You are browsing the archive for Tim Geithner.

NYC Mayor Bloomberg Gives Goldman Sachs a Hug Over Hurt Fee Fees

8:41 am in Economy by Scarecrow

Marks: Ms. Piggy and Kermit (Wikipedia)

This is what happens when banksters rule your country.

New York City Mayor Michael Bloomberg visited Goldman Sachs Group Inc. (GS)’s headquarters in Manhattan in a show of support after a departing employee publicly criticized the firm’s culture yesterday.

“The mayor stopped by to make clear that the company is a vital part of the city’s economy, and the kind of unfair attacks that we’re seeing can eventually hurt all New Yorkers,” said Stu Loeser, a spokesman for the mayor.

“Unfair attacks”??  Just to be clear, what the resigning midlevel exec in the GS London office said in his New York Times op-ed was that the culture at Goldman Sachs was such that its clients were being bilked by trading schemes knowingly designed to rip them off, while the GS execs laughed about how gullible their “muppet” clients were for trusting them. That was shocking, but it wasn’t unfair or news, because that’s essentially what we’d already been told, in sworn testimony.  It’s what Senator Levin’s hearings and investigations found, what the SEC found in the case it settled, and what the Financial Crisis Commission found in its investigation and final report.

Goldman’s vultures should be shunned in polite company, even evoking the “good grief, I’m running for President!” statements from the likes of Mitt Romney, even though some of his best friends are vultures.  But apparently those rules don’t apply to Mayor Bloomberg. A mid-level exec reveals the GS culture is led by a bunch of thugs who bilk their clients and laugh about it behind their backs, and the billionaire Mayor of New York feels he needs to give the thugs a hug because their fee fees (literally) might be hurt?

In a rational country, that would end a politician’s career, but it won’t in today’s America. Instead we get to shake our heads in disbelief amidst rumors that Bloomberg may replace Tim Geithner as Secretary of the Treasury. (And never mind that Larry Summers, who helped defend Wall Street deregulation and argued during Dodd-Frank that TBTF banks are needed, is now being considered to run the World Bank.)  How reassuring that the man being considered for Treasury is someone who knows the value in having a Wall Street fully capable of tanking the world economy, defrauding whole nations, looting their clients, putting millions out of work, and . . . getting away with it.

Meanwhile, Tim Geithner was busy with a misdirection of his own, explaining that while it was politically unpopular, bailing out the banking system was necessary to avoid a depression. So brave Tim courageously did it anyway.

He reiterated his view that, around the time of the financial crisis, the public probably would not have supported the bailouts for banks that helped cause the crisis. But Mr. Geithner added that past financial crises had been made worse by governments that failed to act with appropriate force because they were afraid of doing something that was unpopular.

True, but a misdirection.

Most of Geithner’s critics give him and Bernanke credit for rescuing the financial system, per se, but fault them for leaving the criminal banksters in charge of that system and then allowing only watered down rules in Dodd-Frank for reining them in. The beef is they’ve done precious little to change the industry’s most harmful practices and incentives. The TBTF banks are now more consolidated, bigger and more powerful than before.

You can’t tell whether this is an ideological blind spot or just being disingenuous. Geithner is deflecting the issue, conflating the essential financial functions of the banking system with the banksters who manipulate it and their personal financial incentives. You can argue the Feds had to push trillions into the system to avoid a total depression, but they didn’t have to leave the criminals in charge of it.  So the crooks are still in charge, and as we’ve seen in the mortgage fraud cases they continue their criminal activities. Yet no one is being prosecuted.

The lesson is clear: Have you hugged your GS overseers today?  They’re very sensitive.

Obama Sings Tea-GOP Song to Unemployed: La, La, La, We Can’t Hear You!

11:40 am in Uncategorized by Scarecrow

President Obama appeared in the Rose Garden this morning to respond to the dismal jobs report (Baker; more here from Konczal) that showed unemployment rising to 9.2 percent over 18 months after the recession supposedly ended. He responded by not mentioning that number or grappling with what it means.

Instead, he continued the excuses and pseudo-economic gibberish that makes sense only to Tea-GOP Zombies and which explains why we’ve made virtually no progress in regaining the jobs we lost. He no longer has a meaningful jobs program but is instead clinging to confidence fairies and expansionary austerity unicorns, which are even less helpful than guns and bibles. It has become pathological.

Misjudging the situation and denying responsibility have become the trademarks of Mr. Obama’s economic record. And so our economy remains at risk, not only because it’s under unrelenting assault by economic Luddites but because he keeps his head in the sands of Tea-GOP talking points.

The only honest response Mr. Obama could have given would be an admission that his employment recovery plans had failed. Tim Geithner and Ben Bernanke saved the banks, for now, and our slanted tax laws and trade agreement outsourcing saved large corporations who are now sitting on nearly $2 trillion in unspent, uninvested funds.

That $2 trillion is about what the economy needs to put a large chunk of the jobless back to work. But there’s no one left in this Administration who either cares or knows how to refocus the nation’s vast wealth to save desperate states, under- and unemployed workers, the uninsured and everyone else in desperate need.

Obama conceded during the twitter event that he and his advisers underestimated the severity of the Great Recession he inherited. Fair enough; lots of smart people did. The last two administrations created the reckless conditions for a housing bubble, financial collapse and an economic depression, and it almost happened. But what are the implications of that truth? Read the rest of this entry →

The First Thing Obama Needs to Do Is . . .

7:41 am in Uncategorized by Scarecrow

When Jane Hamsher recently asked people what Obama should do that didn’t need Congress’ approval, lots of folks came up with dozens of interesting and worthwhile suggestions.

Some of those ideas have broad support –e.g., an executive order suspending further enforcement of DADT — and are consistent with what the President claims to believe is the right policy.

Other ideas would require the President to concede the policies he’s implemented or the advice he’s followed have been insufficient, misguided or just flat wrong. You don’t normally see a President say, “I was wrong,” or “I followed the wrong advice.” Obama’s interview with the New York Times Peter Baker is as close as this President has come:

While proud of his record, Obama has already begun thinking about what went wrong — and what he needs to do to change course for the next two years. He has spent what one aide called “a lot of time talking about Obama 2.0” with his new interim chief of staff, Pete Rouse, and his deputy chief of staff, Jim Messina. During our hour together, Obama told me he had no regrets about the broad direction of his presidency. But he did identify what he called “tactical lessons.” He let himself look too much like “the same old tax-and-spend liberal Democrat.” He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works. Perhaps he should not have proposed tax breaks as part of his stimulus and instead “let the Republicans insist on the tax cuts” so it could be seen as a bipartisan compromise….

Does he really believe there were just "tactical" mistakes, and that accounts for the drubbing his Party is about to receive for following his lead? If I were to compile a list of things the President should do, acknowledging far more serious mistakes in judgment would be the first thing on my list. Without it, I don’t think anyone will give him much credit for anything else he announces, even if they’re things the public generally supports in principle.

This President has at least two serious problems for those who might be inclined to support him but remain unenthusiastic, disillusioned, or worse. First, his policies for economic recovery aren’t working; they’re stalled and not making a dent in unemployment or the economic insecurity facing millions of Americans. But equally important, people are losing hope in the country’s ability to solve these problems. For many, Obama represented that hope, so if he fails, then his supporters’ hopes for change fail with him.

To be sure, the Republicans worked to make him fail. They have functioned not as the loyal opposition but as the nation’s enemy. They’ve sabotaged and underfunded recovery efforts and lied about every effort to make things better; they demonized the President and his proposals. They’ve become promoters of failure, not just Obama’s failure, but the nation’s failure. Their behavior continues to be beyond the pale.

But Obama’s supporters expected him and his Party to confront and overcome such opposition, to fight for the public interests against all of the powerful forces resisting change and protecting their own wealth and privilege. He now has a serious credibility problem, a problem of trust as well as competence. So his first priority is to reestablish that trust, to rekindle hope.

My guess is voters first need him to acknowledge that the ideas and assumptions he and his closest advisers brought with them to solve the country’s problems turned out to be inadequate to deal with how serious the country’s problems have become.

1. He can explain that our economy is huge and the near depression he inherited turned out to be far more serious than he and his advisers imagined; he didn’t cause the depression, but he has to take responsibility for that miscalculation. So just as many of his liberal critics claimed, we needed a much larger, more effective stimulus and a Plan B to redouble and refocus that effort if it wasn’t enough. We still need that.

2. He needs also to concede he and his advisers put too much faith in the ability of the private sector to recover from such a serious financial collapse and loss of individual wealth. Market deregulation failed, catastrophically, so stop defending it. It was a mistake to assume that if we made the banks prosperous again, that would also take care of Main Street. That benevolent trickle down view was wrong, again. It’s time to discard it.

3. Further, since his advisers knew that jobs always lag other aspects of recovery, especially in recessions linked to financial collapse, he and they should have realized we needed massive direct jobs programs, to complement and focus the stimulus. We don’t need foolish symbolic gestures like leaving government positions unfilled. Instead, we needed then and need now more direct hiring by government to perform dozens of public functions, including much greater support for states to avoid layoffs of state funded teachers, firemen, police, and so on. He should have refused to compromise on this just to please a couple of timid, misguided Senators; they needed to step up.

4. The President apparently agrees we need to start rebuilding America’s infrastructure. He can now make a commitment to tackle the trillions in investment backlog we’ve accumulated over recent decades. Go big, and tell the hypocritical deficit hysterics that Bush’s $700 billion tax giveaway to the richest 2 percent should instead be used to rebuild the country.

5. He needs to acknowledge that tackling the nation’s problems requires a more fundamental challenge to the economic power, greed and corruption of America’s major institutions, particularly America’s largest corporations. They will not willingly give up their power nor willingly protect consumers or preserve the middle class. The resulting concentration of wealth at the top is destroying the middle class and systematically corrupting government, using Karl Rove, the US Chamber of Commerce and their conservative friends to launder billions to buy elections to maintain their power.

Without a formidable public challenge to the mega-corporations’ economic power, concerns about individual liberty, which supposedly motivate libertarians/Tea Partiers, will be overwhelmed; ordinary real people can’t hope to compete against multi-billion dollar corporate “persons.” Nor can the public expect government to pursue policies in the public interest, let alone rescue the middle class from an inexorable decline and the increasing transfer of their wealth to the richest one percent.

The voters need to hear their President say these things, so they understand the problems they see in their lives are real, but have an identifiable cause — instead of just letting right wing demagogues blame and demonize blacks, latinos, muslims, or nonexistent “socialists” and “others.”

Such a statement would signal that the President understands it is he who much change and he who must step up, get engaged, and act more boldly. Without showing he’s both honest and mature enough to admit these things, voters will find it hard to believe any of his new initiatives, even if well intended, are anything more than electoral opportunism.

Once he’s done that, the President can ask the voters to support him and any members of his Party prepared to fight for a better agenda. He can explain that the opposition party is not merely in denial on most of these problems; they are accomplices. Their “solutions” would make every problem even worse, and the country can’t afford that.

What does he have to lose?

[Ed note: For more in this series see What Obama Could Do Now]

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

What Half a Depression Looks Like — And How We Escaped (So Far) the Other Half

7:24 am in Uncategorized by Scarecrow

If you want to see what half of a Great Depression (a.k.a. a "Great Recession") looks like, take a look at this graph of the extent and duration of unemployment for each of the last six recessions. It’s a chart compiled and kept up to date by Catherine Rampell, the New York Times Economix blog editor.

The chart shows each recession, with the zero point being the peak level of employment at the recession’s start and then showing the changes and duration in unemployment until unemployment returns to the starting level, whatever that was. We have a long way to go, and it could take years.

As Paul Krugman says of this lastest update, We’re Number One!, or "this is the big one." The depth and duration of this Great Recession’s unemployment scourge is far worse than anything in decades.

A couple other points. First, we can call this a "half depression," because the picture above could easily have been twice as bad if the Federal Reserve, Treasury and Congress under both Administrations had not thrown everything including the kitchen sink to stop a full on depression. That’s the conclusion of a just released but as yet little discussed study (e.g., see DeLong on Leonhart) by economists Alan Binder and Mark Zandi.

Binder/Zandi developed a model to estimate how much GDP would have shrunk and unemployment increased if the federal government had taken none of the monetary and fiscal actions of the last two years. From the initial Times story:

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.[*]

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. . . .

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

As many have noted before, a huge chunk of today’s deficits were caused by the near-depression baked into the cake by 2008. Since this year’s GDP growth is now expected to be about 2.5 to 3.0 percent, the Binder/Zandi study suggests that without massive federal intervention, GDP would have shrunk by about 3-4 percent, instead of growing slowly. Worse, instead of 15 million unemployed, we’d have over 23 million without work. So Binder/Zandi provide support for the Obama Administration’s (and many other economists’) argument that their actions (and the Fed/Treasury bailouts before Obama took office) have at least prevented a depression.

The economists examined the Federal Reserve’s actions, which were about double the size of the ARRA stimulus bill and provided trillions in loans, loan guarantees and asset purchases. These actions thus likely had a greater effect on turning the economy around than the ARRA/stimulus bill alone, though they argue the combined efforts likely reinforced each other. This finding should increase pressure on Bernanke’s Fed to do even more on monetary easing to ensure the economy does not slide back into a recession or worse and to tackle unemployment more aggressively.

A second point from Rampell’s chart is how it helps assign responsibility for the depression/unemployment catastrophe. The worst unemployment level was reached about six months ago, in January/February of 2010, but for a year before that, unemployment had been in free fall. Obama’s ARRA/stimulus didn’t pass until early 2009, and most of it took 6-12 months to kick in.

What the chart tells us is that gross mismanagement by the previous Administration, their financial regulators and regulatory philosophy created conditions for a genuine depression. That depression was only narrowly avoided, so far, by massive interventions by the federal government.

Even then, the Bush Administration’s economic team passed a Great Recession-near-Depression onto the Obama Administration, which has been struggling ever since to turn the economy around.

But this is not just George Bush’s legacy; it’s the legacy of an entire economic philosophy and regulatory attitude, supported as holy doctrine by the entire Republican Party and all too many Democrats. Most still haven’t taken responsibility for this huge failure; instead, they would/could, if allowed to rule again, easily drag us back into a Depression. Voters take note.

Finally, the chart makes clear that the federal government is not even close to doing all it needs to do with stimulus spending and monetary support to reverse course and meaningfully hasten the reduction in unemployment. By any standard, those efforts remain less than half enough; it took a long time for Obama’s advisers to concede this (sort of), and there are growing indications the Federal Reserve recognizes this too. [Update: see Fed member's deflation warning hints at policy shift.]

The Obama Administration now has the responsibility to lead the way out of the catastrophe it obviously inherited from Bush’s economic team and a shared, failed philosophy. That members of that team or those who retain that philosophy still have jobs as economic advisers is both astonishing and dismaying.

And there should be no doubt that Republicans and conservaDems who obstruct (or undermine) direct jobs programs, more stimulus spending, state budget rescues to prevent even more layoffs and so on are still hurting the economy and 15 million unemployed by tying the government’s hands either for political gain or because of their misplaced deficit hysteria. Further obstruction of necessary spending to revive demand is not just foolish; it’s unpatriotic, economically unsound, and morally unconscionable.

Come November, voters should endeavor to remove from office every one of these obstructionists and hysterics, Republican and Democrat alike, before they do even more damage to the country and its future.

*Blinder/Zandi correction:

JULY 28, 2010 1 P.M. CORRECTION: This article now contains corrected figures for our estimate of 2010 GDP with and without the stimulus. As the article now reflects, GDP in 2010 would be about 11.5% lower without the government’s response, and the fiscal stimulus has raised GDP by about 3.4%.

Update: Dean Baker critiques the study’s assumed counterfactual:

While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

Baker notes it’s unlikely the Government would have done nothing; instead, it could have implemented other financial/monetary strategies that could have produced preferable results.

Brad DeLong, citing Krugman, ARRA: Underpowered from the start

Krugman/DeLong on the dangers of permanently high unemployment; also, How did we know the stimulus was too small?
NYT/Rampell, Bleak outlook for long-term unemployed; also, Job subsidies providing help to private side
NYT, Industries find surging profits in deeper cuts

NYT’s Sorkin Examines Trees, Can’t See Forest on Geithner’s A.I.G. Backdoor Bank Bailout

1:20 pm in Uncategorized by Scarecrow

I can’t quite determine what Andrew Ross Sorkin, a New York Times business columnist, is trying to tell us about what many observers describe as the New York Fed’s and Bush Treasury’s 2008 "backdoor bank bailout" when the US seized A.I.G. and gave it $85 billion (and more later). In Some Backup for Goldman on A.I.G., Sorkin cites newly released evidence from Congressional commitees he suggests supports Goldman’s story, but it seems to do the opposite.

Sorkin starts out reminding us of all the skepticism about Goldman Sach’s claims that it didn’t need the US to bail out AIG, because Goldman was fully hedged against AIG’s failure:

Goldman has maintained that it had entirely hedged its exposure to the American International Group before A.I.G. collapsed in September 2008. Goldman’s chief financial officer, David Viniar, has repeated over and over again: “We had no direct exposure.”

Wall Street laughed. Congress laughed. The media laughed. Impossible!

Sorkin then examines the evidence Congress uncovered on this question and pronounces himself, uh, not convinced, and maybe Goldman was right. So what is this ambiguous evidence that may point to Goldman having told us the truth?

It seems Goldman was exposed to AIG’s possible failure for at least $10 billion in risky products insured by AIG. But Goldman maintained it was more or less fully hedged, so it could not be accused of putting pressure on the Bush Treasury or Tim Geithner’s NY Fed to rescue AIG, since Goldman would not lose money if AIG failed.

Goldman’s so-called protection was of two types: cash collateral Goldman forced AIG to post (i.e., Goldman already had the money) and additional insurance against AIG’s possible collapse that Goldman purchased from other parties:

First, some numbers by way of background. Goldman Sachs originally had bought about $20 billion in protection against an underlying portfolio of collateralized debt obligations, or C.D.O.’s, with exposure to A.I.G. By that September, given the decline in the value of those instruments, Goldman’s gross exposure was $10 billion. A.I.G. posted $7.5 billion in collateral, leaving Goldman exposed to a potential $2.5 billion loss.

But documents released by the Senate Finance Committee late Friday suggested Goldman was trying to brace for that potential loss. It now appears that Goldman had hedged itself against such a potential loss by buying $1.7 billion in insurance on A.I.G. from more than 30 different banks, and made other bets against A.I.G. worth more than $600 million. Whether it would have all paid off remains an unanswered question.

So Goldman was fully protected against the risk of AIG failure, right? Wrong. Sorkin then reveals (but doesn’t seem to recognize) the smoking gun that suggests what was going on:

Another document — released by the House Committee on Oversight and Government Reform — has gone unnoticed and might be even more important. It contains an e-mail message to Mr. Geithner, sent on Sept. 16, 2008, at 12:02 p.m., just as he and the board of the Federal Reserve were deciding to inject $85 billion into A.I.G., which they did several hours later.

The e-mail message came from one of Mr. Geithner’s lieutenants, Brian Peters. In the message, Mr. Peters said that he had just spoken to Goldman’s chief risk officer, Craig Broderick.

Mr. Peters spelled out his understanding of Goldman’s direct exposure to A.I.G. to Mr. Geithner. He said that Goldman’s “net exposure is $2.3 billion,” but immediately added, “They have credit hedges of $2.5 billion, $500 million of which is internal, so they are roughly flat.”

We only need two more facts from the Sorkin article to connect the dots: (1) the cash collateral posted by AIG at Goldman’s demand that made up the bulk of the "protection" would have been at risk (there was a chance it could be clawed back) in any bankruptcy filing if AIG had been allowed to fail; and (2) the third parties — including Lehman, Citi — from whom Goldman had purchased additional insurance against AIG’s possible collapse were themselves likely insolvent and/or so dependent on everyone else not failing, that their insurance was worth little or nothing.

So while Sorkin and Goldman can construct at nominal case showing Goldman was "fully covered" and did not need AIG bailed out, all of Goldman’s coverage was at risk to one degree or another, and much of it subject to potential litigation in an AIG bankruptcy proceeding in which other parties would be fighting hard to get that money back — just as critics have been saying all along. So what the Bush Treasury’s/NY Fed’s takeover and initial $85 billion bailout of AIG accomplished was to move $10 billion in Goldman’s protection from an "at risk" category to a "no risk" category. And the backdoor bailout likely accomplished the same type of risk-reducing transformation for all bank recipients of the NY Fed’s largesse.

This shouldn’t be suprising; it’s what many thought all along. It’s just surprising that Sorkin would argue that the newly released documents make Goldman’s (or other bank recipients’) arguments about being hedged any more credible than before. If everyone was fully hedged with little risk, the argument for $85 billion in bailouts would disappear.

What’s also surprising is Sorkin’s limited discussion of the "important" e-mails flowing between Tim Geithner’s lieutenants and the banksters. I doubt anyone assumes that a lone e-mail between the NY Fed’s Peters (Geithner’s deputy at the NY Fed) and Goldman’s chief risk officer means that’s there was some special collusion going on only with Goldman. More likely these communications were occurring with all of the banksters, because the NY Fed needed to know Wall Street’s total AIG exposure.

It seems obvious the NY Fed was actively talking to all the major investment and mega banks, trying to determine how much they were all at risk if AIG failed — Goldman’s "at risk" piece was $10 billion — and from that total "at risk" amount, deciding how large the backdoor bailout needed to be to rescue the banks.

The e-mails are thus not exonerating for Goldman; collectively such e-mails are the smoking guns that explain the purpose and size of the backdoor efforts. But for some reason, Sorkin doesn’t offer this interpretation, even though he’s looking at the trees, the forest, and the bagmen handing over the first $85 billion of taxpayer money to Wall Street.

Occam’s Razor Answers Krugman’s Question

5:10 pm in Uncategorized by Scarecrow

The simplest, now increasingly unavoidable answers to Paul Krugman’s question are: (1) the White House political advisers are incompetent and/or fools, and (2) the White House economic policy advisers are at least incompetent advocates, and they worry more about Wall Street’s health than Main Street’s.

There are other possible explanations, but all others are less flattering and/or require an understanding of multidimensional chess that has nothing to do with things that concern voters.


Sam Stein, White House sends its least credible spokespeople to defend it

PBS News Hour, White House sends Rahm Emanuel to insult Jim Lehrer and viewers

CNBC/Kudlow, Tim Geithner insists Obama loves business, making Kudlow feel warm and tingly

ABC/This Week, David Axelrod endures dumb interview questions from Jake Tapper — why should America care whether industry titans who benefit from federal anti-trust protection, lax corruption/campaign laws, military contracts and massive subsidies like or dislike Obama, Jake? — but has no compelling message and sounds defensive and unconvincing the whole time.

WashingtonPost/Balz, in which Dan Balz quotes Obama’s appointed co-chair of the "deficit" commission making an absurd statement without noticing how ridiculous it is nor pointing out the other co-chair’s deficit hysteria is entirely misplaced.

Added Monday a.m. proof
: for months the President’s poll numbers have been sinking, something you might explain were the President bravely making tough, unpopular decisions — even though his advisers persistently tell him not to. But when generic Democratic vs Republican polls show Republicans at 45 percent and several points ahead of Democrats, even though Republicans repeatedly show themselves to be crazy and provide ample ammunition to discredit them forever, it’s a clear sign the WH political operatives have utterly failed. They don’t know how to get the Democrats’ numbers up and haven’t a clue how to get the Republicans’ numbers down.

Did G20 Economies Just Vote for Another Great Recession, Massive Unemployment?

12:10 pm in Uncategorized by Scarecrow

Unless I misunderstand these stories, it appears the world’s biggest economies just decided, over US objections, to resurrect Herbert Hoover, rebury Keynes and pursue another Great Recession, tanking their economies and putting millions more out of work. And it’s all driven by a world-wide plague of deficit hysteria syndrome.

You can’t tell what the world’s largest economies just agreed on from the AP (via WashPost) article of the G-20 financial summit in South Korea. The piece has several diplomatic statements from Tim Geithner warning Europe it can’t look to a booming US economy to lift Europe, so they better have plans to grow their own economies by expanding internal demand. Stronger demand in Europe would then support US hopes to use increased exports to help drive US economic growth. That plan now looks dead.

The Financial Times coverage of the same event tells us a majority of G20 nations plus the International Monetary Fund (IMF) are planning to shrink their economies and depress demand, signaling a broad rejection of the claimed US position.

First, the US/Geithner centric version from the AP (via WashPost):

The Group of 20 welcomed measures taken by the European Union, the European Central Bank and the IMF, including a $1 trillion bailout, to help countries cope with the fallout from unsustainably high debt.

"All of us have a strong interest in seeing those programs succeed in restoring confidence," U.S. Treasury Secretary Timothy Geithner told reporters after the meetings ended.

Long-term, sustainable growth will depend on rebalancing growth, he said.

"The United States is moving aggressively to fix things we got wrong and to strengthen our economic fundamentals," Geithner said, noting that as Americans boost savings and investment and consume less, other countries will need to generate more growth.

"All the countries recognize the basic reality that the U.S. is reforming and adjusting and that for the world to grow at its potential it is going to require that growth outside the U.S. will come more from domestic demand than in the past," he said.

Next, what the Europeans are saying, via the Financial Times (subscription required):

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

So, our trading partners, particularly Europe, are giving up trying to increase demand through stimulus and other measures and are focused on reducing deficits, even though that switch is bound to depress economic growth and put millions of people out of work. And the deficit reduction and other "austerity" measures are aimed directly at wages, benefits and safety nets for the less well off — exactly what the deficit hawks are urging for the US through Obama’s stacked deficit reduction commission.

It seems there’s a world-wide pandemic of deficit derangement syndrome, being pushed by the usual economic elites at the expense of everyone else. And even if "belt-tightening" is needed in some cases, there’s no talk of asking for shared sacrifice among the wealthy. Bond holders/Creditors must be protected.

The angry citizens demonstrating in Europe’s cities know this is class war being waged against them by the world’s economic elite, but nobody calls it that; instead, it’s all wrapped there and here in the language of "fiscal responsibility" (from FT):

Many other finance ministers accepted market realities had changed the G20’s policy, Christine Lagarde, French finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth”.

Even Dominique Strauss Kahn, managing director of the International Monetary Fund who championed fiscal stimulus since January 2008, recognised the world was suddenly different. Asked whether he felt comfortable with the change in tone from the G20, he replied: “Totally comfortable. I am not the champion of fiscal stimulus, but the champion of right fiscal policy.”

Where’s Our Plan B? New Team A?

The Obama Administration is staring at a failed economic policy. The recovery is not robust enough, and they can’t point to a credible driver for sustained growth. At best, it’s likely to take years to recover the 9 million or so jobs we’ve lost.

They’ve shackled themselves to half policies. Obama was unwilling to ask for more than half the fiscal stimulus his own economists told us we needed last year. Now they’re afraid to ask Congress for what the economy still needs and can do nothing while nihilist Republicans and inexcusably ignorant Blue Dogs tell us we can’t afford to keep states from laying off hundreds of thousands teachers and others as they curtail Medicaid. We can’t even afford to have summer jobs for students.

It’s inexcusable that Ben Bernanke told us, before he was confirmed, it’s not his problem, even though it is. Now more of his Fed colleagues are clamoring for policies that could produce another recession if pursued now.

Once the Administration was unwilling to spend enough and unwilling to demand the Federal Reserve follow its mandate to pursue full employment, the economic team told us we’d use expanded trade to grow our way out of the Great Recession, e.g., looking to European expansion. But G20 and panic in Europe just killed that, and Obama’s own pandering to the deficit hysterics makes our protests unconvincing.

We need more than a Plan B; we need a different Team A (save Romer). Even if the current team claims they "saved" the financial sector (to do what? The "reforms" preserve the same looters, only bigger) after ignoring how they let it nearly collapse, it’s not convincing to say we shouldn’t give a different economic team a chance. We might even find some actual Democratic economists for a change. I suspect Democratic voters would approve.

John Chandley

What Digby said, Global Neo-Hooverism
Krugman, Lost Decade, Here We Come

Paul Krugman, The pain caucus; Lost decade looming
Dean Baker, Pearlstein nails spendthrift Blue Dogs; Deficit Hawks opposed to the jobs bill were too dumb to see $8 trillion housing bubble
Brad DeLong, The ten-year US treasure rate is . . . 3.20%; Well yes, my hair is on fire . . . linking to Duncan at Eschaton
Simon Johnson, French Connection: European crisis worsens; Eugene Fama and TBTF banks
Calculated Risk: check out the unemployment graphs, esp. here and here.

Goldman Fraud Suit Link to AIG Payouts?

11:14 am in Uncategorized by Scarecrow

I suspect I just missed this before, but . . .

Remember the outrage following the New York Federal Reserve’s decision to cover 100 percent of the credit default swaps claims against AIG. Well, now it appears that payout may have been for the same types of Goldman Sachs initiated securities over which Goldman is now being sued by the Securities and Exchange Commission.

From the continuing fine reporting by the Times’ Louise Story and Gretchen Morgenson we get a very helpful chart of the scheme and more clarity on how it worked.

Goldman used ACA Management as the respectable front for the alleged scam, telling potential investors that ACA Management was a disinterested independent entity compiling the mortgage-based securities that would be placed in one of the numerous Abacus investments. Meanwhile, SEC alleges, Mr. Taurre, a Goldman VP, knew that hedge fund manager John Paulson was not only helping select likely-to-fail securities for that investment, but also planning to bet against them because he believed the mortgage bonds on which the investment was based would fail. The investors betting the same securities would be fine weren’t told about this conflict.

Goldman structured the Abacus portfolios with a sharp eye on the credit ratings assigned to the mortgage bonds contained in them, the S.E.C. said. In the Abacus deal cited in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved.

Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against the bonds while clients on the other side of the trade wagered that they would make money.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre disclosed only the ratings of those bonds and did not disclose that Mr. Paulson was on the other side, betting those ratings were wrong. . . .

But that wasn’t the only Abacus investment that might have been structured this way:

In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which received a $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.

That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital.

So, shouldn’t we be asking whether AIG was used in the same way that ACA Management was used? Were the Credit Default Swaps for which AIG was on the hook — and which taxpayers would eventually pay off at 100 percent — also influenced by Goldman directly or through John Paulson or other hedge funds intending to create investments that, while sanctioned by AIG, were bound to fail and make the secret creators rich?

Officials at NYFed testified earlier at the Financial Crisis Inquiry Commission and before Congress about the 100 percent payout, but that was before we knew the latest details on the alleged Goldman fraud. Maybe it’s time to haul these folks back and ask whether they were also duped by Goldman, AIG or others.

More fraud stuff:
Yves Smith: Rabobank Merrill Committed Similar Fraud to Goldman with a Magnetar-sponsored CDO
Simon Johnson, Our Pecora Moment
NYT/Story and Morgenson: For Goldman a Bet’s Stakes Keep Growning

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