OT AIG Story - Under the Hood

[keno]

After reading the following piece, a longer history of and current dealings by the government with the AIG matter, I am truly worried about our country's financial future, not to mention the emasculation of us ordinary taxpayers. If you have the interest and the time, this piece is well worth reading. While the government is a central character, it is not a political piece in the usual sense of the phrase. It does, however, have some rough langauge (well used, in my view) for a very serious and well-researched and written piece for those sensitive to such use of language.

http://www.rollingstone.com/politics/story/26793903/the_big_takeover

I happened to see the following picture this am, and somehow its inclusion seemed appropriate in my current mood about the AIG matter.



keno

[Ray]

MATT TAIBBI is trying to be the next Hunter Thompson. He occasionally succeeds. Pretty much hates power in any form and, thus, anyone IN power. Always worth a read, though, and really entertaining on the occasional talk show (he used to show up on Bill Maher's show pretty regularly).

-Ray

[goonster]

It's a good article.

Conclusion: A Brooklyn College grad is at the root of all evil. ;)

[fiamme red]

It's a good article.

Conclusion: A Brooklyn College grad is at the root of all evil. ;)You talkin' about me? ;)

Fortunately, no one could describe me as "pudgy, balding, with beady eyes and way too much forehead." :)

[Kirk Pacenti]

some might argue "they" have been working on this since the mid 1930's.

http://www.amazon.com/Plot-Seize-White-House-Conspiracy/dp/1602390363/ref=pd_bxgy_b_img_a

[goonster]

I've been reading Matt Taibbi since his days at the NYPress, and was never really a fan, but methinks he's written the piece of a lifetime here.

I was not aware of this Fed repurchasing program, that's completely unrelated to TARP. Nor did I realize that the Congressional powers of oversight essentially add up to zilch. Even after all that has transpired thus far, this article is a bit of an oh-**** moment for me. :butt:

[Pete Serotta]

good read...THANKS

[robin3mj]

I stopped reading after a couple pages. He may be on to something, but I’d be more inclined to buy into his viewpoints if he didn’t resort to the juvenile way he paints his bad guys…”beady eyed” “pudgy”, etc. I’d be no less outraged at the whole situation if all the bankers and AIG folks looked like All-American QB’s and fresh faced cheerleading captains.

[paulrad9]

MATT TAIBBI is trying to be the next Hunter Thompson. He occasionally succeeds.

He's also the author of 'The 52 Funniest Things About the Upcoming Death of the Pope'...nice guy

[Climb01742]

After reading the following piece, a longer history of and current dealings by the government with the AIG matter, I am truly worried about our country's financial future, not to mention the emasculation of us ordinary taxpayers. If you have the interest and the time, this piece is well worth reading. While the government is a central character, it is not a political piece in the usual sense of the phrase. It does, however, have some rough langauge (well used, in my view) for a very serious and well-researched and written piece for those sensitive to such use of language.

http://www.rollingstone.com/politics/story/26793903/the_big_takeover

I happened to see the following picture this am, and somehow its inclusion seemed appropriate in my current mood about the AIG matter.



keno

this really must be the apocalypse. keno and i agreeing. yikes. :D

the more the curtain is drawn back from wall street, the more i believe it isn't part of, and doesn't believe in, capitalism.

[RPS]

Good read, but can’t say this piece changed my mind in any way. IMO the fundamental problem remains having “too-big-to-fail” entities and our unwillingness to let them fail on their own while keeping taxpayers out of the loop. I know that would have gotten ugly, but what we are doing is insane – only palatable because the full impact won’t be visible for years to come.

[Volant]

Thanks for the link...very interesting.

[CNY rider]

Ken thanks for posting that link.

You and others who are interested may want to take a subscription to Bill Fleckenstein's site.
Fleckensteincapital dot com.

Fleck has been talking about this stuff for years and his analyses have been spot on. He's made me (and saved me) serious $$$ with his excellent analysis of the markets and the surrounding economic issues.

He's up to $120 a year I believe but well worth it.

[1centaur]

As with all things Taibbi, a lot of truth, a lot of crap, and the same universal cynicism that skewered McCain, Romney, Obama and Clinton during the campaign. He could write a disgusted, sarcastic, smarter-than-you piece about a monastery living under a code of silence. Rolling Stone's readership (I have a lifetime subscription) is done no favors by his style, because they pick up his emotional tenor without the wisdom to see the crap.

He failed to prove his thesis, most importantly. There was no plan to grab political power by Wall Street, there was instead a growth of complication to the point that nobody (and I mean nobody) understood it all and just hoped other people did. Washington reacted with the skillset it brought to the table - better ex-Goldman people than ex-Elks Club people, but still not enough. The acronym-filled plans Taibbi cites were brought to the table one at a time to meet a perceived need (hmm, like almost every regulation ever!) but not every need was immediately perceived well or at all, so they mounted over months. I'm sure it kills Taibbi that Obama's administration is acting like the Bush administration in the attempt to solve all this, and that the regulation changes were mostly pre-Bush (surely this is why it was Wall Street's plan to grab this power, not Bush's), but he's almost certainly right that the regulation was pathetic in the Bush years. Still, getting convenient quotes from junior traders and undersecretaries with their own blinders on is not the most convincing way to make an argument.

In the end (if I can see that from here), Wall Street brought itself down through its own complexity. Investment banks are gone, institutions will get smaller (not too big to fail) and safer, and most community banks will continue on. The bailout is of the system, not the ownership value of the big Wall Street houses, in large part. Both administrations believe letting the system fail is not acceptable. Both administrations believe the system will fail if the big institutions are wiped out, a la Lehman. The 50% of us who pay taxes going forward will pay, but we don't know how much. This web will get untangled slowly by various administrations to come. No book will ever get this story all the way straight because, irony drum roll, the complexity of the bailout is as bad as the complexity of the derivatives/structured product world. Every version will be tainted by world view and clouded by lack of expertise. Good luck to us all.

He's an incredible lefty, but I recommend Soros's column on the editorial page of the Wall Street Journal today about only using CDS to hedge owned positions. I was always uncomfortable with naked CDS $ trillions but assumed others knew what they were doing because they acted like they did and I was not going to spend months finding out otherwise - I already had a job. Silly me.

[rounder]

I read the Taibbi article and thought that it really explained a lot. It was well written in describing what happened with AIG and how it all...so far... came to pass. I knew it was not without bias. Then 1centaur responded with his (to me) typical reasoned analysis of what is really happening on Wall Street, which it seems that he does nearly every day.

I just got done listening to the pres and follow up questions from the press. There was no meaningful analysis...just more typical hype and drivel. I read the news everyday and believe that I learn more from these typical OT posts than I can get from reading the newspaper/Internet/tv These days, it seems like our leaders in government are just as greeedy as the folks on Wall Street.

[jhcakilmer]

The entire problem can be explained very simply......greed makes people dumb.....period. We all want to make it philosophical and academic, but history has repeated itself over thousands of years, through a variety of systems and mediums.

Those that actually "get it" are some of the wealthiest, and most powerful individuals the world has ever seen. Gates, and Buffet are not only ridiculous successful, but also unbelievably generous. They understand that any community's, any society's prosperity is based on the totality of the whole, it's not a vacuum that can be controlled or contained.

This is exactly why our health care delivery system is so horrid. Every other developed country has realized this, why not the US.....greed.

This whole ideal of "the system taking care of itself" has one problem, it hurts the "small guy" the most (which is 99% of the populous). This just doesn't make sense, and obviously doesn't work.....trickle down is a great ideal, but has a flaw......greed.

We want to make this problem sound so sophisticated, and intellectual, but the only reason it's so complicated is because of, you guessed it.... greed. They've created a system that is so convoluted and haphazard, it's just ridiculous....absolutely ridiculous. If only a few people understand it (or so they think), than only a few people control the system. But as others have stated, they apparently don't.

I do agree there is a fine line between too much regulation, and the "free for all" that they've had in the past, but come on.....we can do better than this. Why aren't more individuals going to jail....we need more accountability. IMO, the system forces those making the decisions to "work" the system, instead of actually running it. Kind of like an economic natural selection, gone awry.

Anyway, good article....obvious agenda, but great writing.

[Climb01742]

In the end (if I can see that from here), Wall Street brought itself down through its own complexity. Investment banks are gone, institutions will get smaller (not too big to fail) and safer, and most community banks will continue on. The bailout is of the system, not the ownership value of the big Wall Street houses, in large part.

i would place the cause as complexity plus an f-ed up compensation model. the beauty of capitalism (and i do honestly believe it's a beautiful system when practiced honestly) is the connection between value creation and reward. but creation of true, meaningful, sustained value takes time, and is often only apparent, and can only be accurately valued, over time...not every december when wall street bonuses are calculated.

contrast the yearly bonus model of comp to stock options. options vest over time. options aren't perfect but at least they address the issue of long-term value creation. until wall street is rewarded for long-term value creation, not yearly financial churn, the system will be whacked, and anti-capitalism.

and, if the goal was truly fixing the system, not protection of ownership value of the big banks, then nationalization would be on the table. i hate to say this but, obama's latest bank bailout plan is a goldman-esque free lunch to reward everyone but the tax-payers and leave the present f-ed up system in place. cynically, i saw monday's 500-point dow gain as, whoppee, the party ain't over, the new sheriff's just like the old sheriff. i couldn't watch last night's new conference. he's become the BS he was suppose to change.

[1centaur]

With Bear and Lehman wiped out, Merrill taken out well below historic value, and Citi and B of A and AIG at nominal values reflecting the overhang of government money to be paid back, protection of shareholders would not seem to be working. I presume the goal is to get private capital into banks now and in the future. Once you set the precedent of state elimination of the shareholder you create a long-term problem of capital input AND quick capital withdrawal if problems mount, exacerbating the problem. I think it would be expedient in fixing this crisis to nationalize (and thus put taxpayers at unknown risk at least as great as they have now) but it appears the economists in Washington are thinking long term.

[Climb01742]

yes, all our choices now are bad or worse. the game is trying to suss out which actually is the lesser evil. but here's my rub with the bank bail out:

private investors are willing to pay 30 cents on the dollar for toxic bank assets, but banks won't accept less than 60 cents. so goldman, d.c. says: let the taxpayers make up the difference plus underwriter about 93% of the dough? why let bankers off the hook for the crappy choices they made? and as far as wiping out shareholder value, isn't that what wall street has been doing to itself, and us, the past year?

is there a solution you see, that doesn't reward failure, and doesn't leave those who made enormously bad choices still in the corner offices? maybe nationalization satisfies my desire for retribution, but isn't paying the price of consequences part of capitalism?

[Ray]

Finally read it last night. As usual with Taibbi, there's a bit of steak and a lot of sizzle. I enjoy the sizzle, but that's what it is. A line that really struck me and relates to the oversimplified discussions we've had here and are often had in the press was:

And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now?

As he implies, its not an either / or situation - its a much more complex mess than that. It's more like capitalism run amok with a healthy dollop of centralized control, but anyone's opinion is as good as anyone else's in terms of whether that centralized control reeks of socialism or fascism - many on the right are calling is socialism and Taibbi and many on the left are calling it fascism. But it hardly matters because they're not that different in the end.

If Climb's right, the Geitner plan is another huge giveaway to the firms that created this mess because they're "too big to fail". If Centaur's right (and I hope I'm not mis-representing this), we need to do this to save the system in the short run. Ostensibly, IF this works to stabilize things, the next step is some combination of greater regulation and much more aggressive anti-trust action to break up some of these huge entities. Is THAT capitalism? Anti-trust rules are often seen by those on the right as anti-capitalistic, but some of the loudest voices on the right saying that no bank or investment house should be allowed to get to be "too big to fail". Perhaps they should be brought back to earth by just allowing them to fail (I guess that's the purely capitalistic solution), but the results of THAT could be even worse (many would say only in the short run, but I'm not at all sure about that).

I clearly don't know what the right answer is. But I'm pretty well convinced that the whole thing is too complex for quick or clean solutions and quick and clear labels. We'll muddle through it by trial and error and we'll either come out on the other side whole or not. The fact that the Paulson and Geitner approaches are so similar is either an indication that they've worked so closely together for so long that its inevitable that they'd think very similarly, or that the best economic minds are arriving at some sort of consensus, or its all some sort of evil plot and they're all in cahoots. I tend to agree with Centaur that NOBODY'S competent enough to pull of a great heist of that magnitude on purpose, but I'm not as convinced as he is.

Screw it. I'm going for a ride.

-Ray

[CNY rider]

i would place the cause as complexity plus an f-ed up compensation model. the beauty of capitalism (and i do honestly believe it's a beautiful system when practiced honestly) is the connection between value creation and reward.

I would argue that there is a more important aspect of capitalism that is being lost in our current efforts: Capitalism allows for rapid, efficient capital destruction. Bad ideas and those poorly executed need to be allowed to fail, and capital allowed to flow to new efforts.
We are propping up a bunch of financial black holes.

I'm not proposing that the state take out the shareholders as centaur alluded to but I am saying that the market should have been allowed to "take out" those invested in the bonds/preferreds/common etc. It is perverse that the bondholders in these entities are getting 100 cents on the dollar, as are the counterparties in the CDS's, while we the taxpayers get.........what exactly?

[Elefantino]

In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled a**holedom ...

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fu** itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

There is some brilliant writing in here, and some excellent reporting. However, there is one group that he didn't skewer but should have. In fact, this group deserves as big a finger as AIG, Paulson, Geithner, Cassano and the rest of them.

You and me.

We were happily rolling in money ("Dammit ... the annuity made only 15 percent this quarter? Get my money manager on the line!") and not asking questions, because when you're making money you're not supposed to ask questions about how you're making the money, which holds true whether you have your money with Chuck® or with Tony Soprano.

Nothing comes easily, but we, you and me, were convinced that it did, because even though it was a movie we all believed, somewhere in the back of our minds, that Gordon Gekko was right when he said that greed was good. As long as it didn't hurt anyone, and it didn't appear to be, greed was good. You could be a socialist driving a tastefully rusted Volvo, flying your red flag and raging against the machine, but you were a much happier socialist when your 401(k) is kicking a**.

The bottom line, delivered by my 89-year-old mom, who still drives her BMW and likes to attend bike races:

"We gave you a wonderful country. And you ruined it."

Mea (and wea) culpa.

[myette10]

You and me.
no doubt.

we wanted the finer things without the sacrifice our forefathers had to make to get them. no social class was exempt from this thinking but some groups had/have more opportunity than others to realize their objectives. Generational improvements in quality of life were no longer enough, we became willing individually and collectively to gamble the future in order to acheive day-to-day measurable improvements in the "quality" of our lives.

What is lost on most is that greed begets greed and want begets want. No matter what a person has, there is always more that they can get, so they will never reach that elusive quality of life they spend so much time and resources chasing (often recklessly). Greed will always leave you unsatisfied because if you owned the earth and the moon there would still be the stars. True happiness lies in appreciation for one's good fortune, health and family. This is as close to religion as I get.

So in our hopeless pursuit of happiness through wealth creation we porked ourselves, our country, and our kids. We put ourselves in homes we couldn't afford only to be tossed out a few years later. We turned power over to the well connected who lined the pockets of their constituents while we defended their actions as patriotic. We stopped making and started buying, handing real weath and value creation over to other countries. All so that we, this generation, could drive Lexus SUVs.

banks need to fail. homes need to foreclose. credit ratings need to tank. people need to loose jobs. maybe we'll learn our lesson, but I doubt it.

time to pay up.

[csm]

I take issue with the idea of "protection of the shareholders!" since when is it the responsibility of the taxpayers in general to do this? I thought the very idea of the stock market was risk? some many of these conglomerates have grown in the interest of "share holder value" that it seems only fair that when they fail the shareholders ought to be the ones who feel it.
I'm torn on Obama's plans; on one hand I'd like to see them fail to get the US back on track but on the other hand....

[Bob Loblaw]

It's funny. This guy claims that the big finance companies are taking over the government. Conservatives claim the liberal government is taking over big finance.

I like what Elefantino's mother said. It's not entirely true though. My dad says something similar...his father paid less than fifteen percent of his income taxes or something, everyone bought American goods because the quality was the highest in the world, and wasn't it wonderful to be an American back then before it all started to go to hell in the sixties?

Well yes it was. However, the rest of the world was a bombed out wreck after WWII. It took a couple of decades for other countries to reach a point where they were economically competitive. And lets not forget we had a few social problems back in the 40's and 50's.

I do, however, agree that this is a mess of our own making, yours and mine. Some of it reeks of the crash of 1929. Overextended credit. Assets becoming worthless instantaneously. Individuals and business ruined across the country. Government stepping in to try to fix the mess.

Demonizing the wealthy isn't going to help. Hey, if someone wrote you a $5 million check, would you give it back or would you buy a nice house or two, a few bikes and put your kids through college? And anyway, without the wealthy, we're the USSR in the 80's.

And yes, people in the financial sector are out there to make money, as much as they can as fast as they can, both for themselves and the investors they work for. It's shocking, I know, that any of them might bend the rules and be sneaky. However, we need those people, just like we need teachers, lawyers, the military and everyone else. You want to blame someone for AIG, blame your Congress for passing an 1100 page bailout bill that none of them actually read. I think we should have let AIG fall flat on its face instead of bailing them out. Let someone else step in and build a new, better version of AIG. That's what America is all about.

Demonizing the government is also counterproductive. We hired them, after all, and they're doing exactly what they said they were going to do if we elected them. We can fire them if we want to, but I doubt that would help.

BL

[Climb01742]

there is a lot of truth in what myette10 and Elefantino said, and what i find so disheartening thus far in obama's presidency is i thought he could be the one to tell us. being a true believer has a downside: you believe.

[Mshue]

private investors are willing to pay 30 cents on the dollar for toxic bank assets, but banks won't accept less than 60 cents. so goldman, d.c. says: let the taxpayers make up the difference plus underwriter about 93% of the dough? why let bankers off the hook for the crappy choices they made? and as far as wiping out shareholder value, isn't that what wall street has been doing to itself, and us, the past year?



As I see it, the whole point of the program is to move the toxic assets from the banks to the government in a way that’s politically feasible. Also, it seems that the private parties most publicly interested in investing have large exposures to the banks in other areas of their business. Thus they can help facilitate the removal of the toxic assets (while the government picks up ~93% of the tab), which directly benefits any of their debt or preferred holding in the selling banks. Heck, they could probably buy some CDS to limit the downside on the relatively small equity position. Great trade for them, but not so much for taxpayers.

The irony of using a highly levered securitization vehicle to try to address the problem of too much leverage in the banking system is a rich irony as well.

[Ray]

there is a lot of truth in what myette10 and Elefantino said, and what i find so disheartening thus far in obama's presidency is i thought he could be the one to tell us. being a true believer has a downside: you believe.
This is where it helps to be a limited believer rather than a true believer. I strong supported Obama but I never expected the guy to somehow transcend Washington. It woulda been nice, but REALLY? I just wanted someone good at playing the Washington game who could preside over the mess that is Washington and try to implement what I think are the right priorities rather than what I firmly believed were the wrong priorities pursued over at least the last eight years. I share his belief that over the long term we must change our health care and energy policies, probably education too, but I'm less sure about which way to improve education. To get there, we have to prevent a total collapse of the economy in the near term.

I don't know whether his short term approach to keeping the economy from completely collapsing is the right one or the wrong one, but I think its his calculation of the best approach of those available that HE COULD ACTUALLY GET DONE. There may be some better approach out there - Krugman's always yelling about better ways to do it from the left, as are many on the right - but you have to understand Congress and what you can get through them or you end up with nothing. Per Carter. I think Obama's doing as good a job as anyone could be doing, which may be faint praise, but I don't think so. They call politics the art of the possible, not the art of utopia. He's doing what's possible.

I share the anger and the the feeling that jerks like Cassano and his henchmen at AIG and his cohorts at Citi and elsewhere should be allowed to fail (and then possibly be thrown in jail, although I guess they weren't technically breaking the law). If I thought that could happen without much more dire consequences (for those at the bottom, not the top) than what we're going through now, I'd be all for it. I'd probably lead the band of vigilantes. But I believe, whether it turns out to be right or not, the prevailing wisdom that this approach would lead to a much worse outcome. So I'm glad Obama's not pursuing that path.

I was never all that illusioned so I guess I can't be all that disillusioned with the current state of affairs.

-Ray

[RPS]

is there a solution you see, that doesn't reward failure, and doesn't leave those who made enormously bad choices still in the corner offices? maybe nationalization satisfies my desire for retribution, but isn't paying the price of consequences part of capitalism?
I would argue that there is a more important aspect of capitalism that is being lost in our current efforts: Capitalism allows for rapid, efficient capital destruction. Bad ideas and those poorly executed need to be allowed to fail, and capital allowed to flow to new efforts.
We are propping up a bunch of financial black holes.
Precisely. Nicely said. :beer:

[1centaur]

I think a lot of the aversion to bank failure is the experience of the 30s - that's driving everything in Washington, via Bernanke's and Romer's published expertise. Back then there were massive bank failures and economic historians later viewed that as a mistake. If AIG failed, banks all over the world would fail (duh, that's why AIG bailout money is going to those banks), so a vote for AIG's failure is a vote for a Western world systemic crash. Not even the most ardent supporter of creative destruction could say where that would lead.

It appears to me that the government is minimizing the value of bank shares, compensation (ex-existing contracts) and job retention without taking the last step to nationalization. I said above why nationalizing has consequences. I think a ton of pain has been and will be felt by the financial firms involved. I just don't see the government's actions as bailing out shareholders anymore than beating someone up and putting them in a coma on life support is giving them life, liberty and the pursuit of happiness. Technically, they are not dead, but it's a close simulation.

As for the latest bailout plan, here's how I see it. Everybody is overly fixated on market price when there is no market in the sense that is required. The complexity of the instruments means there are very few buyers willing to bet they understand the value, and those buyers are sophisticated enough to demand really high returns AND to know they are dealing with desperate sellers. THIS is the price that capital must be marked to and/or taxpayers must pay or they are getting ripped off and banks are getting a free ride? And if we assume that this is the only "fair" price, don't we get that the gap from par must be put up by taxpayers as capital anyway, or the bank must be nationalized which means taking 100% of balance sheet risk on taxpayers' shoulders rather than just a portion of it. You can come at the arithmetic any way you want to, but taxpayers have to fill the gap to create a well capitalized financial system that will lend and get things going.

So how can you reduce the size of the value gap from distressed forced seller prices to something more reasonable? The Paulson plan required taxpayers to accept a lower rate of return than hedge funds - 12% instead of 35%, for example, and then of course filling in the value hole via capital infusions. The Geithner plan requires taxpayers to provide leverage to private money managers so they can get high returns at higher prices/less discount. I have no idea if taxpayer dollars required for leverage plus capital are lower than for just capital at the lower prices of Paulson Plan 1. I hope Geithner knows. I worry that he is fixated on the issue of not "overpaying" in the sense of paying more than a hedge fund would, which is why he sees it as vital that private capital sets the price, not government. However, I do like the idea of cleaning up balance sheets so private money eventually can provide capital under little threat of nationalization. I am sure this has all been modeled, but then again, so have climate change, housing price changes and default swap risk :)

Capitalism is what we make it. It has not in my lifetime been regulation free, anti-trust included. Capitalists don't like the effects of monopolies any more than socialists do. It's like officiating a basketball game - blow the whistle every time a hand touches a body or swallow the whistle unless someone is tackled? The fans who say "let 'em play" are not saying the refs should leave the court. Same is true of free market supporters. Consistent calls that don't disrupt the essence of the game are the goal.

climb, keep believing. Obama is a law professor/community organizer/political communicator thrust into an incredibly complex economic situation. He's picked respected advisers and he's trying to set the tone, but if he blows up the economy on a gut feel about how things should be that he's never really been involved with you can bet he won't get a shot on education, climate, health care, etc. You could tell in his news conference he does not believe the business of America is business, that his gut wants a world where everybody makes $60k, volunteers a lot, lives green and government is their fraternal twin. He could not resist talking in terms of people making "too much" (not AIG-types). He thought it was okay for an entrepreneur to have some success or an investor to make a good return, but that seemed like his limit. Bill Clinton was business as usual. Obama is not.

[Samster]

it's like asking one man to change the mindset of a nation. read into that whatever you want.

i have to say though, no matter how many times i read about how we got into the pickle we're in, the amazement factor never seems to diminish.

thanks for linking an enlightening article.

[1centaur]

This is worth reading on the other side, after all the "outrage" and talk of "paying people who were responsible for this mess," this will give you a sense why Wall Street is wary of working with this administration:

http://online.wsj.com/article/SB123793914378932263.html#mod=todays_us_opinion

Yes one can quibble here and there, but like the Taibbi article there's plenty of truth here too.

[Samster]

This is worth reading on the other side, after all the "outrage" and talk of "paying people who were responsible for this mess," this will give you a sense why Wall Street is wary of working with this administration:

http://online.wsj.com/article/SB123793914378932263.html#mod=todays_us_opinion

Yes one can quibble here and there, but like the Taibbi article there's plenty of truth here too.over and over again we forget the press writes to sell what they write. interestingly, the fury we see around us may actually get the truth printed. bits of it, anyway. this article also contains a good point of view to ponder, along with others. no sarcasm intended. thanks. -sam

[keno]

One element stands out for me so boldly in this mess, and it's the worst possible one. Whoever is responsible, whoever is to blame, it is not the politicians. They make the laws, and they have the power to make others cower. They are the ultimate cowards in my view, particularly in light of their failures made clear by the Taibbi piece.

My wife, certainly to the left of me, has said for years that all politicians, right and left, have one thing in common; they are scum. I cannot disagree. Particularly high on my personal list is Barney Frank, supposedly endowed with a substantial left hemisphere, who had all of the data and chose to ignore it as housing prices climbed without good reason. Many smart people saw this coming and made their point of view clear, yet the likes of Frank and other politicians found it inconvenient to respond. Both right and left deserve to exit stage left and right.

Like it or not, Goldman, Sachs plays poker better than everyone else and we provide the table stakes.

keno

[1centaur]

I'm sure there are politicians who are not scum (I would put some notable Democrats on that list of well intended and decent), but I do think they tend to have the power gene (in the power/affection/achievement personality test in college I think I got a zero on power - reading the questions I was kinda scared of the people who scored high on that scale). Success in politics requires a fine balance of persuasion, intimidation, and inspiration, all wrapped around a cunning mind and sufficient communication skills. Starting from that impressive base, you need to enjoy the game against a lot of people just like you. All that requires a big ego. Contrast that list with the public imagination of an ideal public servant: humble, diligent, hard working, honest, smart - Jimmy Stewart. Whenever I hear somebody say he wants to run for President or the Senate, I instantly wonder about character/ego, and I don't have to wonder long. To throw yourself into a very high stakes world of appearance vs. fact seems awful to me. I live in a world where I understand what I am doing better than anybody I run into regularly. To live in a world where there is no right answer, just a string of relative successes that ends or doesn't, cheek by jowl (literally) with hundreds of people doing the exact same dance...ugh.

[csm]

I think there should be mandatory prison sentences when you are elected to office.
maybe 1 day for every term at the local/school board level up to 2 yrs for every one in office at the federal level.
they're all crooks. even the ones I voted for.
just sayin....

[Ray]

I've defended politicians around here to absolutely no effect before, so I'll spare you all the details of my associations and impressions. But the vast majority of them are not scum. They have very different dominant personality traits than most other people (a lot of overlap with lawyers, where a large percentage of them come from), and like most personality traits, they are double edged swords with both good and bad qualities. On the one hand, they have to be intensely ambitious (not all at the local level are, but anyone who makes it to state or national level has got a BIG ambition gene). On the other, they have to believe strongly in the importance of public service, have a big enough ego to believe that they can do it better than the other guy, and they have to decide that incredible personal sacrifice is a worthy price to pay for public service. Most of us couldn't survive a political campaign for state representative, let alone for US rep or Senator or, god forbid, president.

Most of 'em are damn smart and could be making FAR more money doing something else. But they put themselves through hell to try to get something done, knowing all the while what low esteem most people hold them in. I couldn't do it. Very few can and damn fewer do it well. Its like someone smart once said, its the worst possible system anyone could ever dream up....except for all of the other ones humans have ever tried. They're not scum - they just fruck up a lot because lots of the issues they're dealing with do not have solutions. They're problems that can be managed but not solved and that's tough to get across to a population that wants solutions. NOW, dammit.

-Ray

[Mshue]

With Bear and Lehman wiped out, Merrill taken out well below historic value, and Citi and B of A and AIG at nominal values reflecting the overhang of government money to be paid back, protection of shareholders would not seem to be working. I presume the goal is to get private capital into banks now and in the future. Once you set the precedent of state elimination of the shareholder you create a long-term problem of capital input AND quick capital withdrawal if problems mount, exacerbating the problem. I think it would be expedient in fixing this crisis to nationalize (and thus put taxpayers at unknown risk at least as great as they have now) but it appears the economists in Washington are thinking long term.

So, 1centaur, do you see the problem as one of liquidity as opposed to one of solvency? If the latter, why not let the FDIC do its job? Once cleaned up, the banks/assets should be able to attract private capital and in the meantime we can avoid "stranding" capital in these zombie institutions. As it stands now the uncertainty regarding bank balance sheets and the ever shifting political winds are such that private capital would have to be nuts to get involved.

I'm not nearly as locked into a view as my tone suggests, by the way. The "systemic risk" variable is scary. Either it's very real (e.g., Lehman), a great negotiating chip for Wall Street or, more likely, a little of each.

[csm]

I won't go into my associations with the political class either but consider just the AIG connections among our fine senators and immediate family.
we don't need a ruling class. yet, we've gotten to the point that we have professional politicians. they come out of law school and enter politics. I think we would be far better served if it was possible for a doctor, teacher, manager, etc to run for office w/o the deck being stacked against him/her. there are no compelling arguments against term limits on senators and congressman. a huge part of the problem is that we have elected officials beholden to special interest groups to stay employed. and it falls on both sides of the house.

[don compton]

this story is very shocking to most people. but, i am a retired, single family detached real estate developer. admittedly in this forum, i am a republican. i started building homes in 1975, age 23, one year out of college, cal'74 b.a. econ. it was so simple them, just add the costs, get a construction loan and line up take-out loans for qualified( note:qualified) buyers and build and sell. today, its just so complicated with all the "smoke and mirrors" regarding buyers and who should be able to buy their first home. the story i just read from your attachment left one important fact, most local banks( and i am including ones that could loan entities as much as 50mil. are still very solvent because they never invested in these "sub-prime loan" investments. in addition, they won't take any "tarp" funds because the feds are telling them that they,again would have to make risky loans like the sub-primes and the easy credit card b.s. :argue:

[keno]

you are too kind. Having worked in Massacusetts politics for several years and being close to many politicians, I never met one who considered the self-sacrifice equation you put forward. As a matter of fact, most were trying to parlay their politicial position into a bigger pay day. Additionally, the perqs of the jobs, particularly at a national level, including "favors" of one kind or another, hardly represent a model of sacrifice. Also, for the most part their ego and power needs made it unlikely that they could function well in the private sector except for the fact that they had made powerful alliances while in politics.

I don't think that any of us can be so sanguine when a four term, is it, senior senator from Connecticut, Christopher Dodds, can't remember legislation regarding AIG bonuses he was responsible for in the first instance as he thought that he could get away with lying. Too many times I saw in my experience that lying in one form or other was stock in trade for these folks.

Considering that, for the most part, every time a political body passes a law someone's rights are diminished, the trades and self-interest that go into such passage make me more than uncomfortable.

The notion of public service in the case of politicians goes to the furthest of back burners in real life for the most of them. Sure, there are always examples of solid citizens, but I wouldn't rely on them to make this country great. Themselves great, yes.

keno

[Ray]

My experience is different. I've seen a lot of good ones (or at least well intentioned, not all are equally talented) and only a few real scum. This includes plenty who I'd never vote for but whom it was a pleasure to work with. I've seen a few more bad ones in Pennsylvania (with its history of machine politics) than I did in Washington State, which was pretty squeaky clean. But most have been very well motivated in both places. I can imagine Massachusetts is a pretty bad example as are a few other notorious places. But I'd argue that's not the rule. The really successful ones do have huge egos, but in politics that's a job requirement and tends to make you better at it. I haven't seen more than a few who were in it for the payday. There are clearly exceptions - a powerful state senator was just convicted on several counts of fraud and other stuff but he had that reputation for decades before they ever got anything solid on him. Blago is an all-too-obvious example of scum. But those kind of guys are the exceptions in my experience.

I disagree about their ability to make money elsewhere. Most politicians were successful at something else first - law or business usually. Only a few got into it when they were really young. And at the state level, most of them still ARE successful at something else because the state legislatures in most states are not a full time job or full-time payday.

-Ray

[1centaur]

So, 1centaur, do you see the problem as one of liquidity as opposed to one of solvency? If the latter, why not let the FDIC do its job? Once cleaned up, the banks/assets should be able to attract private capital and in the meantime we can avoid "stranding" capital in these zombie institutions. As it stands now the uncertainty regarding bank balance sheets and the ever shifting political winds are such that private capital would have to be nuts to get involved.

I'm not nearly as locked into a view as my tone suggests, by the way. The "systemic risk" variable is scary. Either it's very real (e.g., Lehman), a great negotiating chip for Wall Street or, more likely, a little of each.

The FDIC's job has been to seize a bank and give it to another bank, possibly using some of their own funds to recapitalize the taken-over bank's balance sheet. I don't think there's enough cash behind the FDIC nor enough partners with the capacity to take on many of the zombie banks. If there was enough cash, then that would just be another form of everything we're doing now, except we'd be locking in the losses to taxpayers by valuing the assets at the trough.

Tough to negotiate from a position of weakness, so not sure how much of a chip systemic risk is. It's the not knowing, the potential consequences (particularly with derivatives), the example of Lehman and the history of the 1930s that keeps us from letting big banks fail. There's a lot of interconnectedness in the system (AIG being the global poster child for this) that did not exist before, so it would be VERY complex, if not impossible, to track every asset/liability pair across all institutions and model the effect of value loss from being an undersecured creditor in a series of American bankruptcy cases. Banks, hedge funds, wealthy individuals, insurance companies, pension funds 401ks, private corporations hedging something, municipalities...the list might be longer than I can come up with off the top of my head of entities that would/could lose a lot very quickly and become distressed. There would be a cascade of asset selling by bankrupt entities and those assets would include stuff that is viewed as fine fundamentally today, but if there are too many forced sellers and not enough buyers the result is extreme valuation loss. Lehman's trustee recently said he would take his time with Lehman's assets. That's because he's a rare case. Create 30 or 100 Lehmans and the question would be, why bother waiting?

[keno]

if what you say is so, i.e. that most were successful elsewhere before entering politics, then your self-sacrifice model evaporates, particularly since many politicians continue their law practices and businesses while in office. Politics for many of them is a part-time pursuit.

On another vector, listening to testimony by Bernanke et al over the past few weeks before various senate and house commitees gave me good reason to question both the knowledge and the intelligence of the questioners. Sure there were a few smart and well-informed ones, but the bulk were inept, and they vote in their respective bodies, too.

On yet another vector, with a piece like this one about hedge fund manager compensation http://www.nytimes.com/2009/03/25/business/25hedge.html?em=&adxnnl=1&adxnnlx=1238065224-knKiZLFfBT83i1OIwx8fGw, the administration's plan to use hedge funds as their partner in buying up toxic assets isn't going to play well on Main Street in my opinion.

keno

[Ray]

On another vector, listening to testimony by Bernanke et al over the past few weeks before various senate and house commitees gave me good reason to question both the knowledge and the intelligence of the questioners. Sure there were a few smart and well-informed ones, but the bulk were inept, and they vote in their respective bodies, too.
Don't confuse posturing for the cameras with the substance of what goes on in committees and in the votes. Posturing is like negative campaigning - its distasteful as hell and the only reason most politicians do both is because it works. Do it and you can win - don't do it and you lose. A lot of very smart people are willing to play down to whatever key group of swing voters they're going to need in the next election. On the one hand, I'm offended by it (like negative ads). On the other, I'm fascinated by the craft of it and almost enjoy watching it in a strategic sense. If you think most of those folks are as dumb as the characters they play on TV, you're fooling yourself.

-Ray

[Mshue]

The FDIC's job has been to seize a bank and give it to another bank, possibly using some of their own funds to recapitalize the taken-over bank's balance sheet. I don't think there's enough cash behind the FDIC nor enough partners with the capacity to take on many of the zombie banks. If there was enough cash, then that would just be another form of everything we're doing now, except we'd be locking in the losses to taxpayers by valuing the assets at the trough.

Tough to negotiate from a position of weakness, so not sure how much of a chip systemic risk is. It's the not knowing, the potential consequences (particularly with derivatives), the example of Lehman and the history of the 1930s that keeps us from letting big banks fail. There's a lot of interconnectedness in the system (AIG being the global poster child for this) that did not exist before, so it would be VERY complex, if not impossible, to track every asset/liability pair across all institutions and model the effect of value loss from being an undersecured creditor in a series of American bankruptcy cases. Banks, hedge funds, wealthy individuals, insurance companies, pension funds 401ks, private corporations hedging something, municipalities...the list might be longer than I can come up with off the top of my head of entities that would/could lose a lot very quickly and become distressed. There would be a cascade of asset selling by bankrupt entities and those assets would include stuff that is viewed as fine fundamentally today, but if there are too many forced sellers and not enough buyers the result is extreme valuation loss. Lehman's trustee recently said he would take his time with Lehman's assets. That's because he's a rare case. Create 30 or 100 Lehmans and the question would be, why bother waiting?

Perhaps where we differ is that I believe at least some of the largest TARP institutions are truly insolvent. Sure they can eventually earn there way back to solvency if the government provides them unlimited liquidity and an upwardly sloping yield curve for long enough, but the return on the government’s capital will be pathetic at best. I agree that the FDIC as designed can’t handle the job. My point is more that these institutions need to go into some kind of receivership with enough government backing to prevent the kind of run on the system that Lehman’s collapse nearly induced. Yes, this means locking in some losses from the first round of TARP infusions, but those are sunk costs and should be ignored as we decide what to do today. In any event, the initial TARP investments were partially successful and thus not a total loss in that they stopped the run on the system that was developing following the Lehman filing.

Financial crises inevitably lead to a major expansion of government debt. Even the U.S.’s capacity to incur debt is not unlimited, so I’d rather see us deploy this capital as judiciously as possible. This means we need to let badly run financial institutions fail. This generic concept is uncontroversial to the vast majority of Americans, but this is where I think the Street has been able to leverage the threat of “systemic risk”. As long as the government continues to fear systemic risk, it will continue to issue guarantees, “invest” in preferred stock on uneconomic terms, etc. In the meantime, the employees of these institutions continue to get paid and retain an option on their admittedly decimated equity holdings. There was a pdf of an AIG presentation to the government making the rounds recently that explicitly invoked the threat of systemic risk, so it’s obvious that financial institutions are playing this card. And while last fall the systemic risk threat was very real when Lehman’s bankruptcy caught everyone off guard, I’m not so sure that’s the case now. But the cascade effect you so ably describe does give me pause - it’s likely impossible for any one human to comprehend the web of interconnections that’s developed in the past two decades.

Of course, if I’m Obama/Geithner and I call the “systemic risk” bluff and I’m wrong, well, that’s a disaster of historic proportions. Still, I fear we’re delaying the inevitable by not dealing directly with the undercapitalization of the banking system and thus ultimately making the problem worse. In the past, the strategy of looking the other way while the banks use the yield curve to earn their way back to solvency has worked, but I think the crisis is just too big for that to work this time.

[csm]

Ray,
Admittedly my view of elected officials is clouded due to living in PA.
But still... how do you explain IL? or NJ? or NY?
Perhaps WA is the exception to the rule.....

[Ray]

Ray,
Admittedly my view of elected officials is clouded due to living in PA.
But still... how do you explain IL? or NJ? or NY?
Perhaps WA is the exception to the rule.....
There are definitely places with looooong histories of corrupt political machines that it takes a long time to get past and some probably never will. That's how I explain IL, NJ, NY, etc. Even in PA (I'm here too and worked with politicos for about 12-13 years of my time here), I've found the vast majority of the state reps and senators to be very good. Fumo was a widely known asshat for years and is gonna get what he deserves, but I've worked with quite a few state legislators and all but a couple were very good. And the bad ones were mostly just semi-incompetent, not corrupt. I work with tons of local folks and they tend to be very good part-timers, a few of whom have problems with ego but nothing much worse than that. Of course, I haven't worked that closely with the City of Philly folks - they've got years of machine problems that are pretty deeply ingrained. But I think Nutter is good and is dealing with the Council in as upfront a manner as possible. The council isn't as bad as it used to be, but I don't know about that system of ward leaders - a lot of patronage still flows in that city. Even places like Delaware County, which was corrupt forever, is slowly coming out of that period as the demographics of the County change and new blood takes on the machine and gets elected. When I started working in Chester County in '92, there wasn't any outright corruption, but it was still a very patronage oriented government. That basically disappeared over the course of several years and there's nothing significant left of it today.

I've worked with four or five US Reps, a couple pretty closely, and had some contact with Spector and Santorum. All were pretty good (except one, who was small-time corrupt and got booted for it a few years ago), including some folks I'd NEVER vote for. I wouldn't vote for Santorum for all the tea in China and can't stand him on social issues, but he was pretty creative, much brighter than I'd ever have imagined, and did a great job on some local business and transportation issues that I dealt with him on. I had the chance to ask him a bunch of pretty detailed questions at a small meeting once and he was really on top of some pretty obscure issues, understood the tradeoffs, understood what was politically doable and what wasn't, and had some really good advice on how to move forward strategically.

These people are not saints and they're willing and able to go on TV and do things that I could never imagine doing (even if I had the skills to do it). But its mostly toward pretty noble goals. Even ones I disagree with.

-Ray

[1centaur]

Mshue:

I think the market also believes these banks are insolvent if marked to market, though one might question the validity of the term "market." Receivership means full US taxpayer exposure to everything vaguely questionable on those balance sheets if we are to avoid Lehman-esque problems, I suspect.

[csm]

ray, you and I might know some people in common. as a conservative, I was appalled at Mr Santorum.

[Ray]

ray, you and I might know some people in common. as a conservative, I was appalled at Mr Santorum.
I too was appalled at him on almost every major national policy issue. Not because I questioned the sincerity of his convictions, but because I don't think I could possibly disagree with anyone more than I did with him. But when it came down to bread and butter issues that I knew real well and actually had dealings with him on, I was surprised and impressed with his ability to deal with the subtleties, and figure out how to get stuff done. Very pragmatic, reasonable, and able. Philosophically, on the stuff we tend to vote for in a Senator, however, there's nothing that would ever get me to vote for him.

-Ray