking and insurance than we've seen lately. Even if it is an over-reaction. We've pissed away so much trust in our banking system we need to rebuild it the hard way, by making it obviously, transparently worthy of trust.

That would be a good approach, imo. And it would entail a lot of pain. A lot. That comes with any one of the choices on the table, so you may as well choose the pain that leads to the best result in the end, rather than pointless, fruitless pain that leaves you in worse straits than before.

Now I should get off this thread for a while. Too agitating. I need a nice long walk in the woods. Nature is so much saner than people are.

Hey, Aimless, thanks; this is very interesting. And, unsurprisingly, it raises more questions:

Generally speaking, allowing the old bubble of money to vanish completely would result in deflation. Replacing the entire bubble of money with equally fictitious money will result in hyperinflation. Replacing some smaller amount of the vanished money, say 35% of it, will result in inflation with very high unemployment. If you were forced to choose, this last alternative is probably the best of some sorry-ass choices.

Why do these various options result in, respectively, deflation, hyperinflation and inflation + unemployment? I mean, for instance, if there is much less money around (option one), why does that depress prices (and why does it do so in a dangerous way)?

The wtf assets would need to be segregated into a national "bad" bank, awaiting some idea of wtf they might be worth.

What does the nationalized bank get in return for this "WTF asset," if anything?

Not propping up zombie banks. Food stamps should be expanded. Ditto for unemployment benefits, education, and medicaid. If the feds are going to have to add to the debt, the money should go into the real economy, and to people and jobs, not banks and financial paper.

So you don't buy the "too-big-to-fail" notion? At least with respect to some of, say, AIG's counterparties?

I think we're on the same page with respect to bank policy. I think we'll need to nationalize some banks after these "stress tests," to clean up the balance-sheets. There's no way to prop up the asset-side of the sheet by betting long on these bad mortgages.

What's amazing to me is that we're facing so many crises at the same time -- (a) the regular recession, (b) the banking crisis, (c) the AIG crisis, and more -- all of which are feeding on each other. Bad news.

I'm wondering if the counterparty issue isn't the elephant in the room here -- make them take a bath and the US has a major international relations and larger creditworthiness problem on its hand perhaps? And yet explaining this only draws attention to the flow of money out of the country?

Simon Johnson (formally of the IMF; now writes for the Baseline Scenario blog) had an interesting idea: Allow AIG to fail and, on the day the failure is announced, have the gov't bail out only those counterparties that are truly "too-big-to-fail." The idea is that, at the moment, we're bailing out all of AIG's counterparites, including smaller players whose failure won't shatter the economy, and that means we're overpaying. This is a more targeted approach. It makes sense, but I don't understand the logistics. If AIG isn't announcing who all it's counterparties are, how can we do this in one fast move? I don't know, but I'm pretty sure Johnson does, and he seems confident it can be done.

So you don't buy the "too-big-to-fail" notion? At least with respect to some of, say, AIG's counterparties?

Big shouldn't mean stupid. No one would dream of claiming to be too stupid to fail. If that is so, then no one should be too big to fail either, if their actions were plain stupid.

I don't recall AIG advertising its swaps were backed by "the full faith and credit of the U.S. government". As a matter of fact, the market in credit default swaps was specifically denoted as an "unregulated market", which, if it means anything should mean - let the buyer beware.

In which case, AIG's counterparties must swallow any losses they incurred through negligence or failure to perform due diligence. I mean, when AIG began writing "naked" credit default swaps, it should have been perfactly evident that they were running a bookie parlor. Running it pretty damn poorly, too. Any Las Vegas casino worth its salt knows how to protect itself against paying out more than it takes in.

It really gets me when apologists for the hedge funds, AIG, investment banks and wall street firms complain that the government wants to act "punitively" for wanting to limit salaries and bonuses, when, if the free market had been allowed to run its course, the punishment for most of these institutions would have been corporate death, with the loss of all income, every job, and the liquidation of every asset down the last light fixture.

These assholes really do not get it. They failed. They failed spectacularly. They failed in all the most important aspects of their jobs. They don't deserve shit. They don't deserve to keep their jobs. They should apologize meekly and go live in their car.

mean, when AIG began writing "naked" credit default swaps, it should have been perfactly evident that they were running a bookie parlor. Running it pretty damn poorly, too. Any Las Vegas casino worth its salt knows how to protect itself against paying out more than it takes in.

OTM. I was shocked when I began reading about "naked" CDSs.

Re: Bonuses. I agree with you. The argument that's being spun now is that compensation limits will keep private businesses from joining Treasury's new "public-private partnerships." That doesn't make sense to me. It might if we were intentionally trying to limit compensation at any institution that receives gov't funds of any sort, but as of now, we're focusing on curbing excess compensation and bonuses at megafirms that spectacularly failed and now need bailouts to survive. The "already-failed (because of excessive greed/recklessness) megafirm" case is distinguishable from the "we're a private firm willing to take a chance on buying toxic assets from distressed banks" case.

The bad assest will be trashcanned.

I'm not sure what this means. Let's take the simplest form of a toxic asset: A million-dollar home sold to an unemployed meth addict that's now worth only 250k. So, it's a bad (or "toxic") asset. What happens when the government "trashcans" it?

The rage of Glenn Greenwald:
http://www.salon.com/opinion/greenwald/2009/03/21/anger/index.html

In sum: financial elites own the Government and both political parties. Their money drowns Washington and their lobbyists control it. They used that ownership of Government to abolish decades-old legal and regulatory protections which previously constrained what they could do. In the lawless environment which they literally purchased from our political leaders, they were able to pillage and pilfer and steal without limit.

I love how this "purchasing" of government is done by the buyer, as if the seller has no responsibility. Our representatives--the United States of US--are complicit in the downfall, it is the people we have elected to represent us who have sold us down the river to a bunch of animals.

Why has there been so little public rage Glenn? Because at the end of the day it is OUR complicity in the system that keeps allowing scandal to perpetuate. It is our guilt for not demanding more from our government. We let our president go on the Tonight Show while we picket Goldman's office. We can rage all we want at the investment banks but in the end we are the enablers.

I agree completely, Don. And I want to add: we are enablers because we like the results it's gotten us: a ridiculously high standard of living for so much of the populace (including nearly every American, if not every American, who posts on ILX). So why ask questions when you're getting paid?

How much would our standard of living drop if we ended these financial shenanigans? I don't mean for the rich-by-US-standards, I don't give a fuck if they bump down to an average standard of living. But what would the average standard of living in the US look like if we cut down the US economy's dependence on financial services?

We let our president go on the Tonight Show while we picket Goldman's office. We can rage all we want at the investment banks but in the end we are the enablers.

wait, who cares if the president goes on the tonight show? what's that got to do with anything? i thought he gave a fairly lucid (if necessarily simplified) summary of the whole aig situation there, and probably reached some people who wouldn't watch your normal 8 p.m. address-to-the-nation.

i agree about the society as a whole acting as enablers -- we've all been in on it, to one degree or another -- but greenwald's obviously right that wall street has pushed again and again for more latitude, less oversight, more access to americans' cash (don't forget their push for a piece of the social security action), all with just the vaguest of assurances that they knew what they were doing. and washington let them essentially keep raising their bet limits, without making sure they could cover their losses (since gambling analogies seem to be the order of the day). the complicity is widespread, but some people are more complicit than others.

tipsy, you're right that some people are more complicit than others inasmuch as they were active plutocrats, while others merely looked away while these active plutocrats acted. But if we are to take this as a lesson for democracy in the 21st century, we should pay a lot of attention to the latter.

our president trivializes the office when he goes on the Tonight Show. The Tonight Show is trivial. Sorry, I just think it debases the whole conversation about AIG when we start expecting our elected officials to dumb down the marketing effort. What's next, an appearance on American Idol? Way more viewers there. Or maybe Jeopardy. Hell, he might as well go on SNL too so that way joking about the Special Olympics will go over better.

But to Greenwald's point, Wall Street owns D.C. because our elected officials have been rolled and sold. The billions of dollars in lobbying was readily accepted in D.C., the favors were bought and the laws were written accordingly. Protesting Wall Street is like protesting criminals when the last line of defense is a corrupt police force.

The simplest form of toxic asset is not in the form of a 250K home that sold for a million. It is an asset, plain and simlpe. The truly toxic assets are in the form of bonds that are backed by a hodgepodge of loans, junk bonds and credit card debt, were rated AAA and now are producing 2% of the anticipated return, if that.

No matter how you slice this, there is no asset behind the bond that one can come at in less than five degrees of seperation and fighting through a phalanx of lawyers. And what you can seize after all that trouble will not be worth the trouble or expense.

I grant you that if some of these bonds are still returning 2% of face value they are worth segregating into the "bad" bank, but many of these assets will prove to be entirely worthless. Zero return. Pure trash.

Aimless OTM.