Rolling US Economy Into The Shitbin Thread

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.

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.

"trivializes the office"? i guess i don't have these kinds of concerns. maybe if he starts doing it every week, or shows up on hollywood squares or something, but as an occasional way do outreach and p.r. and whatever, it seems sensible. (and i'm not really sure the tonight show is any more trivial than meet the press or whatever.)

as for dumbing it down, if you could get yr average american to grasp even a dumbed-down version of what happened with aig, mortgage-backed securities, and the whole big clusterfuck, we'd be a good step ahead of where we are, knowledge-wise.

I suppose that what surprises me the most about AIG is not the intelligence community connections and the inside line to the Republican establishment (I had no clue that the founder of AIG was Ken Starr's uncle), but that AIG had all these inside connections for years and still managed to fuck up.

culture of nepotism in wall street/washington is disgusting (elite private prep school=>elite ivy/stanford/berkeley=>$120,000 investment banking jobs straight out of undergrad), reason #1 we're in a foundering plutocracy rather than a healthy democracy

culture of nepotism in wall street/washington is disgusting (elite private prep school=>elite ivy/stanford/berkeley=>$120,000 investment banking jobs straight out of undergrad), reason #1 we're in a foundering plutocracy rather than a healthy democracy

you realize that what you've described as "plutocracy" is gabbneb's version of utopia, right?!?

also, i find it hard to take seriously arguments that president obama is trivializing the office of the presidency by appearing on the Tonight Show after eight years of an administration that raised trivializing the presidency to an art form.

i know, when he was on there (at least until the special olympics joke), i was thinking it was nice to have a president who can go on tv in an ad hoc setting and not seem a.) totally canned and scripted, and b.) like a dunce. he can talk like a more or less normal person, and seem smart while doing it. i'd go on the tonight show too if i was him.

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.

So the toxic asset you're referring to is more akin to that "top 10% tranche" of a CDO that was, at one time, considered safe enough to warrant a AAA-rating? I'm asking (a) to confirm my understanding and (b) because I'm especially interested in this aspect of CDOs. It seems to me that -- assuming the below-quoted passage from Taibbi's article is correct -- there is a massive fraud claim against the banks selling these CDO:

The problem was, none of this was based on reality. "The banks knew they were selling crap," says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. "They had some back room somewhere where a bunch of Indian guys who'd been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years," says one young trader who sold CDOs for a major investment bank. "It was nuts."

Who would have standing to pursue such claims is a separate question.

This leaves the question of how "toxic assets" -- of whatever type -- are handled in a nationalization scenario. So the government swoops in, takes over the bank, (n.1) I assume infuses it with capital (as an inducement to permit the takeover), divides up its assets and leaves only the good ones, and as quickly as possible thereafter, shops the leaner-and-meaner institution to private purchasers looking to acquire a bank. The bank gets nothing for the toxic assets (of either the "bad" or "WTF" variety). Those toxic assets are then put into a government bank. The debtors whose accounts were bundled into the toxic asset are still responsible to make their monthly payments, I assume. If those debtors default, I guess now it's the government that can foreclose on the security agreement if it chooses to do so. The government can, I assume, also renegotiate the terms of the loan, thereby helping the debtor stay afloat. Is that basically what happens? (I realize this is horribly oversimplified).

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(n.1) Another issue here is what happens if the bank disputes the results of a gov't analysis finding it insolvent. That is, can the bank say "NO" to the government's efforts to nationalize it, and if it does so, is the bank then vulnerable to efforts by its creditors to force it into bankruptcy? (I assume a forced bankruptcy is the only recourse left at that point, unless the bank -- down the line -- admits its insolvency and voluntarily seeks protection under the bankruptcy code (or whatever analogous set of laws applies to a bank)).

That's the first time I've ever seen a footnoted ilx post. Kudos.

can the bank say "NO" to the government's efforts to nationalize it, and if it does so, is the bank then vulnerable to efforts by its creditors to force it into bankruptcy?

i don't know the answers to a lot of your (good) questions, but this one pretty much answers itself. no company would face nationalization if it weren't facing bankruptcy. when people talk about "nationalization," they're really talking about a form of bankruptcy -- but a more structured one than the "let the cards fall where they may" approach to lehman brothers. in retrospect, the problem with lehman wasn't just that it went under, but that it went under with no serious attempt to mitigate the effects of its collapse. instead of learning from that that collapses would have to be handled differently, paulson and bernanke freaked out and said 'NO MORE COLLAPSES!' which led us directly to our current limbo, where these things aren't being allowed to fail, but also remain outside the direct control of the government.

plus consider the operating differences/assets between an i-bank like Lehman and, say, General Motors. Lehman collapsing is more of a vaporization/vacuuming effect for creditors compared to industrial type bankruptcies.

That's the first time I've ever seen a footnoted ilx post. Kudos.

lol. Thx.

I just listened to this interesting interview on TPM. It reinforces a lot of what's in Taibbi's article, and there are whispers in it of the underlying economic class-issues that lay just below the surface of this debate. OTOH, there's this analysis from TPM's Josh Marshall, which basically suggests that it's understandable cautious thinking that has the Obama Admin. trapped in the TARP/buy the toxic assets mindframe.

Not to say Marshall agrees with the TARP-type approach. From what I can tell, he doesn't. He just says that the outside chance of a global economic collapse is what's keeping the Obama Admin. from taking the boldest type of action with regard to the banks (e.g., nationalization).

And, on a more optimistic note, Matthew Yglesias makes a case for the new public/private partnership plan, and seems bullish on the Admin.'s new financial regulations, implying they may be laying the groundwork for putting large, dead financial firms into receivership.

(Sorry for multiple, multiple posts).

I really don't see much use for Marshall's post--risk aversion/mitigating risk is a cornerstone of anyone dealing in finance.

As for Ylgesias--he's kind of stating the obvious :"By contrast, if enough people buy up mortgage-backed securities to get the banks back in business, then sound elements of the real economy can expand and the economy can recover." There's the rub Matt--who are "enough people" in this scenario and how much taxpayer assistance do we give them to buy shitty securities?

I really don't see either JM or MY having very good insight on economic matters.

i've found josh marshall helpful exactly because he admits a lot of this stuff is over his head. he's been hashing it out in public, trying to get a bead on it, and it's made for some good layman's reading. (he boiled down the basics of the whole counterparty-payment issue with aig before i saw anyone in the bigger media outfits really get a handle on it.)

and i think he's right that caution rather than cronyism is behind most of what geithner and obama have done (or not done) so far, although under the circumstances they can look awfully similar. but as various people have started to say, it seems like we're far enough beyond september now that we should be able to talk seriously about letting some things "fail" (in a careful way) without everything going to hell. but that doesn't seem to be the plan, which is maybe a problem.

Baseline Scenario, the best online destination-point I've found for information/analysis on the economic crisis, just posted an analysis of Treasury's new program. One thing that puzzles me, in No. 1 and 2, is what appears to me to be a double payment/guarantee by the gov't. For instance, in No. 1, the gov't (a) pays up to 80% to buy a bank's troubled loans and then (b) it provides non-recourse loans for up to 85% of the total funding/guarantees against falling asset values. Anyone know if I'm reading this right, e.g., that there are two payments/guarantees being made by the gov't in point-one of Treasury's new program? And, if so, what's the difference between them? It seems to me that the initial money being committed is cash to buy the actual troubled loan, and the second money being committed is a guarantee against the purchased asset falling in value (or maybe not rising sufficiently in value).

BTW, Baseline Scenario also has a good new post discussing some nationalization issues.

Guys ive been out of town for two days and at the airport CNN was all "OMG AIG is suing the government". Did anything come of that, or was that Wolf Blitzer yelling for no real reason?

OMG DeLong is a heretic!!!!!!!!!!!!!!
http://delong.typepad.com/sdj/2009/03/i-think-paul-krugman-is-wrong.html

delong's point #2 there is what i used to think the obama strategy was -- wear down resistance to the idea of nationalization by exhausting other avenues first. but i'm not sure of that anymore. but hell i'm not sure of anything.

or, take office 30 years into voodoo economics plutocratic nightmare, gradually (takes longer than two months) tilt county back to normalcy over four year term

tim speaks
http://online.wsj.com/article/SB123776536222709061.html

http://www.nytimes.com/2009/03/23/business/economy/23toxic.html?hp

As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

The horror!

But - I don't understand how those those last two grafs connect with the first one. Compensation limits, disclosure, governance rules, etc are potential conditions of taxpayers owning a preponderance of shares in a company, i.e. owning it.

Government subsidies with which private funds can buy up troubled mortgages have nothing to do with that.

Does "90% tax" ring any bells, Tracer?

Yes, for companies that are almost entirely owned by the taxpayer there are compensation limits being sought, i.e. a 90% tax on bonuses. Just think of it as union-busting Don.

But with what justification would the govt demand these things of companies that simply take advantage of cheap govt loans to buy up bad mortgages? I don't get it.

Sigh.

The problem--one that I hinted at twice upstream--is that you have to give incentives for private money to get involved i.e. you have to mitigate the risk somehow. In this case, we are talking about massive public subsidization to do that. And so yes, our public ownership entitles us to make the rules.

What PE/HF firms do not want to happen is have the rules get changed downstream i.e. when management fees and bonuses are made public. Retroactive punitive legislative behavior is what alarms anyone managing an i-bank.

Is it starting to make sense yet? Private banking doesn't want to do business with the fed if the rules are going to get changed willy nilly because that raises risk.

I understand your point. But as I said before, the case of the "megafirm that collapsed due to greed/recklessness/fraud and now needs a public bailout and arrogantly refuses to even attempt to curb its outrageous bonus structures" is distinguishable from the case of the "private company that is working hand-in-hand with gov't to try and rejuvinate the economy by solving the bank's toxic asset crisis." In the former case, compensation limits make sense. In the latter case, they likely don't (unless there's abuse by the private entities in the process that also brings the economy to the brink of collapse). So I don't see a reasonable fear by private investors.

It's a reasonable fear--retroactive interference or governance--by private investors because their business models rely on current regulations, not ones that get dreamed up whenever pitchforks appear on The Mall.

The compensation limits are one thing, but things like disclosure rules frighten i-banks/HFs/PE firms to their core.

I really don't see why, if you're running a PE firm, you can't say to the government, "We'll help you out as long as you don't change the investment contract if you're unhappy with it."

What's the point of entering a contractual agreement if one party has the right to change the contract at will?

Or, more succinctly, where's the incentive to enter an agreement like that?

Don I completely agree and I'm still trying to work out where anyone in the govt has suggested that this is even a possibility with investors who participate in this "let's all buy the bad stuff together" plan.

The investors mentioned in the article think it's a possibility because they think they just saw it happen with the "90% tax". THAT'S MY POINT.

To wit, Treasury can get the whole thing set up as an agency and have rules in place, but how does an investor know whether or not Congress won't come in behind Treasury and change laws? That's the point those guys in the article were making.

The opposite situation -- a highly deregulated environment where private interests do as they please to maximize value -- produced the current situation, so there's risk on both ends. As between the two, I want a robust regulatory environment, notwitstanding the risk that the private sector may not partner with the gov't in Treasury's plan as a result. But, by the way, I think it's unlikely that this "fear" by the private sector is completely genuine.

And the ability to change contracts has always been the gov't right. It infects all types of business relationships, (n.1) but it doesn't scare off private-sector ventures.

(xp to Don)

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(n.1) To give just one example, in an effort to crack down on Medicare fraud, the gov't moved to an auction system for durable-medical equipment providers who sought reimbursement from CMS. The auction was run last year, and it was shoddy: Private entities who were qualified were erroneously disqualified; Non-viable entities who should have been disqualified were not. Nevertheless, the gov't went forward, and awarded contracts to winning bidders. Just as those contract went effective -- and after the winning bidders spent money and allocated resources to fulfill those contracts -- Congress, recognizing the problems with the auction, scuttled the contracts and began reviewing the system (with a slate of concessions from the DME industry). The gov't was legally entitled to break those agreements, and I guarantee you, when the next auction is held, all the entities who grumbled about the way the first one was run will submit bids and hope feverishly that they're among the "winning bidders."

Don your point doesn't make sense. What incentive, or rationale, would the govt have for punishing investors who it has just coaxed into buying up trash assets?

With a place like AIG, which is now taxpayer-owned, it makes sense to open up the books and curb the excesses of these people. It's owned by the people, who are the only thing standing between AIG and total bankruptcy. This new plan doesn't involve the govt taking equity in anyone; so why would the govt be in any position to dictate these companies' governance and compensation?

I mean, that's a genuine question, I honestly don't get it. The linked NY Times article quotes exactly one "senior exec" who has these fears but doesn't explain why s/he has them, since his/her situation would be completely different from a bailed-out zombie firm. In fact the rest of the article contains quotes from ahnother exec and from two people on Obama's team who say - on the record - that firms who participate in the plan are obviously in a different category.

What incentive, or rationale, would the govt have for punishing investors who it has just coaxed into buying up trash assets?

It's not the short term that worries anyone. It's the long term, I assume. For example, let's say the toxic buyback is a roaring success, and management fees end up higher than anyone expected. You think Goldman wants to see a decrease in fees two years from now, simply because pols in DC thinks that Goldman is making too much money off of the program?

And yes--the government is entitled to legally break contracts (just as you are if you don't pay your mortgage.) But when the government breaks a contract or changes the rules retroactively, it reminds the private investor of the risk of doing business with the government. The government isn't taking equity in anyone--it's private money at risk, but the government essentially can retroactively control the profit margin.

I'd say right now that it looks like a really good deal for private investors--too good, in my opinion--and maybe it looks so good that at least one guy at an i-bank is wondering what the catch is.

Let me see if I have this right. 1) This asset-buying plan will be a roaring success; 2) the trash assets will come back up in value; 3) The currently on-life-support ibanks will reap big rewards; 4) So will the taxpayer; 5) The govt will then seize a portion of the ibanks' fees.

in that scenario, I'd amend #5 to read "the govt reserves the right at any time to retroactively change compensation either by contract or through punitive taxation"

i rly wish i didn't have to wait for planet money to break this down for me

I think the past few months have shown the govt's extreme reluctance to do anything of the kind, even with institutions that it now effectively owns, and even when the public is baying for it.

Oh really?

http://www.ritholtz.com/blog/2009/03/ben-was-so-right/

“Politicians acting in haste rarely act wisely, least of all when guided by rage” commented the Financial Times over the weekend. The paper calmly, but effectively, editorialized that to use “the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact with retroactive force…is Constitutionally dubious…and an abdication of responsibility.” Those FT guys really know how to use the King’s English, don’t they?

Sunday’s NY Times was not going to be outdone by their brethren across the pond. The headline in the paper was that the Obama Administration is going to call for increased oversight of executive pay at “all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation.” The other thing likely to be announced this week (and may already have been by the time you read this) is a three pronged approach to rid the financial system of toxic assets. It would encompass a: 1) an entity backed by the FDIC to buy and warehouse loans; 2) an expansion of the TALF to buy older asset backed paper and not just newly issued stuff; and 3) the long awaited private/public partnership to buy mortgage backed paper and other troubled assets on banks’ balance sheets.

Beyond the problem of how to price this stuff that we have been wrestling with since the idea was first formed, the other, and bigger issue, is who will step up from the private sector to play with the bully that changes the rules after the fact?