Showing posts with label Indispensable Man. Show all posts

Downgrading On A Curve

After all of the faux drama of the debt ceiling debate, the US has endured what we were told we were trying to avoid: a down-grade of our creditworthiness. S&P did the deed this afternoon after the markets closed.

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy outlook for America's finances. It downgraded long-term U.S. debt to AA+, a score that ranks below more than a dozen governments', including Liechtenstein's, and on par with Belgium's and New Zealand's. S&P also put the new grade on "negative outlook," meaning the U.S. has little chance of regaining the top rating in the near term.
The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled. Around 1:30 p.m., S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P's math that delayed an announcement for several hours. S&P officials decided to move ahead, and after 8 p.m. they made their downgrade official.
S&P said the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.

The effort is already on to blame intransigent Republicans. No doubt there's enough media bias and Pelosi rants available to make that sort of thing stick for a little while. But, I just don't see how Obama et al. avoid the fact that the American debt problem is a result of the wild spending in the post-TARP political scene.

We didn't get downgraded because of the Tea Party. We got downgraded because of TARP, the auto bailouts, the stimulus, Obamacare, QE1 & 2, Cash for Clunkers, and a million other wastes of money. Those weren't Republican or conservative initiatives. In fact, with a few notorious exceptions, they were resisted mightily by virtually every Republican in elected office. (and those who didn't resist have found themselves out of office). Hell, the Tea Party started to protest the explosion of spending coming out of DC!

Indeed, S&P specifically complains about the failure of the debt agreement to make a serious attempt to reduce spending. That wasn't the Tea Party's fault. Obama and the Democrats in Congress were the ones who pressed to preserve spending at today's mind boggling levels. As Erik Erickson points out, S&P has indicated that only a plan with a minimum of $4 trillion in cuts would have impressed them. Well that was the Tea Party's plan, a plan that has been denounced as unserious and terroristic.

No wonder S&P considers America's government to be institutionally incapable of making the sort of changes needed to change its depressing course: the people whose proposals would help are routinely denounced as the unsophisticated Hezbollah branch of the GOP, while the people causing all of this destruction can present themselves as saviors even as they blithely promulgate policies that are destroying us from within and from without.

Michelle Bachmann - she of the migraines and the "gay" husband, according to the media - immediately called for Tim Geithner's resignation. If I were him, I would be too embarrassed to show up at the office on Monday, but I'll bet he will, and everyone will continue to act like Bachmann is the one with the problem.

The fact is that we are the ones with a problem. The public has been fairly consistent in protesting the spending of the Obama years. Yet, the spending has continued virtually unabated. While we have a Republican House, we also have a Democrat Senate that hasn't produced a budget in two years for no better reason than they don't want to have to vote on all of the spending they have nonetheless been committing the country to. And, we have an economically illiterate president who has governed as a hard leftist after campaigning as a pragmatic moderate.

America will continue to be institutionally incapable of facing up to its troubles as long as 2/3rds of the government continues to be in the hands of a leftist minority that would destroy the economy rather than admit their technocratic plans have failed utterly.

In a New York Fed Minute

The NY Times has a long semi-unflattering story about the Indispensable Man's tenure at the New York Fed, including choice exerpts from his calendar showing meetings, and even (horrors!) lunches with the powerful bankers he was regulating:Geithner, as Member and Overseer of the Finance Club

For all his ties to Citi, Mr. Geithner repeatedly missed or overlooked
signs that the bank — along with the rest of the financial system — was falling
apart. When he did spot trouble, analysts say, his responses were too measured, or too late.
In 2005, for instance, Mr. Geithner raised questions about how well Wall
Street was tracking its trading of complex financial products known as derivatives, yet he pressed reforms only at the margins. Problems with the risky and opaque derivatives market later amplified the economic crisis.
As late as 2007, Mr. Geithner advocated measures that government studies said
would have allowed banks to lower their reserves. When the crisis hit, banks were vulnerable because their financial cushion was too thin to protect against large losses.
In fashioning the bailout, his drive to use taxpayer money to backstop faltering firms overrode concerns that such a strategy would encourage more risk-taking in the future. In one bailout instance, Mr. Geithner fought a proposal to levy fees on banks that would help protect taxpayers against losses.
The bailout has left the Fed holding a vast portfolio of troubled securities.To manage them, Mr. Geithner gave three no-bid contracts to BlackRock, an asset-management firm with deep ties to the New York Fed.

There is a fine line beween preventing systemic risk and regulatory capture (is it like being captured by robots?), wherein the perspectives of the regulated become the perspectives of the regulators. In the Indispensable Man's case, the problem is not "capture," it's competence. The various emergencies he presided over, along with Paulson and Bernanke, - Bear Sternes, Lehman, AIG, the Reserve Fund, Fannie & Freddie, etc - arose through a combination of lax regulation and corporate insiders who were simply lying about the state of their firms right up to the moment they showed up on Friday afternoon to be rescued before the Monday markets opened. It wasn't until there was a full-bore crash that the regulators acted and by then it was too late.

I don't really care who had the Indispensable Man had lunch with. I care that his (and others') inaction has created a near infinite collection of liabilities for tax payers in a very short period of time, and that such liabilities show no sign of having alleviated the systemic risk that has been weighing down the economy.

Sir, We've Lost Stiglitz! Damn!

Joseph Stiglitz has been critical of the Obama bank rescue plan, but he really unloads here: Stiglitz Says White House Ties to Wall Street Doom Bank Rescue

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

Stiglitz is hardly a right-wing ideologue. Quite the opposite. And yet, he is bluntly accusing the Obama administration of being beholden to Wall Street.

It is actually quite shocking to me that people like him and Paul Krugman - whom you would expect to be natural allies and supporters of the administration - have been so blunt and unstinting of their criticism of Obama's efforts in bailing out the finance system. Salon has published a pretty good list of Obama's most prominent and caustic critics. Except for Ron Paul and Michelle Bachmann, it's a list of heavy hitting economists, most from the center and the Left (they might have included Robert Reisch and Robert Kuttner, also, both of whom are from the progressive side).

That Obama, Indispensable Man, and the rest are pressing forward with their plans despite their extreme unpopularity with the public, and in the face of severe criticism from their natural allies in the economics profession strikes me as ominous. No one believes the plans will work. The stress tests and toxic asset purchase plans are widely seen as shams intended to distract taxpayers from the trillions in liabilities they have been asked to take on. And yet they persist.

Let's Give The Currency Markets A Good Roil, Shall We?

The Indispensable Man finally had a good day Monday. The Street liked his toxic assets plan - what's not to like when taxpayers will be subsidizing virtually their entire "investment" in said assets - giving him some much needed breathing room, but now he's back to "normal." Geithner Comments Send Dollar For a Ride.

In a blink of an eye, the U.S. dollar has collapsed against the Euro, Japanese Yen and other major currencies. The trigger was comments from Tim Geithner who said that the U.S. is "quite open" to China's suggestion of moving towards a Special Drawing Right (SDR) linked currency system. If the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean that countries around the world would need to hold less U.S. dollars. The U.S. is probably open to this suggestion because a weaker dollar is stimulative for the U.S. economy and would relieve the U.S. from having to implement effective monetary policy while balancing the international demand for a reserve currency.

God forbid he would stand up for his country and his currency. Instead, he ends up kowtowing to an economically hostile initiative from a country that doesn't really wish us well.

Paul Volcker has come out of his "undisclosed location" where the Administration has secreted him away, and has shown the Indispensable Man how a real man defends America's economy and currency: Geithner And Volcker Back The Buck

Paul Volcker, the former Federal Reserve chairman, threw cold water Wednesday on a Chinese proposal to downgrade the dollar, the second day in a row he has supported the greenback's primacy.
"I understand restiveness about the lopsided nature of the present international monetary system that's so dependent on the dollar," Reuters quoted Volcker as saying at a panel with Prime Minister Gordon Brownof Britain at New York University.
Volcker first spoke out against the Chinese proposal Tuesday, saying at a Wall Street Journal conference that the Chinese, "are a little disingenuous to say, 'Now isn't it so bad that we hold all these dollars.' They hold all these dollars because they chose to buy the dollars, and they didn't want to sell the dollars because they didn't want to depreciate their currency."

Was it really that hard to say all that?

Finding the Hidden News

here's what you will find on page A18 in the NY Times today: Many in Government Knew Weeks Ago About A.I.G. Bonuses

The question was direct and prescient. Representative Joseph Crowley, Democrat of New York, asked theTreasury secretary in an open hearing what could be done to stopAmerican International Group from paying $165 million in bonuses to hundreds of employees in the very unit that had nearly destroyed the company.

Timothy F. Geithner, the Treasury secretary, responded by saying thatexecutive pay in the financial industry had gotten “out of whack” in recent years, and pledged to crack down on exorbitant pay at companies like A.I.G. that were being bailed out with billons of taxpayer dollars.
The exchange took place before the House Ways and Means Committee on March 3 — one week before Mr. Geithner claims he first learned that the failed insurance company was about to pay a round of bonuses that have since caused a political uproar.

It's maybe too obvious to point that if the Indispensable Man were a Republican, he wouldn't be getting the "buried in the back pages" treatment.

The AIG bonus story is outrageous. It has also been great fun to watch for those of us who were against the bailouts from the beginning. But, it's time to get real. The primary scandal is the huge sums paid out by the gov't with AIG as its conduit. The secondary scandal is the behavior of the political class, which has been engaging in a "shocked! shocked!" routine that is completely bogus. As you can see from the above, the bonuses were widely known and discussed. I have never heard of Congressman Crowley. I assume he has a staff, a basic level of reading comprehension, and a brain. I would assume he didn't just stumble accidentally into this question about AIG bailouts.

That the Congress and the Obama Administration is now expressing its faux-rage is disingenuous and an insult to the intelligence of their supporters. It's also clear that they know things about the bailouts that are not widely discussed, or even acknowledged, except behind closed doors. You can get away with that if you're talking about national security, but not over the unregulated expenditure of a trillion dollars to the financial sector. The bailouts and their enablers should be the target. Not the stupid bonuses.

It's time to put away childish distractions and attack the root of this on-going scandal.

Atlas Insurance Group, pt 3

For once in my life, I am in complete agreement with Robert Riech: Robert Reich: The Real Scandal of AIG

The administration is said to have been outraged when it heard of the bonus plan last week. Apparently Secretary of the Treasury Tim Geithner told AIG's chairman, Edward Liddy (who was installed at the insistence of the Treasury, in the first place) that the bonuses should not be paid. But most will be paid anyway, because, according to AIG, the firm is legally obligated to do so. The bonuses are part of employee contracts negotiated before the bailouts. And, in any event, Liddy explained, AIG needed to be able to retain talent.
AIG's arguments are absurd on their face. Had AIG gone into chapter 11 bankruptcy or been liquidated, as it would have without government aid, no bonuses would ever be paid; indeed, AIG's executives would have long ago been on the street. And any mention of the word "talent" in the same sentence as "AIG" or "credit default swaps" would be laughable if it laughing weren't already so expensive.
Apart from AIG's sophistry is a much larger point. This sordid story of government helplessness in the face of massive taxpayer commitments illustrates better than anything to date why the government should take over any institution that's "too big to fail" and which has cost taxpayers dearly. Such institutions are no longer within the capitalist system because they are no longer accountable to the market. So to whom should they be accountable? When taxpayers have put up, and essentially own, a large portion of their assets, AIG and other behemoths should be accountable to taxpayers. When our very own Secretary of the Treasury cannot make stick his decision that AIG's bonuses should not be paid, only one conclusion can be drawn: AIG is accountable to no one. Our democracy is seriously broken.

Absolutely right, although it doesn't help that the Indispensable Man has been so intimidated by AIG's executives. He really missed a chance to stand up for himself and the taxpayers, and instead lazily acquiesced faster than Paulson would have.

This business about how the "bonuses" must be paid because of pre-existing contracts is absurd. Breach the damned contracts and let's see these guys try to get their money through the courts. Let them try to bring lawsuits to enforce these contracts. I think it's high time America came face to face with the whizzes who have done so much to destroy our financial system, and yet continue demand their perquisites.

Reich is right that AIG and the rest of the Bailed Out are no longer within the capitalist system. They are demanding, and getting, government protection, despite that protection being ruinously expensive and deeply unpopular. AIG has spent nearly twice as much $$ as the entire Marshall Plan, but the only recipients of that largesse has been fellow members of the financial community. It is time to turn off the $pigot, but our government is too cowed to do so.

Ignatious On the Maginot Line

I don't want this blog to turn into the "David Ignatious Critique Site," but Ignatious is the voice of the Ivy league educated, transnational liberal elite that thinks it ought to be running things, even during GOP administrations. And that elite is looking at the endless bailouts and bourgeoning debt, and is beginning to see the handwriting on the wall - for themselves.

Ignatius now writes that the inadequate economic performance of the Obama Administration's team of Indispensables is giving rise to fears that a gathering storm is about to break. The elites don't line this one bit because they know their positions are tenuous should there be a true popular revolt at the ballot box.

First the good stuff: Ignatious draws a parallel between the early months of 2009 with another false spring:

For all the legislative commotion surrounding the economic crisis, we are still living in the equivalent of "the phony war" of 1939 and 1940. War has been declared on the Great Recession, but it's basically politics as usual. The bickering and mismanagement that helped create the crisis are continuing, even though we elected a president who promised a new start.

History tells us that phony war doesn't last forever and that when it ends, all hell breaks loose.

Utterly by coincidence, I just read "Put Out More Flags" by Evelyn Waugh, which is set during the "Phony War." Like Waugh's characters, we are aware that there is a great disruption in our world, but we have tried to adjust and live our lives normally, even as events seem to occasionally threaten to hurtle out of control. Ignatious correctly diagnoses the problem is too much "normalcy" and too little effort to man the battle stations:

One reason this season feels so political is that Obama has stacked his administration with politicians and former government officials. You might think that with the greatest financial crisis of his lifetime, the president would want a few business leaders with experience managing large organizations in crisis. But no.

I believe I have been complaining about the same thing. There are a lot of smart, innovative thinkers in America, but they have largely been shut out of the room for no better reason than they are not part of the Democrat's NYC-DC axis.

But then, Ignatious sees storm clouds and emerges with his head all wet:

What will happen if Obama's efforts fail? That's the question that really worries me when I think about history. During the 1930s, European politicians failed to solve the economic crisis through normal democratic means. So the public turned elsewhere. People became so angry with bankers and business tycoons, and with the bickering parliamentarians, that they turned to authoritarian leaders who promised national action -- in the form of fascism. That nightmare scenario may seem far off today. But there's an ugly mood developing, as people start looking for villains to blame for the economic mess.

Oh, piss off. The elites don't fear "fascism," even if they tell themselves that they are holding the line against the "ugly mood" of "people (who) start looking for villians to blame for the economic mess." They fear that Americans will revolt against the cozy Big Government world that has been built in DC since the FDR administration. And their greatest fear is that the revolt will not be lead by the easily mocked likes of Ross Perot, Ron Paul, Pat Buchanan, or Ralph Nader, but will come from someone with a large national constituency and the sort of populist appeal that DC's Indispensable Men completely lack, someone like say Sarah Palin.

Voters are not looking for "revenge." A resurgent electorate isn't going to be a pack of lumpen proles thrilling at the sight of goose-stepping brownshirts. Frankly, the increasing corporatization of the US gov't is closer to real fascism than whatever cartoon fascism that Ignatious is thinking of. Liberals love to believe that the US middle class is forever on the verge of turning to authoritarian "saviors" - the famed "dark cloud of fascism that is forever descending on America, but always lands somewhere else." Maybe it gives them a secret thrill to believe that they are holding the line against an American Gulag Archipeligo, but really it's a sign of their insularity and historical illiteracy.

We have seen this before in the querelous cries that greeting the ascension to power of Ronald Reagan, Newt Gingrich, George W Bush, and Sarah Palin. Much of what we think of as liberal bias in the media is often directed at attacking such figures before they can permanently reform the welfare state. Many conservatives and Republicans have shown themselves to be less than stalwart in the face of media swarms that accuse them of such Modern Sins as Creationism, Racism, Oppression of the Poor, and Starving "The Children." After all these years, it should be clear that such attacks - and the furious "Nazi" insults that accompany them - are little more than an illusion stirred up by the likes of Ignatious in order to protect their world from The People for whom they claim to act.

Indispensable Man Agonistes

Geithner, With Few Aides, Faces a Wave of Challenges

In the six weeks since Mr. Geithner took over as Treasury secretary, he and a skeleton crew of unofficial senior advisers have been racing to make decisions that will shape the future of the banking, insurance, housing and automobile industries.
But even as he maintains a frenetic pace — unveiling plans, testifying before Congress and negotiating new bailouts with the likes of Citigroup, General Motors and theAmerican International Group — there are signs that events are getting ahead of him

It's literally too much to expect one person - even the Indispensable Man - to deal with all of the problems facing the financial sector. His boss needs to take the lead on this; no one else can command the attention of all the actors involved.

Parenthetically, I will say (once again) that it is a national disgrace that he is working with a "skeleton crew," due to the slow pace of nominating and vetting his political appointees. This is uncomfortably reminiscent of the "light footprint" in Iraq.

The Cheese Stands Alone

I already posted on how the Indispensable Man is having trouble filling top spots in the Treasury Dept. Now he's going backwards because two of his picks have pulled out after expressing impatience with the vetting process.

Annette Nazareth, who was expected to be tapped as deputy Treasury secretary, and Caroline Atkinson, who was being considered to oversee international affairs, have both taken their names out of the running, these people said. Ms. Atkinson's name was withdrawn weeks ago and Ms. Nazareth withdrew several days ago.

Across the administration, several potential candidates have been blocked by the Obama administration's tough rules about who it will hire. In addition, the White House increased the rigor of its vetting process after tax problems threatened Mr. Geithner's confirmation and scuttled that of former Sen. Tom Daschle.

Look, either there is a crisis or there isn't. If there is a crisis, then you need to staff up immediately with the best people you can find and deal with the crisis. Hiring nonentities and strictly adhering to "ethics rules" (which have had no appreciable effect on ethics in gov't) is OK for flush times, but not now.

Supposedly, the Indispensable Man needs to come up with a surefire "rescue plan" for the banking system and come up with a new regulatory framework for the securities market. He can't do it by himself (obviously!); but he also can't do it with no names like "Annette Nazareth." I mean her no disrespect, and think maybe she also didn't want to get off of the iceberg for a cabin on the Titanic. Still, the systemic reforms that are being contemplated demand that the gov't - if it's serious about reform - needs to look well beyond the DC-NY Ivy League crowd for help.

The Indispensable Man vs The Indefatigable Sun

The Indispensable Man has apparently solved all of the other problems on his desk and has moved on to dealing with Global Warming: US Treasury secretary is attacking oil, gas tax breaks

"We don't believe it makes sense to significantly subsidize the production and use of sources of energy (like oil and gas) that are dramatically going to add to our climate change (problem). We don't think that's good economic policy and we think changing those incentives is good for the country," Geithner told the Senate Finance Committee at a hearing on the White House's proposed budget for the 2010 spending year.

First of all, you'll hear no objections from me to end corporate tax breaks/welfare, but give me a break. Global Warming is beginning to look like the WMD of tax policy, energy policy, and anything tangentially related to the Dems' plans.

If they're all going to start carrying on like climate experts, shouldn't we start holding them to the same scientific standards that GOP politicios are held on issues like stem cells or evolution? Does Geithner really think the world is in serious imminent danger from Death By Climate Change? Does he think that the US must act, even in the face of Indian and Chinese refusal to curtail their own energy use?

Best of all, does Geithner believe - along with Al Gore and Energy Secretary Steven Chu - that the North Pole is in danger of "melting" in the next 5 years? Based on what?

Geithner's sounds like a lot more like he's hustling unpopular ideas with some good ol' fashioned fear mongering, rather than a well thought out argument in favor on his positions. It doesn't sound like he's convinced his preferred policy ideas would pass on their merits.

Atlas Insurance Group

Charlottesvillian over at TigerHawk finally distills the AIG "problem" to its essential terms:

As I understand it, the losses at AIG, the parent, are a result of various credit default swaps made with outside counterparties. At one point these contracts were so out of the money that they probably required tiny premiums to AIG to take the risks (wrapping AAA rated MBS, CDOs etc). The risk of collapse of mortgage markets in particular but also probably other market sectors were perceived as being virtually non-existent. These were contracts where they would pay only in extreme, long-tail events, and the revenues off this book of business were probably pretty small on a per contract basis. Hence, a lot of contracts had to be written to make the business worthwhile, and since the risks were seen as virtually non-existent, this was a management decision in an unregulated entity. Now, we are in the long tail that AIG financial engineers did not foresee, and the contracts have sucked all the capital out of AIG, plus everything the government has given them.

So let’s walk through this. The government pays money to AIG so AIG can continue to honor its contracts. It is making payments under these contracts, to the counterparties on these contracts. The amount of capital given to AIG by the government, most of which AIG has presumably paid out, has reached $180 Billion. That is a lot of money, and is on top of however much capital AIG had before the crisis, which was also sucked out under swap agreements and paid to counter parties.

Isn’t it curious that for all the talk on all the channels all day, all the Paulson speeches, all the hearings with bankers paraded before House panels, no one has mentioned where the huge amounts of money flowing out of AIG are going? They must be going to a number of big institutions. Probably their CEOs stood before Congress only three weeks ago. Some of them are getting AIG money, but they remain silent. The government must know who is getting the money, and they remain silent too. Yet somehow it apparently feels compelled to provide AIG a ceaseless stream of capital to pay to these outside institutions. Will these institutions fail if the AIG contracts stop paying? This must be concern, noting else makes sense other than outright looting.

AIG has been the enigma among all of the bailouts. AIG began to fail immediately after Lehman Bros. tumbled into bankruptcy. I remember seeing the Wall Street Journal headline announcing the near simultaneous crash of Lehman, Merrill, and AIG. AIG! There had barely been a whisper of trouble for AIG before that fateful week.

I may not agree with the bank bailouts, but I at least understand why the Federal Reserve would be lending to banks, and the federal gov't would be backing them up. The same goes for Fannie, Freddie, and the Big 3. History and the law provide the feds with a role in bailing out these entities, even if I disagree.

But AIG has gotten more money than any of these. That's a pretty good trick, especially when you consider that the Fed has no statutory authority to lend to an insurance company. Same goes for the federal government. And yet they are desperately working to make sure AIG keeps making those damn CDS and CDO payments. Why?

What's incredible is the veil of secrecy that has been drawn over all this. Oh sure, we all "know" that AIG has been bailed out, but no one quite knows why or how. Most explanations are given in highly precise technical language that tax the ordinary person's comprehension. No matter how many times you hear it, it just doesn't make sense that some credit default swaps sold by AIG's hotshot London office would cause a giant insurer like AIG to suddenly require an "emergency" infusion of $150 billion (some emergency!). We hear that "collateral calls" were made, but we never know who made these and whether these calls proved profitable.

Look at what has happened this week. AIG announced a $60 billion loss for the last quarter. $60. Billion. No company can do that and live. And, yet it was announced almost indirectly, via rumor and then press release. No one from AIG, that I know of, stood up at high noon on Monday and announced that it had taken such a staggering loss (a loss that occurred after our $150 billion bailout). After the loss was not announced, it was announced that the government would be providing an additional $30 billion to AIG. Again, this was done by indirection and implication. It appeared on Yahoo's main page on Sunday night, and then the Monday papers. No one - not Ben Bernanke, or Nancy Pelosi, or Sheila Bair, or President Obama, or the Indispensable Man, or Elliot Spitzer - stood up and said "this is what happened. this is what we're doing. this is how it ends."

Look at this article in the NY Times, which purports to describe the "new" bailout. You want to know what's strange about it? Not one human being involved in these deliberations is identified by name! (Edward M Liddy is mentioned in passing in describing AIG's recent history). This from the newspaper that fearlessly spoke truth to power by publishing national security secrets, along with the names of the relevant government agents and officials, during the NSA spy wars of a couple years ago. The same media organizations that are ready to fill an hour's coverage with tales of expensive waste baskets, and corporate jets, have been strangely passive about the incredible expenditure of funds that have disappeared into AIG's maw. Why?

AIG has gotten nearly $200 billion is bailout money, and yet it is a dead institution. $200 billion to one company in a little less than 5 months. It's dumbfounding. It's incomprehensible. And C.villian is right; there has never been a time when someone from the federal government has stood up and explained what is going on. I mean, we have "progressive" congressmen who would knock their grandmother to the ground to denounce the Pentagon's latest $600 toilet seat. We have Senators who think we should amend the Constitution to ban flag burning. Right now, there are people agitating to let gays serve in the military, but wondering if they "move too soon" it might hurt President Obama. Doesn't anyone wonder what the virtually silent expenditure of $200 billion for the benefit of a single company might do to his popularity?

The multi-billion dollar question is: who is getting all this money? I strongly suspect that, if the American people ever found out, there would be hell to pay. Tigerhawk's commenters seem to think it's an unholy combination of big-league US and European banks. The Market Ticker thinks it's mostly going to the Chinese. Most would probably say all of the above and more.

No matter where the money's going, it appears from the outside that AIG is the linchpin for the crisis in the financial world. AIG was insuring against the loss of value in real estate. That loss was considered so remote that AIG did not seriously believe it would ever have to make good on these contracts. Now, the banks, SIV's and other institutions that endured their own losses from the real estate crash are hanging on to their AIG contract payments with all their might. And the federal government is abetting this with an incalculable transfer of US tax money.

I'm beginning to think it's in some sort of crazed feedback loop with money simply going around the world and back because no one wants to know what will happen if the machine is turned off. But, if the truth is ever found out, the American people - even those shiny happy people in Grant Park last November - will shut it off.

The Birth of the Conventional Wisdom

The Crash of '08 and the Great Recession are too complex to simply blame on one or two bad actors. But, the Left's effort to use it to blame a party (the GOP) and a philosophy of government is well under way. David Ignatious' essay "We Saw the Crisis Coming" shows the sort of contortions of fact that the advocates of Big Government and the DC elite have to make in order to make this "true."

Nothing about this crisis is really a surprise. People have been warning about it for more than a decade, in academic studies, official reports, Wall Street analyses, even op-ed pieces. Our smartest financiers, Warren Buffett and George Soros, saw it coming clear as a bell.

Ignatious is absolutely right that "people" foresaw doom in the government's efforts to use Fannie Mae and Freddie Mac as a means of lowering lending standards and facilitating the sale of subprime mortgages. Virtually all of these voices (except Buffet and Soros) were either conservatives or libertarians. Ignatious seems oddly reluctant to mention this.

Ignatious then lets loose this howler:

This failure is especially clear in the case of three prominent people who are shaping the response to the crisis now: They saw the dangers building but failed to take decisive action -- for fear that a new financial architecture would frighten the markets.
The three who saw it coming are Robert Rubin, the treasury secretary during the Clinton administration; Lawrence Summers, Rubin's successor at Treasury and Barack Obama's chief economic adviser; and Timothy Geithner, who served under Rubin and Summers, then headed the New York Federal Reserve and now runs Treasury.

What?! What did any of these guys do to avert the "coming" crisis? Rubin and Summers were part of the now discredited "committee to save the world," discredited because no one now believes that a handful of gov't officials in DC can make the world financial system bend to their mighty resetting of interests rates. They were also part of the permanent Democrat Establishment that used GSE's as their method of achieving their political goals outside of the political arena.

As for the Indispensable Man, he has been in the room during all of the lousy decision making over the last 2 years. No, Geithner, Paulson, and Bernanke cannot be "blamed" for the current mess. There would have been a mess no matter what, it seems. But they can be blamed for throwing hundreds of billions of $$ into a few financial blackholes to no apparent good effect.

Ignatious' descriptions of Rubin's activities are especially (ahem) judicious in their selectivity.

First, Rubin: During the boom years of the 1990s, he was deeply worried about the risk of systemic failure in the financial markets. He was especially nervous about derivatives, the exotic financial instruments that were being created willy-nilly on Wall Street. Rubin hadn't run Goldman Sachs that way, and he feared the new crowd was taking risks they didn't understand. In the event of a crisis, would the window of transactions be wide enough to maintain orderly markets? Or would liquidity simply disappear?

Rubin pinpointed all the right issues. And yet when pressed in interviews about a new financial architecture to reduce these systemic risks, he would shy away like a skittish colt. Famously, he balked at the recommendation of Brooksley Born to regulate derivatives at the Commodities Futures Trading Commission

Yeah, that Bob "Skittish Colt" Rubin, he was real torn up about it all.

The truth is that Rubin made $100 million in less than a decade working at Citibank as some sort of quasi-consiliergi. Citibank has now received tens of billions of dollars in gov't $$ to save it from the frauds, gross negligence and manipulations that occurred on Rubin's watch. Ignatious is well aware of this. But he's counting on the fact that the people reading his Mandarin-esque analysis will NOT know these crucial facts.

Parenthetically, I note that Ignatious includes Rubin in this group of "three prominent people who are shaping the response to the crisis now." Is this true?! Is Rubin really working with the Obama Administration on dealing with the banking crisis? Right now? Is he "helping" with the Citigroup bailout? Because if he is, that seems like a conflict of interest that the average person would need to know about. Rubin wouldn't just be interested in saving Citigroup. He would be working to save his reputation (which would never recover if the truth of his role at Citi was ever fully explained), and his $$ (which must seem pretty vulnerable with the air full of demands for "clawbacks" and the like).

Ignatious does admit that decisions approved by these three policy makers have made things worse.

The paradox is that many reforms of those years have actually made things worse, by building in pro-cyclical forces that accentuate the downturn. This was true with the so-called "Basel II" capital standards. By requiring banks to maintain high reserves during crises, it forced them to sell assets into a falling market, compounding the downward pressure.
Other reforms had similar unintended consequences. The mark-to-market rules adopted by the accounting profession had the perverse effect of forcing banks to write down their portfolios daily as the market for securitized assets collapsed. These "marks" were often imaginary, since there was no real market. But banks had to take huge write-offs anyway, accelerating the death spiral.

Then, why exactly should they be in charge of the clean up? Their reluctance to do away with "mark to market" rules simply looks like the behavior of people who don't want to admit their preferred policy prescriptions have failed.

The media and the Dems have adopted the mantra - repeated like an incantation on the cable shows - that the crisis is the result of the "free market" system. The reality is that we had a market system in which government and a few super-banks were able to distort normal business activity with their billions of dollars. That was a "system" set up by the hip "New Democrats," not the GOP. The GOP had the only politicians actively working to reform the monstrous growth of the GSE's!

Now, however, the Establishment, through its media voices like Ignatious, is actively working to change this truth into a sort of meta-Truth, easily distilled into a coherent bumpersticker slogan (perhaps to cover up all those fraying "Bush Lied. People Died" stickers); something like "GOP Greed Caused Billions in Need." This "truth" is, of course, an obfuscation of and distraction from the real story.

I have said it before and I will say it again. There are a lot of smart innovative thinkers in the US. But, they are being shut out of the decision making process in alleviating the financial crisis because they don't belong to the political class represented by Rubin, Summers, Geithner, and Ignatious. Instead, the people whose decisions directly or indirectly lead to this mess are still in office and, in Geithner's case, have been promoted. We are told that elections have consequences, but in this case nothing has changed.

Should We Bother Being Outraged Anymore?

Citibank and the Treasury Dept. have reached an "accord" (since when is the language of diplomacy appropriate for a gov't rescue of an insolvent bank?) for Citi's THIRD bailout.

As much as $25 billion in preferred shares held by the U.S. government will be converted into common shares as Citigroup struggles to stabilize itself following more than $37 billion in net losses during the past five quarters.
Depending on how many current holders of Citigroup preferred stock agree to a similar move, the company's tangible common equity could surge to $81.1 billion from $29.7 billion at Dec. 31. That would reverse the recent slide in tangible common equity -- a gauge of what shareholders would have left if the company were liquidated -- that fueled a downward spiral in Citigroup shares.
The conversion leaves taxpayers exposed to the risk of greater losses. The government's preferred holdings had stood ahead of common stock in Citigroup's capital structure, meaning they were less likely to lose value if the company's woes continue to mount. In addition, by converting much of the U.S. stake to common shares, Citigroup won't have to pay the hefty dividend payouts that were attached to the preferred stock.

As George Washington points out, Citi has not just been nationalized. Its ownership is such that it has been internationalized.

The U.S. now owns about 36% of Citigroup.
The Government of Singapore owns around 11%.
The Kuwaiti government owns about 6%.
And a Saudi prince owns about 5%.royal
That totals some 58% owned by governments and foreign ty.

At the very least, you would think "we" could use "our" ownership of Citi to force some changes at the top, but Sec. Geithner has decided that CEO Pandit is a man "we" can do business with.

Well, then how about replacing the Board of Directors that governed Citi into its current mess? Apparently, the move to revamp - not replace - the Board "faces hurdles" Doesn't it always.

Oh for God's Sake

Stringent Hiring Rules Leave Treasury in Need of Staff says the W$J.

The Obama administration's tough rules about who it will hire and its increasingly rigorous vetting process are complicating Treasury Secretary Timothy Geithner's team-building efforts, government officials say, at a time when his agency faces a punishing workload brought on by the worst financial crisis in decades.

The delay leaves Mr. Geithner without many chief lieutenants while the Treasury is spending hundreds of billions of dollars to try to blunt the financial crisis -- and hustling to stay abreast of unfolding events. Mr. Geithner himself is taking on a bigger workload and relying on a skeleton crew of advisers, including some holdovers from former Treasury Secretary Henry Paulson's staff.

Ladies and Gentlemen, it's your 2009 Indispensable Man!

It's a paradox worth pondering that the ethics rules so beloved of good government types often lead to the exclusion of effective, ethical people from government. Instead, the government is often populated with people like, say, Secretary Geithner who are rendered untouchable so long as they meet the letter of the law; but, if they don't, then an "exception" will be made. I'd say the Treasury Department would be better off with fewer ethical hurdles and more streamlined hiring.

Icarus at Dawn

Some are already wondering if the Obama presidency has "failed." There's a lot of partisan eagerness under many of these claims. and it does seem a little silly to be crying failure just 2 weeks after the Inauguration.

Still, some of the voices sounding this pessimistic note have been striking. Victor Davis Hanson was one. Now, the hard nosed, sophisticated Martin Wolf has taken a look at the economic plans issuing from Washington and come to the same conclusion. It's hard not to see why. The Stimulus Bill will be too expensive and will not stimulate anything except growth in government. Meanwhile, the latest bank bailout - announced to the fanfare of falling stock prices - is too little to do any good.

I did not vote for Obama. I don't want him to usher in a New Era of permanent Democratic majorities. I certainly do not (and have not) supported any of the bailouts. But, the last couple days have been depressing. The sight of Treasury Secretary Geithner - looking small and tentative - announcing the "new" bailout plan as the Market literally began to plunge as he spoke ... it was hard to watch. The cemeteries are indeed full of "indispensable" men.

Like Rush Limbaugh, I don't want Obama to "succeed" in the sense that I don't want Obama to pass every item on the socialist-progressive wish list. But, I would like to see Obama succeed in taming the financial crisis that seems to have sapped the world economy of its confidence and animal spirits. That hope looks to be increasingly faint.

Scenes From The Dawning of the New Age

Confirmation Hearings for Treasury Secretary-designate Geithner Postponed. If there was ever an example of media double standards that favor Democrats, it's this. Can we imagine the reaction if a Republican nominee for Treasury Secretary had failed to pay his taxes? Yes We Can! Actually, this is a special dispensation that only favors Obama nominees. Bill Clinton's AG nominee Zoe Baird was derailed over a $2,900 fine for unpaid nanny taxes. Subsequent nominee Kimba Wood withdrew from consideration on similar grounds, even though she really didn't have a tax issue. Geithner, on the other hand, failed to pay $34,000 in taxes over a period of several years. That is not an error; that is on purpose.

There is an obvious "too big to fail" joke that can be made here. However, there is something more serious at work. Geithner has not paid his taxes. The IRS, and its demands, are well known. Geithner is going to be heading the IRS, in his capacity as Treasury Secretary, and yet he has been unable to follow its most basic rules. All of this has a "Spitzer prosecuting johns" quality. I think I can safely predict more tax disclosures. It goes without saying that the REAL reason to object to Geithner is his status as "Man on the Scene" at the New York Fed during Wall Street's implosion and subsequent bailout. This will not end well.

Clinton to Engage Iran and Syria Soon . Give me a break. All you "soft" "smart" folks out there: what are you going to do that is substantively different from the Bush era? Is Hillary going to be flying in and out of the Gaza Strip to meet with Hamas and shake hands with their rotating cast of spokesmen who can promise everything and deliver nothing? How will she handle a resurgent Russia? Or a soon-to-be-nuclear Iran that we have been engaging for 30 years while they plot our destruction? And if Bush is so stupid, how did he manage to open relations with India (among other things)?

All of this talk of "soft" and "smart" power is no doubt soothing to their advocates' egos. They will go back to doing things the "right" way. This means lots of flights to the Mideast and lots of time spent (and lost) at innumerable summit meetings. It's good for preserving the illusion that the elites are in charge. Meanwhile, only God will know what is happening in the shadows. And after few years of "smart" power, they will be ready to educate us.

Chu Softens Views on Coal, Nuclear Power . That's right. Just say enough to get through a hearing chaired by your ideological allies. Too many times, the people charged with safeguarding the nations's environment are not asked about the practical effects of the rules they impose uponthe rest of us. Usually, environmental regulations are passed with the promise that they are benign, but such rules are often job killers. If you are in an industry that uses any sort of chemical, or creates any sort of discharge, then you know about the Law of Unintended Consequences follows any law that Chu might be charged with enforcing.

7thriv