March 2009 Archives

$700 trillion derivatives market

The derivatives market is worth $700 TRILLION! MarketWatch’s Thomas Kostigen puts that incredible number in perspective:

[Residential real estate] at best worth $23 trillion in the U.S. We’re struggling to save the stock market, but that’s valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion… The total value of all the stock markets in the world amounts to less than $50 trillion.

Besides gigantic, the derivatives market is also opaque. When you buy an option on a regular exchange, you don’t have to worry about “counterparty risk” because you’re required to maintain an adequate margin account as the value of your option rises and falls. If you fail to make a margin call, the exchange immediately closes out your position. Everyone trades with the exchange, not another trader, and the exchange ensures that derivatives traders pay their losses and receive their gains.

This is not so with derivatives traded bilaterally. When you write a derivative contract with another party, you expose yourself to “counterparty risk.” The other party may not pay on time. They might go bankrupt. They might sell their derivative contract to a third party, which might in turn sell it to another party, which might go bankrupt. That’s tremendously dangerous to you.

But it’s even more dangerous to the system as a whole because no one knows who holds what contracts with whom. So no one knows which institutions are financially solid and which are zombies. Once the economy turns down, institutions become unwilling to lend to or trade with one another for fear their counterparty will go bankrupt. Creating an opaque $700 trillion web of derivatives is truly insane and should have been totally illegal. But that’s exactly what we have today. Consequently, it’s hard to see a happy ending to our current nightmare:

Few know what derivatives are worth. I spoke with one derivatives trader who manages billions of dollars and she said she couldn’t even value her portfolio because “no one knows anymore who is on the other side of the trade.”

…That’s why stabilizing the housing market will do little to take the sting out of the snapback we are going through on Wall Street… It isn’t the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished — trading phony instruments to the tune of $700 trillion.

Posted by James on Mar 10, 2009

"Agriculture would be destroyed and life would be impossible over much of the planet"

If you think financial news has been gloomy these past few years, you won’t believe what climatologists have discovered. Reality has exposed even the gloomiest “pessimists” of just a few years ago as naively sunny optimists. Every new datapoint has exceeded climatologists' worst fears. The world’s heating and melting is accelerating rapidly and could devastate human society:

Lord Stern, the economist who produced the single most influential political document on climate change, says he underestimated the risks of global warming and the damage that could result…

Lord Stern said new research done in the past two or three years had made it clear there were “severe risks” if global temperature rose by the predicted 4C to 7C by 2100. Agriculture would be destroyed and life would be impossible over much of the planet, the former World Bank chief economist said…

Lord Stern said the world’s population needed to be aware of the implications of climate change, with many areas devastated by hurricanes and others drying out.

“Much of southern Europe would look like the Sahara. Many of the major rivers of the world, serving billions of people, would dry up in the dry seasons or re-route.”

Billions of people would have to relocate as a result, he said.

“What would be the implication of that? Extended conflict, social disruption, war essentially, over much of the world, for many decades.”

Great. And I’m expecting to welcome a new daughter into this world any day now.

Posted by James on Mar 13, 2009

AIG = "Always Invest in Garbage," then pay garbage buyers $165 mil. in bonuses

I wish this were an Onion article, but it’s all too real and reported by the New York Times:

[AIG], which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year…

The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses…

A.I.G., nearly 80 percent of which is now owned by the government, has defended its bonuses… Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

There’s a legitimate argument for paying multi-million-dollar bonuses to executives in AIG’s many profitable, low-risk business units. But paying $165 million to executives in the very unit that severely damaged the world’s economy and has cost taxpayers $170 billion (and counting) is insane!

“Retention bonuses” for those who bankrupted their massive company, cost U.S. taxpayers a fortune, and helped wreck the world economy?!?!? Are their resumes looking so good now and the financial job market so strong that we’ve got to pay these losers $165 million or they’ll leave? How ‘bout we pay 'em nothing and kick 'em out the door?

Posted by James on Mar 15, 2009

AIG's CDS operation intertwined with tax-evasion service for corporations and the rich

I previously blogged about how Joe Cassano bet hundreds of billions of dollars (AIG didn’t have) that the economy would not turn down… bets U.S. taxpayers are now paying off to AIG’s creditors. Well, ABC News reports Cassano also used financial gimmicks to hide AIG’s operations from U.S. regulatory and tax agencies:

Cassano set up some dozens of separate companies, some off-shore, to handle the transactions, effectively keeping them off the books of AIG and out of sight of regulators in the U.S. and the United Kingdom.

“This is the other very important issue underneath the AIG scandal,” said Blum. “All of these contracts were moved offshore for the express purpose of getting out from under regulation and tax evasion.”

The Wall Street Journal reports:

The Internal Revenue Service is challenging tax benefits received by Hewlett-Packard Co. from an offshore transaction it purchased from American International Group…

According to a person familiar with the business, AIG’s tax-structuring operation was even bigger than the credit-default-swaps business that led to the company’s meltdown.

Talking Points Memo suspects AIG’s massive tax evasion business was intertwined with its massive CDS business:

Today the Wall Street Journal explores AIG’s euphemistically-named “tax structuring” business in a story about an IRS battle with Hewlett-Packard over an offshore entity — or what the IRS terms a “sham that lacked economic substance and a business purpose” — that AIG set up for the company to collect $132 million in tax credits… We are beginning to suspect the credit default swap business and the tax “structuring” business were the same thing — not just because they served the same end.

An attorney and tax shelter expert we spoke with today says AIG FP was one of the biggest players in the business of engineering offshore tax shelters for corporate and private clients that resembled a multibillion dollar tax evasion scheme called Son of Boss… that thousands of corporations and wealthy individuals used to book phony capital gains losses and evade most or all of their income taxes in the late nineties and early 00s. The mind-numbing litany of esoteric loopholes such tax shelters employ to concoct said phony losses is something you don’t want to hear about at this hour — trust us — but they are generally anchored by a set of exotic unregulated derivative securities whose ‘notional value’ can help fabricate losses that don’t actually exist.

Posted by James on Mar 31, 2009

AIG's "healthy" operations sick too?

Two decades ago, I sat through the trailer for “Weekend at Bernie’s.” The plot seemed to be: dead guy’s death was inconvenient for others, so they propped him up and pretended he was alive.

That 20-year-old memory came to me as I read the latest shocker about AIG and realized how many parties prefer AIG to at least appear alive, even if it’s actually Bernie:

Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG’s supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being “healthy,” as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it “a house of cards.” Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG’s own 300-page annual reports, Gober argues that AIG’s 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.

Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn’t have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG’s reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don’t add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. “The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire,” says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of “cooked books” between AIG subsidiaries. Based on the state insurance regulators' own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging.

…Christian Milton, AIG’s vice president of reinsurance from 1982 to 2005, was convicted last year in federal district court of conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission.

…More than any other Wall Street rogue, AIG has been able to indulge in “regulatory arbitrage” on a global scale, creating totally unsupervised businesses that act beyond the purview of any government (AIG has repeatedly said that its problems were confined to the London-based financial-products unit). The company’s ability to escape an umbrella regulator was one reason the financial-products group was able to sell, indiscriminately and without hedges, credit-default swaps around the world in the belief that they could never all come due at once… Huge regulatory gaps also exist in insurance. “There is no federal insurance regulator,” according to a senior government banking official, only individual state agencies. Are we missing something really big here?

Posted by James on Mar 18, 2009

AIG's incompetent casino... Vegas is better regulated and better run

A.I.G. ran a massive gambling parlor, taking bets from anyone who wanted to bet the economy would turn down. But, unlike real gambling houses, A.I.G. was totally unregulated and had no “edge.” Unlike real casinos, it wasn’t guaranteed to win more from bettors than it lost. Instead, it basically asked everyone in the world to bet heavily on red. And then, when the economy turned red, A.I.G. had to pay off everyone at once, which it couldn’t do (without massive cash from taxpayers).

Insurance policies on financial assets should have been regulated as insurance or financial assets or gambling contracts. Instead, government insanely decided not to regulate them at all. Especially stupidly, government even allowed “naked” derivatives… “insurance” policies that are pure bets rather than insurance policies on some risk exposure of the insured party.

Here’s how stupid that decision was: A.I.G. gambled twice its value — without setting aside any collateral! — on these unregulated bets:

It is truly amazing how outsized A.I.G.’s insurance commitment was, at $440 billion. After all, in 2005, when A.I.G. put many of these swaps on its books, the market value of the entire company was around $200 billion.

That means the geniuses at A.I.G. who wrote the insurance were willing to bet more than double their company’s value that defaults would not become problematic.

Posted by James on Mar 08, 2009

Alan Greenspan = Liar

I don’t normally call people liars, but when someone who severely damaged the world economy claims he’s blameless, I lose my normal restraint.

Amazingly, Alan Greenspan’s still claiming “The Fed Didn’t Cause the Housing Bubble”. His chief argument is that the Fed controls only short-term interest rates, not long-term rates:

The interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages.

David Fiderer dismantles this disingenuous argument in “How Dumb Does Alan Greenspan Think We Are? Very”.

[After] 2001, Greenspan lowered rates relentlessly in order to prime the economy for the 2004 election. By mid-2003, the fed funds rate was one percent, a 45-year low. Mortgage rates for both FRMs and adjustable rate mortgages (ARMs) fell dramatically, but rates on ARMs fell more. And this is a critical point. By early 2004 the rate difference between FRMs and ARMs was two percent, the highest it had been in 10 years. In other words, if you had a $120,000 mortgage, your monthly payments would have been $200 less under an ARM.

The bigger the rate difference, the more likely homeowners are to elect to finance with an ARM… In early 2004, when 5-year ARMs hovered around four percent, compared to FRMs at six percent, the refinancing risk associated with an ARM was much greater.

And it was precisely at this point, going into an election year, when Greenspan threw gasoline on the fire, encouraging homeowners to try ARMs. “Greenspan says ARMs might be better deal,” was the USA Today headline on February 24, 2004. “Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives,” the paper reported.

When Greenspan spoke, people listened. So by March 2005 the percentage of homeowners taking out adjustable-rate mortgages hit an all-time record, at 36%. In 2001, it was 12%. In 2002, it was 17%.

Moreover, ARMs were concentrated among the riskiest types of mortgages in the riskiest markets, as we see from statistics from the New York Federal Reserve. These are the markets, and the mortgages, that drove the bubble and the financial crisis we face today.

And this doesn’t even mention the Fed’s role in utterly failing to crack down on systemic fraud in the mortgage and banking industries that gave mortgages to people who obviously couldn’t pay.

Posted by James on Mar 12, 2009

America: Trust, Never Verify

We’ve sunk into a horrific financial sinkhole blackhole caused by horrible incentives — massive bonuses for generating short-term “profits,” even on “profits” that are actually gambling winnings — and the complete absence of regulatory supervision or audits.

We failed even to stop Bernie Madoff’s $50 billion Ponzi scheme, even though Madoff used a strip-mall-based, three-person (one a secretary; one a 78-year-old living in Florida) auditing firm (“Madoff’s auditor, Friehling & Horowitz, operated from a 13-by-18-foot office”) and used no independent broker.

Well, The New York Times demonstrates that our nation’s food supply is protected with the same great system we use to protect our financial assets. The peanut factory with holes in its roof that knowingly shipped — for many months — salmonella-infected peanut butter that killed nine and poisoned tens of thousands was given a “superior” grade by its inspector. The system is obviously broken, but companies and government seem eager to pretend private companies can regulate one another. It’s an exact parallel to Moody’s and Standard & Poors taking billions of dollars from Wall Street to slap “AAA” ratings on their toxic assets, except people are dying:

When food industry giants like Kellogg want to ensure that American consumers are being protected from contaminated products, they rely on private inspectors like Eugene A. Hatfield. So last spring Mr. Hatfield headed to the Peanut Corporation of America plant in southwest Georgia to make sure its chopped nuts, paste and peanut butter were safe to use in everything from granola bars to ice cream.

The peanut company, though, knew in advance that Mr. Hatfield was coming. He had less than a day to check the entire plant, which processed several million pounds of peanuts a month.

Mr. Hatfield, 66, an expert in fresh produce, was not aware that peanuts were readily susceptible to salmonella poisoning — which he was not required to test for anyway. And while Mr. Hatfield was inspecting the plant on behalf of Kellogg and other food companies, the Peanut Corporation was paying him for his efforts.

“The overall food safety level of this facility was considered to be: SUPERIOR,” he concluded in his March 27, 2008, report for his employer, the American Institute of Baking, which performs audits for major food companies.

Posted by James on Mar 05, 2009

Animals aren't meat machines!

As I sat down to eat my dinner tonight, I turned on the HBO special “Death on a Factory Farm”. Within fifteen minutes, I couldn’t take another bite. I was that horrified by the abuse of pigs and piglets I had just witnessed.

For example, mother pigs at this farm were forced to lie on the ground as milk machines for their babies and given no other contact with them, and when the piglets grew big enough to move to the next phase of their miserable lives, they were literally thrown several feet in the air until they landed with a thud against the hard metal side of a mobile pig-mover or on top of some of the piglets already inside. All the while, piglets were squealing and the mother was going insane as her babies were ripped away from her. The pigs were then thrown onto a school bus, at which point I turned it off because I couldn’t watch any more.

I was eating a chicken dish, but I know most chickens are raised in incredibly cramped conditions. I knew factory farms weren’t kind to animals, but I didn’t suspect they could be so cruel. We usually buy “free range” or “cage-free” eggs, but I’ve just learned that those labels can be pretty meaningless.

I haven’t (yet) watched more of the show, but it’s made such an impact that I’m beginning to re-think my meat-eating practices. My first stop was at Certified Humane. It says:

The Certified Humane Raised and Handled program is the only farm animal welfare and food labeling program in the U.S. dedicated to improving the welfare of farm animals from birth through slaughter for the 10 billion farm animals raised for food each year.

Certified Humane’s website says I can find products they certify at several nearby stores, including Stew Leonards and Stop & Shop. I’ll be looking for their logo and encourage you to do the same!

Posted by James on Mar 19, 2009

Are AIG execs receiving hush money for giving taxpayer money to favored firms?

Why did the Fed and Treasury permit massive theft of taxpayer money? They could have easily conditioned our saving of AIG on reasonable bonuses. In fact, such legislation passed the Senate but was mysteriously stripped out by a conference committee. As I argued earlier, AIG’s Financial Products Division — which lost hundreds of billions of dollars — should not have received a dime in “retention bonuses.” We now learn that the “retention bonuses” even failed to retain those who received millions of dollars.

Why was this permitted? Is this hush money? Each CDS written by AIG is, in effect, a cash payment from taxpayers to a third party. Could CDSes have been written simply to take “free” money from taxpayers? If so, is this why taxpayer cash is being used to give massive golden parachutes to the people who arranged for “free” money to flow to third parties? If this sounds unlikely, realize that this is exactly the sort of asset shifting firms with negative equity and government guarantees are inclined to pursue.

I’m posting here most of a letter from New York Attorney General Andrew Cuomo to House Committee on Financial Services Chairman Barney Frank:

We learned over the weekend that AIG had, last Friday, distributed more than $160 million in retention payments to members of its Financial Products Subsidiary, the unit of AIG that was principally responsible for the firm’s meltdown. Last October, AIG agreed to my Office’s demand that no payments be made out of its $600 million Financial Products deferred compensation pool. While this was a positive step, we were dismayed to learn after the fact that AIG had made multi-million dollar payments out of its separate Financial Products retention plan on Friday.

AIG now claims that it had no choice but to pay these sums because of the unalterable terms of the plan. However, had the federal government not bailed out AIG with billions in taxpayer funds, the firm likely would have gone bankrupt, and surely no payments would have been made out of the plan. My Office has reviewed the legal opinion that AIG obtained from its own counsel, and it is not at all clear that these lawyers even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money. I hope the Committee will take up this issue at its hearing tomorrow.

Furthermore, we know that AIG was able to bargain with its Financial Products employees since these employees have agreed to take salaries of $ I for 2009 in exchange for receiving their retention bonus packages. The fact that AIG engaged in this negotiation flies in the face of AIG’s assertion that it had no choice but to make these lavish multi-million dollar bonus payments. It appears that AIG had far more leverage than they now claim.

AIG also claims that retention of individuals at Financial Products was vital to unwinding the subsidiary’s business. However, to date, AIG has been unwilling to disclose the names of those who received these retention payments making it impossible to test their claim. Moreover, as detailed below, numerous individuals who received large “retention” bonuses are no longer at the firm. Until we obtain the names of these individuals, it is impossible to determine when and why they left the firm and how it is that they received these payments.

If AIG were confident in its claim that those who received these large bonuses were so vital to the orderly unwinding of the unit, one would expect them to freely provide the names and positions of those who got these bonuses. My Office will continue to seek an explanation for why each one of these individuals was so crucial to keep aboard that they were paid handsomely despite the unit’s disastrous performance.

As you may know, my Office yesterday subpoenaed AIG for the names of those who received these bonuses, and we plan to do everything necessary to enforce compliance. American taxpayers deserve to know where their money is going, and AIG’s intransigence and desire to obscure who received these payments should not be tolerated. Already my Office has determined that some of these bonuses were staggering in size. For example: * The top recipient received more than $6.4 million; * The top seven bonus recipients received more than $4 million each; * The top ten bonus recipients received a combined $42 million; * 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million; * 73 individuals received bonuses of $1 million or more; and * Eleven of the individuals who received “retention” bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million;

Continue Reading…

Posted by James on Mar 18, 2009

Banking industry wasn't funding "industry-funded" FDIC

For a decade, as it “earned” massive “profits,” the banking industry didn’t pay into the “industry-funded” FDIC that insures bank deposits! Now, the FDIC needs a bailout too.

The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.

Now with 25 banks having failed last year, 17 so far this year, and many more expected in the coming months, the FDIC has proposed large new premiums for banks at the very time when many can least afford to pay…

[FDIC chair Sheila] Bair said yesterday that the agency’s failure to collect premiums from most banks “was surprising to me and of concern.” As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

Posted by James on Mar 12, 2009

Banks' sloppy operations will cost them (us) dearly

It’s bad enough thinly-capitalized banks took on massive risks. But now we learn banks were simultaneously failing at basic operations, like ensuring the paperwork on $750,000 mortgages was kosher and maintained in safe places:

The notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.

But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it…

No one knows how many loans went into securitization trusts with defective documentation. But… eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.

Posted by James on Mar 02, 2009

CNBC: Market crash is all Obama's fault

After Jon Stewart thoroughly embarrassed CNBC on two recent shows simply by showing CNBC clips, Salon.com’s Gabriel Winant watched CNBC all day long so we wouldn’t have to. The report, “Why is Jim Cramer shouting at me?: Is CNBC as bad as Jon Stewart says it is? Yes” is pretty revealing.

CNBC blames the market crash on President Obama, even though: 1) Obama has been in office about six weeks; and, 2) CNBC’s own talking heads now confess they totally failed to see the market crash and don’t know why their former beliefs about markets have failed so miserably:

CNBC has become notorious as a redoubt of talking — no, shouting — heads who insist that the market is tanking because the new president is an incompetent lefty. A Bolshevik even, according to Bloviator-in-Chief Jim Cramer. A squish who hands out free mortgage do-overs to “losers,” according to Chicago trading-floor populist Rick Santelli…

The station’s business model rests on its claim to insider wisdom and market smarts. …Yet the financial future is starting to seem unmanageable, even to the all-knowing pundits of CNBC. Someone must be to blame. Thus the essence of CNBC circa 2009 is an uneasy mixture of despair and boosterism, made to cohere with the liberal application of pure venom. And the venom is directed at the most convenient target: Barack Obama.

…[Cramer] says, “You know what drives market pros and grizzled veterans crazy about this particular market? It’s that no pattern that we’ve had before, ever, nothing that worked before, is working now.” “We’re like navigators operating without a map or compass.” Now, with the Dow below 7,000, he tells us.

…A caller asks him if it’s a good time for new investors to break in. Cramer says there’s no hard-and-fast rule, we’ve got to go case-by-case, and then, without missing a beat, or seeking any further information, says, “Buy Verizon.”

…Cramer warns that the Obama administration might cause another Great Depression, accuses the administration of “wealth destruction,” and compares Obama’s cap-and-trade carbon pricing scheme to the McCarthyite House Un-American Activities Committee. “It’s time to join the witch hunt against known polluters,” he snarks. “Will the Democrats carbon blacklist this company, unless it names names?”

Economist Larry Kudlow… accuses Obama of “waging war against businesses and investors and entrepreneurs.” He tees up guest Art Laffer, a wholly discredited economist, who claims, “The political process started in late 2007. Since that time, the markets have been down 55 percent. Markets are forward-looking, not backward-looking. They saw what was coming in the election. They were anticipating what this guy would do, and they caused a slowdown.”

Got that? It’s not our fault none of the models are working. The economy collapsed because the government broke it. Buy Verizon. If it goes up, Cramer and Kudlow and Santelli are geniuses. If it goes down, it’s Obama’s fault. Either way CNBC wins.

Posted by James on Mar 11, 2009

CNBC misses Great Depression II... then blames Obama

Jon Stewart laid bare CNBC’s incompetent “coverage” (i.e., non-coverage) of the financial crisis: how CNBC repeatedly told viewers — in reverse-Chicken Little style — that the sky was done falling and poised to rebound. Its advice was dead wrong.

But CNBC’s greatest failure was failing to analyze the economy. Isn’t economic analysis the #1 mission of a financial news network? CNBC completely missed the boat on the greatest financial news event since the 1930s because it was too busy sucking up to CEOs and Wall Street banks.

Reflecting on this, I just realized the greatest irony of CNBC’s recent repeated attacks on President Obama. Many on CNBC have bashed Obama for “causing” the stock market to crash. This from the same “financial journalists” who failed — for a year-and-a-half — to grasp the magnitude or the causes of the deepest market plunge in 75 years!

CNBC failed to identify or analyze the root problems (which should have been pretty obvious to a network of financial journalists), and then they poured their bile on a man who had nothing to do with causing the problem! I’m the first to say I’m disappointed with President Obama’s inadequate response and dithering. But anyone who blames Obama for problems caused by almost everyone except Obama is either insane or lying to score cheap self-serving political points.

P.S. I certainly don’t want to suggest everyone at CNBC is an incompetent shill for Big Business. I recently blogged gushingly about David Faber’s excellent “House of Cards,” which explained — albeit a few years too late — the systemic problems that created America’s housing bubble and its inevitable bursting. But CNBC reportedly laid off the writer/producer of “House of Cards” just before it aired!

I know the producer of this documentary, James Jacoby, who spent a year of his life tracking people down around the world to interview to try to bring the details of the housing crisis to light.

Most ironic of all — he lost his job right before this doc is going to air. He’s just been laid off from CNBC.

Which makes me wonder: Was he punished for telling the truth?

Posted by James on Mar 06, 2009

Cut military spending

America spends ten times as much on its military as the world’s second biggest spender. America spends almost as much on its military as all other nations on Earth combined. According to SIPRI’s 2008 Yearbook:

The USA’s military spending accounted for 45 per cent of the world total in 2007, followed by the UK, China, France and Japan, with 4–5 per cent each. Since 2001 US military expenditure has increased by 59 per cent in real terms, principally because of massive spending on military operations in Afghanistan and Iraq, but also because of increases in the ‘base’ defence budget. By 2007, US spending was higher than at any time since World War II.

Instead of a “peace dividend” after the collapse of the Soviet Union, we’ve hiked military spending 59% in real dollars since 2001! Who’s the enemy? We never captured the purported perpetrator of 9/11, Osama bin Laden, so what have we bought for untold trillions of dollars flowing into the Pentagon, besides 4.7 million Iraqi refugees and more than a million Iraqi deaths?

With massive budget deficits and a financial crisis and 4 ½ million newly unemployed Americans desperately needing jobs, health care and financial assistance, why aren’t we slashing military spending?

As Chris Hedges' book review of Sheldon Wolin’s Democracy Incorporated notes, “even in the midst of our economic collapse, the two main political parties refuse to challenge the right of the military-industrial complex to gorge itself on taxpayer dollars.”

Posted by James on Mar 15, 2009

Damodaran values GM

Valuation expert Aswath Damodaran says you don’t need fancy equations to value GM:

Has GM taken good projects? Of course not.

How much money should GM be able to borrow? Nothing! You already are losing billions.

How much should they pay out in dividends? Nothing. They don’t have the cash flow.

What should they be worth? Probably nothing. We’re done.

So why’s the government refusing to do the obvious: let GM fail and (hopefully) allow creative destruction to find value in some of the pieces? How about, for example, repurposing some of GM’s workers and machinery to build railcars? America could sure use a rail system like Europe’s. The trains running from my home in Stamford to Manhattan are literally falling apart. Every few weeks the train bringing my wife home from Manhattan is delayed an hour or so because it broke down en route.

Posted by James on Mar 03, 2009

Damodaran: Wonderful free lectures on finance and valuation

Aswath Damodaran is a brilliant finance lecturer, probably the clearest teacher I’ve ever “had.” I put “had” in quotation marks because I’ve never met the man. I’ve only watched his courses (one on Corporate Finance and another on Valuation) on his website, where he places them for anyone to watch, free of charge. This is a wonderful gift to anyone interested in learning these subjects.

Last year, I watched and really enjoyed his 2008 lectures. I today revisited his website and learned that he’s uploading his current lectures too. Normally, re-watching a course a year later wouldn’t excite me much, but so much has changed in the world of finance that I’m eager to hear Mr. Damodaran’s take on our global financial crisis.

If you’re interested too, you’ll find tons of materials (including video lectures, book-sized presentations and wonderful datasets) at his website. I can’t recommend more highly.

One caveat: His website uses frames. Here’s the direct link to his current finance course and the direct link to last fall’s valuation course.

If you want/need to download the lecture files (perhaps due to connectivity issues), downloading RealMedia files is a pain. Here’s how to do it if you use Linux (I use/recommend Ubuntu): Install MPlayer and wget. Do a “wget xxx.rm” on the file’s URL. Then look inside the .rm file for an “rtsp” link. Once you have that link, create and run an executable file with the following code:

#!/bin/sh

mplayer -noframedrop -dumpstream -dumpfile YOUR_CHOSEN_FILE_NAME.rm rtsp://128.122.195.6:554/faculty/adamodar/b40230220s09/012609-adamodar-b40230220s09.rm?cloakport=8080,554

Posted by James on Mar 03, 2009

Does Jim Rogers read this blog? ;-)

Interesting comments from legendary investor Jim Rogers in a BusinessWeek interview.

Rogers shares my fear — stated previously on this blog — that Obama doesn’t understand economics and is foolishly trusting the people who got us into this mess and are wedded to saving the status quo ante (and can only think in terms of saving the institutions rather than saving the economy… a mindset Willem Buiter terms “cognitive regulatory capture”) to deliver us from their self-created mess:

They’re making [the crisis] worse. It’s pretty embarrassing for President Obama, who doesn’t seem to have a clue what’s going on — which would make sense from his background. And he has hired people who are part of the problem.

Rogers also agrees the bailout should focus on helping the real economy and putting money into healthy banks, rather than pouring money into sick banks:

These are people who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans… I’d like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out.

He wants AIG, Citigroup, bankrupt car companies, and everyone else to go through bankruptcy. He rails against bailouts because they subsidize and encourage unwarranted risk-taking:

If Long-Term Capital Management had been allowed to fail, Lehman and the rest of them would’ve lost a huge amount of money… [But] Instead of losing capital, losing assets, and losing incompetent people, they hired more incompetent people.

He’s mad at corporate executives who profited while they steered their companies toward bankruptcy:

How many hundreds of millions of dollars did [Chuck] Prince take out of [Citigroup]? How many hundreds of millions of dollars did other Citibank execs take? …[Stan O'Neal] got $150 million for leaving, even though he ruined [Merrill Lynch].

And he predicts chaos:

We’re going to have social unrest in much of the world. America won’t be immune.

Posted by James on Mar 01, 2009

Don't pick stocks... But if you do...

99% of investors should not purchase individual stocks. If you want to own stocks, buy low-fee index funds.

Having said that… If you have the time and interest to try to pick individual stocks (and can afford to lose a lot… do this only as a hobby, not with your child’s college fund), I recommend you read a great book (with a lousy title) from Morningstar: The Five Rules For Successful Stock Investing. It’s a very solid primer on analyzing firms and their financial statements.

Posted by James on Mar 01, 2009

Fed ignored community plea to crack down on predatory lending

Alan Greenspan says “The Fed Didn’t Cause the Housing Bubble” (or, presumably, the current financial crisis which would not have happened without the housing bubble). I’ve already discussed how the Fed kept interest rates ridiculously low and Greenspan personally talked up ARMs as great deals for home buyers because they carried lower interest rates than fixed-rate mortgages. Here’s another reason the Fed deserves blame… Failure to crack down on predatory bank lending, even when communities being destroyed by predatory lenders begged the Fed for help:

Cuyahoga County, which includes Cleveland, posted a record number of foreclosure filings. The number of empty houses is so staggeringly high that no one has an accurate count. The city estimates that 10,000 houses, or 1 in 13, are vacant. The county treasurer says it’s more likely 15,000. Most of the vacant houses are owned by lenders who foreclosed on the properties and by the wholesalers who are now sweeping in to pick up houses in bulk…

Cleveland didn’t see housing prices rise through the stratosphere. But even moderately rising property values created the conditions for subprime lenders to exploit strapped homeowners. Cold-calling mortgage brokers offered refinancing deals that would let homeowners use the equity in their houses to pay off other debts. A neighbor of Brancatelli’s had medical problems and fell behind in her bills. She refinanced, then did it two more times, draining the equity in her house. “She used her house as an A.T.M.,” Brancatelli says. “In the end, they just walked away. The debt exceeded the value of the house.” In other instances, mortgage brokers would cruise neighborhoods, looking for houses with old windows or a leaning porch, something that needed fixing. They would then offer to arrange financing to pay for repairs. Many of those deals were too good to be true, and interest rates ballooned after a short period of low payments. Suddenly burdened with debt, people began to lose homes they had owned free and clear.

As early as 2000, a handful of public officials led by the county treasurer, Jim Rokakis, went to the Federal Reserve Bank of Cleveland and pleaded with it to take some action. In 2002, the city passed an ordinance meant to discourage predatory lending by, among other things, requiring prospective borrowers to get premortgage counseling. In response, the banking industry threatened to stop making loans in the city and then lobbied state legislators to prohibit cities in Ohio from imposing local antipredatory lending laws.

In the ensuing years, the city’s real estate was transformed into an Alice-in-Wonderland-like landscape. Local officials began keeping track of foreclosed homes by placing red dots on large wall maps. Some corners of the map, like Slavic Village, are now so packed with red dots they look like puddles of blood. The first question outsiders now ask is, Where has everyone gone? The homeless numbers have not increased much over the past couple of years, and it appears that most of the people who lost their homes have moved in with relatives, found a rental or moved out of the city altogether. The county has lost nearly 100,000 people over the past seven years.

Posted by James on Mar 13, 2009

Financial Times says U.S. government, not CEO, should run Citibank

According to John Kay, writing in The Financial Times, which is seldom labeled a communist/socialist rag:

When the US government announced further support last week, [Citibank CEO Vikram Pandit] was reported as telling analysts: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.” But if I were a US taxpayer, I would ask why I had provided $45bn (€36bn, £32bn) to a business that was going to be run for shareholders, especially when the current value of outside equity is barely 10 per cent of my own contribution. I can think of no good answer. The US government has not given Citigroup $45bn because it thinks such support is a good financial investment. Most experience shows the situation of struggling banks gets worse much more often than it improves. The US government has given Citigroup $45bn because it fears, rightly, that its collapse would have devastating consequences for the US financial system.

The first objective of Citigroup’s management should be to put the bank in a state in which it can operate without government support. The second should be to ensure that the organisation is structured in a way that can never again jeopardise the stability of the world economy. The interests of shareholders must be entirely secondary.

So when Mr Pandit says that the government’s injection of capital will not change strategy, operations or governance, I would e-mail my congressman to ask why on earth not, and tell that congressman what changes I did expect. The company should divest or close activities not related to its essential public function. If Citigroup wants to continue to engage in proprietary trading, it should raise capital for the purpose from private sources.

Posted by James on Mar 09, 2009

Former IMF chief economist: "What we face now could, in fact, be worse than the Great Depression"

I’ve just begun reading a new article in The Atlantic by former IMF chief economist Simon Johnson. I previously touted Johnson’s appearance on Bill Moyers Journal, so I’m sure his article contains valuable insights.

Johnson warns “What we face now could, in fact, be worse than the Great Depression.” And he describes how economic death spirals typically evolve through exactly the form of political favoritism we’re witnessing toward American mega-banks today:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise…

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Posted by James on Mar 27, 2009

Former managing director of Soros Fund Management on Bill Moyers

Bill Moyers Journal this week featured yet another superbly qualified economist, Robert Johnson — former managing director of Soros Fund Management, former managing director of Bankers Trust, former Chief Economist of the US Senate Banking Committee, and former Senior Economist of the U.S. Senate Budget Committee — making a strong case that we need to close down and restructure our largest banks rather than continue shoveling them money and letting them live as continuing entities under current management and ownership.

Johnson terms the Obama/Summers/Geithner approach “intravenous drip capitalization… Meaning: don’t realize the losses on the balance sheet now. Don’t account for everything in a prompt way. Don’t truncate the losses, but allow them to go on… The capital assistance program is warehousing zombie banks and running the risk [that] the taxpayer, over the next one or two years, will experience much larger losses.”

Here’s an excerpt:

Financiers used to say, with all of their academic consultants, and everything else, “You can leave us alone, and we’ll create flexibility and prosperity. Trust us.” And then, when they got in trouble, they say, “You have to bail us out, because if you don’t, your hostage in society goes down with us.” Which is kind of what’s happening right now.

We had 25 years of excessive risk taking with people like Alan Greenspan and everybody else underwriting by rescuing each crisis. Robert Rubin and Larry Summers rescuing from the Mexican crisis, the Long-Term Capital Management deal, which didn’t involve taxpayers' money but it involved public officials organizing it. But you kept anaesthetizing the fear of loss on the part of financiers, and they built the bubble bigger and bigger and bigger. And now they need the bailout. We made a mess of regulation in the old days because we acted like they would never do something that took excessive risk. And they did do things that took excessive risk.

You can watch or download the video or read the transcript.

Posted by James on Mar 02, 2009

Free accounting tutorials

If you’re like me, you just can’t get enough accounting.

Well, if you’d like a free, easy-to-understand accounting tutorial, AccountingCoach.com is a good place to start. For example, it shows how to automatically calculate an appropriate “Allowance for Doubtful Accounts” based on the aging of Accounts Receivable and how to reverse a write-off if an apparent deadbeat actually pays you.

Another good one is DWMBeanCounter.com. DWMBeanCounter.com links to more accounting tutorials.

Posted by James on Mar 11, 2009

Funny quotation of the day

I hope you enjoy this quotation:

Q: Are you smarter than Larry Summers?

Paul Krugman: No — Larry is incredibly smart. Ask him, he’ll tell you.

In the same Q&A, Krugman said “Keynes is utterly relevant to the modern world” and recommended Keynes' 1930 article “The Great Slump of 1930”. Just read it, and the parallels to today are scary, esp. when you realize 1930 was only the beginning of economic pain.

Krugman also debunked two free-marketeers' would-be fall guys:

Q: Do you agree that the Community Reinvestment Act (CRA) is the cornerstone of subprime lending, the root cause of financial meltdown?

Paul Krugman: No, and I’m glad someone brought that up. CRA has been in existence since 1977; plus, it only applies to depository institutions (regular banks). Meanwhile, we had a subprime bubble that mostly took place after 2002, with most of the loans made by institutions that weren’t subject to the CRA.

That’s why everyone who’s looked at this honestly says that the Community Reinvestment Act had nothing to do with the crisis.

The attempt to blame it all on the CRA is just an attempt at blame-shifting — an attempt to make liberals and nonwhite people the villains of a story that is actually about runaway financial institutions and the free-market ideologues who refused to regulate them…

Q: While you are debunking conservative myths (CRA), how about the one that the whole housing crisis was due to corruption at Fannie and Freddie?

Paul Krugman: OK, glad someone asked that. The thing is that there was corruption at Fannie and Freddie, which makes them hard to defend. But the crucial point is that because Fannie and Freddie were under scrutiny over accounting scandals, their share of mortgages outstanding was falling during the height of the housing bubble. This in turn means that private lenders were responsible for the bulk of the bad lending. You have to go through huge intellectual contortions to blame institutions for bad loans they didn’t make and didn’t securitize. But of course if you believe as a matter of faith that government is the root of all evil…

Posted by James on Mar 02, 2009

Geithner plan: Banks set price taxpayers pay for banks' junk assets

A week ago, I pointed out that the government’s massive subsidies to “buyers” of troubled financial institutions' assets incents financial institutions to massively overpay to “buy” one another’s assets using taxpayer’s money.

Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City, has also figured out this scam. In Hudson’s example, “buyers” put up 15% of the purchase price, but The New York Times reported “buyers” could pay as little as 3%.

Whether taxpayers pay 85% or 97%, banks will soon reap massive profits (at taxpayers' expense) buying one another’s junk assets at sky-high prices. Banks name their price. We pay the bill.

If banks bid $100 trillion for one another’s junk assets, will taxpayers just cough up $85 trillion (or $97 trillion)? That seems to be the Geithner plan.

Posted by James on Mar 28, 2009

Give us $30 bil in unmarked notes... or we'll kill your economy

AIG sent the Treasury a ransom letter four days before receiving ANOTHER $30 billion:

An AIG report to the Treasury Department last month warned that if the government didn’t come to its rescue again, its collapse would trigger a “chain reaction of enormous proportion” that would “potentially bankrupt or bring down the entire system” and make it impossible for AIG to repay the billions it already owed the U.S. government.

Four days later, AIG was given $30 billion in federal aid on top of the $130 billion it had already received.

You can read AIG’s ransom note here.

Posted by James on Mar 10, 2009

Govt response to too-big-to-fail banks: bank mergers and trillions in gifts to our largest banks

I finally finished Matt Taibbi’s superb Rolling Stone article and want to urge everyone to please read every word.

This excerpt points out another dimension of the insanity of government’s response to the banking crisis. Government has refused to seize and restructure the largest (likely) bankrupt banks (Citibank, BofA, etc.) because they’re “too big to fail.” But its “solution” is — ironically — an orgy of mergers and multi-trillion-dollar giveaways to the largest, sickest banks rather than to smaller, healthier banks (which would have already lent out a much higher proportion of that money than the big, sick banks have):

The [lack of transparency] with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn’t a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless…

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he says.

This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven’t received any funds, they haven’t even gotten a call back about their applications.

“There’s definitely a feeling among community bankers that no one up there cares much if they make it or not,” says Tanya Wheeless, president of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. “They’re not giving out subprime loans or easy credit,” says Wheeless. “At the community level, it’s much more bread-and-butter banking.”

Nonetheless, the lion’s share of the bailout money has gone to the larger, so-called “systemically important” banks. “It’s like Treasury is picking winners and losers,” says one state banking official who asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.

One last interesting point:

By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

Posted by James on Mar 23, 2009

Greenspan's culpability: Part 3

Angered by Alan Greenspan’s claim that the Fed was faultless in the housing bubble and financial crisis, I’ve already posted two sets of reasons Greenspan bears substantial culpability. Here’s another, from The New York Times‘ Edmund Andrews. He wrote “Fed Shrugged as Subprime Crisis Spread” in December 2007:

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

That Greenspan rebuffed Fed Board member Gramlich is especially abominable. After Gramlich told Greenspan exactly what was wrong (systemic predatory lending and heavy use of teaser interest rates) and would soon ruin much of the financial industry, Greenspan yawned:

What alarmed Mr. Gramlich was that many subprime loans were extremely complicated and loaded with hidden risks.

Borrowers were being qualified for loans based on low initial teaser rates, rather than the much higher rates they would have to pay after a year or two. Many of the loans came with big fees that were hidden in the overall interest rate. And many had prepayment penalties that effectively blocked people from getting cheaper loans for two years or longer.

“Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked in a speech he prepared last August for the Fed’s symposium in Jackson Hole, Wyo. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.”

Posted by James on Mar 14, 2009

Healthcare for all, now!

In America, even toddlers stricken with cancer receive no help from the government:

Denise Prosser, 39, has battled cancer since she was a toddler.

Yet Prosser can’t afford her next cancer treatment — a radioactive therapy that she’s supposed to receive once a year — because she and her husband lost their jobs in December. Without insurance, she has postponed the radiation indefinitely and is taking only half of her asthma medications — sacrifices that often leave her gasping for air and could allow her cancer to come surging back.

What kind of advanced industrial “society” rations cancer and asthma treatments based on wealth? Is America merely a 300 million-person marketplace? Shouldn’t citizens in a nation as wealthy as ours expect and demand that their government provide basic healthcare for all? How can we tolerate our fellow citizens suffering and dying needlessly because they lost their job?

People have been dying needlessly in America for decades. But the current recession is already pushing the death rate way up. Our refusal to care for the weak and the poor among us is insane and infuriating.

Posted by James on Mar 11, 2009

Hooray for Sen. Bernie Sanders (I-VT)

The Obama Administration has been an even greater disappointment on the financial crisis than I long feared. President Obama recently nominated another consummate insider (who is also, not coincidentally, another former Goldman Sachs employee) to head the Commodity Futures Trading Commission (CFTC). The marvelous Senator Bernie Sanders has just blocked Gary Gensler’s appointment with a “hold.” Sen. Sanders' statement notes that Gensler’s fingerprints are on many major deregulatory actions that have pushed the world economy into a deep recession (depression?) and future Americans' taxes sky high (to pay for multi-trillion-dollar bank bailouts):

While Mr. Gensler is clearly an intelligent and knowledgeable person, I cannot support his nomination. Mr. Gensler worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of A.I.G. and has resulted in the largest taxpayer bailout in U.S. history. He supported Gramm-Leach-Bliley, which allowed banks like Citigroup to become “too big to fail.” He worked to deregulate electronic energy trading, which led to the downfall of Enron and the spike in energy prices. At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace and move us away from the greed, recklessness and illegal behavior which has caused so much harm to our economy.

Posted by James on Mar 25, 2009

How 'bout a newspaper bailout?

AIG, gambling banks and crappy car manufacturers all deserve to go bankrupt but are instead receiving massive taxpayer bailouts.

Conversely, we’re letting newspapers fail, even though newspapers: 1) have long provided an extremely valuable public service; 2) have recently become unprofitable through no fault of their own (i.e., the Internet has made it hard for anyone to charge for information); and, 3) need only a tiny fraction of the funds we’re giving the finance industry. Johann Hari of Britain’s wonderful paper The Independent asks “Why?”:

A recent study in The Journal of Law, Economics and Organization found that one of the biggest single factors in reducing corruption in a country is “the free circulation of daily newspapers per person.” Go to any country, and you’ll find that the lower the newspaper circulation, the higher the corruption. If nobody’s watching, anything goes…

In an age of bailouts, several European governments are experimenting with ways to support the world of news-gathering so it will survive for the twenty-first century. The best plan has come from French President Nicholas Sarkozy. He has launched a programme where every French citizen, on her eighteenth birthday, will be given a year’s free subscription to a newspaper of her choice. The effects are subtle. Many young readers will develop a newspaper habit. In turn, newspapers will compete harder to capture this lucrative guaranteed market, and make their product accessible and fresh. A benevolent whirl replaces the current death-spiral.

Of course there is a terrible danger in making newspapers dependent on the government’s actions. Nobody wants that. But there are ways to avoid this trap. In 1971, the Swedish government set up a system of subsidies to newspapers allocated by an independent body on the basis of circulation and revenue data. Intriguingly, the Swedish press became more adversarial and critical after it was introduced, not less.

As the thud of falling newspapers echoes across the Atlantic, we can’t afford to dawdle. Good newspapers — for all their flaws and selective vision — are the sinews of representative government. In 1787, Thomas Jefferson wrote: “Were it left to me to decide whether we should have a government without newspapers or newspapers without a government, I should not hesitate to prefer the latter.” Unless we act now, fast, we may be left with the opposite: a government, but no newspapers left to monitor them.

Posted by James on Mar 23, 2009

Humans arming superbugs by wasting antibiotics on healthy animals

Nicholas Kristof is raising the alarm at our unilateral disarmament against lethal superbugs. By feeding massive quantities of antibacterials to healthy animals, we’re helping already deadly bacteria evolve resistance to our entire arsenal of antibiotics. People are already losing their lives to bugs resistant to all available medicines:

Seventy percent of all antibiotics in the United States go to healthy livestock, according to a careful study by the Union of Concerned Scientists — and that’s one reason we’re seeing the rise of pathogens that defy antibiotics…

Five out of 90 samples of retail pork in Louisiana tested positive for MRSA — an antibiotic-resistant staph infection — according to a peer-reviewed study published in Applied and Environmental Microbiology last year. And a recent study of retail meats in the Washington, D.C., area found MRSA in one pork sample…

MRSA already kills more than 18,000 Americans annually, more than AIDS does…

Research by Peter Davies of the University of Minnesota suggests that 25 percent to 39 percent of American hogs carry MRSA…

Unlike Europe and even South Korea, the United States still bows to agribusiness interests by permitting the nontherapeutic use of antibiotics in animal feed. That’s unconscionable.

The peer-reviewed Medical Clinics of North America concluded last year that antibiotics in livestock feed were “a major component” in the rise in antibiotic resistance. The article said that more antibiotics were fed to animals in North Carolina alone than were administered to the nation’s entire human population.

“We don’t give antibiotics to healthy humans,” said Robert Martin, who led a Pew Commission on industrial farming that examined antibiotic use. “So why give them to healthy animals just so we can keep them in crowded and unsanitary conditions?”

Posted by James on Mar 15, 2009

If I owe you $10K, I'm in trouble; if AIG owes you $400 billion, taxpayers are screwed

Everyone’s quoting John Maynard Keynes on the need for fiscal stimulus to escape the global de-leveraging economic depression. But here’s a Keynes quotation relevant to the bank bailout:

“If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”

In 21st Century Americanese, that’s: “If I owe you $10,000, I’m in trouble; but if AIG owes you $400 billion, you’re screwed.”

Sadly, AIG’s creditors and the Obama Administration reject this truism. They think that if AIG owes counterparties (like Goldman Sachs) $400 billion, then taxpayers are screwed. The bank lobbyists running the government bailout — basically a bunch of guys from Goldman Sachs — are making sure AIG’s creditors get paid every penny they’re “owed” for the massive bets they placed with a firm that could not remotely pay off its gambling losses without hundreds of billions from taxpayers.

Maureen Dowd notes that Goldman is receiving tens of billions from taxpayers (not to mention even larger gifts from the Fed) without surrendering one iota of control to taxpayers:

A.I.G…. funneled $93 billion — more than half its federal money to date — to its high-flying insurees, including Goldman Sachs, Merrill Lynch and a group of European banks.

Goldman Sachs separately got $10 billion in bailout money last year, but recently asserted snootily that it’s doing well enough and doesn’t want our money because of the restrictions attached. Yet as Goldman sneers at the federal money at the front door, it’s taking delivery of billions in no-strings federal money through the back door. Can we taxpayers deduct the difference?

Our gift to Goldman demonstrates why the government’s headless and heedless bailout of A.I.G. is so wrong.

And why are we bailing out foreign banks, including a couple of French ones and UBS, a Swiss bank currently tussling with the I.R.S. because it refuses to hand over the names of thousands of U.S. tax-dodgers?

Posted by James on Mar 22, 2009

If Spitzer hadn't destroyed his career, would taxpayers be paying trillions in bailouts?

Like many powerful men before him, former New York Attorney General and Governor Eliot Spitzer made an insanely stupid career-ending and family-damaging mistake. But there are many reasons to suspect he was caught and prosecuted for political reasons. Specifically, it’s easy to suspect he was outed for being knowledgeable and outspoken regarding white-collar crime just as the financial crisis was exploding. Spitzer was outed soon after publishing an outstanding op-ed in The Washington Post titled “Predatory Lenders' Partner in Crime: How the Bush Administration Stopped the States From Stepping In to Help Consumers”.

With that context, it’s hard not to wonder how the political response to the financial crisis might have evolved differently had Spitzer not destroyed his career (possibly with the help of Patriot Act-enabled domestic spying). Spitzer just published a letter asking a key question:

Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

…It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Posted by James on Mar 17, 2009

I'm a dad x 2!

On the off chance anyone reads this blog, my apologies for not posting yesterday. I was at the hospital all day helping my wife deliver a healthy (6 lbs., 15 oz.) baby girl! Mother and daughter went through a (relatively) short but exceptionally painful ordeal. Labor progressed too fast relative to (slow) hospital procedures for my wife to get an epidural, so she delivered “the old fashioned way.” She was heroic!

In my brief web surfing this morning, Time’s article on credit default swaps caught my eye. Haven’t read much of it (yet), but you can’t learn enough about CDSes because they’re the catalyst that turned a bad economy into a potential Great Depression and a giant vacuum sucking taxpayer dollars into financial firms.

Posted by James on Mar 17, 2009

Jon Stewart savages CNBC for incompetence and pro-bank/anti-people bias

After CNBC’s Rick Santelli cancelled his scheduled appearance on The Daily Show, Jon Stewart exposed CNBC as the financial news network with no clothes (for utterly failing to grasp the financial crisis) and no shame (for urging bailouts of several trillion dollars for banks while excoriating Obama’s plan to spend a tiny fraction of that to help struggling homeowners).

After a montage of clips showing fawning CNBC “journalists” lobbing softball questions at CEOs and unquestioningly regurgitating their press releases, Jon asked how CNBC kept pumping stocks and calling the market bottom and urging viewers to buy and assuring viewers Bear Stearns was fine (and Lehman Brothers was fine, AIG was fine, etc.) throughout the greatest destruction of wealth since the Great Depression:

CNBC — how did they miss this entire story? They’re a financial news network! I mean, it’d be like the Weather Channel interviewing Hurricane Katrina and saying, “You know there’s reports that you have high winds and flooding,” and Katrina’s like, “No, no, no. I’m sunny,” and they’re like “alright.”

Posted by James on Mar 06, 2009

Keeping the sausage factory going

I wondered yesterday how banks could possibly have believed A.I.G. could really insure every financial asset in the world against losses. It seems obvious they must have expected the government to pay off A.I.G.’s creditors if the economy tanked.

Well, consider this:

When I asked one former A.I.G. executive, Robert J. Arvinitis, what the larger economic purpose of A.I.G.’s credit default swaps were, he laughed. “The purpose was to keep the sausage factory going for the investment banks.”

Posted by James on Mar 02, 2009

Krugman vs. DeLong

The excellent U.C. Berkeley economics professor Brad DeLong says his main principles are: “Paul Krugman is right” and “If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.”

Since DeLong’s not one of the masses of know-nothing Krugman-bashers, I read with great interest his post “I Think Paul Krugman Is Wrong.”

DeLong’s primary disagreement with Krugman boils down to this: Krugman believes toxic bank assets are toxic, so taxpayers should not pay much for them (unless we restructure the banks and wipe out owners and possibly creditors too). DeLong believes the assets have two possible values: low — if the government plan fails to solve the banking and economic problems — or moderate — if the government plan substantially stimulates bank lending and boosts the economy. DeLong is willing for the government to “overpay” (relative to what private parties are willing to pay today) because the very act of overpaying for so many bank assets will substantially improve bank balance sheets, which — he claims — should boost the economy and raise the value of those currently toxic assets.

Both arguments are plausible, but I’m inclined to agree with Krugman. To agree with DeLong, you need to believe two things:

  1. Government purchases of toxic assets will largely solve the current banking and economic crises.

  2. Financial benefits of a government bailout that rescues private investors from horrible investment decisions should flow to private investors, not the government and taxpayers.

DeLong’s critique deserves consideration, but I suspect #1 is overly optimistic, and #2 seems unfair.

One reason I doubt #1 is that house prices have fallen so far, so many jobs are being lost, and so many people have so little home equity that it’s easy to imagine large-scale foreclosures and home abandonment by people whose mortgages are larger than their home values. Even worse, in areas with heavy concentrations of foreclosures and home abandonment, communities are being destroyed, pulling down the prices of all nearby houses. Giving insolvent banks cash won’t solve the house price problem or the job loss problem or the blighted neighborhood problem.

Posted by James on Mar 23, 2009

Maher: Banks, car companies and health care more screwed up than the Post Office

Bill Maher ranted insightfully about Louisiana Gov. Bobby Jindal’s two-pronged message that “government is bad” and “Americans can do anything”:

The stimulus package was attacked as typical tax-and-spend, you know like repairing bridges is left-wing stuff. Ooh, there the liberals go again. Always wanting to get across the river.

Folks, the people are the government. The first responders who put out your fires. That’s your government. The ranger who shoos pedophiles out of the bathroom. The postman who delivers your porn. I mean how stupid is it when people say “Oh yeah that’s all we need. The Federal Government telling Detroit how to make cars, or Wells Fargo how to run a bank. You want them to look like the Post Office?”

Yeah. Actually. You mean the place that takes a note in my hand in L.A. on Monday and gives it to my sister in Jersey on Wednesday for forty-two cents? Well, let me be the first to say I would be thrilled if America’s health care system was anywhere near as functional as the Post Office.

The truth is, recent years have made me much more wary of government doing the opposite. Of stepping aside and letting unregulated private enterprise run things it is plainly too greedy to trust with, like Wall Street, like rebuilding Iraq. Like the way Republicans always frame the health care debate by saying health care decisions should be made by doctors and patients, not government bureaucrats. Leaving out the fact that health decisions aren’t made by doctors, patients or bureaucrats. They’re made by insurance companies.

Posted by James on Mar 07, 2009

Many warned deregulation would cause financial crisis & taxpayer bailouts

Many smart people warned against financial industry de-regulation and predicted the consequences in starkly accurate terms.

A decade ago, many warned against the 1999 Financial Services Modernization Act, which allowed financial institutions to grow too-big-to-fail, unregulatable, and inscrutible. And 15 years ago, the General Accounting Office (GAO) warned that failure to regulate the derivatives market could force “a financial bailout paid for by taxpayers.”

In 2000, Ralph Nader predicted this crisis.

Two years earlier, in 1998, the late, brilliant Molly Ivins warned against passage of the Financial Services Modernization Act, predicting that massive financial institutions (like AIG) might take on excessive risk and require taxpayer bailouts:

Watch the House pass a bad bill. Watch the Senate make it worse. Watch the banking industry dig its own grave. Watch supposedly smart people set up a financial disaster. Can we see President Clinton veto this mess? Veto, Clinton, veto.

Not since Congress passed the Garn-St. Germain bill in 1981 – the one that deregulated the S&Ls and unleashed a half-a-trillion-dollar disaster, which the taxpayers of this country wound up paying for – has there been a move to match this for pure folly.

In May, the House passed (by one vote) a bill to eliminate barriers between banks, brokerage firms and insurance companies. This sets up financial holding companies that can offer all three types of services simultaneously. The most obvious risk is that a blunder in the insurance or brokerage end of the business could bring down a bank, putting insured deposits at risk. The taxpayers, of course, then wind up with the tab, as we did with the savings-and-loan mess.

In 1999, Senator Byron Dorgan predicted that passage of the Financial Services Modernization Act could lead to “massive taxpayer bailouts”:

This bill will also, in my judgment, raise the likelihood of future massive taxpayer bailouts. It will fuel the consolidation and mergers in the banking and financial services industry at the expense of customers, farm businesses, family farmers, and others, and in some instances I think it inappropriately limits the ability of the banking and thrift institution regulators from monitoring activities between such institutions and their insurance or securities affiliates and subsidiaries raising significant safety and soundness consumer protection concerns.

Sen. Dorgan and the late, great Sen. Paul Wellstone expressed grave concern about dismantling financial regulations put in place to prevent another Great Depression. Sen. Dorgan even predicted the time frame to within a year:

“I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. “I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

You can watch Sen. Dorgan speaking on this issue in 1999 or watch him speaking about it on a recent episode of The Rachel Maddow Show.

Fifteen years ago — in 1994 — a 200-page General Accounting Office (GAO) report called for regulation of the exploding derivatives market, warning that it could result in “a financial bailout paid for by taxpayers”:

This combination of global involvement, concentration, and linkages means that the sudden failure or abrupt withdrawal from trading of any of these large dealers could cause liquidity problems in the markets and could also pose risks to the others, including federally insured banks and the financial system as a whole…

Although the federal government would not necessarily intervene just to keep a major OTC derivatives dealer from failing, the federal government would be likely to intervene to keep the financial system functioning in cases of severe financial stress. While federal regulators have often been able to keep financial disruptions from becoming crises, in some cases intervention has and could result in industry loans or a financial bailout paid for by taxpayers…

The immediate need is for Congress to bring currently unregulated OTC derivatives activities of securities firm and insurance company affiliates under the purview of one or more of the existing federal financial regulators and to ensure that derivatives regulation is consistent and comprehensive across regulatory agencies…

GAO also recommends that Congress systematically address the need to revamp and modernize the entire U.S. financial regulatory system. Gaps and weaknesses in OTC derivatives regulation clearly demonstrate that the existing regulatory structure has not kept pace with the dramatic and rapid changes in the domestic and global financial markets that have occurred over the past several years.

The Columbia Journalism Review provides an analysis of this document and the media and financial industry’s reaction to it.

Posted by James on Mar 26, 2009

Massive tax evasion by the rich should be punished severely

It’s ridiculously easy to avoid paying taxes if you’re rich, thanks to banks eager to profit by helping you cheat your government and screw your fellow citizens. All you need is no conscience. And, apparently, plenty of people lack consciences. Even still, I’m shocked to learn the scale of tax evasion. Rich Americans are cheating Uncle Sam of an estimated $100 billion in taxes every year:

Senate investigators estimate that Americans who hide assets in offshore bank accounts are failing to pay about $100 billion a year in taxes… The government not only needs the money, but closing down such tax scams is essential for President Obama’s rescue effort to retain public support and credibility.

Some of the banks at the center of the global financial meltdown are prominent purveyors of evasion services. UBS of Switzerland has acknowledged that as of Sept. 30, it held about 47,000 secret accounts for Americans. It has refused to disclose the names of all but a tiny number of the account holders, arguing that it would be a breach of Swiss law. But last month — after UBS got caught soliciting business in the United States — it admitted to breaking federal law by helping Americans hide assets, and the bank agreed to pay $780 million in fines and restitution.

The United States Treasury isn’t the only one being shorted. The Tax Justice Network, a research and advocacy organization, estimates $11.5 trillion in assets from around the world are hidden in offshore havens.

This must stop immediately, and everyone who cheated should be severely punished. None of this “OK, pay your taxes and all will be forgiven” garbage that only encourages cheating by never punishing those caught cheating.

Posted by James on Mar 14, 2009

Matt Taibbi nails it (yet again)

Rolling Stone has provided some excellent political coverage. Their most colorful current writer is Matt Taibbi, who always tells you exactly what he’s thinking (curse words and all). In his new article, “The Big Takeover”, Taibbi declares — accurately, I believe — “People are pissed off… but they’re not pissed off enough.”

We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said. “When the world catches pneumonia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet’s investment portfolio down.”

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else’s financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its “pneumonia” was making colossal, world-sinking $500 billion bets with money it didn’t have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

Beyond the moralizing excerpt (above), Taibbi’s article is worth reading in its entirety because it provides a remarkably clear description of the financial crisis. For example:

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

In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn’t have even a fraction of that amount of cash on hand to cover its bets.

Taibbi also provides a new (to me) analysis of how the massive global operations of AIG, GE and Ameriprise came to be “regulated” by the (totally incapable of regulating them) Office of Thrift Supervision rather than a more capable regulator like the Federal Reserve. These giant multinationals were basically allowed to choose their “regulator” and chose the least competent one: “the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world’s largest insurer!”

Posted by James on Mar 21, 2009

Media Matters: Media ignores Krugman... except when he criticizes Democrats

I’m a huge Paul Krugman fan. I’d have to search for hours to uncover something he wrote that I disagree with. America would be a finer nation today if every American regularly read Krugman’s articles.

And I’m an equally huge hater of most TV news. Until Rachel Maddow, I hadn’t watched TV news in years.

So I’m glad MediaMatters.org is complaining that the media largely ignored Krugman’s years of tough and completely accurate critiques of the Bush Administration but is suddenly fascinated by Krugman’s criticisms of Obama:

For years Krugman only occasionally appeared on the pundit talk shows. He wasn’t referenced much inside The Village, either. Meaning, the Beltway press pros didn’t seem to care what Krugman wrote about Bush and didn’t think his writing—his opposition—needed to be examined closer. He was just a liberal critic, so who cared what he wrote about Bush…

But now a Democrat is in the Oval Office, Krugman is still hitting the president from the left, and suddenly the Beltway press thinks Krugman’s work is fascinating and newsworthy. Trust us, it is. (For years he’s been our pick as the country’s premier columnist.) We just think everyone would have been better off if the press had paid this much attention to Krugman’s work between, say, 2002 and 2006.

Posted by James on Mar 30, 2009

"Monopoly Olympics for the grand masters of the universe"

The estimable William Greider, writing in The Nation, has translated Krugman and Stiglitz’s prose condemnation of Geithner’s plan into a poetic metaphor:

President Obama has invented a new board game for Wall Street money guys to play that promises to be a lot of fun. It’s very much like the regular Monopoly game that kids play—only better—because this one uses real money, provided courtesy of the taxpayers. The best thing about Obama’s game is nobody loses. Usually, the winner in Monopoly is the one who winds up with the most money. In the Obama version, the losers get any losses back from the government at the end of the game…

The president hands out tall stacks of cash to all the players—hedge funds, insurance companies, big-time investors, any well-heeled capitalist with a serious taste for acquiring greater wealth…

Only adults are allowed to play this game. It is much too complicated for ordinary citizens so sophisticated financiers are needed to do such tricky deals. But Americans at large can have fun watching the action and rooting for various participants… It’s like Monopoly Olympics for the grand masters of the universe. Will Warren Buffett take a seat at the table? Bill Gross, the PIMCO bond king, is salivating at the prospect of double-digit returns and says Obama’s game is “win-win-win.” Can billionaire George Soros resist such an opportunity? Will legendary traders at Goldman Sachs square off against James A. Baker III’s Carlyle Group with its oil-rich Arab backers? What a kick that these famous people will be playing with our money.

Posted by James on Mar 25, 2009

Most "experts" are clueless

Torpedoing the world economy took thousands of “experts” working in concert to stuff their bank accounts before the inevitable consequences of their gambling (with other people’s money) habit and “talent” for selling crap at premium prices to trusting victims materialized.

It’s now taking a Federal Reserve, Treasury and White House of “experts” to re-arrange deck chairs as the Titanic sinks to the ocean floor.

Paul Krugman believes officials overseeing the financial system rescue have failed to craft an adequate rescue plan because they’re still living on Fantasy Island:

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

Recovery will remain impossible until officials face facts and accept reality. Amazingly, the American people have moved on to anger and depression while the “experts” possessing all the fancy charts and models, deep knowledge of the Great Depression, and supposed ability to make thoughtful, rational decisions are stuck at denial and immobilization.

Posted by James on Mar 06, 2009

Nader: "What Washington is not doing to prevent another round of greed and misdeeds"

I noted last month that Ralph Nader warned in 2000 that deregulation was about to turn Wall Street into an unregulated casino and that banks would eventually collapse exactly as they have. Given Nader’s foresight in 2000 (except perhaps into how his candidacy would tip that election), it behooves us to consider what Nader now terms “seven avoidance indicators which outline what Washington is not doing to prevent another round of greed and misdeeds by the Wall Street few against the innocent many throughout the country”. (Strangely, I found only six indicators):

  1. Where are the resources for comprehensive law enforcement against the Wall Street crooks, swindlers and purveyors of costly deceptive practices?…

  2. Where are the anti-trusters to revive the moribund divisions in the Justice Department and Federal Trade Commision?…

  3. What about Congress and Obama shifting some power [from CEOs & executives] to the investors and shareholders who are paying for all these losses?…

  4. The federal officials are talking up stronger regulation and re-regulation proposals but we have not yet been informed of their specific plans…

  5. By now, Washington should be devising ways to pay for these gigantic deficits and bailouts. A fraction of one percent sales tax on the hundreds of trillions of dollars in derivative transactions annually would produce hundreds of billions of dollars in revenue and tamp down some of this Wall Street gambling with other peoples' money…

  6. Our government doesn’t highlight not-for-profit institutions like the 8000 credit unions that are increasing their loans and continue to serve over 80 million Americans without a single insolvency.

Posted by James on Mar 14, 2009

Naked CDSes

The brilliant Cenk Uygur says taxpayers are nuts to pay off AIG’s “naked” CDS losses:

How could the CDS [credit default swap] market be larger than the world GDP combined? That doesn’t make any sense…

CDS are basically supposed to be insurance on a group of assets. So, if you have a collection of mortgages, loans and other assets, and you would like to insure their value, you get a CDS. This makes sense since some of these underlying assets turned out to be quite risky.

What doesn’t make sense is for the insurance market to be many times larger than the value of all of the underlying assets combined. Well, it turns out there is a reason for that. It’s called the “naked” CDS. These deals are not attached to any underlying asset. They are not collateralized. They are not attached to anything of real value. They are simply bets. As in wagers. As in gambling…

Here comes the really crazy part — the American taxpayer is now paying off these bets. The people who bet that the housing bubble wouldn’t burst or that the assets would retain their value, well, they lost — but they don’t have the money to pay off all of these theoretical bets since they never put any collateral down on them. So, they’re turning to the government and saying they’re out of money. And we’re paying them. That’s insane.

It’s one thing to pay off mortgages that went bad. It’s another to pay off insurance for a collection of bad debts. But it’s another thing all together just to pay off gambling debts that otherwise have nothing to do with the economy. We, as the taxpayers, would have to be utter fools to provide the money for these inane bets. And, of course, that’s exactly what we’re doing…

I’ve never heard Tim Geithner or Ben Bernanke or any congressman or senator talk about what we should do with the naked CDS. They talk about all of the assets and obligations as if they are all the same.

Because most politicians serve their special interest paymasters rather than the American people, government refused to regulate the CDS market. Given that, I’m not sure the government could fairly just declare all naked CDSes null-and-void. But why are taxpayers paying off AIG’s gambling losses at 100 cents on the dollar (esp. on bets that are not total losses)? Taxpayers aren’t liable for AIG’s gambling losses. The government could have seized the insolvent financial institutions and imposed a solution. Or it could have used its leverage — before paying insolvent AIG’s gambling debts — to negotiate compensation of, say, 50 cents on the dollar. Instead, it screwed taxpayers to the maximum while sparing gambling losers, like AIG, from the normal and fair consequence (bankruptcy) of their actions and allowing gambling winners to collect all their winnings after gambling at a casino they must have known couldn’t pay its gambling debts in full if the economy sank.

Posted by James on Mar 27, 2009

New theory of the origins of trust

Primatology has long fascinated me for the insights it yields — by comparing and constrasting ourselves with our biological cousins: chimps, bonobos, gorillas, etc. — about human nature.

The dominant paradigm holds that much of morality grew out of the need to collaborate with those close to us (our “in group”). We therefore keep careful track of favors and harms others do to us and are prone to gossip about, ostracize, and punish those who cheat us. In-group collaboration is also fostered — with the help of collective activities such as dance, music and religion — by the need to protect our group (“us”) against external threats from rival human groups (“them”). Anyone with even cursory knowledge of human history will recognize that territoriality and glorification of “war heroes” are perhaps universal truths across human societies. Richard Wrangham’s Demonic Males: Apes and the Origins of Human Violence is an excellent example of this literature.

So I read with great interest about a new paradigm suggesting trust evolved in humans alongside adorability of babies and the need for “cooperative breeding” as the human baby’s need for adult support greatly outstripped that of other primates.

As a parent who benefits from both daycare and grandparents who live with us, I suspect there’s a lot of truth in this new theory, esp. since infanticide is common in most other primate species.

These theories are likely both true to some extent. That this theory comes from a female scientist illustrates (once again) the value of having a diversity of backgrounds engaged in creative endeavors.

Posted by James on Mar 02, 2009

Obama: No lobbyists... except everyone advising me on the banking crisis

Despite promising to clean up Washington and keep lobbyists out of his administration, President Obama is living in an economic news bubble. He’s allowed himself to be taken captive by banking industry insiders and is now receiving advice on banks only from bankers.

Many Supreme Court justices' most significant votes would have shocked the presidents who nominated them. Why? Because presidents often fail to anticipate what contentious issues will settled by future Supreme Court sessions.

When America was choosing its presidential nominees in 2007 and early 2008, we had no idea we were confronting (at best) a bitter, deep recession and (possibly) Great Depression II. President Obama’s political brilliance is obvious to all. But only since Inauguration Day have we discovered the dangerous consequences of relying on an economic neophyte to save us from economic armageddon.

Appreciating his lack of expertise, Obama has surrounded himself with smart, knowledgeable people. But these “experts” are wedded to the same failed institutions and mindsets that led us to the brink of Great Depression II. There’s not a single Krugman or Stiglitz inside the White House advocating for the screw-bank-shareholders-and-CEOs view held by a majority of Americans and an overwhelming majority of economists.

After running a campaign pledging not to allow lobbyists into his administration, Obama’s letting banking industry insiders mold his thinking. And because he lacks economic training, he’s trusting their opinions. He’s also too insulated from the broad debate that has led many (most?) economists to beg government to temporarily seize failed banks and restructure them rather than keep handing them hundreds of billions every time they demand more.

Here’s Paul Krugman’s latest:

“Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. To be sure, leaders are supposed to sound calm and in control. But in the face of the dismal data, this remark sounded out of touch.

And there was no hint in the interview of readiness to do more.

…[Obama] went on to dismiss calls for decisive action [on bankrupt banks] as coming from “blogs” (actually, they’re coming from many other places, including at least one president of a Federal Reserve bank), and suggested that critics want to “nationalize all the banks” (something nobody is proposing).

As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery … well, you get the picture.

Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along?

Posted by James on Mar 09, 2009

Obama's bank bailout: Mission impossible?

Frank Rich says Obama’s proposed new round of bank bailout is a political non-starter and a solution to the crisis is not yet in view (at least of Obama’s economic team):

The genuine populist rage in the country — aimed at greedy C.E.O.’s, not at the busted homeowners mocked as “losers” by Santelli — cannot be ignored or finessed. Though Obama was crystal clear on Tuesday that there can be “no real recovery unless we clean up the credit crisis,” it was telling that he got fuzzy when he came to what he might do about it. He waited two days to drop that shoe in his budget: a potential $750 billion in banking “asset purchases” on top of the previous $700 billion bailout…

As Obama said, we can’t move forward without a functioning financial system. But voters of both parties will demand that their congressmen reject another costly rescue of it. Americans still don’t understand why many Wall Street malefactors remain in place or why the administration’s dithering banking policy lacks the boldness and clarity of Obama’s rhetoric…

Among the highlights of Obama’s triumphant speech was his own populist jeremiad about the “fancy drapes” and private jets of Wall Street. But talk is not action. Two days later, as ABC News reported, the president of taxpayer-supported Bank of America took a private jet to New York to stonewall Andrew Cuomo’s inquest into $3.6 billion of suspect bonuses.

Handing more public money to the reckless banks that invented this culture and stuck us with the wreckage is the new third rail of American politics. If Obama doesn’t forge a better plan, neither his immense popularity nor even political foes as laughable as Jindal can insulate him from getting burned.

Posted by James on Mar 02, 2009

Only thing more insane than financial crisis is government's response

The Fed and Obama Administration are proposing massive subsidies to private investors to buy toxic bank assets:

The F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Ironically, the Fed’s proposing more non-recourse loans after non-recourse loans helped get us into this mess. Millions of people who bought homes and can afford to make their mortgage payments are instead abandoning their homes now that they’re worth less than their remaining mortgages. Buyers have the option to “un-buy” their homes and stick banks with the loss because mortgages in America are non-recourse.

Now we want to gift taxpayer money to wealthy investors to do with toxic assets what Americans did with their homes? If the economy recovers, wealthy investors keep the upside. If the economy remains weak, taxpayers eat the losses. And, either way, banks sell their toxic assets for far more than they’re worth to investors playing with Monopoly money. Insanity.

The two possible interpretations of the Treasury’s plan to let private investors play “heads-we-win-tails-you-lose” with taxpayer money to overpay for toxic bank assets is: 1) The Treasury’s stupid; or, 2) The Treasury cares far more about banks and hedge funds than taxpayers.

Paul Krugman explains the plan’s “logic”:

The Obama administration is now completely wedded to the idea that… there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets…

Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

The Naked Capitalism blog is even blunter:

[The plan] appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper…

Notice the utter dishonesty: a competitive bidding process will [supposedly] protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

Posted by James on Mar 21, 2009

Optimal language learning

I recently started watching a Chinese TV show for children with my 32-month-old son. My vocabulary is much larger than my son’s, but my son seems to grasp fast dialogue somewhat better than I do. So I was surprised to find that I understand my son’s shows better than he does. I suggested to my wife that I have an advantage because my son relies completely on his ears whereas I’m able to read the characters at the bottom of the screen (because Chinese TV usually prints the dialogue text).

My wife replied that I’m able to follow the dialogue better in part because I have greater knowledge of the world. I agreed that was a big factor. For example, in last night’s show, the kids in the classroom had show-and-tell. My son’s never experienced that, so unfamiliarity added a layer of complexity to his attempt to absorb the dialogue.

Coincidentally, I woke up this morning and read this interesting New York Times op-ed on educational practices and educational testing that addresses the very topic my wife and I discussed last night:

These much maligned, fill-in-the-bubble reading tests are technically among the most reliable and valid tests available. The problem is that the reading passages used in these tests are random. They are not aligned with explicit grade-by-grade content standards. Children are asked to read and then answer multiple-choice questions about such topics as taking a hike in the Appalachians even though they’ve never left the sidewalks of New York, nor studied the Appalachians in school.

Teachers can’t prepare for the content of the tests and so they substitute practice exams and countless hours of instruction in comprehension strategies like “finding the main idea.” Yet despite this intensive test preparation, reading scores have paradoxically stagnated or declined in the later grades.

This is because the schools have imagined that reading is merely a “skill” that can be transferred from one passage to another, and that reading scores can be raised by having young students endlessly practice strategies on trivial stories. Tragic amounts of time have been wasted that could have been devoted to enhancing knowledge and vocabulary, which would actually raise reading comprehension scores.

Let’s imagine a different situation. Students now must take annual reading tests from third grade through eighth. If the reading passages on each test were culled from each grade’s specific curricular content in literature, science, history, geography and the arts, the tests would exhibit what researchers call “consequential validity” — meaning that the tests would actually help improve education. Test preparation would focus on the content of the tests, rather than continue the fruitless attempt to teach test taking.

A 1988 study indicated why this improvement in testing should be instituted. Experimenters separated seventh- and eighth-grade students into two groups — strong and weak readers as measured by standard reading tests. The students in each group were subdivided according to their baseball knowledge. Then they were all given a reading test with passages about baseball. Low-level readers with high baseball knowledge significantly outperformed strong readers with little background knowledge.

The experiment confirmed what language researchers have long maintained: the key to comprehension is familiarity with the relevant subject. For a student with a basic ability to decode print, a reading-comprehension test is not chiefly a test of formal techniques but a test of background knowledge.

This raises a more general question: Is it better to learn language (or programming, carpentry, etc.) through books and formal instruction or trial-and-error interaction with the material? Both approaches are productive and can — if teachers adapt their teaching to students' current abilities — reinforce one another. In many fields, new learners begin with formal training but gradually spend more and more time with trial-and-error, hands-on learning. Flying airplanes is a good example. New students must learn the standard body of knowledge and pass an examination. Then they must spend a lot of time flying airplanes with a gradual decrease in the role of their flight instructor.

I believe our schools are overemphasizing formal learning while underemphasizing encouraging children to read, read and then read some more. Kids should read whatever interests them, not whatever the teacher insists they read. As a child, I read countless books, and I re-read favorites like Charlie and the Chocolate Factory a zillion times. Each time through, I understood it better than before and grew more comfortable with the words and intuited the meaning of previously unfamiliar words.

My nephew currently is struggling with reading because he views it as a required chore — like visiting the dentist — rather than something fun and enlightening. I suspect that’s partly because his teacher generally chooses his required reading. Reading what others tell you to read is boring.

This coincides with research that our brains form permanent memories much more easily when we’re emotionally engaged. The stronger our emotional reaction to something, the more likely our brains are to create permanent memories of the experience. So, it seems that you’re more likely to learn from reading a book you enjoy than a book you’re trudging through as a class requirement.

For much of the time I’ve studied Mandarin, I’ve relied heavily on books. But the past few years I’ve incorporated a lot more intuitive learning, the kind of learning my son uses to learn Mandarin. I’ve downloaded countless audio broadcasts that I listen to on my iPaq whenever I’m brushing my teeth, doing the laundry, putting away dishes, raking leaves or walking to the store. I usually understand the gist of the broadcast and learn new words. This is especially easy in Mandarin because so many words are what we call “compound words” in English. The Chinese put two or three characters together to create a word; you can often figure out a word’s meaning from context and the sound of its component characters.

Listening comprehension and reading comprehension are distinct skills. But they can reinforce one another if smart teachers speak about the same content that students are reading about. One reason my early years studying Mandarin were less than ideal is that the textbooks I used focused on Chinese history, customs, ethnic groups, and foods that I didn’t see around me or have any need/opportunity to talk about. I’ve since found books that focus on more everyday items and activities, and now I have more opportunities to solidify that vocabulary because I speak and hear those words with my wife, son and in-laws. So my personal experience confirms the op-ed writer’s comment that language learning should be integrated with students' non-language (science, global studies, etc.) content classes.

Remarkably (to me), my son intuits the concept of “Use it or lose it.” When he hears a new word, he’ll often immediately re-use that word in a few sentences. That’s a brilliant technique for learning new vocabulary and for learning most anything else.

P.S. One reason I’ve stressed book learning while studying Mandarin is that there is a very weak relationship between written and spoken Mandarin (as you might guess from the fact there are so many mutually incomprehensible spoken Chinese dialects all of which use the same written language) whereas there is a very strong relationship between written and spoken English. Consequently, you cannot begin to learn to read and write Chinese without extensive book learning. But someone who learned to speak English and knew basic rules of spelling could write in a comprehensible manner. Studying Mandarin through books lets me study both the written and spoken languages simultaneously.

P.P.S. My mom — an expert on educational testing — commented on the op-ed:

When a standardized test is designed for use over a broad area (e.g., a state) and there is considerable variation within that area (e.g., 115 individual districts) in the specific content that is taught, you may still end up with some students having an “unfair advantage” on the test. And whatever the specifics of what is taught, it may be more “relevant” to some groups of students than others.

She’s right, of course. But there’s a spectrum between the extremes of each-teacher-for-him/herself and a minute-by-minute national daily curriculum. For example, a national curriculum could specify grade-specific themes each month and then teachers and students could select material on those themes. For a Civil War theme, a Pennsylvania teacher might cover Gettysburg while a Virginia teacher might cover Manassas and a South Carolina teacher might teach about Fort Sumter. Similarly, students might choose to read different kinds of books about the Civil War, one choosing a book on Lincoln, another on slavery, and a third on famous generals.

Posted by James on Mar 23, 2009

Pension Benefit Guaranty Corporation gambles... and taxpayers lose (yet again)

Another day. Another looming tens-of-billions-of-dollars taxpayer bailout.

This time, taxpayers were screwed by the Bush Administration’s decision to shift “much of [the Pension Benefit Guaranty Corporation’s] $64 billion insurance fund into stocks.”

Anyone who has ever read two pages of a book on pensions knows “Pensions invest in safe assets.” Putting most of a pension’s funds into stocks is like gambling with your life savings. You just don’t.

But the Bush Administration did. And their timing could not have been worse… right before stock markets around the world crashed.

I can think of only three possible explanations:

1) Out of blind stupidity, free market fanatics ignored every rule of pension fund investing

2) Heading into the 2008 election, the Bush Administration hoped to make the economy look stronger than it was by pumping government pension money into stocks

3) Having failed in its plans to enrich its Wall Street friends by pushing Social Security funds into the stock market, the Bush Administration did the “best” it could for its friends — by pumping government pension money into stocks

There is no justification for this extremely costly (perhaps $30 billion) error. The error was immediately obvious last year:

Peter Orszag, head of the White House Office of Management and Budget, has “serious concerns” about the agency, according to an Obama administration spokesman.

Last year, as director of the Congressional Budget Office, Orszag expressed alarm that the agency was “investing a greater share of its assets in risky securities,” which he said would make it “more likely to experience a decline in the value of its portfolio during an economic downturn the point at which it is most likely to have to assume responsibility for a larger number of underfunded pension plans.”

Posted by James on Mar 30, 2009

"Regulators" can't stop even obvious frauds

How was $8 billion fraudster “Sir” R. Allen Stanford not stopped? He had declared personal bankruptcy in 1984 with a negative net worth of $13.4 million. And his Ponzi scheme was built on lies:

Stanford developed the history that the bank’s roots went back to 1932—to a financial-services company started by his grandfather, Lodis. There was no mention of Stanford’s failed effort at trying to run a string of health clubs in Texas, nor the two then-recent bankruptcy filings. Instead, all the bank’s early marketing material focused on Lodis Stanford and “the wise guidance of our parent company, The Stanford Financial Group.” In 1992, a year after Guardian relocated to Antigua and was rechristened Stanford International, the bank put out a brochure that said the company was “celebrating our 60th anniversary” in helping customers find “conservative yet lucrative investments.”

Says a former employee who worked with Stanford more than a dozen years ago: “Allen decided to make his grandfather the anchor of the company history and ordered a picture of Grandpa to be placed in every office.” …It was long taken as gospel within the company that the firm’s roots went back more than 70 years.

But the truth appears far different. His grandfather was a barber in Mexia who later started a small insurance brokerage called Stanford Financial. The brokerage was eventually sold to a larger company. People familiar with Stanford said there’s no evidence of any continuous link between the grandfather’s insurance business and the offshore bank and brokerage firm founded by the younger Stanford in the 1980s.

In later years, Stanford would continue to embellish his family story. For years, he would describe himself as a distant relative of Leland Stanford, the former California governor who founded Stanford University. But university officials have long said there’s no evidence of any familial link between the college and Allen Stanford’s family.

Posted by James on Mar 10, 2009

Sachs: "Spending that helps make rich guys richer while leaving the poor to die"

Columbia University economist Jeffrey Sachs is outraged that “the taxpayer transfers to make ‘rich guys richer’ could amount to tens, or hundreds, of billions of dollars of the public’s money, massive transfers that are avoidable”:

The government loans by design will go to poorly capitalized special investment funds set up specially to buy toxic assets. The approach is tailor-made to leave the FDIC and Fed with massive losses. Since the taxpayer losses will be hidden on the balance sheets of the FDIC and Fed, the tens or hundreds of billions of dollars of taxpayer losses will not be recognized until the program is long forgotten by the public.

The cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer… The government could provide new loans to blue-chip investors to buy up the toxic assets at a deep discount, but the government’s loans would have to be repaid by the investors whether or not the toxic assets pay off. In the current plan, the investors are allowed to default on the government loans if the toxic assets perform badly.

Investors would of course bid less for these assets than under the Geithner-Summers plan, so that the banks and bondholders would get less, but the taxpayer would also be left much less exposed. If the write-downs of the bad assets force the bank into insolvency, the FDIC would pump in public capital to keep the bank operating without interruption. Even in that case, however, the solution would be cheaper than under the current plan, since the taxpayers rather than the existing shareholders would be the claimants on the bank’s assets.

We all know the end of the story as it’s now being written with an overpriced rescue of the banks. When it comes time for health care reform, education funding, infrastructure rebuilding, and (heaven forbid) help for the world’s poor and dying people, there will be no fiscal space. Budgets will be tight. Spending that helps make rich guys richer while leaving the poor to die of hunger and disease seems to be par for the course in our Wall-Street-besotted public policy.

Posted by James on Mar 30, 2009

Stiglitz calls Geithner plan "robbery of the American people"

My blog has repeatedly touted Nobel Prize-winning economists Paul Krugman and Joe Stiglitz as men Obama should let run the government’s financial crisis response.

Well, Stiglitz shares Krugman’s view that the Geithner plan is a massive taxpayer subsidy to banks that own crappy assets and to wealthy, powerful investors who will “buy” the toxic assets. I put “buy” in quotation marks because they can “buy” them for as little as 3% of the sale price, with government agencies (i.e., taxpayers) lending the other 97%. And we’re not requiring “buyers” to repay their loans unless the assets they “buy” are worth enough to pay back taxpayers. If they overpay for assets, taxpayers will bear up to 97% of the losses!

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, [Stiglitz] said.

“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

Even if the plan clears banks of massive toxic debt, worries about the economic outlook mean banks could still be unwilling to make fresh loans, while the prospect of a higher tax burden to pay for various government stimulus plans could further undermine U.S. consumers, he said.

Posted by James on Mar 25, 2009

Stiglitz: Let's create "good banks"

Nobel Prize-winning economist Joe Stiglitz reiterates and elaborates his long-standing view that government must temporarily seize failed banks:

It has been obvious for some time that a government takeover of our banking system—perhaps along the lines of what Norway and Sweden did in the ‘90s—is the only solution. It should be done, and done quickly, before even more bailout money is wasted.

Stiglitz also explains another sensible approach (that is apparently receiving no consideration from the banking industry insiders running the bailout show):

One innovative proposal (variants of which have been floated by Willem Buiter at the London School of Economics and by George Soros) entails the creation of a Good Bank. Rather than dump the bad assets on the government, we would strip out the good assets—those that can be easily priced. If the value of claims by depositors and other claims that we decide need to be protected is less than the value of the assets, then the government would write a check to the Old Bank (we could call it the Bad Bank). If the reverse is true, then the government would have a senior claim on the Old Bank. In normal times, it would be easy to recapitalize the Good Bank privately. These are not normal times, so the government might have to run the bank for a while.

Meanwhile, the Old Bank would be left with the task of disposing of its toxic assets as best it can. Because the Old Bank’s capital is inadequate, it couldn’t take deposits, unless it found enough capital privately to recapitalize itself. How much shareholders and bondholders got would depend on how well management did in disposing of these assets—and how well they did in ensuring that management didn’t overpay itself.

Posted by James on Mar 09, 2009

Stocks lose 56.4% at same pace as during Great Depression

DShort.com provides a graph plotting our current stock market crash against the three largest previous crashes: Click to View

Stocks during our current crash took exactly as long to lose 56.4% of their value as stocks did during the Great Depression. Not encouraging.

Posted by James on Mar 05, 2009

The Fed: Bank-owned; beyond control of Congress; pumping trillions to banks

Most Americans believe the Fed is a branch of the U.S. government, but it’s not. Banks own the Federal Reserve banks and exert substantial control over their operations. According to FactCheck.org:

The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System… They do receive dividends of 6 percent per year from the Reserve Banks and get to elect each Reserve Bank’s board of directors.

62% of U.S. banks have no ownership stake in the Federal Reserve banks:

About 38 percent of the nation’s more than 8,000 banks are members of the system, and thus own the Fed banks.

Because large banks own a disproportionate share of the Federal Reserve banks, they presumably exert disproportionate control. This makes me wonder whether political power of large banks at the Fed is playing a role in the government’s refusal to force Citibank, Bank of America, etc. into the same type of “restructuring” that smaller banks with negative equity are regularly forced into. Obviously, the prominent role of bankers (esp. bankers with ties to Goldman Sachs) at the top of the Obama Administration is helping protect them. But this may also happen to some extent at the Fed.

When reformers suggest the Federal Reserve should play a larger role in regulating banks, it’s a strange notion. Do we really want banks regulating the banks that own them?

Beyond regulatory concerns, the Fed is pumping trillions of dollars to private firms, much of it in secret and beyond the control or even knowledge of Congress. Do we really want to allow bank-owned private banks to direct trillions of dollars in secret? Perhaps it’s time for us all to read up on Andrew Jackson and the Bank of the United States. The Fed does many great things. But we should be able to improve its accountability, incentives and transparency. Writes Matt Taibbi:

By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you’ve never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there’s also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments)…

No one knows who’s getting that money or exactly how much of it is disappearing through these new holes in the hull of America’s credit rating…

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 fuck 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.

Posted by James on Mar 22, 2009

The insanity of wealth-rationed health care

The superb McClatchy news organization reports health care has become a luxury item for Americans:

More than half of American households have cut back on health care in the past year because of concerns about the costs, according to a new Kaiser Family Foundation survey…

Nationwide, more than a million cancer survivors are foregoing what they think is necessary care because of the cost, according to new data from a National Cancer Institute researcher.

Posted by James on Mar 15, 2009

Three dirty letters: "A.I.G."

When the history of the current global depression recession is written, will the three dirtiest letters be “S.E.C.” or “Fed” or “CDS” or “CDO”? (There sure are many candidates, aren’t there?)

I’m betting on “A.I.G.”

The New York Time’s Joe Nocera wrote an anger-inducing article describing how A.I.G. recklessly put taxpayers on the hook for hundreds of billions (and counting).

I thought I had a pretty good grasp of the A.I.G. nightmare, but Nocera’s article added a new chapter — “2a-7 puts” — to the book of insane heads-we-win-tails-taxpayers-lose risks A.I.G. took.

I’m too angry now to write more. Perhaps tomorrow. But please read the excellent article.

Bottom line: A.I.G. “insured” everything under the sun but didn’t put aside any capital to pay off losing bets. Governments didn’t bother to regulate A.I.G.’s financial insurance policies as either insurance or financial instruments. Ratings agencies continued to let A.I.G. maintain an absurd “AAA” (riskless) rating as it issued hundreds of billions (or trillions?) in insurance policies against losses on risky financial assets without setting aside money to pay off claims. And A.I.G. executives earned massive payouts from the (short-term) “profits” from its unprecedented gambling spree. Now we taxpayers are being forced to pay off our reprobate brother’s gambling losses.

Didn’t the sophisticated institutions purchasing “insurance” from A.I.G. realize that a thinly-capitalized institution writing hundreds of billions of insurance contracts promising to pay off losses on financial assets of all kinds was too good to be true? Of course they did!

So why are taxpayers paying off these unrealistic “insurance” policies? Capitalism has a mechanism for dealing with bankrupt companies: bankruptcy. And fear that an A.I.G. might go bankrupt is supposed to encourage those seeking insurance to buy insurance only from firms that can pay insurance claims when things go badly. By insuring everything under the sun, A.I.G. was obviously unable to pay off its policies if the economy turned down. So, why did everyone pretend A.I.G. would pay those claims? Was everyone expecting a taxpayer bailout if the economy turned bad? If so, we’re being played for suckers.

Posted by James on Mar 01, 2009

To collect even fatter taxpayer subsidies, "troubled" banks buying assets to flip

A week ago, I warned that the government’s gift of non-recourse loans of up to 97% of the cost of buying bank assets could lead to massive overpayments — at taxpayers' expense — for bank assets:

Heck, if Citibank is allowed to bid, it buys up all of Bank of America’s crappy assets for 100 cents on the dollar and BofA does the same for Citibank. Problem solved. Bank balance sheets are in wonderful shape. Except taxpayers have massively overpaid trillions of dollars for garbage assets.

I’m even more concerned after reading that banks are using taxpayer bailout money to buy up even more assets at higher prices than other private buyers are willing to pay:

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post.

Both Citi and BofA each have received $45 billion in federal rescue cash meant to help prop up the economy and jumpstart the housing market.

But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Even if the Geithner plan were limited to assets troubled banks held on a certain past date, its incentive scheme was totally screwed up. But the fact that banks seem to be able to buy more bad assets now and re-sell them for a big profit — thanks to taxpayer subsidies — is totally outrageous.

Posted by James on Mar 27, 2009

Treasury invitation to screw taxpayers

My previous post explained that the latest Treasury plan — to have government agencies lend private parties up to 97% of the cost to buy troubled bank assets — unfairly lets private parties take all future profit and stick taxpayers with almost all future losses. Remarkably, there’s an even bigger problem:

Imagine that a hypothetical Citibank-held asset with a face value of $100 million is actually worthless and the market knows this. At the government-subsidized auction, if people bid honestly, the asset would not sell for even $1. But participants have every motive to scam the government’s idiotic 97% subsidy.

Someone could bid $100 million and pay $3 million. Over the next few years, a grateful Citibank — $100 million richer thanks to the purchase of its worthless asset for $100 million — could then show its gratitude by shoveling, say, $35 million to the worthless asset’s buyer. Citibank’s $65 million richer. The asset’s “buyer” is $32 million richer ($35 million minus its $3 million loss). And taxpayers eat a $97 million loss (our 97% subsidy of a $100 million purchase).

Heck, if Citibank is allowed to bid, it buys up all of Bank of America’s crappy assets for 100 cents on the dollar and BofA does the same for Citibank. Problem solved. Bank balance sheets are in wonderful shape. Except taxpayers have massively overpaid trillions of dollars for garbage assets.

Posted by James on Mar 21, 2009

U.S. cybersecurity chief resigns in protest over NSA domination

U.S. cybersecurity “tsar” Rod Beckstrom resigned in protest of the dominant role played by the National Security Agency:

NSA effectively controls DHS [Dept of Homeland Security] cyber efforts through detailees, technology insertions, and the proposed move of NPPD and the NCSC to a Fort Meade NSA facility. NSA currently dominates most national cyber efforts…

This is a bad strategy on multiple grounds. The intelligence culture is very different than a network operations or security culture. In addition, the threats to our democratic processes are significant if all top level government network security and monitoring are handled by any one organization (either directly or indirectly).

Posted by James on Mar 09, 2009

US taxpayers paying off AIG's gambling "losses" before they're losses

The US government is funneling at least $50 billion through AIG to banks (many foreign) and refusing to say who’s receiving taxpayers' cash. Even worse, they’re paying off bets that counterparties haven’t even won yet!

The insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.’s counterparties whole on losses that have not happened yet? Why didn’t it force these financial companies to close out the contracts at a discount, making them take what is known on Wall Street as a “haircut”?

Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., and an expert in insurance… said it is not clear that the government had to pay out 100 percent of the contracts’ value to all the counterparties. Healthier institutions could have been persuaded to take a haircut, he said. “That is what tough negotiators do,” he added.

Imagine you’re at a racetrack and bet the trifecta and then the horse you predicted to win wins. You wouldn’t expect the racetrack to rush over and pay off your entire bet even before the other horses finish the race and you see whether the #2 and #3 horses finish in the order you bet they would. And you certainly wouldn’t expect a bankrupt racetrack to be irrationally eager to pay off your bet even before you’ve won. What is our government’s motive?

I’m bothered by this part of the New York Times article:

AIG… sold contracts to these sophisticated counterparties that theoretically protected them from losing money if the debt they had purchased defaulted. Known as credit default swaps, the contracts offer the same kind of protection a homeowner receives from an insurance policy against fires and other unforeseen calamities.

If AIG had only insured parties against losses they would otherwise have sustained, AIG’s situation (and taxpayers') would be far less dire. The biggest problem is that government allowed AIG to take bets from anyone. Many of the CDSes were bought by speculators, effectively like low-cost options. Many have called for government to pay off only CDSes taken out by parties that actually were insuring something they already owned. Many CDSes were really low-risk, high-reward gambles.

Posted by James on Mar 15, 2009

When you ain't got nothin', you got nothin' to lose

“Zombie banks” have negative net worth. U.S. law requires the government to shut down banks before they become zombies because zombie banks have nothin', so they’ve got nothin' to lose from paying their executives fat bonuses or taking unwise risks by, say, giving their friends loans for high-risk projects.

Although the FDIC routinely shuts down small banks, the Bush and Obama administrations have shielded big zombie banks from reorganization. We’re now getting a glimpse of how mega-zombies are throwing away the taxpayer money we’re feeding them:

Citigroup Inc, which received $50 billion in Troubled Asset Relief Program funds, made an $8 billion December loan, not to an American entity, but to a Dubai public sector company, according to a newly released Monday memo by Rep. Dennis Kucinich (D-OH), chairman of the House Domestic Policy Subcommittee.

The Goldman Sachs Group, which received $10 billion in TARP funds at the end of October, saw fit to spend $2 billion earlier in the year on the repurchase of company stock, which resulted in an increase in company share price.

The memo notes of that stock repurchase, “That increase would have constituted a significant benefit to top executives at Goldman Sachs, who typically own large amounts of company stock.”

As of January 3, Goldman Sachs CEO Lloyd Blankfein owned 1,995,835 shares of the company, according to the memo.

In mid-November, Bank of America spent $7 billion investing in the China Construction Bank Corporation. Bank of America received $25 billion in TARP funds.

J.P. Morgan Treasury Services spent $1 billion investing in cash management and trade finance solutions in India.

Posted by James on Mar 09, 2009

"Where do I go to sign up for my extremely large, entirely risk-free loan?"

Answer: “Sorry – You’re not too big to fail.”

Cartoon from my favorite cartoonist, Tom Tomorrow:

Sorry - You're not too big to fail

Posted by James on Mar 31, 2009

Who says crime doesn't pay?

Insure every financial asset in the world against an economic downturn…

$500 BILLION

Trigger global financial collapse and endless taxpayer bailouts?…

UNTOLD TRILLIONS

“Earn” $280 mil plus $1 mil/month consulting contract…

PRICELESS

ABC News reports:

Ground zero for AIG’s spectacular implosion, which has soaked up more federal bailout money than any other entity, appears to have been a small London branch office that may have lost nearly half a trillion dollars in bad deals.

The disastrous deals were built up in a decade and, when the crisis hit, the man who ran the unit for the last eight years [Joseph Cassano] retired after making $280 million for himself and leaving with a $1 million-a-month consulting contract…

ABC News obtained a tape of Cassano from August 2007 telling investors just how confident he was.

“It is hard for us with, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions,” Cassano bragged.

Posted by James on Mar 10, 2009

"Why does Citigroup need 427 separate subsidiaries in tax havens?"

One of my favorite writers, Joe Conason, says “AIG is chump change — let’s find corporate America’s hidden billions”:

According to the Government Accountability Office, nearly all of America’s top 100 corporations maintain subsidiaries in countries identified as tax havens. As the GAO notes, there could be reasons other than avoiding the IRS to set up branches in places such as Singapore, Luxembourg and Switzerland, where taxes are light or nonexistent and keeping clients' illicit secrets is considered a matter of national pride.

But what reason other than evasion could there be for Goldman Sachs Group to set up three subsidiaries in Bermuda, five in Mauritius, and 15 in the Cayman Islands? Why did Countrywide Financial need two subsidiaries in Guernsey? Why did Wachovia need 18 subsidiaries in Bermuda, three in the British Virgin Islands, and 16 in the Caymans? Why did Lehman Brothers need 31 subsidiaries in the Caymans? What do Bank of America’s 59 subsidiaries in the Caymans actually do? Why does Citigroup need 427 separate subsidiaries in tax havens, including 12 in the Channel Islands, 21 in Jersey, 91 in Luxembourg, 19 in Bermuda and 90 in the Caymans? What exactly is going on at Morgan Stanley’s 19 subs in Jersey, 29 subs in Luxembourg, 14 subs in the Marshall Islands, and its amazing 158 subs in the Caymans? And speaking of AIG, why does it have 18 subs in tax-haven countries? (Don’t expect to find out from Fox News Channel or the New York Post, because News Corp. has its own constellation of strange subsidiaries, including 33 in the Caymans alone.)

When the cost of these shenanigans was last estimated two years ago, the U.S. government’s annual loss in revenue due to tax avoidance by major corporations and super-rich individuals was pegged at about $100 billion… That is only a rough assessment, as is the estimate of $12 trillion in untaxed assets hidden around the world. Nobody will know for certain until the books are opened and transparency is established.

Whatever the accurate accounting proves to be, it is certain to exceed hundreds of billions annually worldwide. That is money every country will need badly for years, to repay debt, finance reconstruction, and fund services, as the world economy struggles to revive itself.

Posted by James on Mar 23, 2009

William Greider's reform ideas

The excellent William Greider suggests the following:

  1. Euthanasia for insolvent banks. Transferring their losses to the public will not restore the trillions in capital the bankers helped destroy. It would merely relieve the banks, their creditors and shareholders of the pain. Government must take control of the system to supervise a just unwinding of the mess—whether we call it nationalization or something else. Handing out money and leaving bankers in control of how it’s spent is nutty and morally wrong. People everywhere understand this. Only Washington seems oblivious to the irrationality of what it is attempting.

  2. The Federal Reserve must be democratized and effectively stripped of its peculiar antidemocratic status as an unaccountable island of power within the government. A new federal agency—accountable to Congress and the president—can be refashioned from the working parts of the Fed. Call it a central bank or something else, but its governing power must not rest with heavyweight bankers on the board of directors at the twelve regional banks. (To understand why, consider that the New York Federal Reserve Bank was headed until recently by Geithner.)

  3. The reformed Fed would be confined to conducting monetary policy and stripped of its regulatory functions. A different section of the Treasury or a new free-standing regulatory agency can assume responsibility for regulation and be armed with strong antitrust laws and other rules to ensure that “too big to fail” institutions are redefined as “too big to save.”

  4. The federal law against usury can be restored to halt predatory lending. Persistent violators would not be fined with trivial penalties, as they are now, but stripped of their government protections and subsidies—that is, doomed.

  5. A new banking system—smaller and more diverse and responsible to the public interest—can fill the hole left by the demise of major banks like Citigroup. Vast public resources should be devoted to creating this system, not to saving the mastodons. Public banks (like the North Dakota State Bank) and nonprofit savings and lending cooperatives can also serve as an important cross-check on private commercial banking—a competitive model that offers credit on nonusurious terms and keeps the big boys honest.

  6. Once the Federal Reserve is domesticated in a democratic fashion, then it can be reformed to assume broad supervision of the nonbank financial firms in the “shadow banking system”—hedge funds, private equity firms, pension funds, mutual funds, insurance companies. (For more on this, see my recent Nation article, “Fixing the Fed.”)

  7. …[D]isturb business as usual in Washington and prevent Congress from taking hasty action to adopt Wall Street’s “reform” agenda. Congress is rattled by the exploding popular anger and listening nervously. The people need to speak louder—loud enough for the president to hear.

Posted by James on Mar 30, 2009

Write a check, save lives

Princeton professor Peter Singer’s new book, The Life You Can Save, reminds us that people all over our planet are suffering and dying for lack of the very basics of nutrition, clean water, medicine, etc. Given how much wealth Americans possess (even after our 401(k)s have lost half their former value), should we not be doing more? Prof. Singer said — on Bill Maher’s HBO show Real Time — Americans are less generous than people in any other developed nation. Perhaps this is because we’ve too long believed the lie that whatever we possess we’ve “earned” through our own merits, conveniently forgetting the tremendous opportunities given to us by our ancestors, our economic infrastructure, our government, our (relative) lack of corruption, our good luck to have been born into a nation of great wealth, etc.

My initial thought was that Prof. Singer’s timing could not have been worse. Who can give money to the poor now that we’re suffering so? But we must ask ourselves, are we really suffering? Some of us truly are. If you’ve had to cut back on the number of meals you eat, you’re truly suffering. But many Americans still possess plenty of wealth, and sending only a little bit to an aid group — may I recommend Doctors Without Borders — makes a big difference in people’s lives and makes us feel better about ourselves. If you’re regularly throwing away money on fancy clothes or expensive coffees, please consider cutting back a bit and sending your savings to help the poor.

The New York Times writes:

On a planet full of so much obvious and widespread suffering, [Peter Singer] writes, “there is something deeply askew with our widely accepted views about what it is to live a good life.”

…[“The Life You Can Save”] suggests, given that 18 million people are dying unnecessarily each year in developing countries, that there is a “moral stain on a world as rich as this one.”

…Human beings have an intuitive belief that we should help others in need, Mr. Singer writes, “at least when we can see them and when we are the only person in a position to save them.” But we need to go beyond these intuitions, Mr. Singer declares…

Mr. Singer praises many people who give away as much as 50 percent of their annual income. For the rest of us, he proposes a more realistic approach: “Roughly 5 percent of annual income for those who are financially comfortable, and rather more for the very rich.”

…Among the [book’s heroes] are Bill Gates and, interestingly, James Hong, who became a millionaire after founding the fluky Web site Hot or Not, where people’s looks are rated by strangers. Mr. Hong donates 10 percent of every dollar he makes over $100,000 each year, and he runs a different Web site encouraging others to make the same pledge.

Posted by James on Mar 11, 2009