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Geithner: My Dog Ate My Homework

Posted in Federal Reserve, Mortgage/Housing Crisis, Timothy Geithner, Wall Street with tags , , on February 17, 2009 by John Stodder

I am unimpressed by the explanation for why Treasury Secretary Tim Geithner’s hyped financial system rescue plan was so fuzzy.

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn’t have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

Not like I’m missing the Henry Paulson Show or any other remnants of the last administration.  However, you don’t have to be a raving right-wing talk show host to be increasingly alarmed by the Obama Administration’s capabilities with respect to managing the economy.

Instead of having his team write a stimulus plan, they outsourced it to House Democrats — a group that, as a whole, is not known for fiscal acumen.  News reports made it clear that Speaker Pelosi’s methodology for crafting the one shot we have at avoiding a Depression was to ask fellow Democrats, or at least the ones not in her doghouse to send her their wish lists.  The bill was somewhat improved by the legislative process, but it is not “temporary, targeted and timely,” the original criteria laid out by Assistant Treasury Secretary Larry Summers.

Now this.

By Wednesday, Feb. 4, Geithner was leaning toward a different approach that his former colleagues at the Federal Reserve had developed months earlier, the source said. This involved a joint public-private fund to buy up the assets. Private investors, likely hedge funds and private-equity funds, would put up capital, and the government would loan money to the fund. If the private investors made wise decisions about which assets they bought, they would be able to pay back the government and make money for themselves.

For the policymakers, the chief appeal of the public-private partnership is that it solves the problem of how to price assets. The private money managers who provide capital for the fund would decide which assets to buy, and at what price, taking government bureaucrats out of that difficult task.

Moreover, the private contribution lowers the total amount of money the government would need to put at risk. Also, the government would require private investors to incur any losses before the government does, reducing taxpayers’ exposure to potential losses (but also potentially depriving them of any windfall profits).

But there were multiple complications: How much government financing would be needed? What other incentives would be needed to get private firms on board? Where would the government get the money? What assets would the fund buy? Would the government have a say in which banks they’re bought from? Might there be more than one fund?

The clock was ticking. But Geithner wasn’t ready to share his thoughts with senior government officials outside his narrow circle. He and his team worked on the plan through the weekend, with some of his staff working until 4 a.m. The team grew to about 20 officials, including lawyers, finance experts and public affairs staff.

(snip)On Saturday, Feb. 7, the officials won a slight reprieve when the White House asked that Geithner’s speech be postponed from Monday to Tuesday to allow Congress to focus a little longer on the on the massive economic stimulus package still pending.

But there still was not enough time to sculpt the detailed plan that the financial markets expected. In the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised. And ambiguity, the officials concluded, would make the plan an easier sell on Capitol Hill, as congressional leaders could be brought into the discussions of details rather than be presented a detailed plan as fait accompli.

Right.  Maybe Pelosi should write it.  No point in trying to tell Congress what to do — let them tell us.  That seems to be the worrisome approach of the early days of the Obama Administration.

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New York Times Wags A Finger at Geithner, Summers

Posted in Barack Obama, Mortgage/Housing Crisis, Wall Street with tags , , , , on November 25, 2008 by John Stodder

Two members of Barack Obama’s new team of economic advisors, Treasury Secretary-designate Timothy Geithner and National Economic Council Director Lawrence Summers, “played central roles in policies that helped provoke today’s financial crisis,” says a surprisingly tough editorial in Tuesday’s New York Times. After dumping blame on Summers for favoring the deregulation of derivatives when he was Bill Clinton’s Treasury Secretary, the editorial notes Geithner’s role in the Bush Administration’s erratic response to the meltdown:

At the New York Fed, Mr. Geithner has been one of the ringmasters of this year’s serial bailouts. His involvement includes the as-yet-unexplained flip-flop in September when a read-my-lips, no-new-bailouts policy allowed Lehman Brothers to go under — only to be followed less than two days later by the even costlier bailout of the American International Group and last weekend by the bailout of Citigroup.

It is still unclear what Mr. Geithner and other policy makers knew or did not know — or what they thought they knew but didn’t — in arriving at those decisions, including who exactly is on the receiving end of the billions of dollars of taxpayer money now flooding the system.

Confidence in the system will not be restored as long as top officials fail or refuse to fully explain their actions.

But who will demand such explanations?  The Senate?  Right, they can all apologize together.

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Time To “Rebrand” the Zeitgeist

Posted in Barack Obama, Wall Street with tags , , , , , , on November 24, 2008 by John Stodder

I’ve been thinking about what to do with this blog in the aftermath of the election.  As October rolled into November, it didn’t seem like there was much to say anymore.  It felt like talking about the air.  “Politics and profits” was all around us.  The original point of the blog was to write about business and the election, as if business and the election were two separate concepts that needed me to link them.  Ha!

Perhaps I was prescient. When TV news started showing the Dow Jones Industrial Average live while the president and president-elect hold press conferences, tracking market movements up or down as a verdict on whether what was being said was wise or foolish, it became pretty obvious that once again, as Calvin Coolidge once said, “the business of America is business.” And our portfolio is getting fatter:  Citibank and soon, perhaps, the Big Three automakers. But we hardly feel like Captains of Industry, do we?

So, after taking a vow of blogging silence for a few weeks while I pondered whether this little venture should continue, it hit me that, more than ever, we are residents of Marshall McLuhan’s global village, all in our separate tribes but joined in watching this phenomenon, to use another 1960s term, this “happening” — the meltdown.  As individuals, families and communities, the ground under our feet might be solid right now, but we all have to watch it give way in other precincts knowing ours might be next.  And we can capture it all in real time.

So that’s what this blog will be all about: Chronicling the meltdown, from an unsafe distance.

President-Elect Barack Obamas News Conference Monday

President-Elect Barack Obama's News Conference Monday

There are some who believe our current political class, up to and including President-elect Obama, is not capable of managing the crisis.  Moreover, there are many who think popular history and partisanship has inflated the roles played by past presidents who inherited crises, Franklin Roosevelt and Ronald Reagan. Their policies, some say, either made things worse (FDR) or deserve no credit (Reagan).  But at this point, we can be a little naive, a little hopeful.  Cynicism at this moment would be unearned although we might achieve it.

Today’s scorn should be apportioned to those who stuffed several successful business models into a thing called Citicorp, and proceeded to wreck it:

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Dear Mr. President: We Can’t Afford a Bear Market

Posted in Wall Street with tags , , on October 31, 2008 by John Stodder

It’s not just your 401-K. It’s the solvency of large firms with defined benefit plans and several states with huge public pension liabilities that will be affected by the continued decline of the stock market. The market has had a few good days, but not good enough to save October 2008 from being the worst month in 10 years, and the fourth-worst month since 1950.

An emerging political issue for 2009 and beyond will be whether pension promises will be kept, and what keeping those promises will cost everyone else. The problems shrinks the more the stock market goes up. And, according to Brian Sullivan of Fox Business, a down market means a lot of us will have to put off retirement:

(M)any Americans and politicians have an erroneous view that stocks are for “rich people” and not them. Wall Street remains a mysterious world, operated largely behind closed doors by mad scientist math wizards. The pension problem proves nothing could be farther from the truth. The teachers, cops and other government workers who trust their retirement to companies such as CalPERs (California’s pension fund) may suddenly take a keen interest in equities.

The other reality is that many Americans will have to work longer than planned. Companies and governments may not have the ability to cover costs for people retiring at 62 and living another twenty years. The math of early retirement + living longer / awful stock markets simply will not add up.

Actually, I think Sullivan might be selling Americans short. Compared with the last prolonged bear market in the 1970s, I suspect the political tolerance for a slacker Dow Jones will prove to be very low. The expectant retiree facing having to work an additional 8-10 longer than planned are about to become the nation’s most potent force.

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Steelworkers Say Paulson Overpaid — By A Lot

Posted in Bush Administration, Mortgage/Housing Crisis, Organized Labor, Wall Street with tags , , , , , on October 28, 2008 by John Stodder

Leo W. Gerard, president of the United Steelworkers (USW), told Treasury Secretary Henry Paulson he paid twice as much for the U.S. Treasury’s investment in Goldman Sachs and other financial institutions as the shares were really worth.

In an invective-filled letter, Gerard claims investor Warren Buffet — who some say might succeed Paulson, especially if Sen. Barack Obama is elected — made an investment in Goldman Sachs stock that, on a per-dollar basis, was half as pricey and at much better terms. Buffet made his buy just three weeks before Treasury did.  The USW international chief attaches an analysis comparing the Buffet and Treasury purchases — click the link to the letter to see it.

Gerard accuses Paulson of overpaying “as a gift to the firms’ shareholders,” according to the Steelworkers’ news release.

“This behavior is simply outrageous,” said Gerard. “Half the money is invested and the other half of the public’s money is gifted to institutions after they paid out hundreds of billions in undeserved bonuses and shareholder dividends and engaged in reckless speculation.”
“This is no different than if you paid me $10,000 for a car for which no one else would pay more than $5,000,” writes Gerard. “You bought it for $5,000 and gifted me the other $5,000.”
“In my world such gifts are rarely offered to working people.”

Martin Manley, a former assistant secretary of labor under President Clinton and founder of Alibris and Reputation Networks, Inc., says “good for the Steelworkers for doing the math.” On his blog, “Jam Side Down,” Manley writes:

Paulson should renegotiate the terms if the deals turn out to be as either as self-serving or as financially lame as their analysis suggests.

Manley said the union’s math was done by Ron Bloom, a former investment banker with Lazard Freres. So far, no response from Treasury, but that’s just a matter of time.

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Why Upper-Middle-Class Voters are Deserting McCain

Posted in Barack Obama, John McCain, Mortgage/Housing Crisis, Wall Street with tags , , , on October 28, 2008 by John Stodder

Michael Barone thinks Sen. John McCain’s campaign is in denial about Pennsylvania — that they don’t believe what a consensus of polls are telling them about the GOP’s slide in the suburbs around Philadelphia.  Things have changed so quickly since 2004, and Barone thinks he knows why:

My hypothesis is that that is because places like the Philly suburbs are places where the recent decline in household wealth has been most conspicuous. Housing prices mean a lot more to you when your house started off at $400,000 and declined to $290,000 than they did when you started off (as may be typical of Scranton or a blue-collar town in metro Pittsburgh) at $140,000 and declined to $110,000. Newspaper coverage of our current economic distress focuses on the very poor (like a recent Washington Post story on North Carolina, which focused on an ex-convict in a cheap motel in Charlotte), but the people who are getting hurt most visibly in their lifelong project of accumulating wealth are the more affluent. They’re the ones whose house values have most visibly and spectacularly declined, and whose 401(k) accounts and stock portfolios have tanked in the last few months as well. Folks in Scranton or in the cheap motel in Charlotte didn’t expect to live comfortably ever after off their increased house values, 401(k)’s, and Merrill Lynch accounts; a $700 monthly check from Social Security is about what they have long expected and that’s not in danger (yet). Folks in the Philly suburbs did expect to live comfortably off such assets.

Barone’s description reminded me of the “swing voters squared,” swing voters in swing states, who I discussed in this post a few weeks ago:  Upper-middle-class homeowners in their 50s and 60s who expected to retire comfortably but now fear the future.  They know the economy will turn around eventually, housing prices will get off the floor and the bear market will turn bullish again.  But they’re afraid the turnaround will come too late to do them any good and now are facing the fact that they’ll have to keep working. These people are as angry as they are scared.  Weren’t Republicans supposed to be looking out for them?

To Barone, Sen. Barack Obama’s ability to take advantage of this situation is richly ironic. Obama

is interested in advancing policies that could have serious wealth-destroying effects: higher taxes on high earners, protectionism, government-controlled health insurance, the card check bill abolishing secret ballots in union elections, which could have the effects on much of the private sector that United Auto Worker contracts have had on what used to be called, quaintly, the Big Three U.S. automakers. Will voters in the Philly suburbs, and their equivalents in target and nontarget states, like the consequences?

These crucial voters who are putting Obama over the top?  All they want is for him to reverse the stock market’s trajectory and revive housing prices so they can reacquire the wealth the Wall Street fiasco vaporized. If elected, will Obama alter his plans in order to keep these voters on board?

ADDED:  Today’s David Brooks column fills in more of the picture.  He explains the widespread cultural failure to perceive how much risk all of us implicitly accepted when we pinned our retirement hopes on the stock market and ever-rising housing pricess. Brooks cites the work of Nassim Nicholas Taleb, author of The Black Swan.

Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck.

Millions of people lost a big chunk of their life savings.  They believed such an outcome was inconceivable.  They thought they were being conservative, prudent and were playing by the rules, working hard, saving, and getting richer due to the magic of the marketplace.  It will take a long time to persuade them of their personal responsibility for their own misfortune.  For the next eight days, they’ll be looking for someone to blame.

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Quotable: John Tamny on the Enduring Trickle-Down Theory

Posted in Mortgage/Housing Crisis, Recession, Wall Street with tags , on October 24, 2008 by John Stodder

John Tamny, editor of RealClearMarkets and senior economist at H.C. Wainwright Economics, claims “trickle-down economics” is not a program, not an idea, merely a description of how the economy works. He illustrates the principle by showing what happens when the trickling stops:

As it turns out, when those with money (meaning the rich) are hurting, their pain is often transferred to those who need money even more.

In a New York Post story dated September 25, the proprietor of Soho-based Five Point Fitness spoke of his inability to attain financing for his popular workout facility. According to owner Kevin McGrath, “The guys [from the bank] said if this was a year ago, it would have been a slam dunk.” But as the Post story noted, as “the economy continues to tailspin, scores of small-business owners are struggling to get tightfisted banks to dole out loans for much needed expansion plans.”

It turns out McGrath is not alone. Four days later a Wall Street Journal account of major food franchisees found that they too are facing troubles with regard to finance. As the Journal put it, the tough financing environment for Panera Bread, Yum Brands and Sonic (employers of those who’d like to be rich one day) is “a sign of how the turmoil on Wall Street is spreading to large companies and small business owners.”

Seeking out other lower-income individuals impacted by problems on Wall Street, USA Today reporter Charisse Jones traveled to Greenwich Avenue in Greenwich (CT), a street famous for its fancy shops and restaurants. While it’s safe to say its shop owners and employees have traditionally earned microscopic fractions of what their customers have traditionally brought home, they’ve not been immune to the financial downturn that has plagued the elite of Greenwich.

Jose Candray, manager of Village Bagels in Greenwich told Jones that “tips are smaller” these days, while Greenwich resident (and investment banker) Bob Jermain referenced the fact that his kids no longer “need 20 sweaters”, which means sales at Greenwich Avenue clothing stores are set to fall. Are layoffs of the lower-wage workers these businesses employ not too far off?

(snip)

What these various accounts tell us is that whether due to pure profit motive through which the rich supply capital to businesses, or through perhaps simple vanity that causes them to give to all manner of charities, it is thanks to the wealthy that job-creating businesses are funded, and it is also thanks to the rich that societal ills are addressed with ample funds.

So to deny the reality of trickle-down economics is the equivalent of denying that the sun sets in the west. It does, and trickle-down economics is. In short, politicians can dream up all sorts of tax plans and programs to harm the rich, but in doing so, they should make no mistake about who in fact will pay in the end.

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Quotable: Robert Samuelson on Deleveraging

Posted in Bush Administration, Mortgage/Housing Crisis, Wall Street with tags , , on October 13, 2008 by John Stodder

The veteran economics columnist Robert Samuelson clarifies the nature of the risk for the world’s financial system in Monday’s column.  Samuelson claims the subprime mortgage industry’s collapse wasn’t, by itself, enough to topple the economy and put it in such peril.

What we’ve discovered is that the real problem is bigger. Large parts of the financial system are too thinly capitalized and too dependent on unreliable short-term debt. Leverage ratios often reached 30-1 for investment banks and hedge funds ($30 of debt for every $1 of capital). The presumption was that the MBA types had learned how to “manage risk.” That false conceit backfired. Low capital didn’t adequately protect against losses. Confidence and trust evaporated, because no one knew which institutions held suspect securities, how much the losses were and who was ultimately safe.

“Deleveraging” — a shift from excessive debt toward more capital — is inevitable and desirable in the long run. The trouble is that, in the short run, it may destabilize the economy if it proceeds too rapidly.

Consider stocks. Their plunge has been driven in part by hedge fund selling. Hedge funds often buy stocks by borrowing from their “prime dealers” — firms like Goldman Sachs and Morgan Stanley, which in turn borrow from commercial banks. If banks “deleverage” by reducing loans to prime dealers, then prime dealers tighten up on hedge funds, which react by selling stocks.

Because of the high degree of debt, the global financial system has been “inherently fragile” for a long time.  What we’re seeing is a correction, but it needs to be managed carefully.

I’m wondering: Are we lucky that we’ve got a lame-duck administration in charge?  From now until mid-January, we’ve got a Treasury secretary who can do what needs to be done without political calculations entering into it.  Will he?  And is he wise enough to exploit his opportunity on our behalf?

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Quotable: Steve Coll on Credit Default Swaps

Posted in Bush Administration, Mortgage/Housing Crisis, Wall Street, regulation with tags , , , , , on October 11, 2008 by John Stodder

Writing in his blog “Think Tank” on The New Yorker’s website, staff writer Steve Coll talks about the consequences of the “shadow banking system,” and how its frightening lack of transparency contributes to the financial crisis:

If the housing bubble had inflated entirely inside a transparent, well-regulated financial system, its end might have been painful, as the tech bust was, but it probably would not have been unusually consequential. The problem, however, was that the bubble inflated inside both the old regulatory system and, simultaneously, inside a new financing system that grew up during the Bush Administration outside of all government scrutiny.

In the current global panic, unprecedented in fifty years, it is common to say that the madness of crowds has taken over. It is certainly true that we should be fearful of fear itself, since panic has practical economic consequences. Prices, for example, speed down faster than they would otherwise, which then causes more panicked selling by leveraged investors. Fearful consumers sit on their wallets, hurting businesses that might otherwise be healthy, and so on. At the same time, it is wrong to blame crowds for this current panic. In many ways investors are reacting rationally to the fact that critical information about the financial markets–the sort of information that New Deal-originated regulatory architecture was supposed to make routinely transparent–is simply not available.

People don’t generally panic in the sunshine. They panic in the dark. And we are in the dark about what assets and liabilities are truly held in what has been properly labeled the “shadow banking system”–the global aggregation of hedge funds, privately placed debt securities, and the hedging or insurance contracts known as credit default swaps. By some accounts, the value of assets held in this shadow system is as large or larger than then value of the assets held in the formal, regulated banking system. But nobody really knows, as there is no transparent market for many of the securities of concern, and no systematic disclosure of assets and liabilities to government regulators–not here, not in Europe, and not in Asia, either.

Read the whole thing.

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Goodbye Capitalism?

Posted in Mortgage/Housing Crisis, Wall Street with tags , , , , , , on October 10, 2008 by John Stodder

I imagine this is the kind of news story that appeared frequently during the Panic of 1907.  Not to overlook the South Sea Bubble of 1720.

Actually, what the writer, Anthony Faiola, is really saying is, the U.S. can’t argue the case for free markets anymore:

Given that the United States has held itself up as a global economic model, the change could shift the balance of how governments around the globe conduct free enterprise. Over the past three decades, the United States led the crusade to persuade much of the world, especially developing countries, to lift the heavy hand of government from finance and industry.

But the hands-off brand of capitalism in the United States is now being blamed for the easy credit that sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments that has infected the global financial system. Heavy intervention by the government, critics say, is further robbing Washington of the moral authority to spread the gospel of laissez-faire capitalism.

Perhaps so.  But is it really accurate to say the US doesn’t regulate the financial industry?

The culprits, as far as I understand things, include government intervention in the housing market via Fannie/Freddie and Congressional pressure on those entities to loosen credit for homebuyers; government again, via the Fed, pushing for low interest rates in order to postpone politically inconvenient slowdowns; and then Wall Street for creating a passel of financial instruments that nobody, including financial leaders, fully understood.

The case for regulation of such instruments, i.e. not allowing them to exist, would have been stronger if we could have had faith that the government overseers would have been able to detect their flaws sooner than Wall Street executives would have.

The case for regulation now is a lot stronger — but what regulations? Candidates talk about “more regulation” as if it was something you could measure, like having “more vegetables” in your diet. Without specifics, it’s a meaningless panacea.

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