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March 21, 2009

Comments

Un-frackin-believable.

This plan is an absolute disaster. We didn't need Obama for this - George Bush could have come up with this all by his lonesome.

I'm left wondering if Hillary Clinton would be doing a better job on this front.

Geithner must go.

(I’m not saying nationalization is necessarily the right policy – just that the focus should be on policy, not the politics of it). But that is the question, isn't it. I'm not sure anyone who is actually in a position to implement policy has a better plan. And those who are throwing spears might well be singing a different tune if it were their ass on the line.

I think one of the comments under Cole's scathing post is about right:
Karmakin
There is no other plan.

I’m pretty sure if there was one, they probably would have went for it. I really doubt that Obama himself is "in the pocket". He KNOWS how bad it looks, and he doesn’t like it one bit. Which is why he’s taking the blame for it instead of trying to deflect it.

But he doesn’t see another option. Neither do I.

Can’t let the entire financial markets collapse, and the asset holders won’t go for anything that doesn’t make them whole at least mostly. And without their buy-in, you can’t force them to do anything. Well you COULD, but the financial markets would collapse if the sanctity of the public markets were threatened too severely.

Or maybe you could let the entire financial market system collapse as it really doesn’t mean anything for the real economy. Of course, if you said this before 6 months ago you’d be seen as a real crank and someone not to be taken seriously.

That’s not to say that there’s not serious problems. It’s plain as day that there are serious moral hazard issues at play when this much money as at stake in the short term. But I’m not sure how you realistically deal with them. This is a cultural issue as much as it is a political one. We tend to overvalue our own worth, as well as the worth of those like us.

The real answer is probably to choke the money going into the high finance speculative sector via the tax code. But that’s a long-term solution, and won’t deal with the current problem.

There is no other plan.

I’m pretty sure if there was one, they probably would have went for it. I really doubt that Obama himself is "in the pocket". He KNOWS how bad it looks, and he doesn’t like it one bit. Which is why he’s taking the blame for it instead of trying to deflect it.

But he doesn’t see another option. Neither do I.

So let me see if I have this straight: Since Obama is incapable of heeding bad advice from Geithner/Summers, this must be the best plan because if there was a better plan (even without it being brought to his attention by his senior advisors), he would be doing that instead.

Um, no.

Can’t let the entire financial markets collapse, and the asset holders won’t go for anything that doesn’t make them whole at least mostly.

But it's not up to the asset holders!

They will accept whatever the US government decides to give them via taxpayer skin.

i'll just point out that all the big brains out here in blogtown are looking at a subset of the facts that the people in the Admin are.

Obama hasn't got a clue.

Congress hasn't got a clue.

The do-gooder-wannabe's who are spinning around hoping to fix things haven't got a clue.

The banks made bad investments, investment houses, pension funds, insurance companies, individual investors, etc. made bad investments. Let them fail. There is no other way.

Government's role is to provide a humanitarian safety net. Period. (And construct useful regulatory mechanisms going forward) but they can't unwind this mess without pain.

i'll just point out that all the big brains out here in blogtown are looking at a subset of the facts that the people in the Admin are.

Yes, to some extent cleek. But then, we're not just talking about blogland - we're talking about Krugman, Stiglitz and a number of extremely intelligent economists.

Even Friedman and Holtz-Eakin.

And if there are some non-public facts that are swaying Obama, make them public.

Thus far, his public statements don't imply such. They just sound like he doesn't get it: Referring, specifically, to his comments on Sweden only having a couple of banks, while we have thousands, as the reason why the Swedish option is not applicable to our circumstances.

"i'll just point out that all the big brains out here in blogtown are looking at a subset of the facts that the people in the Admin are."

Which might be right--I sure don't know--but nobody around here would accept that argument if Bush was in the White House.

nobody around here would accept that argument if Bush was in the White House.

Bush 2007 or Bush 2002 ?

The roots of this crisis go back much further than the Bush years and the Obama economic team is dominated by people like Summers who helped plant them (if it's any comfort, so was Hillary Clinton's economic team).

I still have some hope that Obama is less of an ideologue than his economic advisers and that he might see the damage they're doing and eventually can them. But by then it may be too late for him politically. And there's also a good chance that he's simply an ideologue who talks like a pragmatist.

Washington Consensus neoliberalism* got us into this mess. Both major parties are wedded to Washington Consensus neoliberalism. It will apparently take a much deeper crisis to budge them from these commitments, if they can be budged at all.

_________________________

*(should I have just written "capitalism"?)

correction:

"But then, we're not just talking about blogland - we're talking about Krugman, Stiglitz, d'd'd'dave and a number of other extremely intelligent economists."

"nobody around here would accept that argument if Bush was in the White House."

All we have to do is say we're better than Bush and we can do anything. ... Uh, that worked for the first 60 days, but what are we going to say now that they've discovered we are worse than Bush, the worst president ever.

ddd dave - what's your position on letting lehman fail? that didn't seem to me to be a triumph of market forces in action. it seemed to trigger a near collapse, which is why we cant just "let them fail"

"Obama's Vietnam"

At first that sounded extreme. But, yes, it could be.

The 2012 race will be here before you know it and all of this will be fresh in voters' minds. And all of the pitchfork outrage/populism will be there to be played upon in what will undoubtedly be a longer campaign that the last one.

If I were a campaign advisor sitting on the sidelines to a likely presidential hopeful, I'd be already formulating a strategy, something like this: Obama promised change, and to fix the banking mess, all we got was more of the same.

For all of the Big Ideas he would like to implement, 2012 will be won or lost on how our wallets feel, how many of us managed to keep our homes, how many of us lost our jobs and are still looking, how many of us can say we are collecting old-fashioned kind of bonuses from our jobs, how repentant and revised Wall Street looks to us small folks.

---

"Geithner must go."

All of us on the liberal side of the fence have praised Obama's intelligence and political skill. On this one, he seems tone deaf.

Geithner had his head in the mess for a long time. He was, after all, the head of the New York Fed. He wasn't a good nominee in the first place and we are paying the price.

I won't judge President Obama yet, but how can we continue to tolerate the likes of Reid, Pelosi, Dodd, and Frank in key leadership positions and getting more stupid everyday. If Obama could get some reasonably intelligent help in Congress he might not slide down so fast. Surely there are Democrat members who think better than these crackpots.

Worse than Bush?

BWAAHAAHAHAHAHAHAHH!!!

Ah. Thanks for that.

"but what are we going to say now that they've discovered we are worse than Bush, the worst president ever."

d'd'd'dave: Not concerned about laying on the hyperbole, are you?

For all of the Big Ideas he would like to implement, 2012 will be won or lost on how our wallets feel, how many of us managed to keep our homes, how many of us lost our jobs and are still looking, how many of us can say we are collecting old-fashioned kind of bonuses from our jobs, how repentant and revised Wall Street looks to us small folks.

2012, haha. He's got this year. In 2010 there are elections, remember. No one will blame him for the Bush hole we're in, but if he lets Geithner dig it deeper he's screwed.

If six months from now AIG comes back for more money (or the they'll tank the economy) he's screwed no matter what he does. If a big bank goes down anyway after TARP 2 he's screwed. Obama is betting the ranch on a liquidity crisis; if it's a solvency crisis he's on a road trip to oblivion.

"He's got this year."

TJ: Thanks for the reminder and erasing any fear I had after hitting the "post" button that I was putting too much heat on the guy.

"If six months from now AIG comes back for more money . . ."

And what makes you think they won't?

And what makes you think they won't?

Oh, I think they will. However, out very own J. Canuck has pointed out that Liddy swore to Congress that all the CDS were gone, and the U.S. would be paid back in 3 years. Congress may be a bunch of dim bulbs in the main, but even those guys aren't going to let that pass. The conditions for AIG getting any more money aren't going to be bonus taxes, they're going to be heads on a pike.

There's something none of you are considering. The plans you want Obama to implement would all require a lot more money to implement. Money that Congress would have to appropriate. Instead, Congress has made it clear that they aren't going to appropriate any more money.

How, exactly, do you want Geithner to go forward without the necessary resources?

All I know is, if I'm running for re-election, I'd like to be on the side of the fence -- Russ Feingold comes to mind -- who voted "no" on the AIG bill that included the now-infamous retention bonuses.

And if I'm Chris Dodd, who's always seemed like one of the "good" guys, I've got to come up with a better story on why he did object after the Fed/Treasury/whoever told him retention bonuses had to be included in the bill he wrote.

"the AIG bill that included the now-infamous retention bonuses."
more accurately- the bill that permitted the AIG bonuses.

All I know is, if I'm running for re-election, I'd like to be on the side of the fence -- Russ Feingold comes to mind -- who voted "no" on the AIG bill that included the now-infamous retention bonuses.

And if I'm Chris Dodd, who's always seemed like one of the "good" guys, I've got to come up with a better story on why he did object after the Fed/Treasury/whoever told him retention bonuses had to be included in the bill he wrote.

I think it's likely everybody gets away with it this time. Next time though, batten down the hatches.

This is like watching AIG (with some political help) prodding a tiger (the public) in a cage with a stick for months (starting with the resort deal) and not realizing the cage door is now unlocked.

"And if I'm Chris Dodd, who's always seemed like one of the "good" guys, I've got to come up with a better story on why he did object after the Fed/Treasury/whoever told him retention bonuses had to be included in the bill he wrote."

I doubt anyone mentioned retention bonuses. Someone said there may be a legal challenge if applied retroactively; Dodd OK well we'll provide an exemption for bonuses already issued.

Did left hand know what right hand doing? Interesting to find out, but I suspect Dodd right- presented to him as technical legal issue devoid of specific implications.

All I know is, if I'm running for re-election, I'd like to be on the side of the fence -- Russ Feingold comes to mind -- who voted "no" on the AIG bill that included the now-infamous retention bonuses.

What bill that included the retention bonuses? The retention bonuses were part of a contract signed before the government poured money into AIG. They didn't result from Congressional action at all.

Bedtime, there was no "AIG bill that included the now-infamous retention bonuses", but if you're already starting on helping the Republicans with the smears for their 2010 ads, then maybe things will work out for them.

AIG bonuses

Course, if the imbeciles at AIG keep getting caught in clumsy lies maybe bastille Day comes early this year.

TJ: If it is a lie. If this is all from AIG FP, big problem, if the balance is from the rest of AIG, then it is not a lie.

question -- i'm trying to confirm whether i understand this. if the basic problem is uncertainty (that is, a lack of trust and knowledge regarding toxic assets), then it seems like this wont help solve that problem -- UNLESS the toxic assets are worth less than the total amount fed gov will spend. that is, they'll spend this money and people still won't know what others' balance sheets REALLY look like

So there's a decent chance that this type of approach does nothing to help. Isn't that the basic problem?

if the balance is from the rest of AIG, then it is not a lie

Didn't Liddy testify under oath that the top people in AIG (rather than AIG FP) weren't getting the bonuses?

How is it not a problem either way?

KC/JMN: Sorry for my inaccuracy. I should have done some linking before making my point.

From USA Today:

"Dodd, chairman of the Senate Banking Committee, acknowledged Wednesday that he, as Bloomberg News put it, 'weakened a provision dealing with executive pay in last month's stimulus legislation at the request of the Obama administration.' The provision inserted in the bill instead expressly allowed companies that received taxpayer bailout money to pay retention bonuses that were part of employment contracts signed before Feb. 11, 2009. That would include the AIG bonuses, although Dodd has said he didn't know about the AIG bonuses at the time."

The link.

All due respect, KC: I don't think I am giving away any state secrets to the GOP in noting that Dodd may have some issues in regard to the whole AIG mess.

Work interfered earlier when this thread -- from publius and Eric -- expressing disappointment in Obama's troubled asset plan, got me wondering:

What, if anything, does Evan Bayh forming his moderate group of a dozen or so senators portend?

Bedtime, I'm not talking about giving away state secrets. I'm talking about promoting invented GOP "facts", putting them out as if they were true. As JMN said, the bonuses were in contracts written long before any bill existed -- contracts Congress had nothing to do with. There was no bill containing bonuses.

There were no Democrats who voted for "the AIG bill that included the now-infamous retention bonuses", because there was no such bill. That's a Republican lie.

question -- i'm trying to confirm whether i understand this. if the basic problem is uncertainty (that is, a lack of trust and knowledge regarding toxic assets), then it seems like this wont help solve that problem -- UNLESS the toxic assets are worth less than the total amount fed gov will spend. that is, they'll spend this money and people still won't know what others' balance sheets REALLY look like

If there's one thing that this plan does, it's to eliminate the uncertainty. It establishes a price for the assets, and it provides some government support for those assets. There are potential problems here, but leaving the uncertainty is not one of them.

Well, yes, KC, and I owned up to my inaccuracy and pointed out the bill that has Dodd in a pickle. That's all.

P.S. What's your tag on the Bayh thing?

Make that "take" -- not "tag" (I've put in way too many hours this week, thank God it's almost over).

it's basically the one of the tricks from Enron's bag. Set up an outside partnership with connected insiders who pony up 3% and Enron would fund the rest with stock. Then warehouse assets off book there for a while then take it back and pay off the insiders handsomely for their troubles

All due respect, KC: I don't think I am giving away any state secrets to the GOP in noting that Dodd may have some issues in regard to the whole AIG mess.

AIG is the least of his concerns. Well, given the national freak-out over the bonuses maybe not. But Dodd has his sweetheart mortgages, his Irish cottage, and getting a presidential pardon for his bud won’t help. Dodd is toast.


There were no Democrats who voted for "the AIG bill that included the now-infamous retention bonuses", because there was no such bill. That's a Republican lie.

How is it a lie KC?

I mean you can quibble that the bill didn’t specify AIG, but Dodd is responsible for the provision that allowed bailout money recipients to pay out (previously contracted) retention bonuses. He has admitted it – I don’t think that’s really a point of contention.

Dodd is responsible for that provision, Democrats passed the bill. Where is the lie?

And then Obama personally demonized the people getting the bonuses authorized by the Democrats….

Well played.

"What, if anything, does Evan Bayh forming his moderate group of a dozen or so senators portend?"

That he's the same tool of big business that he's always been.

OCSteve, if someone says that the bill contained bonuses when the bill didn't contain bonuses, it should be pretty clear what the lie is.

There's also a difference between "authorizing" and "not retroactively invalidating a legal contract providing for" (something I'm surprised to see any Republicans arguing for -- at least if the contract doesn't involve unionized workers).

J - but what if the fed funds don't cover the assets? what if they only cover a percentage? then aren't we back to square one?

KC - The bill authorized the paying of bonuses by companies bailed out by taxpayer $. Of course the bill didn’t contain bonuses. The provision was inserted specifically to allow these bonuses to be paid.

Dodd inserted the provision because the WH asked him too. WH=Obama. Then Obama vilified the people getting the bonuses.

Bedtime, I'd say that Bayh is importing into the Senate the House tradition of Blue Dogs stabbing the Democrats in the back.

Of course the bill didn’t contain bonuses.

Then what's the problem with my saying that it's a lie to say the bill contained bonuses?

There was no provision inserted to allow the bonuses to be paid. They were already in a contract and set to be paid. No provision was inserted to prohibit them from being paid because it was judged that that would not have been legal. Calling that "authorizing" is at best misleading.

And if such a provision had been inserted, then Republicans would have screamed bloody murder about the violation of contracts, so it's a bit rich to have them complaining about it now.

Dodd inserted the provision because the WH asked him too. WH=Obama.

he's accepting the responsibility, which i think he should. but that's still a bit of a broad statement.

I don't want Republicans to benefit politically from the financial mess, because I think they're the greater of two evils, but right now I'm much more worried about whether Obama knows what he's doing. Not that I'm in a good position to judge.

"The bill authorized the paying of bonuses by companies bailed out by taxpayer $. Of course the bill didn’t contain bonuses. The provision was inserted specifically to allow these bonuses to be paid."

Are you saying that the bill continued existing law -- that contracts that aren't illegal are legal -- or what are you saying?

If the former, than what are you talking about? If the latter, then what are you talking about?

The provision was inserted specifically to allow these bonuses to be paid

What provision? Since you know what it says, how about providing us with the text of it?

J - but what if the fed funds don't cover the assets? what if they only cover a percentage? then aren't we back to square one?

If there's not enough money, sure. That goes back to my still unanswered question of what the administration is supposed to do if Congress isn't going to appropriate funds. If there is still uncertainty, that's not a problem with the plan, just one of available funds. In that case, there's not much the administration can do.

I guess Japan's lost decade doesn't look so bad now...

Hoisted the comments, via Naked Capitalism:

I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

It's just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You've also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.

Now I'm all depressed.

There is a coherent explanation for honoring these employment contracts but the Obama Administration seems incapable of saying it out loud. Liddy explained it at the hearings but the MSM didn't understand what he said. THey were already writing the Pitchforks-and-Torches articles. The insurance business is a business that writes contracts that must be honored even though there will be a clear winner and loser. That is the product or service that they perform. When large enterprises buy an insurance contract they want to know that the company selling it always honors its contracts. The failure on a contract *by an insurance company* can trigger something called "cross default" in many of its other contracts. Other customers of AIG could demand collateral or other security. Larry Summers was too arrogant to explain that on the Sunday morning talking-heads shows. He dismissed the questions with "we are a nation of laws and always honor contracts" which got the union guys upset since they know that is not true. Summers is too full of his own brilliance and so contemptuous of his fellow citizens. A good public servant can explain and the average American is smarter than he thinks. The sharpies at AIGFP knew that contracts are sacred at insurance companies. The new management could have forced a re-negotiation last year, but they had the choice of prolonged negotiations and restaffing or just getting the mess unwound and the good businesses sold. Liddy chose the latter and just said, "no performance reviews, do your job and help us get this done and we will pay you what you earned in 2007." Probably overpaid in money terms but a huge time-saver to getting this wound up. It seems Bernanke agreed and he's the smartest guy in the room. What I want to know is who is feeding all this well-timed stuff to damage Geithner to the press. $165mm is such small potatoes. Possibly Paulson's large and well-paid (thanks to the tax forgiveness they have received)...GovernmentSachs group that works for him at Treasury? They are all still in place and I presume responsible for the latest unworkable policy prescriptions.

I keep struggling with this. If it is so obvious according to everyone in left blogostan that this plan is stupid and damngerously wrong WHY DOESN'T OBAMA SEE IT? What is it about this/him that lets him give this bad idea a pass? That is what I don;t understand. I haven;t seen a real reason why this plan is more compelling that the criticisms. In fact there is no public rationale that I can see at all. And maybe the 60 minutes interview was too far ahead of the news but it sure would be nice to see Obama asked about why he thinks that subsidized the public privat eplan will work.

What is it about this/him that lets him give this bad idea a pass?

Corruption.

At this point it's very simple: are you going to be a looter, or are you going to be a victim? With MERKX and DBA in margin accounts, in offshore banks, you can ride the wave of collapse, profit off the sullen masses who will pay.

I keep struggling with this. If it is so obvious according to everyone in left blogostan that this plan is stupid and damngerously wrong WHY DOESN'T OBAMA SEE IT?

exactly what i keep asking.

except i think i get a different answer...

how many in left blogostan have economics degrees?

and for that matter, does anyone know: on average, do the professional economists that the amateur economists of left blogostan are listening to (amateur or otherwise) do better than a coin flip at predicting recessions and recoveries. what's their record when it comes to designing manageable dismantlings of companies like AIG (not that it should be difficult, given the wealth of similar situations the world has faced) ?

What is it about this/him that lets him give this bad idea a pass?

I'm still waiting for an answer as to how the administration can go the nationalization route without money from Congress. No one seems to want to touch this one.

"What, if anything, does Evan Bayh forming his moderate group of a dozen or so senators portend?"

I just saw this upthread and I had to share my take on it: that, for most functional purposes (e.g. economic stimulus, health care reform, climate change legislation, etc.), the Senate is in the hands of the opposition. Now that I've realized that the Obama administration's treatment of the Senate(e.g. Lieberman, the stimulus bill, etc.) makes a lot more sense.

And, honestly, that has implications for a banking bailout, too. What are your bailout options if the Senate (which you *will* need to pass any substantive legistlation related to the issue) is in the hands of the opposition?

I should add that given the foreign, sovereign wealth fund ownership stakes in many of our largest banks (e.g. Citigroup) and foreign holdings of much of our "AAA" debt, that the banking crisis is as much a *foreign policy* problem as it is an economic problem. Note that (for instance) the government of *Singapore* needed to buy into the most recent Citi bailout (the preferred stock conversion). Not to mention all of the AIG CDS payments that went to European banks. For all the Hillary Clinton fans out there: if there's non-public information guiding the Obama adminstration's handling of the banking crisis, I'd bet it has as much or more to do with State as it does with Treasury.

I don't like where we are at all (and I think a TARP-recipient-based tax increase is a great way to respond to the AIG bonuses), but I think most commentators don't appreciate how big a hole we're in. I suspect Krugman does and that he realizes (and is hinting at, but not saying) that the only real solution to the banking crisis is to provoke a dollar crisis, by deliberately provoking foreign governments (i.e. China). However, I don't think it is at all surprising that, 60 days in, the Obama administration is still trying to avoid that.

"The insurance business is a business that writes contracts that must be honored even though there will be a clear winner and loser."

Tell American General that: Back in the early '80's they sold me a universal life policy with a guaranteed minimum rate of return of NINE PERCENT. (Guess they they thought inflation wasn't going away. I thought it was.)

Strangely enough, it's not paying that anymore.

Bob, I really don't think that Obama is corrupt. This may be his Katrina moment and he may fail to handle the economic crisis effectivley--don't know, above my pay grade--but I doubt very much that he's on the take in any illegal or unethical sense. Listening to the wrong people for the right reasons isn't corruption. It's an error of judgment. Possible error of judgment.

REPUBLICANS :STOP all YOUR political demagoguery.
How else can we cure this economy? if not by spending and stimulating the economy?. It will take a lot of spending money to remediate the worst depression since the great depresion. Doing nothing is much worse. Republicans/ conservatives stop criticizing the president. Instead think that all our problems were created by a republican Bush who did not have a clue on how to run a country.

on average, do the professional economists that the amateur economists of left blogostan are listening to (amateur or otherwise) do better than a coin flip at predicting recessions and recoveries.

What I know is that they've done better than Geithner and Summers in describing the status of the financial system - and the economy as a whole - over the past decade. That earns them a certain level of credibility.

I'm still waiting for an answer as to how the administration can go the nationalization route without money from Congress. No one seems to want to touch this one.

JMN: What money are they using for the current plan? Why not use that?

The shrill one elaborates:

http://krugman.blogs.nytimes.com/2009/03/21/more-on-the-bank-plan/#more-1689

What I know is that they've done better than Geithner and Summers in describing the status of the financial system - and the economy as a whole - over the past decade

is there a list of the things all of the people here (Geithner, Summers, Krugman, Smith) have correctly predicted vs what they have incorrectly predicted / failed to predict ? a little empirical evidence to tell us if they have earned our trust when it comes to the situation we're in now ?

yes, Krugman won a Nobel prize. but his prize wasn't for his work on the effects of over-leveraged insurance companies.

Via Yglesias, Brad DeLong's Geithner Plan FAQ. The part I have the most trouble with is this:

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

I don't see how the only way the auction can produce a too-high price for the bad assets is if we're headed for complete economic meltdown. Isn't it possible for the economy to recover while recognizing that the bad assets really are bad? If not, then that would seem to mean there's no hope if they are bad.

If not, then that would seem to mean there's no hope if they are bad.

My guess is that, on some level, the toxic waste now forms the asset foundation for many, if not most of the pension plans and insurance reserves around the world. I have heard that if AIG falls, umpteen million Japanese & Chinese lose their life savings.

The investment banks did commit a very sophisticated fraud on America and the rest of the world. A Ponzi.

Exposing that fraud, and demanding that the world take its losses, could have international political implications, to understate the situation. Forcing the American people to cover the world's losses, without really admitting why we are taking a significant hit to our standard of living, could have domestic political consequences. Trying to force the pain on the rich elites, when they can move their assets to Bahrain may not end well.

DeLong may be right, and this greenmail may have forced us into turning America inro a banana republic for generations, with a two tier economy. The alternative could look like the 30s & 40s.

Some of you know me. I think politics is almost always played at revolutionary speed, and those who can't sometimes choose violence will be the victims of it. I didn't ask to be forced to such a choice.

"Violence is the midwife of history". ...Karl Marx

KC/DC: Check out Galbraith's latest article in Wa. Monthly for the "way out". People are expecting the revival of the financial system to lead us out of the economic mess. In reality, it needs to be the other way around.

Cleek: I do not see your point regarding assembling a "list". The question is fairly simple: Is the financial crisis one of liquidity or one of solvency? Which side has Krugman come down on? Which side has Summers come down on?

This is not rocket science-much as the Masters of the Universe would have you believe.

Oh. Horribly, we do not have the time for a long period of neo-liberal oligarchy with a gradual incremental return to egalitarianism.

The rich elites, if allowed to stay in place, will not pay the economic costs for escaping Global Warming and Peak Oil. They will simply hole up in their solar powered domed gated communities with Blackwell Security and let most of the world die.

That is the plan. Those with supposedly good intentions tell themselves they are trying to avoid near-term revolution and war, millions dead, and comfort themselves with obscure hopes of a change in character of elites.

And billions will die.

What bobbyp said.

Further, the housing bubble. Was Krugman, Roubini et all correct? Or was Summers?

Was Geithner on the ball as the head of the NY Fed with respect to the enomrous mortgage backed securities scams/bets/leveraging? I don't recall so.

I do not see your point regarding assembling a "list".

i want to see evidence that Krugman et al are worth listening to.

The question is fairly simple: Is the financial crisis one of liquidity or one of solvency? Which side has Krugman come down on? Which side has Summers come down on?

that's what you think the question is. that doesn't mean that it is the question.

cleek: Paul Krugman described the Fed's actions in the wake of the dot-com crash as effectively creating a new bubble--in housing. You can go find the columns yourself, but he was right about the whole thing.

Those who say that we can't let AIG fail due to systemic risk are in denial--it has failed, and the system has collapsed. All of the bailouts so far have (a) postponed, and made worse our eventual reckoning with these facts, and (b) allowed bankers to make new disastrous gambles and pay themselves handsomely for doing so (see Merril Lynch, December 2008).

I think that Bob Mcmanus is right in his comments. The rescue plan will help individual financiers immensely; it will not help our financial system; and it will impose a crushing amount of debt on generations of Americans. The financial system is broken. The government should be creating a social safety net to deal with the consequences, and chartering new banks that people can trust.

Paul Krugman described the Fed's actions in the wake of the dot-com crash as effectively creating a new bubble--in housing. You can go find the columns yourself, but he was right about the whole thing.

what did he have to say about CDS and AIG's leverage situation ? this situation is far beyond a simple "housing bubble".

the system has collapsed.

what "system" ?

If there's one thing that this plan does, it's to eliminate the uncertainty. It establishes a price for the assets, and it provides some government support for those assets.

I think this is exactly wrong. Unless by 'eliminate the uncertainty' you mean 'eliminate the risk', but those are two very different things.

Nobody has unwrapped any of this crap to see whether it has any real value or not. We will get a "market price", but it will be a market in which any meaningful risk has been removed, because the US of A will be providing "some government support" in the amount of up to 97% of the cost.

Andrew's example is, IMO, precisely right on.

And no, you really don't need an economics degree to follow along.

The investment banks, and the financial sector generally, went nuts and bankrupted themselves.

If we let them just take their haircut, it's highly likely that the ripple effects will bankrupt not only other banks, but millions and millions of private individuals and entire nations as well.

So we are going to have kabuki asset auctions where 'public private parntnerships' will buy a bunch of paper with no realistic understanding of what it's actually worth. If the paper ends up being worth less than the 'market' price it commands during the auction, we, meaning you and me, will eat it.

Maybe the economy will be so wonderful over the next few years that all of this paper that nobody will buy without a 97% loan from uncle sam will end up paying handsomely.

Hooray!

More likely we are going to pay, and pay, and pay, and then pay some more. We are going to pay a lot.

The financial sector will make a lot of money.

In all of this, I see an astounding lack of not only will but even interest in exerting any kind of discipline on the financial sector.

So look for another round of more of the same in a couple of years.

What I take away from all of this is that the government of the United States of America is in thrall to the financial sector. Whether that makes folks in government puke, or makes them click their heels with glee, makes no difference to me, and makes no practical difference to the outcome. They are in thrall.

As long as that is true, we are screwed.

what did he have to say about CDS and AIG's leverage situation ? this situation is far beyond a simple "housing bubble".

What did Geithner and Summers have to say about it?

If they've all been silent, I'll take the guy who at least was right about a huge part of the story.

Roubini too.

Further, given Geithner's position as head of the NY Fed, it was incumbent on him to not only know what was going on, but to do something about it.

I'm not sure of his status as to the former, but we know about the latter.

What did Geithner and Summers have to say about it?

in Nov 07, Summers was dead on.

    Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

..

    Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt.

..

    Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

etc.

I'll take the guy who at least was right about a huge part of the story.

Summers was right about more than just the housing bubble, well over a year ago.

Ravi: Congratulations for being the first person I've seen or heard anywhere to assign Secretary of State Clinton blame for the banking crisis.

Eric Martin is spot-on about Geithner simply being a poor spokesman about the current crisis (aside from what you think of the job he is doing).

CNN devoted an hour to the AIG scandal last night -- "Facts and Fury," I think was the title -- and it showed Geithner's various public statements throughout the week and one could only come away with the conclusion that, to be kind, in public, he is a waffler at a time the country and the Obama Adminstration needs a voice of authority from the Treasury.

(The program also let Dodd dig a deeper hole for himself, which the sentator, strangely, did not seem to realize he was doing with his contradictory public statements. At least he gave an on-air apology.)

To be fair to Geithner, Christina Romer did not project much authority or confidence this morning, either, today on John King's program.

On the other hand, watching Fareed Zakarhia today, you got the feeling if Elliot Spitzer still had a role in overseeing Wall Street someone in the government may have gotten out ahead of this mess earlier or at least more effectively. (Yes, I'm aware that Mr. Spitzer was brought down because he let the little head out-think the big one. And since that sentence just made me laugh, what the hell, I'm leaving it in.)

Just after I mention Spitzer, I see this.

There's hope for the private sector yet.

I was too tired to log back on when I got home from work yesterday. But I did get around to reading this week's TIME cover story.

The way I read it, OCSteve was right when he said the Obama Administration -- namely, Treasury -- essentially "authorized" payment of the AIG retention bonuses.

Remember, even though it is a simple point, AIG would not have had any money to pay bonuses -- it would have went under -- if the government had not bailed it out with taxpayer dollars. As such, the Obama Administration had more control over those bonuses than KCinDC asserted upthread.

More in important, however, the story makes the point that AIG has done far more troubling things with our money than pay out the retention bonuses and that could be the next phase of the pitchfork revolution.

The next phase of the pitchfork revolution will center on how, as TIME puts it:

" AIG has become the banking industry's ATM, essentially passing along $52 billion of TARP money to an array of U.S. and foreign financial institutions — from Goldman Sachs to Switzerland's UBS. Those firms were counterparties to the credit-default swaps (CDSs) that AIG FP sold at least through 2005, and the companies were collecting on the insurance-like derivatives. AIG paid out an additional $43.7 billion to many of the same banks, which were also customers of the securities-lending operation run out of AIG's insurance division. In this case, AIG managed to take a business specifically designed to be low risk, low return and amp it into another dicey venture — with taxpayers on the hook."

Not as easy to explain as bonus money, but certainly more problematic.


Next we learn that AIG has been in bed with Goldman Sachs, who has been in bed with the the United States Treasury.

Perhaps that's laying it on too thick.

But:

"Many experts wondered why AIG paid 100 cents on the dollar (with taxpaper money)," the TIME article states. "Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs, the investment-banking house that has been the single largest supplier of financial talent to the government. Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives. Initial phases of the rescue were orchestrated by ex–Goldman chairman Hank Paulson, who was recruited as Treasury Secretary in part by former White House chief of staff and Goldman senior exec Josh Bolten. Goldman's current boss, Lloyd Blankfein, was invited to participate in meetings with the Fed. AIG's Liddy is a former Goldman director and an ex-CEO of Allstate. Another alum, Mark Patterson, once a Goldman lobbyist, serves as chief of staff at the Treasury, while Neel Kashkari, who runs TARP, was a Goldman vice president.

"Goldman has repeatedly declared that its exposure to AIG was 'immaterial' and fully hedged. But some rivals point to the fact that Goldman had uncharacteristically piled into contracts with a single counterparty.

"'I am shocked that Goldman had this much exposure [with AIG]," says an analyst at a competing bank. 'This was a major failing, but they got bailed.'

"Goldman got bailed twice: first on its CDS exposure and a second time, to the tune of $4.8 billion, for another AIG fiasco, losses on its securities-lending business."

I read that and then I hope that last week's populist outrage will continue and be put to good use.

I read that and I can't help but think that it proves Russell to be 100 percent right when he said upthread: "What I take away from all of this is that the government of the United States of America is in thrall to the financial sector."

The rest of us must wait in line.

bedtimeforbonzo, I specifically did NOT blame Hillary.

I'm just trying to point out, for those people who think she'd be doing a better job, that she must be in the loop on the banking crisis as it affects foreign policy. Given that, and given that she would have had similar economic advisers (both Geithner and Summers were in Treasury under Bill Clinton, after all) I really don't see the basis for the wishful thinking that a President Hillary Clinton would be better on the banking crisis. I don't think she'd have been worse on policy either (I think she would have been more politically vulnerable than Obama, not less, but that's a different set of considerations entirely).

I'm just really frustrated by some of the smugness I've seen from the Clinton side of the primary battle - that if Hillary had won she would have done the Right Thing and it would be All Better. I don't think the situation is nearly that simple.

While I do think the foreign policy side of the banking crisis is under-reported and truly scary, I don't think Hillary had anything to do with creating it. Even as a Senator what could she have done to convince China and the Gulf states to undervalue their currencies? I'd also guess (since we don't hear about that side of things) that whatever role she's playing as Secretary of State is making things better (or is at worst neutral).

cleek:

The "system" I refer to is the global financial system of lending and borrowing. It's broken because those responsible for ensuring that it runs smoothly made wagers thirty times the size of what they can actually pay. There isn't enough money in the US, or anywhere, to cover these bad bets. Further compounding the problem is the massive erosion of trust that naturally follows such a betrayal. The world financial economy functions, finally, due to trust.

A lot of people want to make all of this sound more complicated than it really is; but there are simple, common-sense explanations for what has occurred and will continue to occur, and the simplest explanations are usually right.

The Big Takeover by Matt Taibbi

If you have high blood pressure, take your medication before reading.

cleek: yes, Krugman won a Nobel prize. but his prize wasn't for his work on the effects of over-leveraged insurance companies.

He’s ridiculed on the right for his predictions. That is, he has been predicting a recession for a decade – well, duh. Anyone can look at historical economic cycles and predict that a recession is coming some day. Keep saying that for 10 years and wow – turns out you were right.

On his time as a government employee who could actually influence policy we don’t have to guess: FAIL.

Ravi: In almost all of the reporting about the need for all of the bank bailouts, it is almost always accompanied with scary implications of a worldwide crisis and the fact that we are in a global recession; notably, it's mentioned in the TIME cover story I link above.

I'm sorry if I'd rather focus on Timothy Geithner than Hillary Clinton on this one as this still strikes me as a domestic issue: My taxpaper dollars are going into AIG, Goldman, Citigroup, et al.

How would Hillary be doing instead of Obama? Frankly, I don't give a damn. Obama is our president and I hope he furnishes programs that will help get us out of the Bush recession.

P.S. I don't think Geithner was part of the Clinton Administration and have no reason to be Hillary would have tabbed him as Treasury Secretary and, if I had to go for one over the other for that job, I'd take Summers over Geithner, whose nomination I wrote negatively about -- although I had hoped President Obama knew more about the man's ability to succeed than I.

"The way I read it, OCSteve was right when he said the Obama Administration -- namely, Treasury -- essentially "authorized" payment of the AIG retention bonuses."

Yes, but you notoriously tend to read only a single source or so. What's your response to the idea that if said bill didn't engage in such "authorizations," well, what would have happened, given that you feel well-informed to comment based on what you read?

Do you really feel knowledgeable enough to speak to this subject? Because you read an issue of Time magazine? Or what?

Me, I sure don't feel I know enough about this topic. And I can't imagine feeling qualified if I haven't read a few tens of thousands of words, if not a few hundred thousand. Are you serioiusly claiming you know what you are talking about because you read an issue of Time? Or what? Because I can't imagine how that would qualify anyone to know squat. So I'm wondering what your other qualifications are to speak to what you're speaking to. Have you read some books on the topics, and if so, which?

I'm assuming you're not some sort of idiot who think he can be an expert on a complex topic based on a smattering of newspaper and magazine articles. God knows that I have no more qualifications is why I never speak to financial topics, myself. One would truly have to be a moron to do so.

Ravi: In almost all of the reporting about the need for all of the bank bailouts, it is almost always accompanied with scary do-it-or-else implications of a worldwide crisis and the fact that we are in a global recession; notably, it's mentioned in the TIME cover story I link above.

I'm sorry if I'd rather focus on Timothy Geithner than Hillary Clinton on this one as this still strikes me as a domestic issue: My taxpayer dollars are going into AIG, Goldman, Citigroup, et al.

How would Hillary be doing instead of Obama? Frankly, I don't give a damn. Obama is our president and I hope he furnishes programs that will help get us out of the Bush recession.

P.S. I don't think Geithner was part of the Clinton Administration and have no reason to believe Hillary would have tabbed him as Treasury Secretary and, if I had to go for one over the other for that job, I'd take Summers over Geithner, whose nomination I wrote negatively about -- although I had hoped President Obama knew more about the man's ability to succeed than I.

Thanks for not calling me an idiot, Gary. Moron is much nicer.

Read the article for yourself. It is sourced and, quite frankly, is as thorough an accounting as I have read, although, following along, have read others.

Frankly, the Dodd and Geithner TV interviews speak for themselves.

And, I'm afraid, I'm following Hilzoy's lead by not being a financial expert yet making a comment on the day's news. I think all you have to be at this point is a taxpayer to do so at this point since, among other things, we own 80 percent of the company.

But thanks for the scolding. I have not received one from my mother in a long, long time and, for some reason, it made me harken back to days gone by. (Come to think of it, I've got to call Mom. The wife mentioned last night she has a rodent problem.)

"I think all you have to be at this point is a taxpayer to do so at this point since, among other things, we own 80 percent of the company."

I'm not sure what one has to be. I'm sure I'm not qualified to speak to this financial stuff, other than at points of pure logic. You maybe be far more educated and smarter about these issues than I am. If so, congrats.

Me, I'm pretty much keeping my mouth shut, so as not to look the fool I'd be if I babbled without knowing what I talked about.

I'm utterly clear that being a taxpayer grants no knowledge about finance, though. Do you disagree?

Geithner's role at Treasury under Clinton is described in this New Republic profile: http://www.tnr.com/politics/story.html?id=c85b418b-5237-4f54-891f-8385243162bd

Here's one quote that says quite a bit about Geithner's role in the Clinton Treasury: "Indeed, if not for Geithner's periodic assertiveness, the '90s might have looked very different. At Treasury, Geithner often cast the deciding vote between Rubin and Summers, who was Rubin's deputy through much of the Clinton era." Given that role, I'd expect that Geithner would have been seriously considered by Hillary for Treasury as well.

I'll admit to be very disappointed in Geithner. In terms of his handling of the 90s currency crises, Geithner and Krugman were on the same page with respect to the economics and psychology of the situation. They might have had differences in how to respond to the situation (Krugman was more willing to explore the desirability of short-term capital controls, for instance). However, based on what I can recall (from what I heard at the time and what I read about it later), I don't think their differences were large.

It is very discouraging to see them at cross purposes now. I'm not sure what is going on. I'd like to hope that Obama wants to be *forced* to nationalize the banks because then he'll have more of an ability to force the necessary changes in the banking, but I can't see any evidence of that.

I see plenty of talk about the worldwide recession, but not nearly as much about the foreign policy details - the sovereign wealth funds and our relationships with oil-producing nations, how policy towards AIG influences our relationship with the EU (via the dramatic impact on EU banks) and so on. Most of what I know about this sort of thing is because I read places like Calculated Risk, naked capitalism, RGEMonitor, etc. - not from mainstream media reports. The other reason I fear "buried foreign policy dogs" is because I don't see the politics of the situation (by itself) being problematic enough to explain the stumbling and hesitation we've seen so far. It is entirely possible I'm missing other scenarios that I should be considering, but, for the moment, I'm surprised that a team that did say plenty of on-target things before they took office (see Larry Summers' FT op-eds, for instance) that they're struggling so much now.

Gary: I think being a taxpayer gives one the right to voice outrage and concern about how one's hard-earned, taxed wages are being spent.

The rodent in question under my Mom's trailer, by the way, is a possum, the breed which, of course, gave life to the phrase "playing possum." Have never been fond of possums.

Squirrels, on the other, I find endearing and resourceful, which is why I'd be insulting the backyard merrymakers to call you "squirrelly." I've always wondered who would stoop so low to originate that term.

But in its common usage it would be correct to call someone squirrelly who, instead of commenting on the facts presented in a forum such as this, prefers to question the legitimacy of the person who presented them. To prevent offending the dear rodent which is the squirrel, I'd offer up calling such a person as being petty.

I've always found squirrels to be above such a characterization since they seem to be pretty good at knowing where their nuts are buried and having a helluva good time while they are at it, both in the burying and unburying. Watch 'em someday. Their intelligence is vastly underrated.

Cleek: thanks for the Summers stuff. Was not aware of that. But that just makes his current position that much more puzzling.

Thanks for the link, Ravi. I certainly share your disappointment in the performance of a team that, as you said, has performed so well in the past.


I see plenty of talk about the worldwide recession, but not nearly as much about the foreign policy details - the sovereign wealth funds and our relationships with oil-producing nations, how policy towards AIG influences our relationship with the EU (via the dramatic impact on EU banks) and so on. Most of what I know about this sort of thing is because I read places like Calculated Risk, naked capitalism, RGEMonitor, etc. - not from mainstream media reports. The other reason I fear "buried foreign policy dogs" is because I don't see the politics of the situation (by itself) being problematic enough to explain the stumbling and hesitation we've seen so far.

I am exactly there as well. I'm very disappointed in Obama's economic team thus far, but I temper my reading of the criticism coming from the econ-blogs with the observation that the econ folks appear to me to think that Obama is some sort of dictator who can operate by fiat, and judging from the political commentary I read on most econ blogs they have a very naïve lack of understanding as to how strongly small-c conservative our political system is (in the sense that it is structurally biased in favor of non-action), and of how sensitive these financial issues are with regard to our foreign relations and the very distinct possibility that governments may fall and violence may erupt in various parts of the world if this financial crisis is mishandled. Metaphorically speaking the Obama administration has been handed a ticking bomb to defuse, and nobody knows how the thing is wired up, just that there are lots of different colored wires going every which way in a big tangled mess.

The other factor is that Geithner doesn't even have all of his undersecretaries confirmed by the Senate yet (thanks, GOP!). At the higher levels he is working with a skeletal staff - because our political system is moving slowly (as it usually does) to get a new administration staffed.

Thus I can understand why the admin. is being cautious rather than bold right now, especially since we are in uncharted waters. This isn't like an Argentinean sovereign default crisis where just one country (and its banks) are insolvent, and the rest of the world stands by to move in with new capital and provide liquidity once the mess has been cleaned up. Instead we are dealing with a solvency crisis in the financial system upon which the global fiat currency is based, one which potentially touches almost all centers of capital anywhere in the world.

It's possible that the only liquid capital left untouched by this crisis will be whatever was perforce excluded from the existing system - e.g. whatever black market cash was being held outside of the normal "regulated" banking system by Afghan opium farmers, South American narco-gangs and Al Qaeda's financial network. What a revolting thought that is.

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