On Edge

For the moment the market has stabilized teetering on the edge.  

I am worried that Obama's economic action team is not up to the task.  Their dithering on toxic assets, the banks and AIG merely puts the solution off to another day.  This has the unpleasant effect of increasing the cost of any future solution.  Treasury is way too tentative, vague, oracular and  shockingly understaffed.    Economists are losing faith.  You know, the ones that told us the free market would set us free. 

And what's this crap about Citigroup making a profit?  Aren't they on taxpayer life support?  What kind of accounting are they doing that they're showing a profit?  Isn't that the kind of accounting that got us into this mess in the first place?

The market surge after the news that Citigroup was projected to be "profitable" in the first quarter displays the desperate psychology of a wounded beast.  Charging wildly in any direction at the slightest provocation.  This beast is far from done.  

Reason for Concern at Treasury

We're going to need a bigger boat.  The fact that our mission critical teams are understaffed right now is scary.  Compare what's going on in terms of staffing at Treasury with what's going on with staffing at State.  Maybe Hillary should have been Treasury Secretary instead.  If this continues like this for much longer we're doomed.  

Econapocalypse

The current econapocalypse has at its root two  intertwined parts, one a first cause and the other its unintended amplifier.  The government must attack both if it wishes to have any hope of halting this catastrophe.  Unfortunately, it currently is doing a dismal job by failing to either breathe life into the securitization markets or expeditiously wiping out the toxic derivatives paralyzing these markets.  And it is simultaneously failing to expeditiously contain the bonfire of credit default swaps copiously sold as insurance on these toxic derivatives of questionable value and the debt predicated on them.

  

The first cause is the meltdown in the subprime market and what it did to the value of securitized derivatives consisting of bundles of mortgages and other hyper inflated assets. There has been a near total collapse of these securitization markets since subprime mortgage defaults began to surge.  Unfortunately these securitization markets are what most major financial institutions had and have large positions in.  Some of these positions were on-balance sheet but also quite often not.  Thus you are seeing large on-balance sheet losses and the market panic caused by the spectre of even more massive off-balance sheet liabilities at many, if not all, major financial institutions.  

 

No one really knows what these toxic derivatives are worth.  Thus this first cause  turns on finding a way to value (price) these derivatives that a gun shy market can trust. No faith in value equals no sale, no matter how many Nobel Prize winning equations you have on your side.  In the meantime in the face of these paralyzed markets the government simply needs to seize the institutions that are illiquid due to their huge unrealized  losses on their derivative holdings. 

 

The second amplifying part of the econapocalypse is the inability of the sellers of insurance (read AIG) upon debt and derivatives  to meet what are essentially margin calls on their positions. As the value of the debt and/or derivatives  AIG was and is insuring plunges, AIG is contractually obligated to post cash collateral to its counterparties based on factors such as the risk of default and loss in value. 

Worse, AIG CDS contracts are the parchment barrier between liquidity and illiquidity for many financial institutions.  If AIG cannot make its contractual payments on these policies many of these institutions will no longer be able to keep their derivative losses off there books, leading to illiquidity and defaults (that AIG insured) and margin calls because of the change in credit risk.  The formerly lucrative CDS echo chamber thus grows into a roar that no one has been able to quell.  The administration's action on this front has been weak and is cause for concern.

   

Someone Please Kill AIG

Good scoop by the WSJ publishing a partial list of AIG CDS counterparties.  They also give a succint and clear description of the magnitude of the CDS problem.  Naturally, the counterparties on the AIG CDS contracts received funneled payments of roughly $50 billion from the federal AIG bailout funds.   It's the usual suspects, including Goldman, B of A, Deustche Bank, Merrill, Barclays etc.  European financial institutions  had large exposures.  The fear of course is that not bailing out AIG on its insurance contract obligations will force all their counterparties to book the losses on their toxic transactions that AIG sold them insurance on.  As long as the counterparties had a good faith belief that AIG would make an insurance payout on their financial transaction they didn't need to book it as a loss.  But those days are over and the government(s) need to force everyone to book their losses, letting the weak die and saving the strongest by whatever means necessary.  Not bailing AIG out when it was about to collapse last fall would probably have been a bad idea, but the time has come to stop propping up this stinking international heap of greed and shortsightedness. 

How much taxpayer money are we going to shovel into this piece of shit insurance company before we take it out back and shoot it?  Really.  The federal government is posting cash collateral to AIG's counterparties?  Why bother with the middleman AIG?   We already pissed away $173 billion dollars into AIG's bottomless pit.   And Citigroup?  A penny stock.   I voted for Obama and all but Krugman is right:  the administration's economic dithering and weak kneed fantasies of private/public cooperation lifting us out of this apocalypse instead of the bullet to the head of nationalization and good old fashioned bankruptcy (and why are they so averse to bankruptcy? all their "too big to fail" policies do is delay it at a higher cost) are fatally naive.  May I eat my words.

Institutional Idiocy

David Brooks has a wistful paean in today's New York Times extolling traditional institutions' affect upon our lives.  He ends by praising traditional institutions for often saving us from our weaknesses and giving meaning to our lives.  Putting aside for a moment the question of whether I want to be saved from my weaknesses or if I give a rat's ass about vacuous concepts like life's meaning, I can go both ways on his nostalgia for traditional institutions.

As a member of the bar, I find much that is useful in the traditions of my profession that I embrace.  For instance, I'm a big believer in our adversarial system of justice, where opposing parties duke it out in front of allegedly neutral fact finders.  I like the skeptical bent of our common law evidentiary system with its distrust of all things outside the scope of a witness's personal knowledge.  These traditions take a lifetime to master and profoundly change you as you learn them.  But one also has to remember that all traditions were new at one point, which means at some time they were an innovation supplanting another preexisting tradition.  And there are plenty of idiotic institutional traditions that should be obliterated but survive because they have powerful lobbies  of persons who have mastered their arcane byways and profit from knowing something that most find impenetrable.

Much of Anglo-American property law is a good example of this.  Why the basis of our modern property laws should consist of French & Nordic feudal law imported into England during the Norman conquest is beyond me.  Really, where else in modern life do you still refer to another person as your Lord, as you do whenever you refer to your landlord?  To a large degree our property law in this country is based on an agrarian world view that viewed land, as opposed to the buildings on it, as what was important. Without boring you with the details, the clash between the feudal agrarian world view and the modern world view causes the courts to make so many ridiculous contortions trying to reconcile the two world views that we'd all be better off if most of traditional property law was abolished and replaced by much more straightforward and modern contract law.  (I am not the first person to suggest this.)  But this won't happen anytime soon because that would put all those who've made their living learning the arcane byways of feudal property law out of a job.  

Which leads me to what I think is the problem with embracing tradition too tightly.  As often as tradition is rewarding and enriching, it also rewards and enriches entrenched interests who smother innovation with the outworn utilities of a bygone era.  Thus I would argue that it is better to engage and innovate within your tradition, sometimes even casting aside your tradition and starting anew, than to reanimate what is dead and of little use to anyone but the few who wring their profits from selling old wares.   

Wicked Economic News

I was a bit disturbed by an opportunity that came my way the other day but quickly got over it to take advantage of what is another informal sign of just how bad this financial crisis is. I was offered free tickets, through a stage manager friend on the show, to the hit Broadway show Wicked.   Now, being a downtown Beckett man, Wicked is not the type of show I'd normally see but I'm not above enjoying a well reviewed Broadway musical, particularly when the tickets are free.  But what occurred to me after I accepted the offer is that it's a show that has always been impossible to get comps to.  I have a lot of connections in the theater business and can usually get "house seats" (full price tickets held back for cast and crew) to any number of hard to get into shows, but getting comps to a show sold out months in advance like Wicked is not a normal state of affairs.  If there was going to be any recession proof show on Broadway, Wicked, and maybe Jersey Boys, was it.  And the fact that I'm getting unsolicited comps of previously hard to come by tickets makes me worry about the fate of my beloved New York City even more. 

The Architect's Turd

Karl Rove's defense of Bush's Presidential record in today's Wall Street Journal is a prime example of Rove's spinning technique: righteous moral indignation woven together with simple truisms presented as a tapestry of indisputable truth. If the piece wasn't the most read and emailed piece in today's journal, it wouldn't be worth reviewing, but it is, so it's worth tugging at the loose threads of this frayed fabric.
First off, I don't really care that Rove thinks that Bush is a decent man. This is an eminently debatable point that turns on one's subjective moral views as to what makes someone decent. Since 2001 I have thought that Bush was puerile,fatuous, vindictive, and petty, but that is neither here nor there anymore than what Rove considers decent. Let's review some of Rove's more objective claims of Bush presidential success.

1. "Mr. Bush was right about Iraq." Really? He was wrong that Iraq harbored weapons of mass destruction, he was wrong that Iraq had anything to do with 9/11, he was wrong about how much the war would cost in blood and treasure, and he was wrong about how long the war would take. Furthermore he failed to comprehend the geostrategic consequences of bogging us down in a discretionary war that has empowered the Iranians by liberating Iraq's Shia majority, vitiated our troop strength in our necessary war in Afghanistan, and distracted us from the real threat of the weapons of mass destruction developed by North Korea during our bungling in Iraq. If Rove thinks that Bush was right about Iraq because the surge worked then this just begs the question why Bush didn't deploy large numbers of troops in the first place when many, most notably General Shinseki, advised him to do so. It was only after years of bungling that Bush found the right strategy- the one he had ridiculed in the first place.

2. "Mr. Bush was right to establish a doctrine that holds those who harbor, train and support terrorists as responsible as the terrorists themselves." Is that why we supported dictator Musharraf for so long? Is that why we invaded Pakistan? Is that why we invaded Saudi Arabia, ground zero for terrorist financing? Oh wait, we didn't any of those things. N'uff said.

3. "At home, Mr. Bush cut income taxes for every American who pays taxes. He also cut taxes on capital, investment and savings. The result was 52 months of growth and the strongest economy of any developed country." This claim is my jaw dropping favorite. All I can say is, have you checked your 401(k) lately?

Rove is right that Bush deserves some credit for combating AIDS in Africa, let's give some credit where credit is due. The rest of the conservative fluff in the piece isn't really worth addressing, although I still doubt to this day that Bush ever has read the Constitution, so I don't know how you can credit him with picking judges that strictly interpret something he has never read or understood. Furthermore, the phrase "strict construction" is only salient for those with a weak grasp of the Constitution. Please explain to me how you "strictly construct" the 9th Amendment, or the Privileges and Immunities" clauses. Get real. But that's a rant for another day.