Relevant and even prescient commentary on news, politics and the economy.

"A Man With a Briefcase Can Steal More Money than any Man with a Gun"

Ken Houghton

I would prefer not to talk about AIG, especially since we already have two posts on it today: Robert brilliantly puts it into context, while DOLB goes for blood.

But the Gorgeous, Brilliant, and Talented BessNormally-not-this-astute-or-succinct Equity Private posted the perfect summary.

And Floyd Norris is on fire as to why this move, with the pathetic, lying excuse for corporate leadership the company now has, makes anyone taking out the perpetrators guilty of nothing more than Justifiable Homicide (not that I’m suggesting that; far from it*).

Clearly, the kleptocrats at the White House and Department of the Treasury are making certain that their lamest two months and ten days make the previous eight years appear to be the epitome of frugality.

*I’m thinking of something longer and slower, like public stockades.

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Is Douglas Holtz-Eakin still an economist?

Via Dr. Black, we get CNN reporting:

Younger, healthier workers likely wouldn’t abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain’s senior economic policy adviser.

“Why would they leave?” said Holtz-Eakin. “What they are getting from their employer is way better than what they could get with the credit.”

And why is it better? Because of the tax credit that is going away.

But let’s be nice to a man who has, in the past few months, eliminated his credibility to ensure that no ex-GWBush Administration official retains his or her reputation after leaving office.* Let’s assume he’s telling the truth.

So the young, healthy workers stay with the employer plan (that, miraculously, doesn’t go away in a miasma of Moral Hazard**). This leaves the older workers, who no longer get a decent deal from their employer, to find something in the marketplace.

Gosh, guess what happens when your selection group becomes more Adverse? Costs go up.

So let’s review what Holtz-Eakin has actually declared, explicitly and by implication:

  1. Younger workers will keep the employer-provided health insurance, since it would cost them more to buy on their own
  2. Older workers won’t be provided with insurance, and it will cost them Even More than More to buy health insurance on their own.

Even if we were ignoring that Health Insurance is NOT HEALTH CARE,*** John McCain’s proposal, by the admission of his own Economic Advisor, makes the current situation appear Pareto-optimal.

Which leaves us only one question: Why would any economist support it?

*I should probably stipulate positive here. For instance, anyone who followed Condi “I was National Security Advisor on 11 Sep 2001” Rice’s prior career wouldn’t have expected much from her.

**Using the actual Health Economics definition here, not the generic phrase to describe why we need to give Goldman Sachs and Jamie Dimon $700 Billion.

***Yes, I’m shouting. Claiming to address health care when all you address is health insurance is like claiming to have fixed a smashed-in door by changing the lock on it.

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You Can Lead a Horse’s Arse to Water, but…

You can’t make him think—or own to loan. Krugman notes:

[L]ast week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash….

Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership. [link added]

So that $700 billion was the kleptocratic c.f. Main Street suspected it was, and which Wall Street has known at least since Ms. Smith Listened in on Washington.

And that just means it will be longer, and worse. But Jamie Dimon will be richer at the end, so all is well in Paulsonland.

UPDATE: Peter Dorman at Econospeak was all over the Nocera piece the day before I saw it. And his reading, naturally, is classier than mine:

You can lead a bank to liquidity but you can’t make it loan.

but the description is pretty much the same:

It makes it crystal clear that Paulson has a plan for his friends in the financial world, but there is no plan for the economy.

The United States can’t wait for noon on January 20, 2009.

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So Why Did we Give SunTrust "bailout buying" money?

Via Dr. Black, Alpha Bank and Trust of Alpharetta is now FDIC-owned.

In related news, PNC is paying about $5.6 billion for midwest-based National City, which was a major player in subprime until everyone realized they weren’t any good at it.

As noted previously, the claim was that monies given to “regional leaders” such as Atlanta-based SunTrust would be used to purchase Endangered Banking Species.

You don’t get much closer to Atlanta than Alpharetta. On the other hand, judging by contemporaneous financial analysis, SunTrust may have been more in need of bailing out than able to bail out.

So Another One Bites the Dust. And Main Street can wonder, once more, exactly what that $700 Billion is supposed to do, other than line the pockets of Hank Paulson’s friends.

*See “my” novel Atlanta Nights for details. Or, as a better idea, just check a map.

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Blind-Reference of the Week

Late to the party, but FelixMatthew Malone (via The Divine Bess) quotes from Andrew Lahde’s good-bye letter, the follow-up to the one in which he noted that he only plays fair games, and the Fed is currently rigging the roulette wheel, so he’s taking his 800%+ return from last year and going home.

This ‘graf in particular caught my eye, since it is Subtil as a Flying Mallet:

I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.

Mr. Lahde appears to be betting that this man’s father won’t hold a grudge. That has never been true before.

(Spelling of Mr. Lahde’s name corrected 31 Dec due to correct rendering in this post.)

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Wasting More Money

The leadership at Wells Fargo must be royally peeved at this point:

Stable national players like Bank of America, JPMorgan Chase, and Wells Fargo are already digesting acquisitions. A second group of so-called super-regional banks are well positioned to take over their competitors, officials said, but have been reluctant to undertake or unable to complete deals.

By offering capital at a favorable rate, the government may encourage them to expand. In this category, industry analysts point to regional leaders, like KeyCorp of Cleveland; Fifth Third Bancorp of Cincinnati; BB&T of Winston-Salem, N.C.; and SunTrust Banks of Atlanta.

Now, to be polite about it, one of those last four is (imnvho) a strong contender for Worst-Run U.S. Bank That Didn’t Pay $400MM for Naming Rights (h/t Skip Sauer). Ignoring that, a quick glance at the list shows at least two—BB&T and most especially SunTrust—that would have made Wells Fargo a very happy camper in its Southern Strategy effort.

So now, having spent the money, beating Citi and saving the FDIC, Wells is going to have to watch as SunTrust eats its lunch before it has even sat down for appetizers.

This is a bad move by the Fed that will result in no new lending, a lot of window-dressing, and bigger bank failures during the second term of the “failed Obama administration.” (Video of Dave Barry appearance at the National Press Club, 12 November 1992, does not seem to be available on the Internet. C-Span?? C-SPAN???)

If anyone wants to understand “moral hazard,” just imagine being a WFC shareholder* who watched your bank do due diligence and is about to watch SunTrust snap up some weak-kneed competitor by filling out a two-page form and sending it to Hank Paulson.

Anyone who says that Paulson (1) knows what he is doing, (2) does not use the word “kleptocracy” in describing Paulson’s actions, and (3) thinks it is a Good Idea is lying or selling something.

*Full disclosure: I’m not, nor to my knowledge in anyone in my family, though I don’t read through all the Prospectus Updates of some of my wife’s Mutual Funds.

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Ms. Osell Buys Her Dream House

Mortgages are a bitch:

[I]n addition to the $300k that we already knew was still outstanding on their mortgage…they had another mortgage on this place. And so the reason they’ve been inexplicably stalling and quibbling over how much they’ll pay to do the repairs that are doubtless going to be required by the VA assessor is because, after dropping their price by $168k already, they are in serious danger of actually losing money on this house at this point.

Which of course isn’t our problem, and if the place isn’t worth what they need to get to cover their outstanding debt, well, that [isn’t good] for them. But I admit I had a moment of “what…were they thinking taking out a second loan on this house?” Which really isn’t in good shape and couldn’t have been in good shape when they moved away less than a year ago. Did they take out that loan to come up with a down payment on their new place, or did they take it out ages ago and just spend it all?

No idea, really. (And to boot, their realtor says there are health problems in the family.) But regardless, the facts are that if they ought not to have been [engaging in]with second and third mortgages, their lender sure…ought not to have been approving them.

In any case. I feel sorry for them. But if this house, in the condition it’s in, isn’t worth their minimum price (which I suspect we’re getting very close to finding out), well. My pity isn’t going to save them. [edited to conform to the Angry Bear Style Manual]

Read the whole thing, which explains, indirectly, why it would have been much preferable to just refinance properties at 7% or somesuch than to “bail out” highly-leveraged and leveraged securities without any support for the underlying assets.

Title ref

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Let the Rich Bail Them Out

Stormy

Let the Rich Bail Them Out. So says Bernie Sanders, now the Independent, junior senator from Vermont, formerly the “longest serving independent member of Congress in American history”– sixteen years.

Bernie makes some cogent points:

This bill does not effectively address the issue of what the taxpayers of our country will actually own after they invest hundreds of billions of dollars in toxic assets.

This bill does not effectively address the issue of oversight because the oversight board members have all been hand picked by the Bush administration.

This bill does not effectively deal with the issue of foreclosures and addressing that very serious issue, which is impacting millions of low- and moderate-income Americans in the aggressive, effective way that we should be.

This bill does not effectively deal with the issue of executive compensation and golden parachutes. Under this bill, the CEOs and the Wall Street insiders will still, with a little bit of imagination, continue to make out like bandits.

This bill does not deal at all with how we got into this crisis in the first place and the need to undo the deregulatory fervor which created trillions of dollars in complicated and unregulated financial instruments such as credit default swaps and hedge funds.

This bill does not address the issue that has taken us to where we are today, the concept of too big to fail. In fact, within the last several weeks we have sat idly by and watched gigantic financial institutions like the Bank of America swallow up other gigantic financial institutions like Countrywide and Merrill Lynch. Well, who is going to bail out the Bank of America if it begins to fail? There is not one word about the issue of too big to fail in this legislation at a time when that problem is in fact becoming even more serious.

This bill does not deal with the absurdity of having the fox guarding the hen house. Maybe I’m the only person in America who thinks so, but I have a hard time understanding why we are giving $700 billion to the Secretary of the Treasury, the former CEO of Goldman Sachs, who along with other financial institutions, actually got us into this problem. Now, maybe I’m the only person in America who thinks that’s a little bit weird, but that is what I think.

This bill does not address the major economic crisis we face: growing unemployment, low wages, the need to create decent-paying jobs, rebuilding our infrastructure and moving us to energy efficiency and sustainable energy.

Then Bernie comes to the crux of the matter:

There is one issue that is even more profound and more basic than everything else that I have mentioned, and that is if a bailout is needed, if taxpayer money must be placed at risk, whose money should it be? In other words, who should be paying for this bailout which has been caused by the greed and recklessness of Wall Street operatives who have made billions in recent years?

Before answering this rhetorical question, Bernie calls our attention to a few unsavory facts:

Over the last seven and a half year, since George W. Bush has been President, 6 million Americans have slipped out of the middle class and are in poverty, and today working families are lining up at emergency food shelves in order to get the food they need to feed their families.

Since President Bush has been in office, median family income for working-age families has declined by over $2,000.

More than seven million Americans have lost their health insurance.

Over four million have lost their pensions. Consumer debt has more than doubled. And foreclosures are the highest on record. Meanwhile, the cost of energy, food, health care, college and other basic necessities has soared.

Then Bernie asks: Who, in the last seven years, made the money–and how much did they make?

For the first seven years of Bush’s tenure, the wealthiest 400 individuals in our country saw a $670 billion increase in their wealth, and at the end of 2007 owned over $1.5 trillion in wealth.

In our country today, we have the most unequal distribution of income and wealth of any major country on earth, with the top 1 percent earning more income than the bottom 50 percent and the top 1 percent owning more wealth than the bottom 90 percent.

CEOs of Wall Street firms received unbelievable amounts in bonuses, including $39 billion in bonuses in the year 2007 alone for just the five major investment houses.

We have seen the incredible greed of the financial services industry manifested in the hundreds of millions of dollars they have spent on campaign contributions and lobbyists in order to deregulate their industry so that hedge funds and other unregulated financial institutions could flourish.

We have seen them play with trillions and trillions dollars in esoteric financial instruments, in unregulated industries which no more than a handful of people even understand.

We have seen the financial services industry charge 30 percent interest rates on credit card loans and tack on outrageous late fees and other costs to unsuspecting customers.

We have seen them engaged in despicable predatory lending practices, taking advantage of the vulnerable and the uneducated. We have seen them send out billions of deceptive solicitations to almost every mailbox in America.

It is hard to argue with Bernie. Eh? And now his solution:

I proposed to raise the tax rate on any individual earning $500,000 a year or more or any family earning $1 million a year or more by 10 percent.

That increase in the tax rate, from 35 percent to 45 percent, would raise more than $300 billion in the next five years, almost half the cost of the bailout.

If what all the supporters of this legislation say is correct, that the government will get back some of its money when the market calms down and the government sells some of the assets it has purchased, then $300 billion should be sufficient to make sure that 99.7 percent of taxpayers do not have to pay one nickel for this bailout.

I do like Bernie’s style and his thinking. I am not sure his 10% hike would really solve the credit problem at this point. It would, however, help make the bailout itself more palatable for the rest of us. It might also be a signal that we are about to get serious about the kind uncontrolled greed that has gotten the green light from those who should know better.

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Optimism from the NYTimes, but is it warranted?

The headline of this piece is “Deposit Plan Will Cost Banks More.”

Is there any evidence in the text that this is true? The closest I can find is:

After forgoing premiums from 1996 to 2006, the agency must now turn to struggling banks and ask them to pay more, putting more pressure on the industry. If a large number of banks fail, the F.D.I.C. may have to turn to the Treasury for more money, forcing taxpayers to foot the bill.

“It’s unfortunate that we didn’t have more time to build up the fund in the good times,” said Sheila C. Bair, the F.D.I.C. chairwoman, in an interview Wednesday. “It is what is, and we are dealing with the situation.”

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