Thursday, May 28, 2009

Ward's Word of the Day: Empathy

It seems we have come a long way since the conversation about the "pube on the coke can" that we all heard about during the confirmation hearing for Supreme Court Justice Clarence Thomas.

And there seems to be (at least for now) less outrage expressed about Sonia Sotomayor than that which erupted over the Bork nomination for SCOTUS way back in the Reagan era.

And though I confess I haven't read obsessively about Obama's pick for the US Supreme Court, I haven't heard the word "abortion" bandied about much over the nominee.

No, the buzz that's racing through the blogosphere about Sonia Sotomayor, Obama's first nominee for the Supreme Court, is focused on a single word.

Empathy.

Though the Republicans have not yet made it known if they're going to "bork" Sotomayer's nomination, we should be heartened, I guess, that much of the chatter swirling about the nomination of Sonia Sotomayer concerns the quality of her "empathy."

Why, then, do I feel like "empathy" is about to turn into a bomb to be lobbed at the Sotomayor nomination?

Oh, just a quick perusal of what the MSM has to say about Sotomayor and her empathy...

Karl Rove says in the WSJ that:

"'Empathy' is the latest code word for liberal activism, for treating the Constitution as malleable clay to be kneaded and molded in whatever form justices want. It represents an expansive view of the judiciary in which courts create policy that couldn't pass the legislative branch or, if it did, would generate voter backlash."

Another article also in the WSJ says:

"In the President's now-famous word, judging should be shaped by "empathy" as much or more than by reason. In this sense, Judge Sotomayor would be a thoroughly modern Justice, one for whom the law is a voyage of personal identity."

Republican strategist Leslie Sanchez writes on CNN.com that:
"As impressive as Sotomayor's life story is, it remains to be seen whether she truly has the much-talked-about "empathy" for Hispanic values and dreams."

Sonia Sotomayor is a jurist who received her undergraduate degree from Princeton (summa cum laude) and who received her law degree from Yale. She was nominated by President George H.W. Bush to sit on the US District Court in NY. She was later named by President Bill Clinton to a seat on the US Court of Appeals. Should she become a Supreme Court justice, she will be the only one of the nine with experience as a trial judge.

At one point, clearly, she exhibited bi-partisan appeal. But not today. She seems smart, experienced, but perhaps too vocal about her Latina heritage to make the right wingers feel good about this choice. So they focus on her "empathy" as the thing that they find disturbing about her.

And a word that defines the action of understanding and being sensitive to the feelings and thoughts experienced by others is now "the latest code word for liberal activism." Kind of like how "he's not like us" became the new millennial conservative code for the 'n' word.

But hey, at least we've moved away from pubes and outrage, right?

The Sky Is Falling! WSJ weighs in on "Crazy Compensation!"

"Despite the vast outpouring of commentary and outrage over the financial crisis, one of its most fundamental causes has received surprisingly little attention. I refer to the perverse incentives built into the compensation plans of many financial firms, incentives that encourage excessive risk-taking with OPM -- Other People's Money."

That's how Alan Blinder's article in today's Wall Street Journal opens - by calling the Wall Street method of compensating its employees "perverse."

Is the world coming to an end? Am I dreaming? A smack-down of Wall Street salaries in the WSJ seems too good to be true.

Not clear if we are nearing Armageddon, but I'm definitely not dreaming. The WSJ is running an article attacking the compensation plans of the financial community.

Now THIS is change we need!

And Blinder isn't just talking about the highly publicized federally-funded bonuses granted to AIG and Merrill Lynch. He's talking about how the institutional structure of compensation plans on Wall Street is a threat to the economy!

Here's the briefest distillation of his thoughts on the issue:

"The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke. Duh."

Blinder's answer? He's not a believer in the efficacy of a government solution. Rather, he thinks the corporate boards should wake up and "abolish go-for-broke incentives and change compensation practices to align the interests of shareholders and employees better."

Which, given the lack of interest corporate boards have shown in change of this magnitude, means the sky probably is falling, but a girl can dream of a world where bankers don't bankrupt the economy, right?

Here's the story in its entirety...

"Wall Street Journal
OPINION
MAY 28, 2009
Crazy Compensation and the Crisis

We're all paying now because skewed financial incentives led to too many big bets.
By ALAN S. BLINDER

Despite the vast outpouring of commentary and outrage over the financial crisis, one of its most fundamental causes has received surprisingly little attention. I refer to the perverse incentives built into the compensation plans of many financial firms, incentives that encourage excessive risk-taking with OPM -- Other People's Money.

What, you say, hasn't huge attention been paid to executive compensation -- especially those infamous AIG bonuses? Yes. But the ruckus has been over the generous levels of compensation, or the fact that bonuses were paid at all, not over the dysfunctional incentives that inhere in the way many compensation plans are structured.

Take a typical trader at a bank, investment bank, hedge fund or whatever. Darwinian selection ensures us that these folks are generally smart young people with more than the usual appetite for both money and risk-taking. Unfortunately, their compensation schemes exacerbate these natural tendencies by offering them the following sort of go-for-broke incentives when they place financial bets: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. These bright young people are no dummies. Faced with such skewed incentives, they place lots of big bets. If tails come up, OPM will absorb almost all of the losses anyway.

Whoever dreamed up this crazy compensation system? That's a good question, and the answer leads straight to the doors of the top executives of the companies. So let's consider the incentives facing the CEO and other top executives of a large bank or investment bank (but, as I'll explain, not a hedge fund). For them, it's often: Heads, you become richer than Croesus ever imagined; tails, you receive a golden parachute that still leaves you richer than Croesus. So they want to flip those big coins, too.

From the point of view of the companies' shareholders -- the people who provide the OPM -- this is madness. To them, the gamble looks like: Heads, we get a share of the winnings; tails, we absorb almost all of the losses. The conclusion is clear: Traders and managers both want to flip more coins -- and at higher stakes -- than shareholders would if they had any control, which they don't.

The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke. Duh.

Amazingly, despite the devastating losses, these perverse pay incentives remain the rule on Wall Street today, though exceptions are growing. For now, excessive risk-taking is being held in check by rampant fear. But when fear once again gives way to greed, most traders and CEOs will have the bad old incentives they had before -- unless we reform the system.

It was not always thus. Not so very long ago, banks shied away from big gambles on securities and investment banks were organized as partnerships, not corporations. In a partnership, the firm's capital is the partners' own capital, which they safeguard with the care you'd expect when using MOM -- My Own Money. Back then, the upper echelons of Wall Street firms were not keen on giving a bunch of unruly 28-year-olds a lot of big coins to flip.

Hedge funds are a kind of halfway house between the stodgy old system and the brave new system. These funds do deploy oodles of OPM. But the senior partners -- the bosses -- almost always have significant shares of their own personal wealth tied up in the funds. So it's no accident that hedge funds operated with far less leverage than investment banks and commercial banks. Thirty-to-one leverage is simply too risky for MOM. That said, they generally compensate their traders the same way.

These wacky compensation schemes have puzzled me for nearly 20 years. My worries were not assuaged when, in 1995, a smart and famous hedge-fund operator told me that the reason his firm paid its traders that way was "because everyone else does it," which is always a terrible answer. But the issue could be considered an intellectual puzzle until the bottom fell out.

If the costs of foolish compensation schemes remained bottled up inside firms, they would not be a cause of public-policy concern, although shareholders should still worry. But that is plainly not the case. Most of the world's financial system collapsed after an orgy of irresponsible risk taking, and the consequences for the real economy have been devastating. We are all now living through a world-wide recession of a magnitude that economists thought was only for the history books.

What to do? It is tempting to conclude that the U.S. (and other) governments should regulate compensation practices to eliminate, or at least greatly reduce, go-for-broke incentives. But the prospects for success in this domain are slim. (I was in the Clinton administration in 1993 when we tried -- and failed miserably.) The executives, lawyers and accountants who design compensation systems are imaginative, skilled and definitely not disinterested. Congress and government bureaucrats won't beat them at this game.

Rather, fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees. These boards, I'll remind you (and please remind the board members), are supposed to represent the interests of stockholders, not those of managers. Quite plainly, many were asleep at the switch, with disastrous consequences. The unhappy (but common) combination of coziness and drowsiness in corporate boardrooms must end. As one concrete manifestation, boards should abolish go-for-broke incentives and change compensation practices to align the interests of shareholders and employees better. For example, top executives could be paid mainly in restricted stock that vests at a later date, and traders could have their winnings deposited into an account from which subsequent losses would be deducted.

Comprehensive reform of the financial system will probably take years. The problems are many and complex, and the government's to-do list is not only long but also a political minefield. Yet fixing compensation incentives does not require any government action. It can be done by financial companies, tomorrow. Too bad they didn't do it yesterday.

Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve Board.

Monday, May 25, 2009

The Bonus Boondoggle Explained!

Since learning of the massive bonuses earned by the Wall Street execs who drove their firms (and the economy) off a cliff last fall, I've been wondering a lot about what happened to the English language to render a "bonus" something granted to a highly paid executive - no matter what.

I had always thought (and had always experienced) a bonus to be a reward for superior performance. Not, as we've seen this year, something expected in return for running a business into the ground and taking the nation's economy down with it.

So I was thrilled to read an essay by Jon Danielsson and Con Keating on Vox explaining just how the bonus culture took over the financial community.

Once upon a time in finance, according to Danielsson & Keating, bonuses were rewards for success. That changed when the financial partnerships that once were the norm in finance were replaced by limited liability corporations:

"Partnerships have disappeared over time, and the predominant institutional structure in the financial industry is now the limited liability corporation. This transformation is a key reason for the emergence of the bonus culture, because it substantially reduces the incentive of senior management to monitor risk taking."

Traders tend to maximize short-term revenues - and in the partnership era, the potential liability that could be suffered from such a short-term focus provided incentive for senior management to oversee the trades made by junior members - and (hopefully) prevent risky behavior from taking down the firm.

Because of the changes in how the limited liability corporations operate, the incentive for senior management to provide oversight has vanished:

"If there are neither employment penalties nor significant personal costs associated with having run a failed institution, the senior management has incentives to adopt high-risk strategies for profit, since failure does not mean high personal costs."

Danielsson and Keating feel that divorcing management from liability clears the way for risky business to take over common sense. In this, they are men after my own heart. Look at what they have to say about the bonuses paid for by the bailout:

"In their haste to ensure the ongoing business of failed institutions and a desire to avoid taking direct ownerships of the financial institutions, the authorities overlooked the issue of onerous (and indeed sometimes odious) contracts that would continue.

The argument that a bank receiving public support needs to retain the services of these traders, with performance of the contract important, is nonsensical. Losing money, even by bad luck, removes any justification for bonus payments."

Danielsson & Keating offer some solutions to the bonus issue:

"Financial institutions should adapt elements of partnership structures to the limited liability financial institutions of today. Senior management (the partners of old) need to have a substantial part of their compensation deferred over a long period of time, with the amount of compensation directly related to the long run fortunes of the firm. Any senior manager in an institution receiving public assistance should lose all of their deferred compensation. By contrast, the supervisors should not mandate deferral of trader bonuses or regulate junior employee compensation. This provides management with an incentive to check for gaming.

The supervisor should have the power and the obligation to impose a lifetime ban from working anywhere within the financial sector, including a nominal unregulated part, for egregious activities. Such powers should be used for managers responsible for financial institutions failing or needing public assistance. For individual traders they should be restricted to breach of limit or risk assessment gaming, especially when bonuses have been retained. This would be a powerful enforcement tool because for most of the trader’s life the future is worth more than the immediate past."

In the end, we have today a financial culture that appears completely removed from suffering any consequences at all for risky behaviors that threaten a firm's survival. Executives at financial firms pushed the boundaries to the limit - reaped astronomical profits in the last few years - and then were scooped up in a federally funded TARP when they crashed last fall.

And they got their bonuses, to boot.

Danielsson & Keating believe that "the bonus culture, created by structural changes within the financial system over the past three decades, was a direct contributing factor to the current financial crisis."

The question remains, however - do we have what it takes to initiate real reform that will prevent such a crisis from happening again?

Contemplating Life Under the Protection of the Pope

As an institution, the Catholic Church is a strong and forceful advocate for life. Thus, abortion is morally reprehensible. Birth control is wrong. The death penalty is murder.

As the protesters made clear when President Obama was speaking at the very Catholic University of Notre Dame in South Bend, Indiana last week, life is what matters.

Unless you are child in the protection of a Catholic orphanage or reform school in Ireland. Then your life is worth very little, in the eyes of the church.

Last week, an Irish commission into the abuse of children by Catholic clerics released a report documenting the horrors inflicted by priests and nuns on children.

Rapes. Scaldings. Beatings. Molestations.

It seems that Dick Cheney's advocacy of waterboarding pales in comparison to the tortures inflicted by the religious on defenseless children.

And the Catholic Church's torture of children went on for decades. The report covers the abuse that occurred from 1930 to 1990.

Protecting the potential life of a collection of cells matters very much to the Catholics, but after you draw that first breath, you're apparently on your own. For much of the last century, if you were an orphan child in Ireland, or an altar boy in America, your life could have been ruined by the sadistic torture inflicted by some of the strongest pro-life advocates in the world.

To me, as a mother and as a Catholic, life matters. Especially the life of a living, breathing child.

It remains incomprehensible to most outside of the Vatican how protecting a collection of cells matters more than protecting the powerless children the Church had assumed responsibility for. Yet when contemplating life under the protective watch of the pope, that's what we see - the fetus is more revered and protected than the child.

The Vatican has no statement to make on this issue at this time.

Some interesting links about this issue include:

A Washington Post story with this to say:

"The 2,600-page report, which capped a nine-year investigation, said rape and sexual abuse were "endemic" in boys' institutions funded by the state but run by the church."

The Irish Times provides some statements from some of the victims - and here's just three:

"– A brother tried to rape me but did not succeed, so I was beaten instead.

– Taken from bed and made to walk around naked with other boys whilst brothers used their canes and flicked at their penis.

– Tied to a cross and raped whilst others masturbated at the side."

The London Times reports that:

"A whole chapter is devoted to a Christian Brother given the pseudonym of John Brander — real name Donal Dunne, who was convicted in 1999 of his crimes and given a two-year prison sentence — which describes his progress through six different schools where he physically terrorised and sexually abused children in his classroom.

The report says that his career, while shocking in itself, illustrated the ease with which sexual predators could operate within the educational system of the State without fear of disclosure or sanction."

The church is always quite vocal on the issue of abortion - witness the demonstrations against President Obama in South Bend last week - but today remains silent on the issue of its abusive priests and nuns. Perhaps after years of focus on the topic of pedophiles in the priesthood, the Vatican would like to change the subject and feels silence is the best approach.

The pope's silence continues the tragedy, however, because silence implies support for the policies of its employees.

Friday, May 22, 2009

Waterboarding is Torture...says Chicago DJ Mancow Muller

Ahhh, Chicago. Broad shouldered, broken nosed, belligerent. Filled with a thirst for confrontation.

Mancow Muller, the nationally syndicated deejay based in Chicago, epitomizes the belligerent version of Chicago masculinity.

Today, he underwent waterboarding during his "free speech radio network" program, thinking he'd prove all the experts wrong - he was going to show that it was not torture at all.

It took less than ten seconds and not quite a gallon of water to make him think otherwise. Though he hated to say it, it was "way worse" than he thought it would be. According to Mancow, waterboarding was "absolutely torture."

Click here to see a video of Mancow's encounter with torture for yourself.

Enjoy the long weekend. Memorial Day, the day of remembrance for all those who've died in the nation's service, is on Monday.

A Refreshing Call for Openness from a Man Shrouded in Secrecy...

Dick Cheney wants transparency.

Finally, after eight years claiming executive privilege to prevent the release of key information, Dick Cheney wants full disclosure of certain memos surrounding the use of torture.

He's calling for such openness as a way to help President Obama make the right choices for defending our country.

As Dick Cheney himself says, "...whatever choices [President Obama] makes concerning the defense of this country, those choices should not be based on slogans and campaign rhetoric, but on a truthful telling of history."

Which is why Dick Cheney yesterday gave a speech to the American Enterprise Institute, an organization devoted to strengthening the foundations of freedom, so that he could truthfully share with us the history of the world as he sees it.

Of course, the AEI is the perfect place for Dick Cheney to have given this speech - if you look at their website, they proudly share their belief that the "competition of ideas is fundamental to a free society."

In his speech yesterday, Dick Cheney agreed that sharing information is a good thing:

"As far as the interrogations are concerned, all that remains an official secret is the information we gained as a result. Some of [President Obama's] defenders say the unseen memos are inconclusive, which only raises the question why they won’t let the American people decide that for themselves. I saw that information as vice president, and I reviewed some of it again at the National Archives last month. I’ve formally asked that it be declassified so the American people can see the intelligence we obtained, the things we learned, and the consequences for national security."

Dick Cheney wants to release more information to the public than the president who has called for greater transparency in government.

How's that for a surprise?!

Strange, though, that the man who's asking Obama for more information spent a great deal of time when vice president defending his privilege to keep his papers outside the realm of public scrutiny.

As vice president, Dick Cheney was involved in a squabbling match with the National Archives. As the LA Times reported in a 6/22/07 story:

"According to documents released Thursday by a House committee, Cheney's staff has blocked efforts by the National Archives' Information Security Oversight Office to enforce a key component of the presidential order: a mandatory on-site inspection of the vice president's office."

Even before his dispute with the nation's records office - even before 9/11/01 - Dick Cheney decided that how public energy policy was developed needed to be kept a secret from the public.

It was a stance that led to a lawsuit with the Sierra Club and Judicial Watch, who, according to this story on CNN.com, wanted merely to know "whether lobbyists for the energy industry privately helped craft the U.S. government's long-term energy policy."

This was information Cheney felt was not fit for public consumption.

So in the call for the release of Cheney memos, let's indulge ourselves. Let's see who advised the vice president on the energy policy of the nation. Let's see those memos and emails he didn't want housed in the National Archives.

Let's give Dick Cheney what he wants - access to his important memos and documents that reveal just what we gained through the implementation of his policies and programs. Give us the opportunity to read what he wrote in an attempt to understand Dick Cheney's ideas on government, on energy, on the firing of eight federal judges, on Guantanamo, on torture.

Let's release the Cheney files because, as the AEI understands, the competition of ideas is essential for freedom - and Cheney's ideas have been held secret from the public for far too long.

Thursday, May 21, 2009

A Remarkable Moment In American History....

Today, May 21 2009, we had the unprecedented experience of having two very powerful Americans talk very publicly about their views on the use of torture in keeping America safe.

Think about it. At this moment in our history, with the economy in the toilet and our troops deployed in two wars, we're talking about whether or not the United States should continue to torture prisoners of war.

We talked about whether we should waterboard enemy combatants.

Throw men against the wall in an effort to make them talk.

Use state-sanctioned torture to protect the interests of America.

President Obama spoke today on the subject of national security at the National Archives.

This is where the U.S. Constitution lives. Where the original Declaration of Independence can be found. This is home for the documents that outlined the attempts of a new country to govern in a new way - democratically.

Our president spoke at that place on this day to inform the nation of the reasons why we've moved away from the use of torture – and why we want to close a place that has held prisoners without trial for many years.

"But I believe with every fiber of my being that in the long run we also cannot keep this country safe unless we enlist the power of our most fundamental values. The documents that we hold in this very hall -- the Declaration of Independence, the Constitution, the Bill of Rights -- these are not simply words written into aging parchment. They are the foundation of liberty and justice in this country, and a light that shines for all who seek freedom, fairness, equality, and dignity around the world."

On closing Guantanamo:

"There is also no question that Guantanamo set back the moral authority that is America's strongest currency in the world. Instead of building a durable framework for the struggle against al Qaeda that drew upon our deeply held values and traditions, our government was defending positions that undermined the rule of law.

In fact, part of the rationale for establishing Guantanamo in the first place was the misplaced notion that a prison there would be beyond the law -- a proposition that the Supreme Court soundly rejected. Meanwhile, instead of serving as a tool to counter terrorism, Guantanamo became a symbol that helped al Qaeda recruit terrorists to its cause. Indeed, the existence of Guantanamo likely created more terrorists around the world than it ever detained.

So the record is clear: Rather than keeping us safer, the prison at Guantanamo has weakened American national security."

As President Obama wrapped up his speech, former Vice President Dick Cheney, the Bush administration's most vocal advocate for torture, began his speech defining why torture must continue to be used as a tool of American foreign policy.

"To make certain our nation country never again faced such a day of horror, we developed a comprehensive strategy, beginning with far greater homeland security to make the United States a harder target. But since wars cannot be won on the defensive, we moved decisively against the terrorists in their hideouts and sanctuaries, and committed to using every asset to take down their networks."

In other words, he has shrouded the use of torture in the ash-laden haze of 9/11.

Cheney continued:

"So we’re left to draw one of two conclusions – and here is the great dividing line in our current debate over national security. You can look at the facts and conclude that the comprehensive strategy has worked, and therefore needs to be continued as vigilantly as ever. Or you can look at the same set of facts and conclude that 9/11 was a one-off event – coordinated, devastating, but also unique and not sufficient to justify a sustained wartime effort. Whichever conclusion you arrive at, it will shape your entire view of the last seven years,and of the policies necessary to protect America for years to come."

And I look at this quote - and I read his speech as a whole - and I say that this man has it all wrong.

He has it all wrong.

The "great dividing line" in our country isn't whether or not some of us believe 9/11 was a "one-off event."

Is there really anyone in America who believes 9/11 was an isolated incident? Does anyone other than Dick Cheney really believe President Obama thinks this?

People who don't want the U.S. to torture do not underestimate the risk of terrorism. Americans opposed to torture feel this way because it goes against the grain of who we are and what we stand for.

When the United States government advocates and uses state-sanctioned torture, it dims the great beacon of liberty and tarnishes our vision of freedom.

What Dick Cheney fails to understand is that the great line of division today in our country is whether we feel compelled to shred the constitution in order to protect it - or whether we believe in the moral authority of the values defined by the founding fathers.

There is a terrible moral hazard when the United States views torture as an essential tool in keeping America safe. We are "the People of the United States," who have worked hard for more than 200 years to "establish justice" and "secure the Blessings of Liberty to ourselves." Thus says our Constitution.

When our government decides to overturn the rule of law to use torture and hold people for years without a trial, we create a mess, not safety.

In the words our president:

"I categorically reject the assertion that these are the most effective means of interrogation. What's more, they undermine the rule of law. They alienate us in the world. They serve as a recruitment tool for terrorists, and increase the will of our enemies to fight us, while decreasing the will of others to work with America. They risk the lives of our troops by making it less likely that others will surrender to them in battle, and more likely that Americans will be mistreated if they are captured. In short, they did not advance our war and counterterrorism efforts -- they undermined them, and that is why I ended them once and for all."

Dick Cheney believes that people who disapprove of torture are expressing "nothing but feigned outrage based on a false narrative." His repudiation of the president's move away from torture aligns him with another powerful African American leader - Malcolm X. For it was Malcom X who believed that human rights should be gained by "any means necessary."

After this extraordinary day in American history, a day spent debating the value of torture, one thing is clear. Our president has pointed the nation in a different direction – using a moral compass outlined for us by a group of men in Philadelphia more than 200 years ago.

And Dick Cheney has made it very clear that he is not on board at all with this shift in policy away from torture and toward the pursuit of liberty and justice that defines us as Americans.

SNL on the Stress Test....

There's been much discussion of the value and impact of the recent bank stress tests.

Saturday Night Live offers its interpretation:





I give that skit an A for effort....

Wednesday, May 20, 2009

The Rabble is Roused...

Royal Dutch Shell shareholders are not happy.

Here's what NY Times Dealbook blog is reporting:

"Shareholders, angered by lofty executive pay in a time of dwindling earnings, turned their wrath on Royal Dutch Shell on Tuesday, voting against compensation packages for senior management, The New York Times’s Julia Werdigier reports from London."

The vote is not binding. But it represents a significant change in the usual rubber stamp shareholders have given in the past to these compensation packages.

Perhaps the rabble is coming around to understand that the investment in executives has shown poor returns in recent months. And perhaps the executives will take note of the rabble's rage.

But knowing how dear and how beloved the compensation packages are to top execs, I'll bet they get what they want, rabble be damned.

Some links below if you want to read more...



NY Times dealbook blog post


Shell's investor center

My 6, 2009 letter from Sir Peter Job, Chairman of Shell's Remuneration committee, explaining why the bonuses were appropriate and should be paid.

Reality Bites: The Wife's Turn...

With Rod Blagojevich, former governor of Illinois, tied up in his trial for corruption, there remains a spot open on the NBC reality TV show "I'm a Celebrity... Get me Out of Here."

And according to the Chicago Tribune, Rod's wife, Potty-Mouth Patty, is the celebrity NBC wants to fill the spot.

So let's take a look at Patty's celebrity status for a minute....

*She's famous for being married to the crook who tried to sell an US senate seat to the highest bidder.

*She's famous for her extensive vocabulary in swear words, caught on tape and released to the world via the federal investigation into her husband's corruption.

*She's a tiny bit famous for being the daughter of a Chicago alderman, with all the baggage that comes with such a title.

You know what? I am sick of these types of celebrities. Sign her up and ship her out! Let her have her fun clawing her way back to Illinois as part of this TV show....

P-PIP: The Puzzle...

The head spins trying to take it all in. The numbers. The spreads. The math. The odds. The payout.

No it's not the odds of the filly winning the Belmont Stakes.

It's a discussion of PPIP, the US government's private-public investment plan to unload the toxic assets from the balance books of the banks.

Apparently the private organizations will do well under the plan.

The public gets fleeced. At least according to Columbia University professor Jeffrey Sachs, in a post that I found on Vox. Here's his take on PPIP:

"Specifically, the FDIC is lending money at a low interest rate and on a non-recourse basis even though the FDIC is likely to experience a massive default on its loans to the investment funds. The FDIC subsidy shows up as a bid price for the toxic assets that is far above $360 billion. In essence, the FDIC is transferring hundreds of billions of dollars of taxpayer wealth to the banks."

And the reason Americans aren't marching with pitchforks on Washington - the math is just too damn complicated:

"With a little arithmetic, we can calculate the size of that transfer. In this scenario, the private investors (who manage the investment fund) will actually be willing to bid $636 billion for the $360 billion of real market value of the toxic assets, in effect transferring excess $276 billion from the FDIC (taxpayers) to the bank shareholders! Here's why.

Under the rule of the Geithner-Summers Plan, the investors and the TARP each put in 7.15 percent of the purchase price of $636 billion, equal to $45 billion. The FDIC will loan $546 billion. (All numbers are rounded). If the toxic assets actually pay out the full $1 trillion, there will be a profit of $454 billion, equal to $1 trillion payout minus the repayment of the FDIC loan of $546 billion. The private investors and the TARP will each get half of the profit, or $227 billion.

Since this outcome occurs only 20 percent of the time, the expected profits to the private investors are 20 percent of $227 billion, or $45 billion, exactly what they invested. Similarly, the TARP's expected profits are also equal to the TARP investment of $45 billion. Thus, both the TARP and the private investors break even. As competitive bidders, they have bid the maximum price that allows them to break even.

The bank shareholders, however, come out $276 billion ahead of the game, while the FDIC bears $276 billion in expected losses! This transfer occurs because the investment fund defaults on the FDIC loan when the toxic assets in fact pay only $200 billion, an outcome that occurs 80 percent of the time. When that happens, the investment fund is "underwater" (holding more in FDIC debt than in payouts on the toxic assets). The investment fund then defaults on its debt to the FDIC. The FDIC gets $200 billion instead of repayment of $546 billion, for a net loss of $346 billion. Since this outcome occurs 80 percent of the time, the expected loss to the taxpayers is 80 percent of $346 billion, or $276 billion. This is exactly equal to the overpayment to the banks in the first place."

See what I mean about the math? It looks like it will add up nicely for the banks – and the execs who run them, because they'll be declaring profits and celebrating with bonuses in '09.

Yet I assume there is a reason why these assets have been labeled "toxic" - because they're not worth anything. The beauty of "the free market" is that the loss needs to be absorbed somewhere - so if not the banks who accumulated the toxic assets, then the public.

We get to pay the price for the big toxic spree made by the banks.

I keep harkening back to Reagan's "trickle down" theory. If only we'd loosen the surly bonds of government, we'd unleash the power of the free market - and see money trickling from the top to the very bottom.

That's what they sold us back then. If you click on this link, you'll see a chart that shows how that plan worked. The top one percent has seen extreme increases in income since Reagan; everyone else, not so much. In fact, the bottom 80 percent has not really seen much growth in income at all since Reagan.

(And if you're a big fan of charts, you can go straight to the source of that chart over here at the Congressional Budget Office website.)

Today, with PPIP, we're not even talking about the money "trickling down." The continued transference of wealth to the wealthy is presented to the public as an "investment." But it's looking like an investment in toxicity that benefits only those at the top.

Monday, May 18, 2009

P-PIP Hooray?!

Stumbled across a frightening story in the Financial Times (sad when terror can be found in the pages of a financial rag, but these are those kind of days!)

A couple of weeks ago, when writing in FT about the fed's Public-Private Investment Program, Lucien Bebchuk asked this question:

"Should banks with large amounts of troubled assets be allowed to participate as managers or investors in funds set up under the US’s public-private investment programme?"

I'm astonished that such a question is even being asked. Apparently, it is not merely rhetorical.

According to Bebchuck, "media reports indicate that some such banks are considering participating in funds established under the administration’s programme."

I've learned lately that Wall Street is an alternative universe, a place where bonuses are not rewards for successful behavior, but legal obligations bankrupt firms must honor no matter what.

A place where great brains thought it would provide long-term capital benefits to bundle up bad loans into large tranches of bad loans to spread the risk to more of the country than just Wall Street.

A place where the amount of toxicity on the books of these firms dragged the economy down in a rapid and terrifyingly dangerous manner.

A place that needed massive capital infusions from the feds or the global economy would have collapsed (more completely than it has collapsed thus far.)

Now apparently, there are some banks that are considering simultaneously unloading and snapping up the toxic assets, courtesy of PPIP.

All I can hope is that Bebchuk is seriously misinformed about this. The idea that the firms loaded with toxic assets would snap up more of them in an attempt to make money is a reality I simply cannot grasp, living as I do in the universe outside of Wall Street.

And if there is profit to be made from toxicity, let's hope the taxpayers see most of it....

Friday, May 15, 2009

A Glimpse of Life without the Cushion....

Last fall, the US Treasury Secretary, Henry Paulson, came to Congress and said that if we did not lay out a massive "tarp" to catch the financial industry from its freefall, there would be no more US economy on Monday.

Congress listened. The money was fed to the banks. Since October, they've received a very fluffy financial cushion from the feds, a cushion that seems backed by a "fluffy forever!" promise from the US government.

In the Chicago Tribune today, we get a glimpse into what life is like when people who are not bankers find themselves in an financial freefall as a result of the terrible economy.

Here's how the Trib's story begins:

"This is how fast it can happen:

One day Patrick Robbins was a sportswear buyer at Mark Shale earning $110,000 a year. The next day he was laid off, with no severance.

Within a week, the family was on Medicaid and had applied for food stamps. Soon his mother-in-law was bringing over toilet paper and paper towels."

This is a story of a middle-class family whose primary breadwinner worked in retail as a sportswear buyer. An industry that, like the banks, is at the mercy of the terrible economic conditions that resulted from the crash.

The Robbins family lived a "balanced life" - until Patrick Robbins lost his job - his company had declared bankruptcy and laid off the entire buying staff. Terms of the bankruptcy agreement did not allow severance packages (let alone bonuses.)

Without income coming in, the family's economic status went into a catastrophic downward spin.

Their mistake was not overbuying a house or maxing out the credit cards. Their mistake was living within their means - but without setting aside an emergency fund for events like the bankruptcy of their employer.

The Robbins family had failed to put up a safety net.

For most people in America, there is no safety net. No inexhaustible government-funded TARP to catch you when you fall. For many in America outside of the financial sector, failure has been the inevitable option of the crash.

Patrick Robbins made it his full-time job to get another job. And he was lucky. He's relocating his family to Little Rock for a new job within the Dillards organization.

Not everyone is as lucky as the Robbins family. Unemployment in America is at 8.6 percent right now, with some predicting it will climb to ten percent before the recession ends.

In reading the story of the Robbins family, I couldn't help but be struck by the unequal distribution of pain resulting from the crash. Those who were instrumental in its creation have received the fluffiest cushion - and the biggest bonuses. The rest of the country has not been so lucky.

So when people talk about the bailout - when people defend the Wall Street bonuses as the only way to get us out of this mess - let's remember that the taxpayer money we're spending on those Wall Street bonuses - which has added up to billions of dollars - is capital that has been taken away from the other areas of the US economy - areas that, with proper investment, could lead to jobs creation.

You can read the Trib story about the Robbins family in its entirety below....


"SCENES FROM THE RECESSION: When DAD LOSES HIS JOB

Surviving the recession: One family's story

Westmont man lost his job and within a week had to apply for food stamps

By Barbara Brotman, Tribune Reporter - May 15, 2009

This is how fast it can happen:

One day Patrick Robbins was a sportswear buyer at Mark Shale earning $110,000 a year. The next day he was laid off, with no severance.

Within a week, the family was on Medicaid and had applied for food stamps. Soon his mother-in-law was bringing over toilet paper and paper towels.

"From middle class to poor," Pat Robbins summed it up. "Immediately."

Imagine a pile of blocks, each one representing an element of ordinary American life.

Slowly, carefully, stack them up. One block for the monthly mortgage payment. Another for the credit card bill.

Next, groceries. Kids' sports leagues, doctor's visit co-pays, utility bills -- pile them up in your mind until they rise toward the sky in a precisely calibrated tower.

It all balances, unless you are forced to top it off with one final element: The loss of a job.

That isn't a block; it's a brick.

And with that, it all comes tumbling down.

------Robbins, 41, has a quiet voice and square-jawed good looks fit for fashion retailing. He and his wife, Kimberly, 42, and their four children live in a nice house on a nice block in the nice suburb of Westmont.

Only there's nothing nice about what has happened to them, and is happening to many other middle-class families for whom a layoff spells disaster.

The Robbinses are spinning through the recession at warp speed. They hurtled into financial straits. Now, just as quickly, they have begun to scramble out. They are emerging shaken at life's unpredictability and devoted to a budget, but also convinced of their strength and determined to change the way they live.

Their journey began at a table in a meeting room at the Mark Shale store on North Michigan Avenue. On March 23, Scott Baskin, co-president of the Al Baskin Co., the family-owned operator of Mark Shale stores, delivered the bad news to Robbins and seven other buyers. The Al Baskin Co., its high-end business battered by the worst retail environment in decades, had filed for Chapter 11 bankruptcy protection. The company was dissolving its buying staff and, along with it, Robbins' 22-year career there. Under the terms of the bankruptcy, Mark Shale was not allowed to give severance payments.

Robbins made the requisite phone calls to say he had been laid off. He called his wife. He called his father, who was a Mark Shale employee for 48 years before he retired.

Then he spent the rest of the day at the North Michigan Avenue store packing his belongings and saying his goodbyes. He bore the company no ill will and was touched that Baskin, grandson of the company's founder, shook each buyer's hand and said he was sorry it had come to this.

But Robbins was scared.

His income was the engine that kept the family going. The $20,000 his wife earned working part time as a personal trainer paid for their four children's Catholic school tuition. All the other bills depended on his paycheck.

At home, he and his wife gathered their 13-year-old son and their daughters, ages 11, 10 and 6, and told them what had happened. Things were going to be different now, they said, though they weren't sure exactly how.

"We told them we might move. They might go to a different school," Kim Robbins recalled. "The only certain thing is that we're going to stay together."

It was very quiet.

It was the first time Pat Robbins' children had seen him cry.

He applied for unemployment, but the math became painfully clear. Unemployment would cover the mortgage. For everything else, they would have to use --

They had nothing to use.

"That three-month emergency fund -- we should have done it, but we didn't," Kim said.

It was hard enough to keep up with living expenses, Pat said. Plus, they were carrying credit card debt. There was no extra money to lay aside for a rainy day. And now it was pouring.

They slashed their budget. They bought groceries at Aldi. They ate pasta. They pulled their children out of sports leagues. They negotiated with their credit card companies. They ended their regular contributions to their church. They stopped 13-year-old Danny's guitar lessons.

Pat kept his membership at an inexpensive fitness club. If he missed working out one day, he spent that night lying awake worrying.

He threw himself into job hunting, calling professional contacts, meeting with people, flying to Little Rock, Ark., for an interview at Dillard's, a department store company based there.

Danny works as a caddie. He recently gave his mother $20.

"Mom, you need this more than I do," he said.

------What does it feel like to lose your middle-class life?

Like the solid ground beneath you turned to water. Like you woke up in a world you find unrecognizable. Like you are sick.

"You feel like throwing up," Kim said. But the closest analogy, for her, is drowning.

"The uncertainty is the worst. It makes you feel like you're suffocating," she said. "The anger, the sadness -- you just get to the point where you can't breathe."

And who saw it coming, back when life was good?

"You're taking care of your kids, your house. You're in this bubble. And everything is fine in your little bubble," she said. "And then the bubble bursts."

Her composure burst, and she cried.

"It's all gone," she said. "Everything you had is all gone. ... Everything you were connected to -- it's gone."

They were not too proud to ask for government help. They just didn't know how.

A friend told Kim to go to the Illinois Department of Human Services Web site and apply for a Link card and, because they couldn't afford COBRA payments, free health care.

The world of public aid was so foreign to the Robbinses that Kim couldn't remember the name of the health-care program for the poor.

"I always forget. Medicaid? Medicare?"

It is Medicaid, and she and her family went on it.

They were touched by the kindness of friends and family. A neighbor organized a pizza night for them, bringing over dinner and a bottle of wine. One of Kim's friends gave her a gift of a professional massage appointment, and handed her an envelope. There was $1,500 inside.

She was not offended, but grateful.

"We're beyond the point where we're offended," Kim said.

"We're humbled," her husband said.

------Last week, Pat Robbins was hired by Dillard's. As a brand manager for its private-label men's sportswear line, he will work with designers and factories on product development. His rescue came as quickly as his fall; he got the new job in six weeks. In this economy, it was a blink of an eye.

The family will have to relocate to Little Rock. Pat and Kim didn't hesitate.

They are thrilled. Talking about it, Kim gave a sigh of relief that practically measured on the Richter scale.

When Pat starts his new job at the end of the month, he will be earning almost as much as he did at Mark Shale. Because the cost of living is lower in Arkansas, it will be as if he got a raise.

It will be a different life, one in which they plan to apply the lessons they have learned:

Credit cards are dangerous. Budgets are freeing. What you want is not the same as what you need. An emergency fund is crucial. The Robbinses are so determined to build one that they plan to buy a less expensive house so they can.

And there are no guarantees that they are out of the woods. If their house doesn't sell by August, when the family joins Pat in Little Rock, things could get ugly again fast.

The experience has strengthened her faith, Kim said: "I prayed a lot more than I ever did in my life."

It was a trip to an unfamiliar world of uncertainty and fear, a place increasingly crowded with people who never imagined themselves ending up there.

And it can only truly be seen from the inside.

"You don't feel the effect of something that's happening to someone else," Kim said. "If someone breaks a leg, you can sympathize, but you don't know how it feels until it happens to you."

Now they know.

Thursday, May 14, 2009

Bunker Fatigue!

Spending the last eight years in a bunker seems to have left Dick Cheney giddy with gabbiness after emerging into the bright lights of his post-(vice) presidential life.

In fact, he now seems unwilling to yield the spotlight to anyone else - except perhaps to Rush Limbaugh.

During his reign as the nation's second in command, he seemed strangely silent, except when he trolled the hallways of the capital looking for votes for torture, money for Halliburton and support for the war in Iraq.

In retrospect, it seemed that Cheney spent the best years of his vice-presidency yammering about Iraq's threat to the world... Iraq's connection to Al Qaeda... Iraq's possession of nuclear weapons. He proved highly adept at spinning falsehoods as truth. There was a time, certainly, when much of the nation was convinced we were about to be blown up in an Iraqi-initiated mushroom cloud.

So we made the preemptive strike against Iraq to protect ourselves from their massive stockpile of weapons.

We all know how that story went....

Now Cheney's back, uncharacteristically hogging the limelight for himself - shilling for torture in interview after interview. His goal, these days, is to persuade everyone to realize that torture needs to remain an essential part of the American dream.

On Face the Nation, he defends his regime's "enhanced interrogation techniques" as policy moves that were "successful." In fact, he asserts that the use of torture (AKA enhanced interrogation techniques) "is one of the great success stories of American intelligence."

In the wake of his rather messy reign, however, he's finding it hard to make his point stick. In this Newsweek story, former FBI interrogator Ali Soufan, testifies why he feels torture to be ineffective - because torture is "slow, ineffective, unreliable, and harmful to our efforts."

According to this story in the Washington Post, Cheney's charge into the bright lights of television interviews is not making some Republican stalwarts very happy. But because of Cheney's popularity among "the base," most GOP critics, according to the WaPo story, want to remain anonymous:

"The fact that most people want to talk [without attribution] shows what a problem it continues to be," said one Republican strategist who spoke on the condition of anonymity in order to be candid. "Cheney continues to be a force among many members of our base, and while he is entirely unhelpful, no one has the standing to show him the door."

Cheney's daughter, Liz, is quoted in the article without the need for anonymity:

"This isn't about partisan politics, it's about what's right for the country," said Liz Cheney, the former vice president's daughter and a former State Department official. "Every American, whether you're a Republican, Democrat or independent, would agree that before critical decisions are made about national security of the nation, we ought to have a full and fair debate."

"A full and fair debate before critical decisions are made about national security," is what is motivating her father to speak out, Liz Cheney tell us.

Interesting that Dick Cheney's discussion on the use of torture is now happening after the fact.

Liz Cheney is her father's daughter, for sure....

Wednesday, May 13, 2009

A Withering Spring...

Just weeks ago, we were heralding the arrival of the green shoots - the recovery, we were told, was blooming alongside of spring.

So it seemed a short time ago. Today, while the lilacs bloom all around me (reminding me of Whitman - and of Lincoln), it seems the green shoots of recovery are withering on the vine.

With Memorial Day - the official start of summer - still in the not-so-distant future, gas prices in my area have jumped up more than fifty cents in the last week or so. (One imagines what the price of gas will be like in July - and one remembers the impact the price of gas had on consumer spending last summer.)

And even before gas prices began to go up, consumers had begun to hang on to their money - according to a story in the Wall Street Journal, the April retail season was not abloom with spending.

In fact it was the second month in a row to post declines in retail spending.

Here's to hoping that those folks getting the bonuses will start spending like mad at Macy's soon!

Here's the WSJ story in full:

Wall Street Journal
MAY 13, 2009, 11:33 A.M. ET
Retail Sales Post April Decline
By JEFF BATER

WASHINGTON -- U.S. retail sales fell a second month in a row during April, as job losses and uncertainty about the economy put pressure on spending.

Retail sales decreased by 0.4% compared to the prior month, the Commerce Department said Wednesday. Economists expected an increase of 0.1%.

Sales in March were revised down, decreasing 1.3% instead of 1.2% as previously reported. Sales rose in January and February, after sliding six straight months.

Separately, U.S. import prices jumped last month by their largest amount in almost one year, reflecting a third-straight increase in oil prices. However, excluding oil, prices actually fell for a ninth-straight month, an indication that the global economic recession continues to take pressure off inflation in the U.S.

Consumer spending makes up 70% of gross domestic product, the broad measure of economic activity. GDP plunged 6.1% in the first quarter. It would have fallen farther if not for a 2.2% increase in consumer spending. The 2.2% increase followed a fourth-quarter spending drop of 4.3%.

But spending remains under pressure due to uncertainty about the economy. Economic stimulus hurried into law by President Barack Obama and a sharp decline in energy prices, pummeled lower since last summer by the economy, have given households reason to relax and spend a little more. Still, consumers are worried about losing their jobs. The recession has put 5.7 million out of work since beginning in December 2007.

Housing-sector sales were mixed in April, with furniture retailers falling 0.5% and building material and garden supplies dealers rising 0.3%.

Another sector that has weighted down the economy is cars. Year over year, auto and parts retail sales are 20.7% below April 2008. April 2009 sales rose 0.2% compared to the prior month. Excluding autos, all other sales dropped 0.5% -- below the 0.2% climb expected by economists. Auto sales fell 2.0% in March and ex-auto sales that month fell 1.2%.

April gas station sales retreated 2.3%, after dropping 3.2% in March. Stripping away sales at gas stations, demand at all other retailers decreased 0.2% last month.

Excluding auto sales and gas station sales, all other retailers saw sales fall 0.3% in April.

Sales last month decreased 0.5% at clothing stores; 2.8% at electronic stores; 0.1% at general merchandise stores; 0.1% at mail order and Internet retailers; and 1.0% at food and beverage stores.

Sales rose 0.3% at sporting goods, hobby, book and music stores; 0.2% at eating and drinking places; and 0.4% at health and personal care stores.

Import Prices Jump on Oil
Import prices rose 1.6% last month from March, the Labor Department said Wednesday, more than double the 0.7% increase that Wall Street economists in a Dow Jones Newswires survey had expected. It was the largest increase since June 2008.

Import prices were still down 16.3% compared to April 2008, the biggest one-year drop since the index was first published in 1982, driven in large part by sharply lower oil prices over the past year. Though petroleum import prices rose 15.4% in April from March, they were down almost 50% on the year.

Excluding petroleum, import prices were down 0.4% from March, and were 5.6% lower on the year, the largest decline on record.

That suggests steep drops in oil and commodity prices at the end of last year are no longer driving U.S. disinflation, but rather the global economic downturn. The World Bank and International Monetary Fund expect global gross domestic product to contract this year for the first time since World War II.

Reports later this week on U.S. producer and consumer prices will indicate how much the decline in import prices is filtering through the economy. The bulk of consumer inflation is made up of housing, medical and other services that aren't traded globally, and consumer price figures haven't signaled the type of deflationary pressures seen in import prices.

According to Wednesday's report, prices for non-petroleum industrial supplies and materials imports fell 2.3% last month. Automobile prices were down 0.1%. Prices of imported capital goods were up 0.1% and consumer goods, excluding automobiles, advanced 0.2%.

Food prices fell 0.1% on the month.

Prices of imported goods from the European Union were down 0.2% on a monthly basis, while those from Canada rose 0.2%. Prices of goods from China slid 0.5%, the eighth-straight decline. Prices of products from Japan were 0.1% lower.

Meanwhile, U.S. export prices rose 0.5% from March, though they were down 6.8% from last year.

Prices of agricultural exports advanced 3.6% on the month, while prices of non-agricultural exports increased 0.3%.

Business Inventories Decrease
U.S. businesses reduced inventories in March less than expected, and a key gauge of supply buildup remained relatively high, suggesting companies will liquidate stockpiles further this spring.

Inventories decreased by 1.0% to a seasonally adjusted $1.401 trillion, the Commerce Department said Wednesday. Inventories in February dropped by 1.4%, which was a revision from a previously reported 1.3% decrease.

Wall Street was looking for inventories to move 1.2% lower during March.

Inventory slashing took a large bite out of gross domestic product in the first quarter. GDP is the broad measure of economic activity. The latest data showed businesses in the first quarter drew inventories down by $103.7 billion, reducing GDP by 2.79 percentage points -- or nearly half of its 6.1% plunge.

Liquidating excess supply of merchandise hurts orders and production and weighs on GDP in the short run. But it prevents a further buildup that could damage the economy farther down the road.

With March's 1.0% drop, business inventories have shrank seven straight months -- the longest period of decline since February 2001 through April 2002.

Business sales plunged 1.6% to a level of $971.7 billion in March, the data Wednesday showed. Sales in February were flat; originally, February sales were seen 0.2% higher.

The inventory-to-sales ratio held steady in March, remaining at its upwardly revised February level of 1.44, Commerce said. Originally, the I/S ratio for February was estimated to be 1.43. The gauge indicates how well firms are matching supply with demand. It measures how long in months a firm could sell all current inventory. A year earlier, the I/S ratio was 1.28.

Year over year, inventories fell by 4.8% since March 2008; sales plummeted 15.6%.

March manufacturing sector stockpiles of goods decreased 0.8% after falling 1.3% in February. U.S. wholesalers' inventories fell 1.6% after decreasing in February by 1.7%.

Retailers' stocks of goods decreased by 0.7%, after dropping 1.2% in February. Auto dealer inventories fell 2.0% after shrinking 2.8% in February. Excluding the auto component, other retail stocks fell 0.2% in March after sliding 0.5% in February. March inventories decreased by 0.5% at furniture outlets and 1.4% at clothing stores. Inventories increased by 0.8% at general merchandise stores; 1.1% at building materials, garden equipment and supplies stores; and 0.3% at food and beverage stores.

—Brian Blackstone contributed to this article.

Monday, May 11, 2009

Determining the Origins of A Dreadful Fall....

...Once upon a time there was an old lady, an ancient lady, bent over from age and the cares of the world. And one day, this frail, elderly woman found herself being chased by seven violently angry men. In an effort to escape the violence of the rage-filled men, she bounded up a very steep hill with surprising agility, for one so old and decrepit.

The seven angry men chased after the bent, ancient woman because they hated her – enraged because she'd given an apple to their housekeeper, a gift that was perceived by the men to be a terrible threat to the woman who cooked and cleaned for them.

So the ancient crone found herself on top of a cliff, fighting for her very life. As she worked to push a boulder down to crush the men and save herself, fate intervened - a bolt of lightening hit the cliff where she stood, toppling the ancient crone off the cliff.

Lightening struck; the old lady fell a dreadful fall to her death; the seven angry men rejoiced in her demise.

Interesting, isn't it, to start the story of Snow White and the Seven Dwarves well after the story actually begins? When you pick up the narrative here, when the old lady is being chased by seven men, we get to eliminate some key plot details - first and foremost, that the crone is Snow White's insanely jealous wicked stepmother whose offer of the apple to Snow White was not a gift. This isn't really a story about a harmless old lady being chased by seven angry men; it's the tale of a wicked woman's attempt to rid the world of a young woman's beauty forever.

And the seven enraged men - of course, they're the dwarves who want to rid the world of the evil stepmother who's done her best to kill their young and pretty housekeeper.

(Haven't seen the Disney film in forever - so I relied on the Wikipedia description of the plot, FYI....)

I offer the story to point out the confusion that can come when you start telling a story several plot points after the story's true beginning. I feel like we're beginning to do this now with the some of narratives I'm reading about the economic crisis.

There was one such narrative published last weekend in the Wall Street Journal - "Inside the Fall" - which chronicles the last 72 hours of Bear Stearns as an independent entity.

Yes, yes - I understand that the story focuses on the end of Bear Stearns - the last 72 hours of its existence, but it is puzzling, I think, to pick up the Bear Stearns narrative precisely at the point of its doom, when it was rescued from bankruptcy by a deal with JP Morgan Chase. As reporter Kate Kelly notes:

"The firm spiraled from being healthy to practically insolvent in about 72 hours.

The meltdown began in earnest the evening of Thursday, March 13, 2008, when Bear executives made a shocking discovery: They were nearly out of cash."

And so the story begins....

Beginning the story in this way, however, leaves out the all important detail of how this firm found itself so woefully undercapitalized. How can healthy firms become insolvent in 72 hours?

Bear Stearns insider Alan "Ace" Greenberg addressed this in a Frontline documentary called "Inside the Meltdown." Prior to the crash, Greenberg says, investment banking firms were companies that "risk[ed] their capital to help their clients accomplish certain things -- give them bridge loans, buy their securities, hold them for a while, resell them."

According to Greenberg, this way of doing business is now gone forever – "because it's been proven without a question of a doubt in the last year that a rumor can put any of these firms at peril. You certainly saw it with us."

The August 2008 issue of Vanity Fair also addressed the collapse of Bear Stearns. In this story, writer Bryan Burrough also points the finger of blame at the "rumors" that killed the Bear:

"The fall of Bear Stearns wasn’t just another financial collapse. There has never been anything on Wall Street to compare to it: a “run” on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo that, as best one can tell, had little basis in fact. Bear had endured more than its share of self-inflicted wounds in the previous year, but there was no reason it had to die that week in March."

So in the narratives being written about the collapse of Bear Stearns, what figures prominently in these stories is a financial system so rickety that the whisper of a rumor will cause a healthy company to topple for no reason.

But wait a minute. The Vanity Fair article also talks about some internal issues within Bear Stearns that might have exacerbated the firm's vulnerability to rumors:

"Everything went swimmingly, in fact, until poor Ralph Cioffi ran into trouble.

"Cioffi, 52, was a Bear lifer, a wisecracking salesman who commuted to Midtown from Tenafly, New Jersey, to oversee two hedge funds at Bear Stearns Asset Management, an affiliate known as B.S.A.M. His main fund, the High-Grade Structured Credit Strategies fund, plowed investor cash into complex derivatives backed by home mortgages. For years he was spectacularly profitable, posting average monthly gains of one percent or more. But as the housing market turned down in late 2006, his returns began to even out. Like many a Wall Street gambler before him, Cioffi decided to double-down, creating a second fund. Whereas the first borrowed, or “leveraged,” as much as 35 times its available money to trade, the new fund would borrow an astounding 100 times its cash.

"It blew up in his face."

Then the story goes on to mention the billions in toxic waste Cioffi had accumulated in those two Bear Stearn funds that he ran. And it talks about how Merrill Lynch confiscated Bear's collateral, an "unusual move," apparently. And it notes that these two funds managed by Cioffi ended up in bankruptcy. And it reminds us that back in 2007, Bear Stearns was just one of many financial firms beset with issues stemming from the mortgage-related losses.

And, oh yeah, before the rumors swirled about the insolvency of Bear Stearns in March of 2008, people were openly discussing the federal investigations into the collapse of Cioffi's hedge funds.

All that said, apparently in the narrative of the Bear Stearns collapse, Bear Stearns was a healthy company that didn't deserve the rumors that killed it.

Hmmm.

The fall of Bear Stearns gave us a foreshadowing of the greater fall to come in September. And there are several ways to look at the story of the 2008 collapse of our economy. The true beginning of the story about the Fall of 2008 can take us back to the development of a financial system so frail the softest whisper of a rumor will cause a healthy firm to collapse in just 72 hours.

Or it takes us to a business culture that is so obsessively focused on raking in the dough that it forgets some common-sense business rules that are foundational within any economic system:

1) Debt doesn't magically disappear.
2) Debt isn't a very secure investment - especially when it belongs to people given loans who don't have a hope in hell of paying them back.
3) Gambling is not an investment "strategy" that will be successful over the long haul.
4) Massively over-leveraging certain funds can lead to whispers of "liquidity problems" that can topple a financial firm overnight.
5) Debt can drag down the economy.

Another version of the story of the Fall could take us to a Wall Street culture so virulently focused on winning that certain people in certain firms would spread blatantly false rumors about a competitor to destroy it - not realizing that the rumors that then could take down the entire economy.

(But hey - Goldman Sachs is having a profitable year, thus far, right? So all is well with the world....)

Whatever narrative you choose, what is clear is that in 2008, we were forced to run up a steep cliff in an attempt to protect ourselves from catastrophe - for reasons that are murky at best - but in doing so, in running up this cliff, we became vulnerable to lightening strikes and terrible, deadly falls.

Whether it was the result of rumor, the result of evil competitors whispering lies into the ears of CNBC reporters, or the result of the fact that all the financial firms on Wall Street decided to turn bad debt into investment instruments that made them money as they toxified their books, one thing is clear.

The US economy fell off a cliff in 2008.

To understand the reasons why - so that we can prevent such a catastrophe from ever happening again - we will need to discover the true beginning of the story to determine the true causes of the fall.

Otherwise, we can end up feeling sympathy for the devil who offered up poisoned apples that killed the economy - instead of making sure he can't offer up such deadly fruit ever again.

Friday, May 8, 2009

Great News This Week!

Workers continue to lose jobs!

Unemployment rate in the U.S. has risen to 8.9 percent!

That's the news out of the Bureau of Labor Statistics today.

And yesterday, the Treasury Department rejoiced in their discovery that 19 of the biggest American banks could lose nearly $600 billion by the end of 2010, if the economy worsens!

Other good news out of Treasury - ten of these 19 banks are now required to raise billions as a capital cushion! More than half of our biggest banks are teetering on the wire without an appropriate safety net!

All this good news leaves me feeling like I'm inhabiting a Terry Gilliam movie. Why do I feel gloom instead of joy when reading these stories? What am I missing?

According to the NY Times, the jobs report was "pretty encouraging."

Because the loss of 539,000 jobs in April was not nearly as big a slide as we've seen in previous months (699,000 in March, 681,000 in February, 741,000 in January), the green shoot in this story is that we've hit the bottom!

At least we hope. I suppose it is nice when we can see blooms in one of the worst job reports in 30 years.

(We do live in a land where appearance carries the weight of fact - and sometimes is even a heavier consideration than truth...)

Not everyone is seeing green. The NY Times surveyed a number of economists on this topic. Some quotes include:

“In April, more than one in four unemployed workers, 27.2 percent, had been without jobs for six months or longer, the highest rate on record since the government started calculating this statistic in 1948.” — National Employment Law Project

“[W]ith the smaller headline job loss number, many are interpreting the April employment report as yet another sign that the economy is “stabilizing,” but the more accurate assessment is that the economy’s pace of contraction is slowing, which is not quite the same as stability and is still a long way from the economy actually improving.” – Richard F. Moody, chief economist, Forward Capital, LLC

“Soaring unemployment is depressing wage gains, up only 0.1% in Apr, putting the y/y rate down to 3.2%, a 40-month low. There’s much further to go here; seriously bad news because without wage gains people can’t deleverage unless they cut spending deeply.” – Ian Shepherdson, chief United States economist, High Frequency Economics

“[I]t still looks like the unemployment rate will move above 10% in coming months which will exacerbate the credit losses confronting the financial sector.” – David Greenlaw and Ted Wieseman, Morgan Stanley

Kind of a bummer to read those quotes. So let's turn our attention to the health of the banks who, last fall, were so close to collapse that Henry Paulson demanded nearly a trillion dollars to hand out to them... or else.

According to Ben Bernanke, chairman of the Federal Reserve, the results of the stress tests "should provide considerable comfort to investors and the public."

In the golden spin of Bernanke, most of the banks should be able to withstand the winds of "hypothetical adverse" events that could blow out more money from their books.

And whatever happens, whatever crisis befalls the titans, Bernanke notes, "...our government, through the Treasury Department, stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn."

Tim Geithner feels we're on track to get back to business again:

"Our government has taken extraordinary actions to ensure the stability of our banking system because this is essential to contain the risk of a worse recession and to lay the foundation for a sustainable recovery.

With this support, and with the clarity provided by today's announcement, banks should be able to get back to the business of banking."

And he he has some words for the titans of Wall Street on his expectations for them:

"Those in leadership positions in our banks are going to have to work hard to repair the loss of confidence in the financial system and regain the public's trust. They can do this by expanding lending to creditworthy families and small businesses that we depend on to generate economic growth. And they need to demonstrate that they are reforming compensation practices to reinforce limits on future risk taking. And this responsibility must be felt by all banks, including those that hope to be in a position to repay the government's capital investments."

However, with news of the bonuses people are set to get this quarter, I have to believe that his words are falling on deaf ears. The compensation system is unchanged; the cost of credit remains high; loans are not easier to come by; the toxic assets remain on the books of these banks, quietly exuding fumes of failure and poison into the system.

Has anything really changed?

Or was Geithner saying what he truly meant - that he sees a return to the "business of banking" that got us into this crisis as desirable - instead of creating a new financial system designed to avoid brinksmanship like this from happening again?

Is he asking the people for whom self-regulation is clearly an impossible task to self-regulate themselves into a new business model?

What do you think? Will it work?

Tuesday, May 5, 2009

Dueling Narratives! But which one wins?

Dana Milbank's story in today's Washington Post is like a sprig of forsythia - a bright bloom amidst a bleak wintery backdrop of doubt and debt.

Milbank starts the story with a rhetorical statement: "Maybe Barack Obama is really The One."

And apparently the president ranks among those considered to have god-like qualities because of all the good news we're hearing today:

"The economy? Recovering.

The markets? Rallying.

Swine flu? Abating.

Drought? Ending."

Such a difference 105 days makes! Just a few months ago, under Bush, the economy was so catastrophically battered that the government had to spend trillions to prop it up.

And now, recovery blooms brightly this spring.

But is it true? Or have we become caught up in a bubble of irrational exuberance once again?

Matthew Richardson and Nouriel Roubini are not nearly as giddy today as Milbank. In fact, they're kind of like a frost waiting to kill the lovely yellow blooms springing up in other mainstream media outlets.

Richardson and Roubini start their story in the Wall Street Journal by reporting what the government is telling us about the stress tests they've been conducting on banks:

"If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape."

The two Rs, however, are "glass-empty" kind of guys. They provide the kind of stats that really bring down the bubbliest optimist.

According to their story in the WSJ, the IMF is estimating nearly three trillion in losses on US loans and securities. Their own stats paint an even bleaker picture:

"Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions."

Nothing like the mention of an insolvent financial system to dim the joy we felt upon reading Millbank's sunny column.

According to Richardson and Roubini, it seems that a dramatic infusion of capital could be needed. And it might be needed because, according to the two Rs, the recipients of TARP have been accepting money from the government and sending it out as dividends, "paying out a staggering $400 billion in 2007 and 2008. While many banks have been reducing their dividends more recently, bank bailout money had been literally going in one door and out the other."

So much for the capital investment program within TARP.

The two Rs also report that some of the weakest banks have been buying up some of the riskiest investments lately - more of those AAA-tranches of nonprime mortage-backed securities that are clogging up the pipes. As they note, "if true, this is egregious behavior - and it's incredible that there are no restrictions against it."

The men confess to be "downright irritated" these days at the broken record coming out of our government, the one that endlessly repeats "if only we had the power to act...."

So as the government spins a rosy glow over the results of the stress tests, there are others who'd like the government to stop spinning and take significant action to get us out of this mess. In the words of Richardson and Roubini, "the government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money."

But maybe we'll have to wait until the real second coming before we see that happening....

Sunday, May 3, 2009

On the Decorating Impulses of Two Leaders...

When listening to NPR yesterday, I heard an interview with Callie Shell, Time's White House photographer, a story that included an interesting comment about Obama's changes to the Oval Office:

"When presidents move into the White House, they often put their own mark on the space with photos on the wall and various personal knickknacks. Shell says that Obama hasn't done much to the Oval Office.

'To me, he appeared to go in the first day and just start working,' she says. 'He wants the room to look good and make people feel welcome. And I've heard him say that, 'This is the people's Oval Office.'"

So the most powerful man in America made the decision when he took office at a moment of crisis to leave decorating decisions aside for the time being, choosing instead to focus his energy on developing solutions for the myriad problems the nation faces today.

The Oval Office, says Callie Shel, remains essentially as it did when Bush was president.

Contrast this with the story of another very powerful man, John Thain, the toxic asset recently jettisoned by the folks over at Bank of America/Merrill Lynch.

Thain became CEO of Merrill Lynch in December 2007, and with a total compensation package worth $83.8 million, became one of the highest paid CEOs that year.

(And he started work as Merrill's CEO with just one month left in the year.)

Within 15 months, he was out of a job. In his well-compensated time at Merrill Lynch, he rammed through early payment of $4 billion in bonuses to fellow Merrill execs (funded, apparently, by TARP), made a sad and ultimately futile attempt to get a hefty bonus of his own and lavished attention on the details of renovating his office.

Now we know Wall Street is all about excess and compensation and they're bright guys, over there on Wall Street, yes we know. Thain is one of many Wall Street execs who are by-products of the Harvard MBA program - that bastion of corporate wisdom.

So Thain comes in to lead a company that is bleeding out money like blood from a severed artery and he decides to spend valuable time, attention and more than a million dollars on making his office and conference rooms over in the Thain style.

In a time of crisis, he went in search of his interior decorator. And a $68,000 credenza. And a $35,000 commode. And a $1,400 wastebasket.

His office looked beautiful.

In the 4th quarter of 2008, his company posted $15 billion in losses - for just that quarter alone.

$5.1 billion in losses in the third quarter of 2008.

The short, unhappy reign of Thain was a terrible, horrible, no good, very bad year by any measure. He came to lead Merrill at a time of crisis and instead of engaging in triage to save his company, he focused on the trappings of power - the imagery of success - the search for the very finest antiques.

In the end, it got him fired.

Hopefully the takeaway we get from the story of Thain and his focus on office renovation is that leadership isn't about the acquisition of "stuff." The beauty of your office means nothing if your company is on the verge of collapse.

Leadership is about ideas and solutions and hard work and sweating the details and motivating the work force and representing your company in ways that inspire confidence among internal and external audiences.

Real leaders know that acting to bring their organization out of crisis is the true compensation for their work. Perhaps, someday, Wall Street execs will catch on to this notion....