The Fed's Public Private Partnership Program, promises to clear down as much as $1T worth of "legacy assets" from banks balance sheets. Globally, equity markets responded positively. But what about assets held off balance sheet?He continues...
All of this is to say, it looks like the hole is deeper than we are told.Off balance sheet vehicles originally were designed to mitigate risk, focusing investments into subsidiaries so credit ratings or leverage ratios of parent companies wouldn't be impacted. Many financial firms improperly used such vehicles to hide poorly performing assets, culminating in the well known collapse of Enron in 2002. Last July The Financial Accounting Standards group postponed FAS statement 140 - which would require firms to move assets on to their balance sheets - for one year, an impending deadline that concerns many analysts.
How much is held off balance sheet? As of Q1 2009 off balance sheet assets at the four largest US banks - Wells Fargo, JP Morgan, Citigroup and Bank of America - totaled roughly $5T, or a sum potentially dwarfing Geithner's trillion dollar plan.
Regulators are aware of the problem and already are planning to increase requirements for economic capital, but considering how reluctant the United States was to adopt Basel II [.pdf] , a real fix could take a while.
The Public-Private Investment Program (PPIP), Treasury Secretary Geithner's plan to save the US financial sector from catastrophe, is...uh...complicated. I won't try to describe it (for that, I"d suggest going here). I will say that from what I understand, it is basically asking the private "investors" to price something that will mostly (completely?) be paid for with tax dollars.Depositors didn't all stick around to see how things worked out. A year ago, the bank was sitting on those $19 billion in deposits. When it was finally sold last Thursday, that number had fallen to $6.4 billion.
would apply only to payments made from January 1, 2009 forward. But almost prospective is like half pregnant. The bill is retrospective for just long enough to clawback the politically fetishized AIG bonuses, while leaving those who made out during the thick of the toxic credit bubble completely untouched. It has all of the philosophical distastefulness of an ex post law, and no offsetting benefit whatsoever, other than punishing a few trophy miscreants from AIG. [em]
It's way too early to pass judgment on the legacy of the Obama administration, but the one thing you can say is that all of the predictions made by folks on both sides of the political spectrum have been off the mark: he's not the wild-eyed socialist Black Panther liberal the right feared he was (and in a perverse way hoped he would be so they could raise campaign funds on secret photos of Angela Davis playing on the White House swing set), and he's not the crusading progressive mowing down the malefactors of great wealth and purveyors of narrow-minded homophobia and intolerance that the liberals hoped he would be, either. The most predictable -- and maddening -- thing Barack Obama has done is defy predictions.
Meanwhile, I actually think the most distressing thing about the criticism from folks like Krugman and Stiglitz is what you can infer reading between the lines from how ferocious it is. They, and other leading critics, are acting like people who’ve been totally shut out of the consultation/communication loop. And it’s distressing to see people of their stature and expertise getting shut out while the administration works harder on kissing Wall Street’s ass to try to persuade the finance class to avoid deliberately sabotaging the economy.
So here was one of Obama's top economic advisers undermining Geithner's key claim (we have no choice!) and questioning Romer's characterization of the firms participating in the toxic assets program. This was not a confidence booster. And I wondered what it would be like to sit in the room when Obama's economic advisers get together and try to sort all this out.
class war:A commentor responds:In one corner are the technocrats not only in finance but also in government and the media: people who can understand the importance of distinguishing between a $250,000 base salary, a $2.5 million bonus, a $250 million bonus pool, a $2.5 billion bonus pool, a $250 billion bailout package, a $2.5 trillion monetary stimulus, and so on.
In the other corner are the real people, the angry people, the unemployed people -- and with them their elected representatives in Congress. They're not interested in such distinctions any more, they're not interested in what's fair or what's sensible. They saw their real wages stagnate for decades as the orgy of plutocratic self-congratulation reached obscene levels only to keep on growing. All they ever had was the American Dream: the idea that they, too, might one day become dynastically wealthy and join the overclass.
Now, of course, that dream is shattered -- and, what's worse, it turns out that very overclass is responsible for the working classes' own present straits. While the talking heads in New York and Washington throw around their millions and billions and trillions before commuting home to their comfortable middle-class-and-better lifestyles, the rest of the country is mad as hell, and ain't gonna take it any more. They're not interested in constructive solutions or in leveraging private capital or in the sanctity of contracts: fuck that shit. Those days are over. They want to see jail time, confiscatory policies, and worse.
And just imagine what an American revolution might look like... proper pensions, a labour movement, maybe even an NHS...Good god, it'd bring them kicking and screaming into the twentieth century.Meanwhile, not having 60 Democratic Senators means that programs like the ones above may have to go through all sorts of contortions to have a chance at being passed.
The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.Having layed the blame at the feet of a figure hated on Wall Street, the WSJ continues:
Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing.Shorter WSJ: malicious investigations forced AIG to bet on housing. What does this evil doer have to say for himself?
When my office, along with the Department of Justice, warned that some of American International Group's reinsurance transactions were little more than efforts to create the false impression of extra capital on the company's balance sheet, we were jeered at for attacking one of the nation's great insurance companies, which surely knew how to balance risk and reward.Ouch, what does he say about the current state of affairs?
So, the WSJ piece knocks on Spitzer for being too aggressive in the context of a piece questioning the lack of oversight by the government (huh?). Meanwhile, Spitzer points out something that is verifiable and public - AIG is shoveling government money over to wealthy people. Yeah, I'm going to go with the zealous prosecutor.The appearance that [the AIG bailout] was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
In Wednesday’s NY Times, this article: New Jersey Sues Over Its Lehman Losses - DealBook Blog - NYTimes.com served as a reminder of how Florida got ripped off in the same way. Has Florida sued? Not mentioned in the article, though California was cited as having sued beforeThe Bond Buyer reports that the wheels are actually starting to turn in the investigation by the SEC of the State Board of Administration (I can't copy and paste the text, so here is a snap):
New Jersey.
Where are we? Why no suit?
New Jersey is out $180 million thanks to the collapse of Lehman. Florida also lost many millions, though a light search doesn’t reveal how much. There is an interesting similarity between Florida and New Jersey, in that both states had a board of officials supposedly overseeing the operation of the fund — like the money market funds we ordinary citizens have been forced to use by our friendly banks — where revenue was parked until needed by local governments to pay their staff and other obligations. In Florida it’s the State Board of Administration.
The SEC letter is here. As FCP notes, there seemed to have been connections between Jeb Bush and Lehman Bros.
What about construction-related work? Enter, the American Institute of Architecture:So what's going on with starts? A big part of the jump came from condos, apartments and townhomes. And a fair amount of that activity flowed from warmer-than-expected weather. If that leads you to think maybe we should give the data another month or two before we start drawing trend lines, I'd be likely to agree with you. As one analyst cautioned, we might be looking at a "weather-related fluke."
It could also be a data-related fluke. Journalists almost never report on statistics precisely, which I'm sure drives all manners of social scientists batty. Here's the actual wording from the press release: "Privately-owned housing starts in February were at a seasonally adjusted annual
rate of 583,000. This is 22.2 percent (±13.8%) above the revised January estimate of 477,000, but is 47.3 percent (±5.3%) below the revised February 2008 rate of 1,107,000."In other words, housing starts could be up 36%, or they could be up 8.4%. It's a range. And, technically, we're only 90% sure the real figure is in that range.
“Despite a higher [Architecture Billings Index] score than last month, we are likely to see light demand for new construction projects through much of the year,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “There is hope that the stimulus bill will result in more project activity, but that is also dependent on banks easing lending standards in the months ahead." [emphasis mine].
the AIG bonuses has been described as "populist". Over at Marc Ambinder's Atlantic page, you might have seen the picture on the right.As its name implies, populism sees itself primarily devoted to furthering and defending the interests and attitudes of ordinary citizens. It has traditionally been distrustful of large and powerful organizations, whether public or private. It views massive government bureaucracy and corporate privilege with equal suspicion. Moreover, concentrations of power and privilege held too long by the same persons lead inevitably to moral and political corruption. This view has two consequences: The first is a preference for regular rotations of positions of authority and power. The second is a preference for popular participation in economic and political structures that affect the lives of ordinary citizens.You could say that any grouping of the "ordinary" citizens implies that there is some implicit group of "extraordinary" citizens and that that idea is insulting. On the other hand, denying that there are people with more power in any given group is not accurate. In this way, I have to recognize that I am ok with the term "ordinary" as a way of saying "not as empowered as others are".
Now, Ambinder has some analysis noting the implications of this outrage if it really is populist. But ultimately I think that the angry responses have more to do with a more basic sense of justice. Fraud is wrong, and it is deeply unsettling.
is just laziness. It isn't as though GM defended the pay of its employees in the same way that AIG has defended the pay of theirs. "We know we promised you this money, but it's clearly politically impossible for us to pay it to you. So you're not getting the bonus you were counting on. Sorry about that. At this point, you have three choices. You can continue to work for us, and keep your job. You can quit, and find a better-paying job elsewhere. Or you can quit, and sue us for the bonus that we promised you. Your call. But if you choose the third option, you'll probably want to hire a PR person at the
same time as you hire a lawyer"
Maybe you could roll the dice on a new job. Or maybe you'd just shut up and get back to work.
Foreclosures spiked by 30 percent last month. All told, 290,631 homeowners got either the news or the boot, depending on how far along in the process they were. The Mortgage Bankers Association calculates that 11.18 percent of all loans was either in foreclosure or at least one payment behind.
The fear now is that the new foreclosures are driven by rising unemployment, and not fallout from the subprime mortgage crisis. New weekly claims rose by 9,000, to 654,000.
The other day at church coffee hour, of all places, I met a guy who does risk management for a major bank. He says they're solid through 10 or 11 percent unemployment. That's in the neighborhood of the Federal Reserve's "adverse scenario" for stress testing banks, at 10.3 percent unemployment next year.
So many questions...
It’s just very hard to imagine, in the United States political system as it works, civil servants really being able to crack heads and prevent wealthy individuals from doing something that they want to do and that appears to be benefiting a fairly wide group of other people.This is a good restatment of the problem. So what is his proposed solution to this?
[A] President interested in building a new effective regulatory system would need to do something to make...a new, more consolidated agency. With a new name and a new logo. And you’d need to bring in a few people from the outside to head it up initially, who are seen as respected and having clout. But beyond the first wave, you’d want to professionalize the organization and not have very many political appointees. And in the early years, you’d need to make a conscious effort to show that well-meaning politicians are deferential to the regulators and take their ideas seriously—to establish the presupposition that anyone who doesn’t treat the regulators somewhat deferentially is dodgy and untrustworthy. (emphasis mine)This seems like a plan that would be destined to fail because it involves politicians consistently deferring to the appointee. But they have no real stake, in the short-run, with this deference. The do have an immediate stake in defering to political donors. Which is to say, that the problem, more globally, is the influence of campaign contributions.
Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success)...
Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters' current extractions with no regard for future losses...."
