Monday, December 27, 2010

TARP not big enough for those NOT too big to fail...

In recent months, there has emerged a terrible mythology around Henry Paulson's audacious plan to save our financial sector. The whispers have grown into kind of a roar: TARP will turn a profit for the government.

To understand this mythology, we need to go back to those dark days of the fall of 2008, when our economy went into a free-fall of its own weight and it looked like nothing would save us from a Depression as terrible as the one that we call the Great Depression. Henry Paulson, then Bush's Treasury Secretary, cobbled together his rescue plan we all know as the Troubled Asset Relief Program, or TARP.

In September 2008, Paulson did his best to explain his new plan. Here's some of what he said back then:

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions.

Here's what he wanted us to do about it:

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars.

We all know that he was not immediately able to "remove these illiquid assets that are weighing down our financial institutions." He instead revised the plan to infuse billions of federal money into the financial system in an effort to recapitalize banks.

Today, some of the big banks are paying back their TARP loans with interest. The cost of the program appears to be significantly less than the $750 billion figure Paulson had originally thrown out for us to consider.

And thus today, the loud claims that TARP is a profitable enterprise for our economy. In fact, Tim Geithner, the man who replaced Paulson as the nation's Treasury Secretary, calls TARP "one of the most effective crisis response programs ever implemented."

And for the big banks, those too big to fail, it's been nice. But TARP was just one element in the generous bailout package the government offered them.

For smaller banks, however, a different story. TARP was, for many, the extent of the bailout they received. And now many continue to struggle. In fact, a recent Wall Street Journal story reports that the number of TARP recipients on the verge of collapse is on the rise. According to the story, there are nearly 100 banks now in jeopardy of failing.

And "seven TARP recipients have already failed, resulting in more than $2.7 billion in lost TARP funds."

TARP's failures are not the big banks:

Most of the troubled TARP recipients are small, plagued by wayward lending programs from which they might not recover. The median size of the 98 banks was $439 million in assets as of Sept. 30. The median TARP infusion for each was $10 million, federal filings show.

What we are seeing is that the "too big to fail" institutions, the ones that got TARP AND other programs, are doing well. Paying out enormous bonuses. Spending large sums on advertising. (Here's one example!)

The smaller banks, the ones that got some funds from TARP, but little else, remain in trouble, which means our financial system has grown even more imbalanced. Far from fixing the financial system, TARP has created an even bigger disparity between large and small banks. Large banks remain too big to fail. Small banks... well, they fail. And the TARP monies invested in them simply vanish.

So the next time someone talks about the profitability of TARP, remember those small, struggling banks. Despite what you hear, TARP is the kind of profitable venture we simply cannot afford to repeat.

Wednesday, October 20, 2010

Progress... the Goldman way

Truly, it's one of the most interesting business dilemmas of the new millennium. Goldman Sachs is raking in money, hand over fist, maximizing opportunities to profit despite an enduring and severe recession that is crippling the rest of the country.

If you look at their website, they tell you right up front what they believe in: progress. Because it's everyone's business. And Goldman Sachs is bringing "people, capital and ideas together to help our clients and the communities we serve."

They've also launched a new PR campaign that helps educate the masses on the benefits Goldman offers to the nation.

And yet, they get no respect.

Why is that, one wonders?

Because their PR campaign about their impact on progress is a lot of hogwash. It's PR mumbo jumbo. If we've learned ANYTHING about Goldman Sachs during this recession, it's that they'll do ANYTHING for a buck.

And the only client they serve faithfully, with dedication and respect, is their internal customer. Themselves.

How do I know? Because for two years now, they've told us that if they don't get their bonuses, the bright minds of Goldman Sachs will leave. In a huff. Because their bonus didn't live up to the brand promise of working for Goldman.

NEVER MIND that the financial sector (of which Goldman is the self-professed leader) exists today thanks only to a generous welfare policy coming out of Washington.

NEVER MIND that the economy is in a shambles, thanks in part to questionable investment instruments coming out of companies like Goldman Sachs, investment "opportunities" that packaged up bad debt and sold it to pension funds, etc.

NEVER MIND that Goldman Sachs can sell an investment instrument to one party, while simultaneously selling insurance to another guaranteeing a tidy profit should the Goldman Sachs investment instrument explode like a grenade, killing all the investors.

Try translating that business model to any other industry - meat packing, pharma, toy manufacturers, etc. As an example, let's just say an egg distributor knew its egg farms were filled with salmonella, that the eggs they sold were tainted by this bug, and it was, in their expert mind, a possibility that their eggs would cause serious illness to those who consumed them. [After all, they know how to count their chickens and eggs!] To maximize profit, to hedge against the catastrophe of an impending salmonella outbreak, they not only sold the eggs, but packaged up and sold a generous insurance policy to an outside firm (for a nice sum) that allowed the outside firm to profit enormously from the pain and agony caused by a salmonella outbreak.

Goldman Sachs can do what an egg company cannot. Yes, it paid a fine of $550 million for "mistakes" it has made in the Abacus deal, for "misleading investors," providing "incomplete information" and failing to clue the investors in on the fact that John Paulson was on the other side of the deal. But the deal itself would have been okay, if not for those paperwork issues.

Not really. Not if you want people to respect you. You cannot sell something to one party and sell insurance to another that ensures profit if your instrument fails catastrophically.

To earn respect, you actually need to stand by your instruments. You need to help your investors, not make them realize that if you choose to invest with Goldman, it's "buyer beware."

PR mumbo jumbo is meaningless without action to back it up, and Goldman Sachs has a long way to go to burnish the image of a once proud firm. In the meantime, they can happily count on their bonuses. Because let's face it. The bankers at Goldman are very, very, very good at capitalizing on the distress of others.

Strange that they suddenly need respect to go with their bonuses. But they might just be realizing that a "buyer beware" business model can turn customers into former customers.

Tuesday, September 7, 2010

A hero died on Sunday...

The hero's name was Jefferson Thomas. He was 68 when he died of pancreatic cancer on Sunday.

He was a true American hero.

He was a hero because as a teenager, he was one of the Little Rock 9. One of the very brave teenagers who stood up to segregation. Stood up to racism. Stood up to hatred.

In 1957, he and eight other students required the National Guard to protect them as they did what so many students take for granted today: they showed up for high school. In those days, schools were segregated. "Separate but equal." Blacks legally barred from attending school with whites.

Mr. Thomas worked to change that.

It could not have been easy to have been on the front lines of the war to integrate schools. But Mr. Thomas and eight other high school students took a risk to take a stand for equality.

He was the almost namesake of another advocate of freedom, Thomas Jefferson, who wrote the Declaration of Independence and who was also a slaveholder in Virginia.

Frankly, Jefferson Thomas was the true advocate of freedom. A man who actually lived for freedom as if he really meant it. Who understood that color should not be a barrier to one of the most basic human rights.

Thomas Jefferson, the man who wrote the Declaration of Independence, was somehow able to justify the ownership of others. Justify the ownership of his own kin, actually.

As a student in high school, Jefferson Thomas acted in the spirit of American liberty, with the kind of bravery most people can't even imagine ever needing. He was a true American hero who made a difference in our nation. I appreciate his faith in the American principles of freedom and equality.

Saturday, August 21, 2010

Bum rush proving to be a REALLY bad deal for Chicago

Nice to know that Chicagoans are really helping out Morgan Stanley improve their bottom line this year. Here's the lead in a recent Bloomberg story:

"Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008."

Privatizing the parking meters in Chicago's been great for Morgan Stanley. But what about for Chicago?

Well - we signed over a lucrative franchise for BILLIONS less than it appears to be worth.

Morgan Stanley and its partners seem poised to reap phenomenal profits from this deal. Again, from the Bloomberg story:

"Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue

That's one HELL of a return! Wish I had access to investments like that!

Parking meter costs skyrocketed almost immediately after Mayor Daley shoved the deal through with no time for the aldermen to consider it. Now today, as a result of privatization, we pay more in Chicago to park at a meter than the Morgan Stanley bankers will pay to park in NYC. From the article:

"Morgan Stanley’s partnership raised parking rates twice since the lease began, and more are planned, the debt document says. Fees at some central business district meters rose to $4.25 an hour from $3 since January 2009 and will go to $6.25 in 2013. In midtown Manhattan, hourly rates are as much as $2.50, according to the New York City Department of Transportation."

The dubious deal gives Morgan Stanley the profit, and the people who pay to park in Chicago the shaft. Business as usual when an investment bank is involved.

The benefits of government assistance...

Wall Street Journal has a fabulous story today about the success of one particular government entitlement program - the bailout of the banks. While unemployment remains high in America, while those on Social Security are likely to see cuts in their entitlement program in the near future, while our federal, state and local governments are seriously in debt, our financial sector gleams brightly as a vision of success.

According to the WSJ story, the average monthly salary in 2009 in finance and insurance is nearly $12,000.

A month.

Up 23% from a year earlier.

More than double the average in NYC.

And that's just the wages paid to the new hires.

Imagine the possibilities for growth in this sector!!!

Especially when you can sell an instrument to one party and sell insurance (or take out insurance for yourself) that allows one to profit when the instrument you created blows up after you sell it off.

(As long as you disclose the names of the people who purchase the insurance!)

Also according to the story, we've seen a great divide grow in recent years between the salaries of bankers compared to the salaries of everyone else:

"Back in the 1970s, bankers’ salaries didn’t differ much from those of other folks. Amid the deregulation and financial innovation that followed, though, they began to break away from the pack. As of 2006, wages in finance were about 72% higher than the average for all professions, according to economists Ariell Reshef of the University of Virginia and Thomas Philippon of New York University

The bailout that was supposed to help the general economy start purring again has failed in that regard. But the engine that drove us off the cliff – the financial sector – the sector that got bailed out and bonused – is humming strongly now.

Don't let ANYONE tell you that government assistance doesn't work. Just look at our bankers. After requiring billions and billions of dollars in in federal assistance, they've managed to secure top wages during one of the worst recessions our country has experienced. What's been a terrible crisis for much of the country has been a bounty of riches for Wall Street. But that's what happens when failed bankers get the full backing support of the US government. They win. We lose. Or at least that's how it's looking today.

Sunday, August 8, 2010

On the language of unemployment...

I am slowly realizing that what we talk about when we talk about unemployment in this economy is largely fictional. A couple of months ago, we celebrated a decline in unemployment. We're no longer looking at 10% unemployment; the number is now hovering at 9.5%.

But when you look closer, that decline is not the result of improved employment and expanding economy. It's the result of not counting people who've despaired of finding a job in this market. If you stop looking for a job, you're no longer considered "unemployed."

That's a pathetic way to look at unemployment - that we're not going to count people who've given up hope of getting a job. Because for us to truly recognize the enormity of the problem, we need to fully count ALL the millions of people who are not employed, not just the ones who remain hopeful of getting a job once again someday.

Here's a link to Mark Thoma's post on the August unemployment report. Two years ago, we rescued our financial sector, we were told, to help the economy. However, two years after the rescue, two years of nice bonuses packages for those on Wall Street, the economy remains in peril.

Wednesday, June 9, 2010

A breathtaking image in today's WSJ

Was startled by the photo that appeared on the front page of today's WSJ. It seems strangely plopped into the general news of the day: showdown on fund taxes; incumbents in danger of losing; poor South Africans protest against government neglect.

And in the middle of the page, a striking photograph of two men in a moment of intimacy. Click on that link and you'll see the image of one soldier comforting a seriously wounded comrade.

This is a picture of man at his most vulnerable. A soldier wounded in Afghanistan. A man far from home. Surrounded by enemies in a foreign land. Sent there to protect his country.

A friend holds a Bible and offers a cigarette to comfort the wounded man. He is reading the wounded soldier's favorite Psalm, Psalm 91. It appears as if someone else not in the picture is holding the wounded man's hand.

In a moment of horror, a wounded soldier finds solace from God and men.

This picture haunts me. It reminds me that in our time of need, we reach out to others - and they reach out to help us. And it reminds me that at this very moment, soldiers are risking their lives to protect our rights as Americans.

Amidst the news of the terrible black plume poisoning the ocean, the struggle to inject a sense of duty, honor and an emotion other than greed into the financial sector, the ridiculous spectacle that is the Blago trial, it is essential to remember that men and women are dying to protect America. We cannot forget this. Our soldiers are protecting our right to be American. We must honor them with our actions.

The Psalm the soldier wanted to hear:

Psalm 91
He who dwells in the shelter of the Most High, who abides in the shadow of the Almighty, will say to the Lord, "My refuge and my fortress; my God, in whom I trust." For he will deliver you from the snare of the fowler and from the deadly pestilence; he will cover you with his pinions, and under his wings you will find refuge; his faithfulness is a shield and buckler. You will not fear the terror of the night, nor the arrow that flies by day; nor the pestilence that stalks in darkness, nor the destruction that wastes at noonday.

A thousand my fall at your side, ten thousand at your right hand; but it will not come near you. You will look only with your eyes and see the recompense of the wicked.

Because you have made the Lord your refuge, the Most High your habitation; no evil shall befall you, no scourge come near your tent.

For he will give his angels charge of you to guard you in all your ways. On their hands they will bear you up, lest you dash your foot against a stone. You will tread on the lion and the adder, the young lion and the serpent you will trample under foot.

Because he cleaves to me in love, I will deliver him; I will protect him, because he knows my name. When he calls to me, I will answer him; I will be with him in trouble, I will rescue and honor him. With long life I will satisfy him, and show him my salvation.

Wednesday, June 2, 2010

The songbird sings a horribly discordant note...

Peggy Noonan wrote a terrible column in last weekend's Wall Street Journal. "He was supposed to be competent" is the headline, and it's about how Obama's incompetence is the reason the Gulf Coast is soaked in oil right now.

Come again?

Peggy Noonan was Reagan's songbird. Her speechwriting for the man who named a revolution was elegant, eloquent and inspirational.

Does she forget that her boss considered government the problem? That businesses were dying under the yoke of regulation? That for America to succeed, a bloodless revolution needed to take place that severed the government from the responsibility of regulating much of American business?

Because untethered, according to the Reagan Revolution, businesses could fly high and soar. And their profits would trickle down into the pockets of all of us on Main Street. Which would have been great, since salaries have remained stagnant since Reagan was in office. That trickle down money could have meant something. Maybe it would have given us all enough pin money to have averted the consumption crisis we're facing today...

Oh we still had regulatory agencies after Reagan, but they were starved of funds and talent. Or the talent they had in house ended up spending their days watching porn. Or they grew frustrated after seeing Dick Cheney develop energy policy with the help of the companies they were supposed to regulate....

And what have we seen since the Reagan Revolution changed our perception of the government's role in regulating businesses? Banks gone wild, acting like college girls on spring break, pushing boundaries because they knew daddy would pick up the tab. Auto companies existing thanks only to the largess of the federal government. Oilmen pointing fingers at everyone else when catastrophe occurs.

Here's how Noonan characterizes the situation in the Gulf:

"And now the past almost 40 days of dodging and dithering in the face of an environmental calamity. I don't see how you politically survive this.

"An environmental calamity," she calls it. And it is.

But this is no natural disaster. This is not Katrina. Obama has not lingered on vacation while his fellow Americans in the Superdome ran out of food and water.

This is a man-made disaster of the worst kind. According to Noonan, key to Obama's incompetence is that "he wanted people to associate the disaster with BP and not him." She continues:

"His philosophy is that it is appropriate for the federal government to occupy a more burly, significant and powerful place in America—confronting its problems of need, injustice, inequality. But in a way, and inevitably, this is always boiled down to a promise: 'Trust us here in Washington, we will prove worthy of your trust.' Then the oil spill came and government could not do the job, could not meet the need, in fact seemed faraway and incapable: 'We pay so much for the government and it can't cap an undersea oil well!'"

What Noonan fails to understand is that this is BP's disaster. They owned the rig. They made the plans. They cut expenses. Rushed the process. Employed people whose decisions resulted in catastrophe.

BP is the 4th largest company in the world. Their revenues increased 25% from 2007 to 2009. That's the time when many of the citizens of the globe saw their net worth disappear like puffs of smoke in the great crash of 2008.

In their 2009 annual report, BP talked about what a great year they had:

"2009 was an outstanding year. Reported production grew by 4% and unit production costs were down by 12%."

You can have that kind of year when you do things on the cheap. Here's what the WSJ uncovered in their investigation of the spill:

"BP made choices over the course of the project that rendered this well more vulnerable to the blowout, which unleashed a spew of crude oil that engineers are struggling to stanch.

BP, for instance, cut short a procedure involving drilling fluid that is designed to detect gas in the well and remove it before it becomes a problem, according to documents belonging to BP and to the drilling rig's owner and operator, Transocean Ltd.

BP also skipped a quality test of the cement around the pipe—another buffer against gas—despite what BP now says were signs of problems with the cement job and despite a warning from cement contractor Halliburton Co.

Once gas was rising, the design and procedures BP had chosen for the well likely gave this perilous gas an easier path up and out, say well-control experts. There was little keeping the gas from rushing up to the surface after workers, pushing to finish the job, removed a critical safeguard, the heavy drilling fluid known as "mud." BP has admitted a possible "fundamental mistake" in concluding that it was safe to proceed with mud removal, according to a memo from two Congressmen released Tuesday night."

No wonder production costs were down significantly in 2009. But the cost of saving money has been astronomically expensive. We will be dealing with the repercussions of this gusher for years to come. And people are wondering - BP earned so much money in recent years and yet they cannot cap the well. That's their job - drilling wells. They assumed the risk of drilling in deep water. And, if you believe their 2009 annual report, they fully understood the risks they were taking.

"Risk remains a key issue for every business, but at BP it is fundamental to what we do. We operate at the frontiers of the energy industry, in an environment where attitude to risk is key. The countries we work in, the technical and physical challenges we take on and the investment we make - these all demand a sharp focus on how we manage risk. We must never shrink from taking on difficult challenges, but the board will strive to set high expectations of how risk is managed and remain vigilant on oversight."

The risk was not managed. Nor was there a plan in place for what to do in case of catastrophe. That's an oversight that has left the world with a terrible "environmental calamity," as Noonan calls it.

Now in the minds of people like Peggy Noonan, the fault lies not in the corporation, who has profited mightily in recent years, but in the president, who can't put a cap on the gusher. The president needs to fix it or he is a failure. BP - not accountable.

That's a terrible political philosophy - that government is solely responsible for cleaning up the mess left by large, profitable global companies. That businesses are no longer responsible for their actions. That to "fix it" requires socialization of loss, while the privatization of profit continues. It's not what Reagan wanted. At least I don't think that's what he wanted. One never knows with politicians.

What we have learned in the years since Reagan, as the bankers informed Congress in 2009, self-regulation doesn't work. That's something Obama needs to address. That's his job. And yes, there were likely failures in that area. But let's be clear: BP is as responsible for the explosion on the rig as they are responsible for the profit they've made in recent years. And they need to be held accountable for the mess they've made.

No matter what the songbird says.

Friday, May 7, 2010

The computer did it!

Innovation in the financial sector is once again turning Wall Street into the biggest roller coaster in America. It was a "glitch," apparently, that sent the markets down a very steep trajectory yesterday.

According to the NY Times article on the crash, at least half of all trading is done via these "high frequency" trades. A computer is programed to do the buying and selling that once were the sole domain of the trader.

"'We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,' said James Angel, a professor of finance at the McDonough School of Business at Georgetown University"(as quoted in the NY Times.)

I love computers as much as anyone. But innovation coming out of the financial sector is a little scary these days.

From the Times story:

"The near-instantaneous swings left brokers dumbfounded."

Traders weren't the only ones shocked by the fall. So were retirees and families saving for college–Main Streeters whose finances have been savaged by the collapse of the economy.

Now this - the collapse of the markets because of a glitch in a highly sophisticated trading program. Like we need a computer malfunction to shock the markets even more these days.

Who benefits from such programs? Not sure. But for many people, the brilliance of the financial sector is getting very expensive.

Looking forward to the day when financial sector innovation creates growth for those outside of Wall Street!

Sunday, May 2, 2010

A loss so big, it seems "synthetic"

Anyone remember the big Soviet demonstrations of military might on May Day? It used to be that every year on May 1st, the Soviets would unveil the power of all their many weapons by parading samples of them down some expansive street in Moscow. Grim soldiers would walk in precise steps past the aged members of the Politburo. It was indeed an impressive display of strength, impressive enough to foster "the arms race."

Moscow's May Day is, of course, ancient history, taking place back when our only enemy, it seemed, was communism.

Today, we face various dangerous enemies on many fronts. And in a story with a May 1st dateline, the Wall Street Journal gives us a glimpse into a mighty enemy that today threatens the United States. You can find the description of this enemy in the story they call "Number of the Week."

This is one of the enemies we face today:

"$132 billion."

That's the dollar amount of the total losses generated by synthetic mezzanine ABS CDOs. These are the innovative financial instruments created and sold by firms like Goldman Sachs, Merrill Lynch, Morgan Stanley and other big players in the financial sector. They're the kind of tools the helped drag our economy off the cliff in September 2008.

That's why that number is an enemy. It represents the terrible business practices that have inflicted serious wounds to our economy. "$132 billion" in losses. I look at that number and marvel at its impressive size. And then I wonder what the hell a "synthetic mezzanine ABS CDO" is.

Here's what the WSJ has to say:

"The names of the deals serve only to obscure their true nature, so we’ll just call them a betting game. This game allowed investors — including banks and insurance companies such as UBS, Merrill Lynch, AIG and Germany’s IKB — to make huge side bets on the performance of subprime borrowers, dramatically increasing the amount of money that would have to change hands if things went wrong."

Still hazy on what these "synthetic mezzanine CDOs are. So hazy that I wonder why our federal government had to bail out banks in order to rescue them from the consequences of a "betting game."

So I googled "mezzanine ABS CDOs" and got 94,100 links.

Time crunched as I am, I went to Wiki Answers first. Here's their description:

"A CDO is a collateralized debt obligation, a security whose principal and interest are repaid by the cash flows generated by a portfolio of assets (usually loans and bonds). The portfolio of assets is the collateral and it is usually in the balance sheet of a separate entity, called special purpose vehicle, which has the CDO as its only liability and the assets in the portfolio as its only assets. ABS CDO is a CDO whose portfolio is comprised of ABS (asset backed securities). A CDO is subject to credit risk, because some of the assets in the portfolio might not generate the expected cash flows (when the underlying credits go into default). Often, the CDO is tranched in tranches of different seniority, which have different priority in absorbing the eventual losses. The equity tranche, the less senior, absorbs the first losses (if there are any). Then comes the mezzanine. Finally come the senior tranches."

All clear now? Not really. In my attempt to translate that info into English, it seems that CDOs are instruments that are supposed to have cash flowing into them - "generated by a portfolio of assets (usually loans and bonds.)"

Sounds great! I like investing in instruments that create a return on my investment!

Who knows if Wiki Answers is right! But where else would I turn for this info? Websites of our strong and successful financial firms? The ones who assure us that "synthetic CDOs" are innovative tools we need to make America strong? No thanks!

But the Wiki Answer is describing "mezzanine CDOs." What about "synthetic mezzanine CDOs?"

Apparently, it's an instrument created out of the fumes of a real CDO. As Gertrude Stein once said of Oakland, "there's no there there" in synthetic CDOs.

Well then! Perhaps that's a reason why they contributed to such a massive loss?

From the WSJ "Number of the Week" story:

"It’s as if our entire financial system went to the racetrack and put a big chunk of its money on a single horse."

Sounds like the investment banks who like to brag about their focus on customers lost sight of the customer. Betting "big chunks of money" on single horse is a terrible methodology for "risk management." (Though it worked well for that guy who bet $100K on Super Saver at the Derby this year!)

Risk management's a key job for our financial sector. Isn't it? Or have they transformed into Vegas gamblers, with the generous backing of the US government as the key differentiator between success and bankruptcy?

That's why this figure - this $132 billion in losses from synthetic CDOs - is such an enemy. It represents massive failure on many fronts.

The economy has been gutted; the government, under George Bush and Henry Paulson, bailed out the financial sector; unemployment soared, as did federal debt, as did profits for the financial firms that were rescued.

It's an equation for continued disaster, frankly. We cannot afford to bail out the banks any more. The socialization of loss and privatization of profit is a terrible model of capitalism.

If this is the kind of innovation our financial sector is peddling, it is as dangerous to the United States as the Soviet tanks and bombs that were once paraded through Moscow on May 1st.

What is our financial sector doing about this? Claiming that their work (God's work!) was done right. Here's what Lloyd Blankfein, CEO of Goldman Sachs, said the other day in his prepared statement to Congress:

"Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is we were not consistently or significantly net “short the market” in residential mortgage-related products in 2007 and 2008. Our performance in our residential mortgage-related business confirms this.

During the two years of the financial crisis, while profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the residential housing market.

We didn’t have a massive short against the housing market and we certainly did not bet against our clients. Rather, we believe that we managed our risk as our shareholders and our regulators would expect."

No regrets coming out of Goldman Sachs! In losing $1.2 billion dollars in the housing market for their own firm, in creating an instrument - this synthetic CDO that gained John Paulson (no relation to Henry) a billion bucks and lost IKB the same amount - Goldman Sachs, according to its leader, "managed our risk as our shareholders and our regulators would expect."

Actually, Blankfein is wrong. In America, we expect far better of the number one investment bank in the country. And we deserve a financial sector that is held accountable for its business decisions, not bailed out and rescued when they fail.

Sunday, April 11, 2010

My wish list...

Things I'd blog about if I had the time to blog these days:

– Paulson's book
– The game that got us to this point (Liar's Poker)
– A review of Atlas Shrugged
– Musings on the fate of Ken Lewis, and how the Merrill deal has destroyed his legacy, even with Paulson's stamp of approval

There is more. But there is less time than usual these days.

Work/life balance out of whack these days... (at least I'm working, right?!)

Saturday, March 27, 2010

Musing on the cost of college...

Brad Delong, economics professor, blogger, expert on money stuff, has a sidebar on his blog noting that he's signed up for a speaker's bureau because "the Eighteen-Year-Old is going to college next year, which means that I need to think about making more money."

Which makes it a bit odd that he's got a guest post on the Berkely Blog called Is It Fair for Education to Be Cheap?

A man now on the hustings to raise money for college is well aware that "cheap" and "college" are not a likely pair.

What he's referring to is the subsidized higher education one can acquire at a public university.

In my state, the in-state tuition is about $22,000 a year, which makes the cost of a four-year degree close to six figures when it's all said and done.

That's not "cheap" education. Or if it is, I'd like to know how a family that makes today's average income of $50K can afford to send multiple children off to school and pay for it without loans.

The cost of private colleges are approaching $40,000 to $50,000 a year. So it's essentially priced out of the realm of possibility for many families, unless draconian loans are taken out or colleges slash tuition costs for poor yet desirable students.

Now I am some years away from writing out those hefty tuition checks – still writing out less-hefty Montessori checks right now, but I shudder to think of the impact college tuition will have our family's bottom line.

And I have twins, so for us, it will be college expenses x 2 students x 4 years x the older brother's college expenses.

We've started saving for future educational expenses, but as we all know, investments have taken a big beating thanks to the crash. For many families, money has been lost in the gamble know as the college savings fund. God only knows what influences college savings fund will experience when it is finally time to send my kids off to college. One hopes not to be on the wrong side of a market adjustment!

Back to DeLong's post on the fairness of cheap college education, a post filled with rather bold claims that don't seem to have a foundation in fact. Like this one:

"On the one hand, the people who benefit from public and publicly-funded higher education are primarily people who are or will be relatively rich...."

I'd like to know what Brad DeLong's definition of "relatively rich" is. Certainly, a college professor's salary does not make one "relatively rich" enough to set aside enough money to send the 18-year-old off to college without additional income.

The most intriguing of DeLong's assertions is this:

"If we don’t keep college cheap–and publicly-funded–we find it next to impossible to increase educational opportunity; if we subsidize college with public money, we are transferring from the not-so-rich to the relatively rich."

First, where is the "cheap" college education? And how is this money being transferred? Are state schools filled only with the "relatively rich?" Are only the not-so-rich paying taxes these days?

Instead of a strange post seeking to answer the fairness of an issue that doesn't exist, I wish bright economists would focus on answering the question: why has the cost of college soared in recent years? Why do American colleges and universities believe that students graduating from college loaded down with ever-increasing amounts of debt is a sustainable business model?

What has motivated them to raise their fees significantly each year? And what are colleges doing to bring costs increases more inline with the cost of living increases? If only the "relatively rich" can afford the debt needed to acquire a college degree, we're looking at an economy that's pricing far too many people out of college. That's not good for a nation interested in retaining its superpower status.

Sunday, March 14, 2010

Tim Geithner: Going Vogue

It will take a while, but you'll find him if you look hard. Page past the metal-clad Gucci model...

Past the the starved-looking girl in the Juicy Couture ad (note to Juicy Couture marketing execs: nothing juicy about anorexia!)...

Past Kate Moss wearing little more than a purse in a cab...

Past the spread on "the Warrior Way" (which has nothing to do with warriors and everything to do with "tattered minis strapped with shoulder armor and breastplates")...

Past the story on Tina Fey (but before the pic-heavy story on Robert Pattison)...

And there you'll find him.

Tim Geithner going Vogue, "on the money," spilling his guts about the bailout, all in the March issue of Vogue magazine.

Who needs the New Yorker and Atlantic profiles when Vogue is there to chat with the US Treasury Secretary about TARP and bonuses and all the other topics so dear to the hearts of Vogue readers?

The article opens with this:

"If last year's bailout of the financial industry caused you to start muttering words like investment banker and robber baron in the same sentence, it may cheer you to know that Timothy Geithner, the man responsible for crafting much of that bailout, agrees with you.

"'I am,' he says, seated in his Washington, D.C. office, an intimidatingly ornate room worthy of a Hogwarts headmaster, 'incredibly angry at what happened to our country.'"

Truly, he looks a little pissed - or kind of angry - or bemused in the pic they use to visualize the Secretary for us.

But even in Vogue, Tim Geithner seems to have a hard time conjuring up the look that suggests "incredibly angry."

Frankly, when I see a profile of Geithner in Vogue magazine, I see a White House press organization desperate to rehabilitate the Secretary's image. And when I see how Vogue describes the Secretary, I think this profile was a bit of a mistake all around:

"A lithe and athletic 48 years old, Geithner, who was named one of the 100 most beautiful people by People magazine (it may have helped that his brother works for the publication), has the the kind of looks that can go either way: Half an inch one way he's John F. Kennedy; half an inch the other he's Lyle Lovett."

God help us! Did not need to Vogue to help us visualize the Treasury Secretary as a JFK/Lyle Lovett combo!

Why Vogue? Are the Elle Woods of the world truly interested in what Geithner has to say? Are they wondering why their dollar is not buying as much Gucci any more? Or will they just page past Geithner in search of Robert Pattison pix?

Do Vogue readers really want the answers to why the economy crashed? Here's Geithner, on the "irksome aspect" of being blamed for the collapse:

"'Think of all the stuff that burned first,' he says. 'Fannie and Freddie, the investment banks, AIG, the monoline insurance companies – it was their collapse that broght the system to the point of panic, but those things were outside the scope of the Fed's jurisdiction. They all got dumped on us when they went bad, but we had no authority up front.'"

There are people who once thought the head of the Federal Reserve of NY should have been able to wield some power over the events that led to the crash. But apparently, according to Geithner, it was a position without much ability to impact the financial sector at all until all hell broke loose.

Vogue is on the money here:

"As the Obama administration's point person for a cratering economy, Geithner knows thing or two about unpopularity."

Progressives think Geithner has sold out to Wall Street. Wall Street thinks Geithner is too tough (according to Vogue.) Which makes Tim Geithner a very unpopular man today.

So Geithner's out on the trail, chatting up with reporters, giving them the skinny on the skinny guy at Treasury. Through Vogue, we learn what Geithner really thinks:

"'In the end,' he says, sounding very much like his political hero, Lyndon B. Johnson, 'it's not about what you believe. It's about what you can achieve.'"

The answer to a Treasury Secretary's unpopularity isn't multiple profile pieces in a variety of publications.

The solution is creating jobs. Reforming the financial sector so that the financial firms can never again drag the economy off the cliff. Reinstating accounting standards so that off-balance accounting, like that which Lehman allegedly practiced, is an immediate red flag to investors and regulators alike warning everyone that funny money is not the sign of strength and stability.

As a war room once reminded all its warriors: "It's the economy, stupid." And improving the economy would be an achievement we could all be happy with.

Innovation that makes you smile...

A video by OK GO 'This too shall pass." (And if this innovative production doesn't leave you with a smile, don't despair. Spring is coming...)

Having spent a portion of my career in production, I know this one-shot video was no easy task!

Friday, March 12, 2010


The Chi-rish are about to let loose.

It's St. Patty's weekend in Chicago.

Which means the Metra today let us know that there would be no glass objects or alcohol allowed on the trains this weekend.

Yes, we love our St. Patty's day in Chicago - it's our way to let loose during Lent. Unlike New Orleans, we still feel compelled to party hard during the time of abstinence. We dye the river a bright, unnatural green. And we all add an O' or a Mac after our name, no matter where our ancestors came from.

Everyone is Irish on St. Patty's Day! At least in Chicago. Not sure what it's like elsewhere. I've heard that until recently, St. Patty's day was a day to go to church in Ireland. That was until the Americans flooded the place wondering where the parade was.

I had no idea that booze was allowed on trains on other days! Just thought the people surreptitiously drinking beer out of gigantic cans during non-festive days was their surreptitious way of getting drunk before getting home.

According to a friend, some bars in Chicago will open at 7 a.m. on Wednesday, March 17.

A fab way to celebrate the saint who drove snakes out of Ireland...

(Wonder if Starbucks' numbers diminish in Chicago in March.)

Wednesday, January 20, 2010

Bailout & Bonuses at BoA

Bank of America has posted its third consecutive quarterly loss. Apparently, the double whammy of paying back TARP and defaults on consumer loans has packed quite a punch to the firm's bottom line.

From Bloomberg:

"'Economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth,' [Bank CEO Brian] Moynihan said in a statement. 'We are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer business.'"

Specks of sun are breaking through, perhaps, but clouds of high unemployment and sluggish consumer spending remain heavy and dark everywhere you look.

Given the gloom surrounding the current economic outlook for consumers outside of Wall Street, why would BoA consider taking the hit now to repay TARP? Wasn't TARP designed to help struggling, massive banks recapitalize?

More from Bloomberg:

"The company repaid $45 billion of government rescue funds in December. Getting out of TARP freed the bank from federal pay limits and as much as $2.85 billion a year in dividends to the U.S."

With TARP repaid, BoA can take money they don't seem to have and pay bonuses to people whose business behaviors left the bank on the rocks.

Of course! It's bonus season. BoA can't afford to lose the people whose questionable business decisions landed them in a swamp. Seems a dubious business practice. But one that is SOP in the financial sector - establishing bonuses that will be awarded no matter how terrible the company does.

As long as the feds back them up with the necessary financing, it's a business model that works - if you're in line for those bonuses. Outside of BoA - well, as Moynihan said, the outlook "remains fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”

Not an outlook that offers much to bank on.

Saturday, January 16, 2010

Am I dreaming?

The man reluctant to cut his vacation short to help Katrina victims is working with Bill Clinton to help Haitian earthquake victims?

Is this a dream or the transformation of George W. Bush into a philanthropist?

From a story in the Washington Post:

"Bush said that his heart, and that of former first lady Laura Bush, 'are broken when we see the scenes of little children struggling without a mom or a dad or the bodies in the streets.'

He pledged to work alongside Clinton to encourage Americans to dig into their pockets. In the near term, he urged people to avoid donating blankets or other items but to just 'give your cash' to aid organizations that can spend it wisely.

(Just had a flashback to those pallets filled with $12 billion in cash that vanished in Iraq in 2003 - 2004. Is Halliburton involved in anyway with the relief effort?)

Strange that a man who failed to mobilize the FEMA forces during the worst natural disaster to hit America has found himself assisting the victims of another terrible natural disaster. Will it be another "heck of a job?"

More from the Washington Post:

'The Haitian people have got a tough journey, Bush said. "But it's amazing how terrible tragedies can bring out the best of the human spirit ... While that earthquake destroyed a lot, it didn't destroy their spirit."

Thursday, January 7, 2010

A prediction so bold it landed on the front page of the WSJ!

GM predicts a profitable year in 2010.

Now that IS bold! The company, clawing its way out of bankruptcy. The economy, still shedding jobs by the tens of thousands each month (down from the hundreds of thousands shed in a few months ago - leading many to predict the beginning of the jobless recovery.)

And a prediction unprecedented in optimism.

The Wall Street Journal characterized GM's statement as a "bold and surprising forecast," and noted the company has not seen a profitable year since 2004.

The WSJ also noted that "significant hurdles remain to repairing GM's bottom line, namely winning back tens of thousands of customers and improving the profitability of vehicles sold."

And the newspaper gives us another curious statement:

"When GM started piling up billions of dollars in losses in 2005, Rick Wagoner, its CEO at the time, stopped offering financial guidance."

Does this mean the CEO shut down from stress? Failed to steer the ship back to profit? Threw up his hands in despair as the Titanic sank?

Oh well. He's set for HIS retirement, having received a $10 million package upon his hasty departure a year ago. Nothing like the golden parachute to let those inhabiting the C-suite know that no matter how badly they screw up (they can even "stop offering financial guidance" all together in a time of catastrophe), they STILL get a fat golden parachute when they're shoved out the door.

All this seems a far cry from the Randian paradise GM once inhabited, back when the Beach Boys included GM brands in their catchy, summery songs, the Big 3 ruled the roads, CEOs earned their salary and the thought of a company surviving thanks only to a government bailout was a capitalist's worst nightmare...

Monday, January 4, 2010

Passing on a great post about TR

The Edge of the American West blog has a wonderful post on Teddy Roosevelt.

It's a lovely post with a lovely conclusion:

"It is always easier to explain why Washington, Jefferson, and Lincoln belong on Mount Rushmore. Lincoln is America’s Christ. And Washington plays God the Father to Lincoln’s martyred savior. Which leaves to Jefferson the role of Holy Spirit: just so, as the author of the Declaration of Independence, the deeply flawed Jefferson nevertheless carried enough divine fire to channel into words the nation’s enlivening ideal of equality and natural right.

With such an established trinity, what need for a fourth figure? If we can see elements of the godly in each of Washington, Jefferson, and Lincoln, what can we do with the rather thoroughly earthly Roosevelt? But perhaps that is the point. Alongside gods humanity also has a place, and a man who did so much to make daily life in America a little better, and to create the expectation that daily life in America must be better, belongs there."

It's worth a read...

Sunday, January 3, 2010

Unlocking the code to financial innovation!

I will be the first to admit that I am a CDO ignoramus. After a year of research, I still can't figure out how collateralized debt obligations work or why we need them. What I find mystifying is the opacity of the offering. And from what I understand, we have not only CDOs that we can buy, but synthetic CDOs, which, as far as I can tell, function as a sellable mirage of the original CDO, which is itself a bunch of debt lumped into various tranches of different risk classes.

But apparently we need this kind of innovation - regulations for the financial sector would squash this kind of innovation, so we're told, and then the market for Ferraris would drop significantly.

(JUST KIDDING about those Ferraris!)

In my search for knowledge, I find myself exploring all sorts of econ blogs - enjoying the journey while remaining mystified by the CDO conundrum. So I read with interest the latest post on the Economics of Contempt blog - "On Goldman and synthetic CDOs."

EoC seems a pretty smart guy - he knows far more about the intricacies of finance than I do. He's not shy about expressing his opinion, which makes his blog enjoyable to read.

This post of his is a rebuttal to a post on Yves Smith's Naked Capitalism blog that denounced Goldman's synthetic CDO practices.

You'll have to read both Yves' and EoC's posts to understand the full gist of their debate. Here's what I found so interesting in EoC's post:

"More importantly, what you have to realize — and where I think Yves goes wrong — is that Goldman wasn't necessarily placing an independent bet against the synthetic CDO market; rather, it was using synthetic CDOs to bet against the housing market."

And what, exactly, does it mean when Goldman bets against the US housing market? EoC gives us the formula:

"The mechanism was this: declining housing prices → higher default rates → reduced cash flows to mortgage-backed securities → lower RMBS/CDO prices → higher value of CDS protection on RMBS/CDOs → ca-ching!"

Ferraris for everyone (at Goldman Sachs) when those foolish home owners default on the loans the banks never should have approved.

Now those are some really smart peeps over there at Goldman Sachs. They saw the tsunami coming and made sure they'd ride the wave in a highly profitable manner and not get swamped like Lehman Brothers and Bear Stearns.

(And when they sent Henry Paulson, their CEO, to head up the Treasury Department back in 2006, I guess he didn't much know about this, or he would have done more to prevent the economy from falling off the cliff, rather than wait for it to crash before taking any action.)

EoC knows there is nothing nefarious in Goldman's actions - this is the world of Wall Street - it is inevitable that profit for some means loss for others. Here's EoC's take on this:

"If Goldman's plan all along was for the synthetic CDO market to collapse, then why were they consistently the biggest liquidity provider (by far) in structured products and structured finance CDS (i.e., ABX tranches)? The point is that Goldman didn't need to artificially drive down the synthetic CDO market. They set themselves up to profit from the decline in synthetic CDOs that would follow naturally from weakening fundamentals in the housing market. By the same token, Goldman didn't need to manipulate the structure of the synthetic CDOs they arranged; any run-of-the-mill synthetic CDO referencing subprime-backed cash CDOs (to the extent there was such a thing) would've suffered steep price declines once housing prices started plummeting."

EoC points out that Goldman was public in feeling bearish on housing - and we see now, it was bearish with good reason.

But for me, that code for success (declining housing prices → higher default rates → reduced cash flows to mortgage-backed securities → lower RMBS/CDO prices → higher value of CDS protection on RMBS/CDOs → ca-ching!) is innovation we don't much need today. Betting against the US housing market seems like a terrible way to make a buck. Phenomenally successful for Goldman, but catastrophic for the economy at large.

And so I find myself still mystified at the innovation known as the CDO. Seems like innovation in finance leads us to meander down a rocky trail that takes us from the approval of terrible mortgages to the creation of mortgage-backed securities chock full of those really bad mortgages to higher default rates on those same mortgages to "ca-ching" for Goldman Sachs.

Goldman Sachs saw the collapse of the housing market coming, and its brilliant staff was able to sell synthetic CDOs to customers as they bet those same instruments would lose value.

Those who found themselves with mortgages they couldn't afford and those who bought the innovative financial instruments from firms like Goldman Sachs discovered they owned "the big oops" - products with all loss and no gain.

That's an interesting innovation - creating products that provide an inevitable loss for someone. Hard for me to wrap my head around innovation designed to create massive profit for the innovator when the mortgage default rate goes up as the entire US housing market tanks.

Which leaves me to wonder if modern American financial innovation is designed solely to enrich the sellers of the innovation, with enormous losses in store for consumers of the products.

Here's what Joseph Stiglitz, an Economics Nobel laureate, had to say on financial innovation in a story he wrote for China Daily (an interesting media outlet for Stiglitz's story.)

"Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly."

And in the end, the major players in the financial sector, including Goldman Sachs, found themselves on the receiving end of one of the most expansive government entitlement programs ever created. And thus, thanks to innovation that led to a crash that led to a bailout, 2009 was a very, very, very good year for Goldman Sachs.

Friday, January 1, 2010

Analyzing a half century of American income tax

Mark Thoma shares an article written by David Cay Johnston of Tax Analysts that compares 1961 income taxes with what we have now. Johnston's goal is to analyze if our tax system is helping us create wealth.

What do you think the data shows?

That the vast majority of Americans have seen only a modest rise in income in the last 45 years. In a span of years that stretches longer than a traditional career, the average income of the bottom 90% of wage earners has risen almost $9300, from an average of $22,366 in 1961 to $31,642 in 2006.

In the last 45 years, GDP has grown - up 227 percent.

Average income for the top 400 taxpayers has also grown from $13.7 million to $263.3 million. That's nearly 20 percent growth in 45 years.

If you've felt a financial squeeze over the years, there's a big reason why. David Cay Johnston explains:

But wages and fringe benefits did not grow with the economy. For most workers, they fell. Wages peaked way back in 1972-1973, were on a mostly flat trajectory for more than two decades, rose briefly in the late 1990s, and then fell sharply in the new century. ... Millions are out of work, and the jobs they once held are ... not coming back. And even if the Great Recession is coming to an end, we face years of jobs growing more slowly than the working-age population, which could radically transform America’s culture, work ethic, and sense of progress.

In 2006 families worked on average about 900 more hours than families did in the 1960s and early 1970s. That is a roughly 45 percent increase in hours worked... For many, the reality is that two jobs produce the same or a smaller after-tax income than just one job did three and four decades ago. ...

During the 45 years starting in 1961, payroll taxes have gone from a minor levy to almost a sixth of wages for the bottom 90 percent of American households. This $760 in income tax savings that the average taxpayer enjoyed in 2006 was taken back, and more, by the increased tax rates for Social Security and Medicare. Those rates rose from 3 percent withheld from pay in 1961 to 7.65 percent in 2006. Not all income is from wages, of course, but those higher payroll taxes wiped out the seeming reduction in the income tax and more. ...

The wealthy have benefited enormously from the income tax code. Again, Johnston explains:

"Without a doubt, the much lower tax rates at the top encouraged people to realize more income in the tax system. And if the only measure is that some people made more, then this would be a good. But let’s ask the question that the classical economists would have asked back when they were known as moral philosophers and their leaders spoke of policies that benefited the majority. Let’s go back to a time before Vilfredo Pareto’s observations began what is the overwhelmingly dominant orthodoxy today, neoclassical economics with its focus on gain.

What is the social utility of creating a society whose rules generate a doubling of output per person but provide those at the top with 37 times the gain of the vast majority? ...

Is a ratio of gain of 37 to 1 from the top to the vast majority beneficial? Is it optimal? Does it provide the development, support, and initiative to maximize the nation’s gain? Are we to think that the gains of the top 398 or 400 taxpayers are proportionate to their economic contributions? Does anyone really think that heavily leveraged, offshore hedge fund investments are creating wealth, rather than just exploiting rules to concentrate wealth, while shifting risks to everyone else?"

In the early 1980s, Ronald Reagan promised that wealth would "trickle down" and benefit all Americans. Johnston's data shows the promise didn't pan out as planned:

"Is our tax system helping us create wealth and build a stable society? Or is it breeding deep problems by redistributing benefits to the top while maintaining burdens for the rest of Americans?

Think about that in terms of this stunning fact teased from the latest Federal Reserve data by Barry Bosworth and Rosanna Smart for the Brookings Institution: The average net worth of middle-income families with children whose head is age 50 or younger, is smaller today than it was in 1983."