Year: 2009

A Good Article on Why the CDS May Still Destroy US

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This is a good read on why credit default swaps are destroying our financial system.

The money quote:

These are deliberate flaws built into the game that include the lack of a central counterparty, no effective limit on dealer leverage and a schizophrenic pricing methodology that has nothing to do with the several different types of underlying risk contained in these contracts. It is a market designed by and for the seller, to the disadvantage of the buyer. But CDS may also be thought of as a poker game where the dealers have few chips on the table.

It comes down to excessive leverage, and the author, Christopher Whalen, is rather more of an optimist than I am about the outcome and how soon the mess will be straightened out.

Hopefully Jail, Absent That, Disbarment

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Newsweek has gotten reports that the report from the Office of Professional Responsibility (OPR) of the Department of Justice on the legal opinions of Jay Bybee, John Yoo, and Steven Bradbury is a strong condemnation of their legal reasoning.

Among other things, it looks like, “the report could be forwarded to state bar associations for possible disciplinary action.”

They pursued criminal charges against lawyers and judges in the Nuremberg trials, and they should do so here.

Hell Freezes Over

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Yes, Alan “Bubbles” Greenspan is now saying that bank nationalization deprivitization is likely the least bad solution to the banking crisis:

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

This from a close friend, and acolyte of, Ayn Rand.

Hint to Geithner and Summers, when Alan fracking Greenspan says it’s time to nationalize, it’s time to nationalize.

Why Geithner Sucked on the Bank Rescue Plan Rollout

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Well now we have an idea as to why Geithner’s unveiling of the stimulus package sucked. According to the Washington Post, a few days before the scheduled announcement date, Geithner discovered that the plan would not work, and he had to change it.

He wanted to do his “bad bank” thing, but, as people have been saying for weeks, if you pay fair value, the banks are insolvent, and if you pay enough to keep them afloat, then you waste trillions of taxpayer dollars.

So, now we have the public-private partnership and “stress tests”.

The question is whether he made this choice because he realized that he wrong, or if it was because he knew that he couldn’t sell the bad bank.

Given Geithner’s history, his last job was as an employees of those investment banks, I believe that he still wants to bail out the banks with no cost, but he hasn’t been able to figure out a way to sell it.

Bill Moyers has an interview with former IMF chief economist Simon Johnson, and he says that we need to break the oligarchs who got us into this situation, just like the IMF did with 3rd world nations. (video and transcript at link)

I agree with Mr. Johnson on nationalization pre-privatization, and I do not believe that Timothy Geithner will do this.

His career has been made as a protege of people like Lawrence Summers and Robert Rubin, and so he is joined at the hip to Wall Street.

Auto Industry Update

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To get a perspective on just how bad the auto industry is hurting right now, look at this graph from Calculated Risk.

It’s monthly the total auto fleet in the united states divided by auto sales, which gives you the turnover rate, basically a measure of how long it would take to replace every car on the road right now.

It’s gone from 10 years to 23.9 years, meaning that if this were baseline sales, the average age of the auto fleet would reach 29.9 years.

It’s clear that something, either auto sales, or the number of cars on the road, or both, will have to give, but this is just nuts.

It’s not surprising then that unions for GM subsidiaries in Europe want the car maker to spin-off of Opel and Saab. They know that they are viable, but that they will be sacrificed by the folks in Detroit.

So, while all this is going on, GM and Chrysler have to make their pitches for their recovery plan today, in order to get federal money.

At this point, there is only one thing that I know, any bailout should make Cerberus pay. The private equity firm that now owns Chrysler were looking for a quick flip on their investment, and they are unwilling to put any skin in the game.

As a first step, Cerberus must open its books to regulators.

Not Enough Bullets: TARP Recipients

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So, after taking billions of dollars of money from the treasury, and trillions from the Federal Reserve’s sh%$pile for cash program, we now discover that they are overcharging for federally guaranteed loans:

Since the Federal Deposit Insurance Corp. started guaranteeing debt in November, banks have charged clients, including themselves, more than $375 million in fees on $154 billion of deals in the U.S., according to data compiled by Bloomberg. Pittsburgh-based PNC Financial Services Group Inc., which received $7.6 billion from the U.S. Treasury, paid Citigroup and JPMorgan Chase & Co. 30 basis points, or $6 million, in December to sell FDIC-backed notes due in three-and- a-half years. A month later, JPMorgan and two other banks charged Freddie Mac 7.5 basis points for a similar offering.

(emphasis mine)

Also, the bailed out banks continue to maintain lavish offices, complete with office staff, for their recently ousted CEOs:

Looking for Charles O. “Chuck” Prince, ousted 15 months ago as Citigroup Inc.’s chief executive officer? Just call his extension at the bank, which still pays for his office and secretary in Midtown Manhattan.

Former Citigroup investment-banking head Michael Klein also has a free office and secretary after receiving a $34.3 million exit package when he quit in July 2008. John Reed, 70, who hasn’t worked at the bank since he resigned as co-CEO in 2000 with a $5 million parting bonus, is entitled to an office and secretary for as long as he wants.

Sanford I. “Sandy” Weill, who retired as chairman in 2006, is ending a 10-year consulting contract with the bank in April after just three years. The agreement gave him millions of dollars in perks, including an office, car and driver and use of company aircraft, which he gave up in February.

Sure as hell beats working for a living, I guess.

It appears to me that we have our own oligarchs in the United States, and we need to deal with them appropriately.

Unfortunately, I can’t find Vladimir Putin on my speed dial.

Ahhhh….Sweet Sanity

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It appears that U.S. and Iran will be working together to combat the Afghan drug trade.

This is basic common sense. Diplomacy can be based on common values or common interests, and there is a common interest here: The Shias in Iran, and the Sunni Taliban hate each other, the Taliban going so far as to murder Iranian diplomats, and Iran as a huge drug problem, with supplies from Afghanistan at its root.

There is a common interest here, and it can be the basis of joint action.

When Did Steny Hoyer Grow Some?

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Because he is now leaning on Pelosi to take a tough stand with Harry Reid:

House Majority Leader Steny H. Hoyer (D-Md.) is pushing Speaker Nancy Pelosi (D-Calif.) to take a harder line with the Senate after a trio of Republican senators forced Congress to trim billions from the $787 billion economic stimulus package.

It’s not clear how far Pelosi is willing to go in standing up to the Senate — or, realistically, what effect Hoyer and Pelosi combined could have in the face of the 60-vote hurdle Senate Democrats face.

But after last week’s stimulus votes, Hoyer called on Senate Majority Leader Harry Reid (D-Nev.) to force Senate Republicans to mount actual filibusters if they want to stand in the way of bills “so that the American people can see who’s undermining action.”

….

(emphasis mine)

I’m not sure what is going on, but I’m not complaining.

Economics Update

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Only a few bits of news, besides the auto bailout update, which I will cover later, but they are fairly significant.

First, the New York Fed’s Empire State Manufacturing Index hit another record low, though it has only been kept since July, 2001, so that’s not an enormously long time.

On the other side of the pond, though we have rumors that Ireland is on the brink of defaulting on its debt, which could make things very ugly very quickly.

It would likely also trigger events that would lead to defaults by other nations, the Baltic republics and Ukraine come to mind, as a rush for the doors starts.

Oil is down again, and the continued flight to safety has driven the dollar up.

Filubuster Reform

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There appears to be a lot of discussion on the blogosphere right now about how the filibuster.

Some are calling for outright abolition, and some are calling for significant changes in the rules governing the filibuster.

I made a graph of cloture motions (Data from the Senate web site), and it speaks volumes.

The first thing to notice is that cloture votes did not break double digits until the 1971-1972 session.

I it was at some point in the 1970s (I’m unable to find it on “the Google”, but it was at some point in the 1970s*), that people no longer had to talk to filibuster: It became a courtesy, not a rule, just the magnanimity of the Majority Leader that if a cloture vote failed, the legislation was pulled.

In addition, the requirements for the filibuster where changed in 1975 from 2/3 of those present and voting to 60% of all Senators in good standing (hence the issues with Kennedy having to show up on the stimulus).

There are a number of problems:

  • A non vote should never be counted as a no
  • What had been a measure of last resort until the end of the 60s has expanded to become a tool of electoral gamesmanship, and so has created a de facto 60 % supermajority to pass anything.

This is further complicated by the fact that there are times where we want the minority to be able to obstruct the majority.
vote. (*cough* Janice Rogers Brown *cough*)†

So, what do we do about a process that has created the disgusting spectacle of a man with a brain tumor, another one having to rush home from his mother’s funeral to break the filibuster, and Republicans admitting paying off the losing candidate in order to tie up the appointment of a Senator in court.

My opinion is that we start by enforcing the rules as they actually exist, and not accord the minority power that they do not have.

Courtesy is a two way street, and the abuse of the filibuster shuts that down.

Make them talk, and let them go hoarse, and have to stay in the Senate.

What’s more with CSPAN covering Congress, the spectacle of Senators talking for hours and days will not only be broadcast locally on cable, it will find its way to Leno, and Letterman, and Jon Stewart, and they will look like complete tools.

If it’s that important, they will still talk. If it isn’t, they will STFU.

As to actual rules changes, that is a difficult thing to do, at least until one side or the other breaks 60 Senators, but I would suggest that the 60% be retained, but that it be of the votes cast, which means that those who support the filibuster need to stay in order to thwart it.

*Another reason to hate the decade, along with Disco, Polyester leisure suits, and pet rocks.
†F%$# you, gang of 14.

A Hipster???? I’m a Mechanical Engineer, for God’s sake!

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Whiskey Tango Foxtrot????

I think that there are still a few bugs in this test.

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Whiskey Tango Foxtrot? Harold Ford?

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It appears that someone in the Obama Administration is floating Harold Ford’s name as the next Secretary of Commerce Nominee.

Admittedly, he didn’t go as far as Lieberman in slamming Obama in the general, but he certainly came close, probably because he thought that he could be president one day.

He’s where he is because he is a member of a corrupt political dynasty, and he’s a political opportunists even by the standards of Washington, DC.

This would be asking for a knife in the back.

When You Give a Child a Loaded Gun

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Let me be clear here, the metaphor implies no adult supervision, I am not making a comment on children and their parents going to the shooting range, or enrolling a kid in a gun safety class, or going hunting with the kids.

In this case, the metaphor refers to California, where a juxtaposition of heavily gerrymandered districts, term limits, and a requirement for a 2/3 super-majority to pass any taxes, have handed a loaded revolver to the most wingnutty of ‘Phants.

Seriously, when you combine the unbalanced districts with the super-majority, and then throw in a dash of “no respect for the legislature as an institution,” because they are limited to 6 years in the statehouse, and 8 years in the state senate, and you have a heady brew.

The Dems, and Ahnuld Schwartzenegger, need to have a club to beat Republicans around the head and shoulders, I would suggest an out of cycle redistricting.

To avoid the appearance of impropriety, have as a requirement, “The length of the borders shall be the minimum practical,” which means that the districts will be mathematically as contiguous as is possible.

Have You Heard the One About the Executive Compensation in the Stimulus Bill?

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Well, it appears that the final version of the stimulus bill has restrictions on executive compensation, no “compensation incentives that encourage senior managers ‘to take unnecessary and excessive risks that threaten the value of a company, no golden parachutes for senior management, “claw back” provisions to get money back from executives when they enrich themselves at taxpayer expense, and require (nonbinding) “say on pay” votes of the shareholders.

Sounds good, but it turns out that Congress gave the Treasury a year to draw up the regulations, and I’m sure that former Federal Reserve Bank of New York President, and general Wall Street butt boy, Timothy Geithner (as well as Larry Summers) will make absolutely sure to take the full 365 days, all the while lobbying for a relaxation of the law.

Oh to live in the UK, where the Conservative Party is calling for a bonus limit of £2,000 (about $2800) for all bank employees.

Yep, the Tories….The party of Margaret Thatcher….Is calling for bonus limits.