Glenn Greenwald’s recent missive on Salon, “Comparing the U.S. to Russia and Argentina.” With links to several favorites of this blog.
Archive for March, 2009
This is the most sensible thing I’ve heard from him yet — a proposal for FDIC-type powers for the government to temporarily take over too-big-but-failing-anyway financial institutions like AIG, clean house, and sell off their remaining assets. I once thought the FDIC already had those powers, but apparently that’s so only for regular commercial banks, not bank holding companies or other financial Goliaths. (FDIC Chairperson Sheila Bair explains it here.)
The new proposal doesn’t necessarily conflict with anything in yesterday’s plan to subsidize the worst financial institutions by overpaying for their worst assets, but it does suggest that the Obama Administration really does have plans to regulate them and is not kidding itself (Pollyannish recent rhetoric to the contrary) that all of them are fundamentally sound.
The fleshed-out Financial Rescue Plan hit the streets today, and the stock market loves it (Dow, Nasdaq, and S&P all up about 7% today). As Dean Baker points out, why wouldn’t they? The plan is a huge gift to dodgy financial institutions, as the Treasury, Fed, and FDIC will be subsidizing gross overpayments for about $1 trillion (by Treasury Secretary Tim Geithner’s estimate) in toxic assets (or “legacy assets,” the latest euphemism. I preferred “troubled assets” — sounds like a Capitol Steps number waiting to happen).
Paul Krugman has some unpleasant arithmetic about the plan, which takes as its starting point the way the plan would subsidize the private institutions (not individuals) that would buy those toxic assets. Reportedly the subsidy would take the form of “non-recourse loans” in which the borrower (and toxic asset buyer) would only have to put up 15% of the price paid for the asset, the asset itself would be the collateral for the loan, and if the asset went bad the lender could default and owe only the bad asset. Just like a 15% margin loan, except some margin loans allow the lender to demand repayment of the whole thing.
Excellent-sounding suggestion about how to stop those abonimable AIG bonuses, from Bill Black, Tom Ferguson, Rob Johnson, and Walker Todd (The Huffington Post, 16 March 2009). Even if it doesn’t succeed in stopping the bonuses, their suggestion to break off AIG’s toxic Financial Products Division (like a hedge fund attached to an insurance company, as Ben Bernanke described it) from AIG’s main business, and then treat the Financial Products Division like the bankrupt entity it is, is very appealing.
Dean Baker makes much the same point: bankrupt companies don’t get to pay bonuses.
The NYT has another sensible editorial about AIG and who it’s been paying off with the $170 billion in bailouts it’s received so far. Under the bailout, the company has been paying off many credit default swap (CDS) holders in full, which is a great way to burn through hundreds of billions of dollars with lightning speed. And now we know that a good chunk of those billions went to CDS creditors like Goldman Sachs who, like AIG, are wards of the state. (To be fair, a substantial but smaller amount of CDS payouts went to state governments.) The only relief I can think of is Herb Stein’s old line: the good thing about something that can’t go on indefinitely is that it won’t.
Calculated Risk has the story; data are from the Federal Reserve.
$61 billion in fourth-quarter losses, tens of million in new bonuses, mostly to people in the most toxic financial products division on Earth, namely their Financial Products division.
And the bailouts just keep on comin’. Word is that the bonuses will be restrained in the future, but why not in the present, when AIG has already received $170 billion in government funds? AIG’s line is that the bonuses were contractual obligations made before the company’s implosion, but aren’t bonsuses supposed to be paid out of company profits? AIG has gone from hosing its shareholders to hosing the taxpayers. And if the government has a plan for dismantling this atomic bomb of a company, it’s doing everything in its power to suggest otherwise. Seems that “Welfare Cadillac” was written about forty years too early:
UPDATE, 16 March 2009: Sunday’s NYT had a sensible editorial on the matter. News of the backlash and the identities of AIG’s counterparties was all over the wires on Monday. Warren Buffett’s warning that credit derivatives were financial weapons of mass destruction looks truer than ever — AIG’s bottomless obligations now seem to be married to the federal government’s bottomless pocket. While the systemic risk from letting AIG fail was huge (and no doubt still is), is it really a worse risk than all-out banana-republic bankruptcy for the U.S. government?
UPDATE, 17 March 2009: Actually a week old, but James Hamilton’s AIG analysis and recommendations on Econobrowser are worth pondering, as is the long comments thread.
I say that not because I’ve been a fan of the Treasury Secretary’s job performance so far (far from it), but because positions like Treasury Secretary, Securities and Exchange Commission Chair, and President of the United States should be well compensated.
In the case of finance-related positions, anyone who was previously working high up in the industry or even in a Fed bank must take a huge pay cut to take on a job that brings power and prestige but also frustration and blame. Cases in point: Geithner and new SEC Chair Mary Schapiro. Now, neither is going to have any trouble paying the bills: Geithner made more than $400,000 last year at the New York Fed and received a similarly sized severance package; Schapiro made almost $3 million as head of the Financial Industry Regulatory Agency (the securities dealers’ self-regulatory board) and got a severance package of over $7 million; but still.
Geithner’s salary at Treasury: $196,700.
Schapiro’s salary at the SEC: $162,900.
After adjusting for the much higher cost of living in Washington, DC than in Oswego, NY, the head of the SEC barely makes more than I do. (Not that I think I’m overpaid. . . )
I’m not being alarmist. It’s worth noting that before the 1930s “depression” was the standard term for a substantial economic contraction, what would now be called a recession. The 1930s depression was termed “great” because it was indeed the worst ever, so bad that it became a proper noun, the Great Depression. Some are calling today’s slump the Great Recession, which is a waste of keystrokes.
I remember my father calling the 1982 recession a depression, and I think he was right: the worst slump since World War II, 10% unemployment (peaking at 10.8%), including the permanent loss of millions of industrial jobs.
Now consider the evidence for the current one:
Seen on a church sign in Clay, NY:
SOME TRUST IN JOBS
SOME TRUST IN THE BAILOUT
WE TRUST IN OUR GOD
Hat tip: Terry.
UPDATE, 13 March 2009: CNBC’s answer to Dick Vitale, Jim Cramer, returns fire, opening the door for another hilarious Stewart takedown (don’t miss the “Dora” clip at the end). And last night’s “Daily Show” included what sounds like a hard-hitting interview with Cramer (I haven’t watched it yet); the much longer unedited version is available on Comedy Central’s website.