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Where Were Tim Geithner’s and Larry Summers’ Stress Tests?

6:28 pm in Uncategorized by Scarecrow

UC Berkeley Econ Prof, Brad DeLong, to whom many of us are indebted for his patient, persistent, and lucid efforts to educate us about macroeconomics, furthers the cause of public transparency by publishing a previously internal February 2009 analysis by Citigroup that was about to disappear. The analysis focused on how difficult it would be for the mega-banks to "pass" the "stress tests" being proposed by Tim Geithner and the Obama economics team.

Citigroup’s answer was: This doesn’t look that hard, and it’s a good idea to ask these questions.

The bank’s internal analysis confirms the views of various outside observers at the time — Krugman, Yves Smith and friends, Mike Konczal, et al — that Treasury’s "stress test" scenarios would not be particularly stressful — and reality was already overtaking the "adverse" assumptions and headed south — and thus wouldn’t really tell us how much risk the banks were facing if things got a lot worse. Indeed, despite all the subsequent industry whining about the Administration being "anti-business," the bank’s analysts seemed to realize early on that Treasury’s purpose in running the tests was not to expose them but to save them, to help the banks convince investors they were not about to collapse and didn’t need to be taken over and would be helped if needed.

Beyond that confidence building goal, the tests were sold to the public as a responsible step to alert banks and regulators to the banks’ need for additional capital to withstand possible adverse changes in economic conditions. Given this guidance, and further efforts to rebuild the banks’ capital, investors could be confident the banks could withstand further shocks or significant forecast errors.

It’s hard to argue with the prudence of that concept: you need to think about and plan for the possibility things could get much worse.

What I find interesting, indeed surprising (shocking?) in light of what’s happened to the economy, the Administration’s stalled economic recovery efforts and the dreadful prospects of extended unacceptably high unemployment, is the economic team’s failure to apply the same stress test concept to their own economic recovery policies.

Certainly, by the time the stress tests were developed, Christina Romer would already have told Tim, Larry and team that the employment and GDP assumptions they used when designing the first stimulus were by then (February 2009) too optimistic. And even if the original forecasts were still holding in February (they weren’t), the argument for testing the stimulus adequacy under worse scenarios would still have applied to the Administration’s original recovery plans.

Indeed, when Summers’ reportedly argued against a stimulus large enough to fill the (by then, under-forecast) expected GDP gap but instead for a smaller "insurance" policy, there must have been some notion of what they were insuring against and how much damage the insurance would leave uncovered.

They needed their own stress tests and a Plan B or C for those contingencies. And that would have included not merely the size and politics of further stimulus, but the sequencing of Obama’s agenda and even thoughts about what they’d need from the Federal Reserve and what types of appointments would support it.

But apparently that didn’t happen, or was never made public. Even if Romer was running what if scenarios internally, I’ve seen little indication Tim and Larry had a Plan B or thought through what Plan B should look like or how (and when) Plan B might be triggered and approved.

With the frustrated Romer’s exit, and Summers’ announced departure, lots of folks are debating Summers’ tenure and indeed the competence of the entire Tim and Larry show. So I think a relevant question is why, given what they were asking the banks, they didn’t ask the same types of questions of their own efforts and have a credible backup plan if they turned out to be badly wrong.

And that question is not just for the economic team. Why didn’t Obama’s political advisers demand their own "political stress tests," knowing that if Tim and Larry’s economic recovery plan stalled after a year of trying, it might tank Congressional Democrats in 2010 and the President’s agenda or re-election beyond?

Since there were very good economists warning them about this from the beginning, not doing such tests/planning looks like political malpractice.

And yet we’re being told that it’s okay for Rahm Emanuel to remain in the White House when he’s reportedly focused on what’s best for his own political future — and thus not what’s best for the country or the Obama Presidency — while the President’s political advisers are already planning their departure to work on Obama’s 2012 campaign.

What all of this tells me is that even now there’s no one working on Plan B even though it’s long been obvious Plan A failed. The mini-Bs they’ve been begging Presidents Snowe and Collins to pass are clearly not enough, but they’re not telling the public.

And with everyone focused on leaving or their next gig, who’s minding the store? In the words of our Vice President, someone needs to wake up.

John Chandley

Iz R Gummit Learning? Obama Meets Alan Greenspan, And Nobody Notices

11:01 am in Uncategorized by Scarecrow

The New York Times front page editors waste our time with an above the fold piece in which Peter Baker ponders how unusual it was for President Obama to say "I was wrong," since none of his predecessors could manage much more than "mistakes were made." But wrong about what?

I suppose getting a President to use the active rather than passive voice represents progress for those with minimal expectations about accountability. But it’s disappointing Baker and his editors made no effort to examine the nature of Mr. Obama’s mistake or what that tells us about how the Administration views its governing responsibilities. Instead we’re seeing articles about whether the executive branch’s response actions were diligent or displayed managerial competence — okay — but little on whether the prevailing, bipartisan governing philosophy under which this all came down has fundamentally, catastrophically, but predictably failed again.

At yesterday’s presser, this is the exchange that mattered [my bold]:

Calmes: Thank you Mr. President. I want to follow up on an exchange you had with [CBS's Chip Reid]. Leaving aside the existing permits for drilling in the Gulf, before, weeks before BP, you had called for expanded drilling. Do you now regret that decision, and why did you do so knowing what you have described today about this sort of dysfunction in the MMS?

Obama: I continue to believe what I said at that time, which was that domestic oil production is an important part of our overall energy mix. It has to be part of an overall energy strategy. I also believe it is insufficient to meet the needs of our future, which is why I’ve made huge investments in clean energy, why we continue to promote solar and wind and biodiesel, and a whole range of other approaches . . . why we’re putting so much emphasis on energy efficiency.

But we’re not going to transition to these clean energy strategies right away. I mean, we’re still years off and some technological breakthroughs away from being able to operate on purely a clean energy grid. During that time, we’re going to be using oil. And to the extent that we’re using oil, it makes sense for us to develop our oil and natural gas resources here in the United States, and not simply rely on imports. That’s important for our economy, that’s important for economic growth.

So, the overall framework, which is to say domestic oil production should be part of our overall energy mix, I think continues to be the right one.

Where I was wrong was in my belief that the oil companies had their act together when it came to worst case scenarios. . . .

So the key point here is not the President taking responsibility; it’s the admission that he was wrong in what he believed, and that belief goes to the core of what’s wrong with the dominant Washington view about the relationship between government and the corporate world.

To be sure, it’s not clear how any intelligent government official could assume that "the oil companies had their act together," that industry and government would be functioning with honest oversight and adequate regard for the public interest or that the "cozy relationship" would ever give sufficient attention to risks and catastrophic consequences. Since the President says he already understood MMS and Interior needed to be cleaned up and had appointed Secretary Salazar to do just that, it’s not credible for the President to tell us now, millions of spilled gallons and thousands of acres of destroyed wetlands later, that he’s just now learning a misregulated industry "didn’t have it’s act together."

In recent years, we’ve seen hundreds of stories of industry-government collusion and corruption, denial or downplaying of risks, failure to mitigate or plan followed by inevitable "accidents" that take lives and destroy communities. How many times must our governing elite make the same startled but too-late confession that "I didn’t realize" and still claim to be surprised?

Henry Waxman got Alan Greenspan to make exactly the same confession about his stewardship of the economy. Under questioning from Waxman, Greenspan conceded that his core belief, that the financial markets were ultimately self correcting, turned out to be fundamentally wrong. But it took a massive collapse of the financial sector, trillion dollar bailouts, trillion dollar deficits, tanking of the American economy, the loss of trillions in GDP and 15 million unemployed to wring that belated confession . . . which Greenspan later hedged.

From the Presidency to Congress to federal regulatory agencies and the courts that review their actions, Washington remains enthralled by a pernicious, disaster-prone ideology that pretends "hurricanes hardly happen." When "accidents" occur, it’s only because either "mistakes were made" or "I was mistaken" in assuming industry functions in the public interest or that a hate-the-government, anti-regulatory ideology is good for us.

The President’s Commission to examine what went wrong at the Horizon rig may be pointless. None of its members is likely to get outside the same deadly belief system, and until we start purging our heads of this dangerous illusion and acknowledge the devastation it has caused, we’re only shoveling oiled sand between catastrophes.

Robert Reich has a similar take.

Common Dreams, Monsanto hid decades of pollution
HuffPost/Ronnie Cummins, Monsanto’s Poison Pills for Haiti
NRDC, Historic cleanup of Hudson River begins; Will G.E. finish the job?
Reuters, FDA probes hundreds of children drug complaints
NYT, Deaths at W.Va coal mine raise safety issues
Seminal, Financial Crisis Commission, Why can’t people sue these crooks?
Emptywheel/bmaz, Scott Block cops a plea for bloching justice
HuffPost/Travis Walter Donovan, What to eat; what to avoid

Melancon: “Everything I Know and Love Is at Risk…These Are America’s Wetlands”

7:37 pm in Uncategorized by Scarecrow

Representative Charlie Melancon (D. Louisiana) at today’s House Commmittee Hearing on effects of the BP oil disaster on his state:

Our culture is threatened. Our culture and economy’s threatened. And everything I know and love is at risk.

Even though this marsh lies along coastal Lousiana, . . . these are America’s wetlands.

Amen to that.

In his press conference Thursday, President Obama spoke to these feelings:

I think everyone understands that when we are fouling the earth like this, it has concrete implications not just for this generation but for future generations.

I grew up in Hawaii where the ocean is sacred. And when you see birds flying around with oil all over their feathers, and turtles dying, that doesn’t just speak to the immediate economic consequences of this, it speaks to how are we caring for this incredible bounty that we have.

And so when I hear folks down in Louisiana express frustrations, I may not always think that their comments are fair; on the other hand, I probably think to myself these are folks who grew up fishing in these wetlands and seeing this as an integral part of who they are. And to see that messed up in this fashion would be infuriating.

Yes, there’s anger and frustration, but more than that, there’s a deep sadness. FDL’s Michael Whitney has been reporting from Louisiana, and he tells us the most common emotion he sees is that everyone is heartbroken. They know they’re losing an irreplaceable treasure, part of their American heritage, part of who they are. It’s being taken from them and no one seems able to stop it.

The President is correct when he says while the crisis is ongoing, "my job is to get this fixed." But it can’t end there. We did not get here by "accident," and this is not an isolated event:

So the thing that the American people need to understand is that not a day goes by where the federal government is not constantly thinking about how to make sure that we minimize the damage of this thing down, we review what happened to make sure it does not happen again.

In that sense there are analogies to what’s been happening in the financial markets and some of these other areas, where big crises happen.

It forces us to do some soul searching. And I think that’s important for all of us to do.

He’s right, and you can probably make the same point about where every major component of the US government intersects with a major industry, and particularly about every regulatory agency that deals with the largest corporations in our economy.

Everyone who paid attention the last 10 years — no 30 years — should realize that since Ronald Reagan’s hate government crowd came to power, there’s been an unrelenting assault on the legitimacy of government and its ability to function in the public interest. The so-called conservatives are not out to preserve anything you or I care about; their goal has been to destroy the notion of public interest governance and replace it with a powerful government subservient to corporate interests. "The banks own this place." And so do the energy giants, and the insurance giants, the media giants, the agri-chemical giants and so on.

Barack Obama knows this. Putting the best face on his views, he claims to believe an intelligent government can effectively oversee and mitigate the worst instincts and excesses of these beasts, and then harness those forces in service to a more humane, defensible economic system. It’s an interesting theory, but it’s hard to point to a single example of a major industry whose government oversight retains even a shred of credibility. We have lost too much ground, and we can’t move forward until we recapture it.

The financial industry practically destroyed much of the economy and left millions unemployed, just as the oil industry is destroying much of the Gulf and the livelihoods there. The devastation each wrought is beyond measure. Every aspect of the federal regulatory system for the financial sector failed, and it’s still in place.

But does anyone truly believe that the agri-chemical industry is doing any less to our farms and food production, that there are not chemical blowouts, environmental time bombs already planted and poisoning us while the USDA looks on? Has PhRMA’s behavior, or that of major insurers and corporate hospitals proved any different? Have any of their regulators remained effective after decades of deliberate hollowing out? Do we even have a Justice Department anymore? A Federal Trade Commission?

America is being strangled by unchecked corporate power, and it’s leaving a trail of dying habitats, devastated communities, layed off workers and heartbroken peoples. Seeing that, explaining that, fighting that, and yes, fixing that, is your job, Mr. President. It’s what people voted for. Lead that fight, and the country will follow you.

[Minor edits Friday a.m.]

Warren Buffett on Investors Trading with Goldman: “Dumb Credit Bets”

1:13 pm in Uncategorized by Scarecrow

Warren Buffett is one of Goldman Sach’s largest stockholders, and since Goldman stocks have taken a pounding in recent days, it’s no surprise Buffett would try to defend the firm in which he has so much invested. But what are we to make of this?

From the New York Times Dealbook coverage of Buffett answering questions at Berkshire Hathaway’s annual shareholder meeting:

A bit more surprising is how strongly Berkshire’s head, Warren E. Buffett, is defending the firm. (He told Bloomberg Television before the meeting that he backs Goldman’s chief executive, Lloyd C. Blankfein, “100 percent.”

Mr. Buffett said that he feels little sympathy for the firms the S.E.C. says were hurt by Goldman’s purported lack of adequate disclosure. Of one firm, ABN Amro, Mr. Buffett said: “It’s hard for me to get terribly sympathetic when a bank makes a dumb credit bet.”

So what is Buffett saying? Sounds like Buffett thinks any bank/investor who invested in a Goldman-created synthetic CDO fabricated by Goldman’s fabulous market makers was making a "dumb credit bet."

I’m sure all of the investors doing business with Goldman will be thrilled to hear this assessment. And so will Goldman’s attorneys and public relations folks trying to fend off the emerging impression that Goldman was running a massive fraudulent enterprise to bilk its naive customers.

Nice to know.

NYT: Goldman Shares Plunge on Inquiries and Downgrades
NYT: Buffett offers firm support of Goldman at meeting

Levin Hearing; Goldman Witnesses Undermine Goldman’s SEC Defense; “We Made Lemonade Out of Lemons”

12:30 pm in Uncategorized by Scarecrow

We are continuing to follow the Senate Hearing on Goldman Sachs. Earlier posts on the hearing are here and here.

One of the rhetorical tactics Goldman Sachs has used to answer the SEC complaint that it misled investors on the Abacus deals has been to argue that it had held a "positive" position holding the Abacus securities whose structuring it allegedly misrepresented.

In other words, Goldman is arguing that since it was itself heavily invested in the Abacus synthetic CDO, and in fact lost money by holding that position, it is not credible to claim it deliberately created an investment it wanted to fail. Why would it deliberately structure a deal to lose its own money?

But in questions from Senator Levin at today’s hearing, Goldman’s VP Tourre, the lone person in the SEC complaint, admitted that the only reason Goldman held that positive position is that it had wanted to lay off that positive position but was unable to sell it; it was thus stuck with the positive position and lost money on it.

This was, I believe, the first public concession from a Goldman employee about something smart financial bloggers (was it Rortybomb?) figured out over a week ago. But Goldman had continued to repeat the line that they couldn’t be accused of structuring an investment designed to fail because they invested in it themselves and lost money. Now we have a Goldman VP testifying under oath that the argument Goldman has been making was just baloney.

Making Lemonade out of Lemons

As the video from another part of the hearing shows, Levin also used another Goldman witness to read Goldman e-mails into the record. Several e-mails suggest that Goldman’s desire to create synthetic CDOs for the purpose of betting against them was the general Goldman strategy during 2007, the period that included the Abacus and several other such deals. As one Goldman e-mail described what the Goldman CDO makers were doing:

"They structured like mad, traveled the world, and worked their tails off, to make some lemonade out of some big ole lemons."

In the second session, which includes Goldman’s CFO Viniar, Levin continues to push the theme of Goldman moving, from late 2006 on, towards a net "short" position against the market for mortgage-based securities, including the syn-CDOs Goldman was structuring and marketing.

Levin: Was your risk biased, to be short?

Viniar: Yes it was.

That point alone is not controversial. What Levin and other Committee members are exploring is the extent to which Goldman was structuring investments for the purpose of facilitating its strategic decision to begin shorting the market as a means to offset its large positive position in mortgage-based securities, and whether it misled investors to enable that strategy.

Udpate: About 4:25 Eastern: During questioning in second session, responding to Levin, Goldman’s CFO Viniar appears to say that he has no problem with Goldman taking a short position against structured products Goldman is marketing to its customers. But he’d prefer Goldman didn’t leave e-mails around saying that! Oops.

SEC Sues Goldman Sachs; US “Shocked, Shocked,” to Find Wall Street Fraud

9:08 am in Uncategorized by Scarecrow

Let the litigation games and perp walks begin. The Securities and Exchange Commission, virtually moribund for the last decade while giant vampire squids looted local, state and union pension funds and misled investors, has finally chosen to take on Goldman Sachs for conning everyone. Who knew?

The New York Times’ Louise Story and Gretchen Morgenson tell the story:

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers. . . .

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

This is just the beginning of what looks like many likely civil suits and, one hopes, criminal complaints against Wall Street giants. There have been numerous similar reports recently involving other Wall Street firms that suggest the housing bubble was artificially sustained through fraud long after the market had become saturated under any reasonable, non-predatory lending practices.

It seems the demand for highly risky mortgages — and hence the plague of predatory lending practices — was goosed by Wall Street firms that created collateral debt obligations from junk mortgages primarily to bet against them. The Wall Street hustlers then duped investors to pour billings into CDO securities they had designed to fail. The whole point was to make money by betting against securities the hustler and/or its CDO maker created to fail.

What’s astonishing is that it has taken this long after the initial 2007-2008 bailouts to awaken the regulators to their duties. [On the other hand, the Bushies did hollow out the agency.]

Update: Felix Salmon in Goldman’s Abacus Lies parses the SEC complaint to get to what Goldman was allegedly doing:

With this suit, the SEC has finally uncovered the real scandal behind the Abacus deals. The NYT tried, back in December, but it didn’t quite get to the nub of the story — although Paulson was mentioned in the NYT story as someone who was generally short the subprime market, there was no indication that he played any role in structuring the deals. Neither was there any mention of ACA.

The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.

Related, similar stories:
h/t to BooRadley, whose earlier Seminal post grabs the Wall Street Journal version.
Gretchen Morgenson/NYT: Banks Bundled Bad Debt, Bet Against it and Won
James Kwok/The Baseline Scenario: SEC Charges Goldman with Fraud
Yves Smith/Naked Capitalism: SEC Sues Goldman for Fraud
Yves Smith: Doth Magnetar Speak with Forked Tongue?
Yves Smith: On Goldman’s (and Now Morgan Stanley’s) Deceptive Synthetic CDO Practices
ProPublica: The Magnetar Trade; How One Hedge Fund Kept the Housing Bubble Going

Tim Geithner Has the Answer to the Next Financial Crisis: 42

1:36 pm in Uncategorized by Scarecrow

Treasury Secretary Timothy Geithner uses the Washington Post’s op-ed page to tell us How to prevent America’s next financial crisis.

I’m not an economist, but I think his answer boils down to "trust the not-really bipartisan Senate bill to give not-even-close-to-credible regulators like him the authority to get it right next time." That should be enough to get everyone to move their money from Citi and Bank of America to their mattresses.

Frankly, Tim lost me at hello; his first sentence declares:

America is close to turning the page on this economic crisis. [!!!] . . .

In fact, we are repairing our financial system at much lower cost than anyone anticipated and expet to return hundreds of billions of dollars in available but unuese TARP resources to the American people. That is a rare achievement.

Actually, whoppers that huge are not that rare. But Tim isn’t finished bragging:

. . .we estimate the overall cost of this crisis will be a fraction of what was originally feared and much less than what was required to resolve the savings and loan crisis of the 1980s.

Then he caveats this proud achievement by noting it doesn’t count what really matters:

The true cost of this crisis, however, will always be measured by the millions of lost jobs, the trillions in lost savings and the thousands of failed businesses. No future generation should have to pay such a price.

What is this man saying? The cost wasn’t that bad, except the true cost was in millions of unemployed with no near-term relief (with no Administration plan to do anything about that), trillions in lost wealth that likely will never be recovered, and thousands of lost businesses. But man, didn’t we make some bucks on TARP? If you needed a sign these people think the way the banksters do . . .

How could such gibberish escape any half-way sentient propaganda editor at Treasury or the White House?

But the good Secretary is not here just to brag about this disaster; he wants us to feel good about what the Senate is doing to reform the financial industry. As we’ve come to expect, the sometimes stronger House bill doesn’t count; only the Senate matters.

Thankfully, signs of bipartisan support for action seem to be emerging in Washington . . .

I think that means that when Senator Mitch McConnell says Republicans oppose the Dodd-Senate bill, claiming it sanctions and guarantees further bank bailouts, that no one will believe this Luntzian lie, just as no one believed Republicans when they said the health care bill would be a government takeover to kill granny and undermine Medicare. Instead, they’ll trust Tim and Ben and Larry:

To prevent large financial firms from ever posing a threat to the economy, the Senate bill gives the government authority to impose stronger requirements on capital and liquidity. It limits banks from owning, investing, or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers. And it prevents excess concentration of liabilities in our financial system.

He’s not saying the bill itself prevents banks from becoming dangerous; he’s saying the bill gives Tim and Ben and Larry the authority to prevent the banks from becoming dangerous. Even if we assume that the boys who blew this one learned enough not to blow the next one on their current watch, there’s nothing to assure us that the next Administration will have learned the same lessons.

In fact, the Republicans are telling us, every day, that they never learned the same lessons learned by Tim and Ben and Larry, let alone by those who actually saw this coming and warned us. But never mind these lessons, it’s not clear to this layman that anyone has really figured out how to eliminate or manage too big to fail institutions.

Most experts seem to agree that TBTF banks are too big to regulate, too complicated (internationally) to unwind and too politically powerful to control or reform. Until we figure out how to do something far more radical than anything on the table, we’re likely stuck with Vampire Squids.

But Geithner tells us not to worry:

Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts.

Does anyone believe that? Anyone?

Instead, we’re left with this admission and inadvertent prediction:

A clear lesson of this crisis is that any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster.

If you were Goldman Sachs, which way would you bet?

Update: via Politico, even Blanche Lincoln says Geithner/Dodd bill doesn’t go far enough on derivatives regulation. In his op-ed, Geithner had said, the bill "brings key markets, such as those for derivatives, out of the shadows."

More pro and con:
Baseline Scenario/Simon Johnson, Fix the Dodd bill; What would really end too big to fail?
Paul Krugman, Failure is a failed strategy; Making financial reform fool resistant

HuffPo, McConnell goes to war for Wall Street
James Galbraith, responds to Greenspan testimony to Crisis Commission
HuffPo/Johnson, Larry Summers on Senator Kaufman on TBTF
Naked Capitalism/Yves Smith, Emanuel and Magnetar Capital

AIG Bailout Hearing Aims At Geithner, Misses the Target

3:36 pm in Uncategorized by Scarecrow

Despite the verbal pounding Secretary Geithner took today over his role in approving the bailout of AIG, I’m hard pressed to find any smoking gun.

I heard lots of grandstand ranting by Congresscritters about backdoor bailouts to banksters, especially Goldman Sachs, lots of unnproven accusations, and plenty of Republicans using the terms "cover up" every other sentence. But what "crime" were they covering up?

Despite having obtained hundreds of documents and e-mails, the questioning provided no damning evidence, and as far as I could tell, none we hadn’t heard before, that proved Geithner and Bush officials acted improperly on the specific decisions at issue here regarding AIG’s bailout. That doesn’t mean they didn’t; but today’s hearing didn’t prove it.

The last Administration made an intial judgment in the Fall of 2008 to bail out AIG, because AIG seemed to be the insurer of the financial industry; it was just too interconnected to allow it to fail. None of the evidence today challenged that basic judgment. And once they decided AIG couldn’t be allowed to fail, they were forced to buttress that bailout repeatedly as the scope of AIG’s unraveling positions became known.

Their later decision in early November to pay off AIG’s counterparties at 100 percent, which so outraged everyone, was made at a time when officials were in near panic, with rating agencies threatening to downgrade AIG and create another run on a now cashless AIG.

By the time the NYFed was called in by AIG to try to negotiate better terms with the counterparties, there were four days left, two foreign creditors had said no, and there was no assurance they could bring everyone on board by November 10, when AIG would have to disclose $25 billion in losses and face imminent, crippling rating downgrades.

To those present, it must have looked like the end of the financial world as they understood it, and after struggling with the crisis for a year, watching Lehman fail, and F&F be taken over, no one could be sure what to do.

Barofsky, the Special Inspector General for overseeing TARP administration made the best argument he could for how Geithner could have gotten concession, but it all boils down to judgment and hindsight. Barofsky argues, in essence, that the Administration/NYFed should have tried harder, appeal to patriotism or self-preservation, or do something creative, to convince the biggest CDO holders to take a haircut and extinguish the CDSs whose collateral calls were imposing unending demands on AIG cash.

But the example Barofsky points to on how Geithner should have acted is Paulson’s jawboning the biggest bankers to accept TARP funds when they might otherwise have preferred not to. Getting the bankers to take more money they might not want seems a far cry from demanding they take less money then they thought they would get if they just held out another four days, knowing they held almost all the cards. If that’s the best argument, it’s pretty thin tea. We just wish Geithner had tried.

The question Bernanke, Paulson and Geithner need to answer is how they could be so negligent in their collective oversight responsibilities that they allowed these conditions to grow and metastasize over several years. Asking them why they had to accept really bad deals once the financial sector was going down for the count seems to miss the target by a mile, but maybe I missed something in today’s hearings.

NYFed/Goldman Sachs Exec: It’s “Just Tradition” That Our Guys Run the Government

2:42 pm in Uncategorized by Scarecrow

During today’s House Oversight Hearing on the bailout of AIG (see David Dayen’s reporting here, here and here), Marcy Kaptur grilled Treasury Secretary Geithner on the fact his chief of staff is a former Goldman Sachs executive — one of many such Goldman alumni that populate the government.

To be sure, Geithner himself is not a revolving door guy, and he takes great offense to any suggestion that his decisions are motivated by anything other than the public interest. And he seems quite sincere when defending his colleagues for having the same commitment.

Later, Rep. Lynch (Dem. MA) followed up with Stephen Friedman, former Chair of the New York Fed and throughout that period a Board member at Goldman, on how Goldman executives view their obligations to God, Greed, Government and Goldman, not necessarily in that order.

It’s reassuruing to know that there’s no grand design on the part of Wall Street’s investment banks to run the government and manage their own regulation, even as they become richer while doing so. It’s just one of those fine traditions of noblesse oblige.

Why Bernanke’s Confirmation Is, and Should Be, in Trouble

7:02 pm in Uncategorized by Scarecrow

No sooner had the New York Times released an initial story that "Opposition Grows Against Second Term for Bernanke," noting opposition from Sens. Feingold and Boxer, than Sen. Harry Reid made a Friday evening announcement that he would support Bernanke.

With presumed White House urging, Reid was hoping to head off further erosion in Bernanke’s support. But it may not be enough.

One unconfirmed vote count late Friday suggested there were still up to 59 Senators undecided, with those supporting/opposing split about 25/16. That was before Reid’s announcement.

The fact that over half the Senate doesn’t know what to do about Bernanke speaks volumes. For such an important position, and with so much already known about Bernanke’s record, you’d think Bernanke’s fate would be known by now.

While Mrs. Greenspan may want to spin this as scapegoating Bernanke, and Chuck Todd may think Tuesday’s MA Senate election changed everything, I think the more important story lies in an answer Bernanke gave last December to UC Berkeley economist Brad DeLong [a strong Bernanke supporter; see update links below], who asked why the Fed wasn’t temporarily raising its inflation target to 3 percent. His answer undermined whatever basis for support he had at the time.

The question was designed to determine whether Bernanke’s Fed would be willing to tolerate more inflation in the short run as a means to stimulate economic growth and reduce unemployment. From The Economist:

Why haven’t you adopted a 3% per year inflation target?

And Mr Bernanke responded:

The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

I can’t imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.

Personally, I think that Mr Bernanke owes us all a better explanation of why he has opted to place so much more emphasis on the price stability aspect of his mission than the full employment aspect. And, there should be a policy debate on this question, the resolution of which should inform the choice to reappoint (or not) Mr Bernanke.

Bernanke’s answer puzzled, disappointed, and/or shocked even those who might have supported him. Matt Yglesias, later echoed by DeLong and Paul Krugman, summed it up:

When I complain that it’s inappropriate of Bernanke to be prioritizing inflation-fighting over unemployment-fighting, people always . . . say there’s nothing more Bernanke can do. But as you can see from Bernanke’s answer, Bernanke doesn’t think there’s nothing more he can do. Bernanke thinks there’s something he could do that would probably reduce unemployment but might make it more difficult to control inflation in the future.

I think it’s a bizarre reading of the relative risks and relative benefits. But it’s one that’s in keeping with the class interests of the wealthy, and it’s hardly shocking to learn that’s what matters most to conservatives like Bernanke. I just wish we could get more attention front and center for what it is that’s happening here. Unemployment is high in large part because the policymakers with primary responsibility for achieving full employment don’t want to use the tools at their disposal to achieve that goal.

[my bold]

Until that point, the debate had been between those, like Dean Baker and others, who argued that Bernanke’s failure to see and head off the housing bubble and regulate the banks before the crisis should cost him his job . . . and those who argued that, "okay, but he did a competent job rescuing the economy from the brink once the crisis became acute, and besides, who else is there?"

As long as folks were focused on escaping the brink of disaster, the latter argument was probably enough to get Bernanke through, but as the concern faded and folks had time to learn more about how negligent a prudential regulator the Fed had been for years, the argument lost much of its credibility. If he missed the massive risk to the economy the first time, why should he be trusted again?

But Bernanke’s December statement, which followed his apparent confusion over the adequacy of the stimulus, provided a more powerful argument against a second term.

The Administration is struggling to redefine itself in populist terms; it must escape the impression/reality it has protected banks instead of the public. So the last thing they — and the country — need is a Fed Chairman that Congress and the public identify with bailing out the banks with insufficient conditions or care for the suffering on Main Street.

And when Bernanke’s answer to DeLong showed he didn’t think there was anything he should do to help the 10 percent unemployment problem, it sent a signal to Senate Democrats that he was exactly the wrong man person to help Main Street recover, no matter how competent anyone thought his Wall Street crisis management was.

FDL/David Dayen, Bernanke: Yes To Social Security Cuts, No to New Jobs Bill

Yglesias, Bernanke’s Plan for Unemployment: Do Nothing

Paul Krugman, The Bernanke Conundrum, with pro/con links to DeLong (Don’t Block Ben) and Calculated Risk (We Can Do Better)
See, FCIC Hearings, Sheila Bair testimony
Mother Jones/Joseph Stiglitz, Moral Bankruptcy
Base Line Scenario/Simon Johnson, Questions Bernanke Must Answer
HuffPo/Sam Stein, How Bernanke Became a Toxic Asset
FDL/Jane Hamsher, Will Reid and Dodd Ignore Hold (Petition for Fed audit)
Dean Baker, Bernanke’s approval is clearly on the ropes

Baseline Scenario/Simon Johnson, Paul Krugman for the Fed

Brad DeLong, Responds to Krugman, and see other links to various views on his site.