Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Month: April 2009 Page 4 of 5

IMF Now Estimates Losses To Grow To 4 Trillion

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On April 7, 2009

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The odd thing about this is that 4 trillion is the number I’ve been hearing as the banks own estimate of their losses for a few months now, I even mentioned it back in February.

If the banks think their losses are 4 trillion, that means the total losses are higher, and the worldwide losses are much, much higher.

Numbers are still being lowballed.  Now that doesn’t mean that 4 trillion will necessarily have to be spent by the federal government, the move to mark-for-market accounting, which allows banks to keep assets on their books until marutity at calculated prices, for example, will reduce how much money the government has to spend to keep banks from actually going under.  The Geithner plan, if it works, is likewise intended to inflate asset prices through the miracle of leverage, and that will reduce perceived losses.  If lucky, it might even reduce eventual nominal losses, by holding the assets to maturity and praying really hard that they don’t default, and that by maturity the market and economy are a lot stronger.

Still, all in all, my guess is that the IMF is still underestimating the issue.  In fact, it’s not even clear if there’s enough free money in the world to absorb all the real losses, but I suppose if everyone keeps printing enough money, we can get there.

Calculated Risk via Atrios

American Voters Approve of Force Against North Korea: AKA American Voters Are Fools

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On April 6, 2009

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Image by Joffley

Image by Joffley

Most of the time I’m angry US elites pay so little attention to popular opinion, but sometimes I’m glad:

American voters across lines of age, party and gender support a military approach to eliminate North Korea‘s nuclear capabilities, according to a Rasmussen Reports survey released Sunday morning — and conducted in the two days prior to North Korea’s test missile launch on Saturday.

The poll shows that 57 percent of all voters support such a response, while just 15 percent oppose it. A military response is favored by a majority in both parties — 66 percent of Republicans and 52 percent of Democrats — and by 57 percent of both men and women.

A majority of respondents, 51 percent, also oppose the U.S. offering economic aid to North Korea in exchange for it agreeing to dismantle its nuclear program.

Uh huh. North Korea has a very large army, poised at the border with South Korea. Strikes against North Korea would lead to retaliation against South Korea.  In this case, the capital, Seoul.  North Korea, unlike Iraq, has a lot of chemical weapons.  They are pointed at Seoul.  If the North Korean army decided to shell Seoul, there would be huge loss of life. If they invaded, and there’s a good chance they would, they would overrun Seoul, and, since I know most Americans could care less if hundreds of thousands of foreigners die, they’d also overrun US forces in South Korea, killing thousands.

The only thing that might allow an attack to work would be heavy use of nuclear weapons.  I believe that would meet the definition of irony.

Elizabeth Warren: Finally someone with a clue how to handle the financial crisis

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On April 5, 2009

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Warren’s the chief watchdog for the 700 billion TARP fund.  Unfortunately, she has no real power, but it’s still nice to see a government official say not just some of the right things, but almost all of the right things.  Talk of how the US is following Japan’s path is finally everywhere (myself and a few others have been talking about it for years, and started really beating the drums last year).  Here’s Elizabeth:

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government’s Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be “wiped out”. “It is crucial for these things to happen,” she said. “Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade.”…

… Warren also believes there are “dangers inherent” in the approach taken by treasury secretary Tim Geithner, who she says has offered “open-ended subsidies” to some of the world’s biggest financial institutions without adequately weighing potential pitfalls. “We want to ensure that the treasury gives the public an alternative approach,” she said, adding that she was worried that banks would not recover while they were being fed subsidies. “When are they going to say, enough?” she said.

She also calls for the resignation of the CEOs of the worst firms.

One thing I’m tired of hearing though is the phrase “lost decade”.  Japan didn’t just lose a decade, it has never really recovered.  The good times have never come back.

I also think that bondholders need to take a haircut as well, not just shareholders, though they may not need to be wiped out in all cases.  However, if the value of a company if it was liquidated is less than zero, then yes, non-secured bondholders (those whose bonds aren’t attached to specific assets with value) should be wiped out.

Libby: Washington December 2006

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On April 5, 2009

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She is slight and crisply gray suit clad, her hair pinned into a bun and her lip bitten. The office is large, with only one window letting in dusk’s strained light. Three walls are covered with maps and graphs, each pinned neatly in place. In one corner, a muted television changes channels each minute and the final wall is nothing but crisp LCD screens. Some display stock tickers, others charts, still others a blur of words or news tickers. The woman sits cross legged in her chair at the center of this, completely motionless. She is looking in the direction of a series of charts whose titles all relate to housing and credit risk derivatives, but her eyes are unfocused..

When the man says her name, “Libby”, she doesn’t so much as twitch until long seconds have gone by. Slowly, with a shift of her weight, she swivels the chair to face the silver haired man.

“John.”

He smiles faintly, “Libby.”

“Credit derivatives.”

He nods. “Offloading default risk from banks onto investors. The chairman says they make the market much… stronger.”

“Who’s buying these derivatives?”

“Hedge funds are big. Those boys need big profits. No one parks their money in a hedge fund to get mutual fund returns.”

“Lot of them are getting mutual fund returns.” She nods towards one of the charts.

“I’m guessing their risk profile isn’t the same as a mutual fund’s.” It’s not a question but Libby nods to another chart.

“Nope. Lots of refi exposure too. ‘Cause the risk of someone defaulting on a second mortgate is no big deal.” She gestures with her chin to a series of charts pinned to one wall and he turns to look at them.

“Time to sale of housing. Seems to be going up in a lot of markets.”

“When a market hits a sharp discontinuity who gets hurt worst, first?”

“People who expect it to continue trend.”

The silver haired man turns back to Libby. His voice is weary, “are we going to hit a discontinuity?”

“Ever blow bubbles as a kid?” One corner of her mouth tilts up. “Any of them ever not burst?”

John shakes his head, but says, “well, not that I know of. But maybe one’s still blowing on the wind somewhere.”

Libby raises a hand slowly, then purses her lips and blows. John turns to look in the direction off her breath, “still going”.

She shakes her head, then cracks her hands together. The two of them match gazes for a few seconds and the older man finally breaks the gaze to look at the monitor. With a stride he stands next to the slight woman, then crouches, his head level with hers. “Show me the numbers.” She swivels back to the monitor and as the last pale light of the sun dims he follows her flashing white hands in a darkness lit only by the light of her screens.

Note:

This is one of the John Q. Treasury series of short stories, the majority of which are no longer online.  There have been some requests to repost them, so here’s one of the last.  I’ll repost more as time goes by and perhaps write some new ones.  There’s certainly plenty of reason for John,  Libby and friends to return.  Unfortunately.

Power and Gender

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On April 4, 2009

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Image by Nick in Exsilio

Image by Nick in Exsilio

Many years ago I took a sociology course which really turned out to be about anthropology.  Indeed the two disciplines are so close that Carleton U used to offer a 100 level course called “Introduction so SocioAnthropology” or something fairly similar to that.

Anthropologists roughly divide societies into basic groups by how they extract a living from the environment. The basic groups are hunter/gatherers, horticultural (take a stick, push it in the ground, drop a seed in), agricultural (plows) and industrial (nomads exist off to one side). What’s interesting about this is that that with very few exceptions (the Inuit are one) hunter gatherer bands are the most egalitarian societies, by far – even more egalitarian than modern industrial societies.

Agricultural societies, on the other hand, are the least egalitarian societies in general.

My Prof at the time posited the following: the more a gender contributes the more powerful they are. In typical hunter gatherer bands women account for 60% to 70% of the food – while the men are out hunting, they gather, and they gather, in fact, more food than the hunters bring in. In agricultural societies, on the other hand, men do the plowing, and women are generally relegated to the home.

But this begs an obvious question, one I immediately asked. If power is based on contribution, why aren’t hunter gatherer bands matriarchal? After all, the women are actually contributing not an equal amount of food – but much more than the men!

The answer was interesting, and I think, has a lot of truth to it. Gatherers don’t work in tight teams. Hunters, as a rule, did (remember, these guys didn’t have guns.) So the men had stronger social ties than the women.

And it is true, in general, that wherever you see women with low status, they are kept from interacting much – from forming ties with other women, or even more so, with men outside their families.

In our own society, it is striking that when things go really bad it is often with women who have become practically house bound. And it is also notable that the 50’s had women practically confined to the house.

None of this, really, should come as a surprise.

If you have the ability to produce more money, you’ll be more powerful. And who you know is one of the biggest determinants of how influential and powerful you are. Simply mentioning that you are friends with a noted lawyer, or being known to hang out with powerful people, can make you money or scare off potential predators. Not to mention give you leverage against an abusive spouse.

The housebound period then, that many modern women go through when they have their children, reduces their power both directly by reducing their earning power, and indirectly because it is often accompanied by a collapsing social circle. Likewise the tendency of many to lose friends once they become married is something to be guarded against.

The general principles, however, suggest hope for those who prefer more egalitarian societies. Because, in general information societies, should we manage to attain such, will increase the ability to maintain and extend social ties despite physical circumstances, and upper body strength will be even less necessary than it is now to earning a living. The hangover of old attitudes, the glass ceiling and so on will still be there, but there should be more cracks in that ceiling, and more power and influence to use in combating those attitudes.

Originally published at the Agonist, or maybe BopNews.

I’m Sure There’s a Difference Between the Bush/Paulson, Obama/Geithner Approaches to Bailouts

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On April 4, 2009

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I’m just not sure what:

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

At this point in time, there seems to be no significant functional difference between Paulson/Bush and Geithner/Obama.  Both intended to give a ton of money to financial firms, either directly or by buying up crap at prices higher than justified.  Both opposed any meaningful restrictions on how they spent the money or who they gave it to.

Actually, I take it back, one difference is that when Paulson wanted 700 billion, he went to Congress.  When Geithner made up his plan he just had the FDIC and the FED pony up most of the money, because he knew Congress wouldn’t give him the money.

Some wonder if this is legal:

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay.

Me, I don’t know if it’s legal.  What I do know is that they plan on giving money away in a manner which clearly intends to end-run Congress’s clearly legislated mandate for how it be given away.  What I know is that they are bypassing Congress when they can, because they know that the elected body which is the only one supposed to be able to pass spending bills wouldn’t give them all the money they want to spend and won’t let them spend what money it does give as freely as they want to.

Of course, that money will still have to be paid back by taxpayers, even if Congress never approved the spending.

But back to the TARP restrictions:

Congress drafted the restrictions amid its highly contentious consideration of the $700 billion rescue legislation last fall. At the time, lawmakers were aiming to reform the lavish pay practices on Wall Street. Congress also wanted the government to gain the right to buy stock in companies so that taxpayers would benefit if the firms recovered.

The requirements were honored in an initial program injecting public money directly into banks. That effort was developed by the Bush administration and continued by Obama’s team. The initiative is on track to account for the bulk of the money spent from the rescue package. All the major banks already submit to executive-compensation provisions and have surrendered ownership stakes as part of this program.

Yet as the Treasury has readied other programs, it has increasingly turned to creating the special entities. Legal experts said the Treasury’s plan to bypass the restrictions may be unlawful.

The problem is that while Geithner’s plan takes money from the FDIC and the Fed, it still uses some TARP money as seed money, and that money carries the restrictions.

I thought it wasn’t the executive’s job to decide that Congress is wrong and then deliberately end-run it.  I thought we had an election to stop this sort of thing.

This is one of the things we spent the last 8 years blasting Bush for doing. But in this particular case, the new administration is being less compliant with Congress’s will than the Bush administration was!

Less!

I don’t know whether to spit or cry.  I’ve always had my doubts about Obama, but in my worst dreams I didn’t think he’d try and end run Congress even more blatantly than Bush, in order to give even more money away to the richest Americans with even fewer restrictions and less protection from the taxpayer in terms of ownership stakes.

It’s going to be a long 4 years.

Devestatingly Bad Jobs Report

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On April 3, 2009

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The headline number you’ll be hearing is 663,000, which is from the survey of businesses (the establishment survey).  The population survey (where they call households) show’s a reduction in employment of 861,000 jobs, with 161,000 leaving the workforce, for a total increase in unemployment of 694,000 (you aren’t counted as unemployed if you’ve given up looking.)

The official unemployment rate jumped from 8.1 to 8.5%.

The only sector still adding jobs is the health sector, though not by much.  Goods producing workers are being hammered, taking almost half the losses despite accounting for less than a sixth of the economy.  The US continues to shed precisely those jobs it needs in order to deal with its addiction to borrowing from foreigners to buy foreign produced goods.

The establishment survey is generally considered more accurate, though the household captures losses and gains of self-employed workers.

Employment is generally considered a lagging indicator, and the general consensus at this point amongst economists is that the leading indicators are beginning to turn around.  I think they’re calling it a bit early, but I expect that when the “recovery” does come it will initially be a jobless recovery, similar to those of the early 2000 and 90’s recessions.  When jobs do start to be created they will not be created fast enough, or in great enough quantities to make up the job losses, and the economy will shake apart due to inflation into the next recession long before all jobs have been regained.  I wouldn’t be surprised if this occurs by late 2010 or early 2011, since the actual stimulus spending is neither sufficient nor well put together.

Remember that any “recovery” won’t hit you for quite some time  unless you’re attached somehow to the spigot of money that Bernanke and Geithner are spewing into the financial sector.

In the meantime I’d expect that we’re going to see quite a few more devastating months.  I wouldn’t expect to see any job gains before 2010. and they won’t be very large.  I would, however, expect to start seeing some inflation in parts of the economy, while deflation continues in other areas.

Did AIG Never Intend to Pay Off Most Collateralized Debt Swaps?

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On April 3, 2009

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There’s an interesting article going around which notes the widespread use of side-letters in the insurance industry. Side letters were used to say “even though you’ve said that you’ll take on X amount of risk on this insurance policy, we won’t hold you to that.”  The letters were generally buried off to one side, only to come to light if things did go wrong.  Insurance companies did this because if they bought say 1 million of reinsurance for $100,000, they freed up $900,000 of regulatory capital which they could continue to use for further insuring or lending and so on.

Think of this as essentially the same as fractional lending.  Insurers have to have enough assets on book to cover their liabilities—policies they may have to pay off on.  If somene else is going to pay off on that risk because you bought reinsurance from them, you don’t need that capital.  So buying reinsurance frees up capital.  As for the seller of reinsurance, they get money in exchange for no risk, if there’s a side letter.  Win, win.

The article goes on to suggest that many Credit Default Swaps (CDSs) AIG sold may have had similiar side letters, which since AIG was never seized, may have been destroyed.  I don’t know if such side letters existed, but my take is that neither side, in many cases, expected to every have to collect on CDSs, or pay on them.

But when everything went to hell, they certainly tried to.  The key fishy problem with AIG wasn’t the bonuses, it was that counterparties were getting paid 100% of the value of CDSs with government money, something they had no right to expect from what amounts to a bankrupt company.  In such a case, either as AIG or the counterparty, why would you bring up the side letters, if they exist?  The counterparties are getting money and AIG is paying out with money that isn’t theirs anyway.

As for the government, the reason all that money was given to AIG was specifically so they could pay off counterparties—it was a way of getting money to various damaged financial firms, including overseas ones, who needed the money, without it being obvious that the government was giving that money away, especially to foreign firms, which would have caused a firestorm

So, I don’t know if these side letters existed, and it’s worth finding out because if they did, that makes all the transactions fraudulent and we can insist on all the money back and prosecute.  But the bottom line is that the government, AIG and the counterparties all wanted the money to be paid out, whether there was a legal obligation or not.  So don’t expect anyone to look too hard, unless Congress really gets the bit between its teeth.

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