10. notes march 20, mostly economics.

March 21, 2009 § 1 Comment

So, lots of stuff. A few comments

A U.N. report published today states that six in ten people (60%) of the world’s population has a cell phone subscription. The driving growth trend is coming from poor, developing countries. This 60% figure is up from just under 15% in 2002.
Pasted from <http://www.tgdaily.com/index.php>

This seems to me social dynamite, because at the same time living conditions are deteriorating in so much of he third (and the rest) world. It means that if a social movement started it could wild fire. 

David Brooks acts reasonable as he argues that Obama should not simultaneously pursue financial issues and social issues, but this is ingenuous because he knows that Obama’s view is that the way to solve the economic is through meaningful social capacity building; health and education, and including environmental infrastructure through energy and transportation. Brooks is playing foul here, rhetoric over integrity. 

The president of the United States has decided to address this crisis while simultaneously tackling the four most complicated problems facing the nation: health care, energy, immigration and education. Why he has not also decided to spend his evenings mastering quantum mechanics and discovering the origins of consciousness is beyond me.

Now, here is what I am afraid of. Assets that are depreciated are being bought up by those with lots of cash.

IndyMac’s assets and operations were acquired by OneWest Bank, FSB, a newly-formed California-based federal savings bank.

The director of the “new” bank isSteve Mnuchin from LA. 


Sears Holdings Corporation

Hoffman Estates ,  IL

Sector: SERVICES  /  Department Stores

46 Years Old

Steven T. Mnuchin, 46, has served as Chairman and Chief Executive Officer of IMB HoldCo LLC, which has signed a letter of intent with the FDIC to purchase the banking operations of IndyMac Federal Bank, FSB, since January 2009. Mr. Mnuchin is also Chairman and Co-Chief Executive Officer of Dune Capital Management LP, a private investment firm, and he has served in that capacity since September 2004. Previously, Mr. Mnuchin served as CEO of SFM Capital Management LP (an investment adviser) from 2003 to 2004 and as Vice Chairman of ESL Investments, Inc. during 2003. Prior to joining ESL, Mr. Mnuchin spent 17 years at Goldman, Sachs & Co. where he served as Executive Vice President and Chief Information Officer. Mr. Mnuchin is a trustee of the Whitney Museum, Riverdale Country School, and New York Presbyterian Hospital.

 On rating companies, who will be getting fees for ratings.


Credit-rating companies, widely assailed for their role in fueling the financial crisis with overly rosy debt ratings, stand to make a billion-dollar windfall in the government’s latest attempt to heal the credit markets.

The new rescue effort, run by the Federal Reserve, kicked off Thursday with bond deals totaling more than $7 billion. Each bond issue will need to be blessed by at least two of the three big rating firms: Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings.

These firms dominate the credit-ratings business, and their imprimatur is considered crucial for investors that buy bonds and asset-backed securities. They have been vilified in recent months because their ratings on mortgage securities were widely off base.

Now the government is in the uncomfortable position of rewarding these same firms through a new program that will result in numerous companies issuing securities. If the ratings companies are wrong this time around, the Federal Reserve and the Treasury — and therefore taxpayers — will be on the hook for some losses.


Fiscal aspects of quantitative easing (wonkish)

The big policy news this week has been the Fed’s decision to buy $1 trillion of long-term bonds, going beyond the normal policy of buying only short-term debt. Good move — but it’s probably worth pointing out that yes, this does expose the Fed, and indirectly the taxpayer, to some risks. And in so doing, it blurs the line between fiscal and monetary policy.

Now, the Fed isn’t taking on any serious default risk — Treasuries are backed by the full faith etc of the US government, and agency debt is de facto backed by the same, although the market doesn’t seem to believe that. Anyway, the Fed is for these purposes a government agency itself, so all this is debt between different parts of USG.

The Fed is, however, creating a new liability: the monetary base it creates to buy these bonds. In effect, it’s printing $1 trillion of money, and using those funds to buy bonds. Is this inflationary? We hope so! The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.

The problem may come when the economy recovers, and inflation starts to become a problem rather than a hoped-for outcome. Basically, there will come a time when the Fed wants to withdraw that extra $1 trillion of money it created. It will presumably do this by selling the bonds it bought back to the private sector.

But here’s the rub: if and when the economy recovers, it’s likely that long-term interest rates will rise, especially if the Fed’s current policy is successful in bringing them down. Suppose that the Fed has bought a bunch of 10-year bonds at 2.5% interest, and that by the time the Fed wants to shrink the money supply again the interest rate has risen to 5 or 6 percent, where it was before the crisis. Then the price of those bonds will have dropped significantly.

And this also means that selling the bonds at market prices won’t be enough to withdraw all the money now being created. So the Fed will have to sell additional assets; if the rise in interest rates is at all significant, it will have to get those assets from the Treasury. So the Fed is, implicitly, engaged in a deficit spending policy right now.

My back of the envelope calculation looks like this: if the Fed buys $1 trillion of 10-year bonds at 2.5%, and has to sell those bonds in an environment where the market demands a yield to maturity of more than 5%, it will take around a $200 billion loss.

I’m not complaining; I think quantitative easing (it’s really qualitative easing, but I give up on trying to fix the terminology) is the right way to go. But we should go into it with our eyes open.

 If the fed is printing lots of dollars, and we are broke, and not producing the stuff people would want to buy, then we are headed for serious inflation .It cuts debt but increases costs of borrowing. Better to face that we are in a jam.

My fundamental view is, with a weakly producing economy, we need to rebuild, not back to where we were, but to a new kind of economy. GardenWorld?

AndNocera in the NYT 

Oh, and let’s not forget the bill that was passed on Thursday by the House of Representatives. It would tax at a 90 percent rate bonus payments made to anyone who earned over $250,000 at any financial institution receiving significant bailout funds. Should it become law, it will affect tens of thousands of employees who had absolutely nothing to do with creating the crisis, and who are trying to help fix their companies.  

In other words, it is in the taxpayers’ best interest to position A.I.G. as a company with many profitable units, worth potentially billions, and one bad unit that needs to be unwound. Which, by the way, is the truth. But as Mr. Ely puts it, “the indiscriminate pounding that A.I.G. is taking is destroying the value of the company.” Potential buyers are wary. Customers are going elsewhere. Employees are looking to leave. Treating all of A.I.G. like Public Enemy No. 1 is a pretty dumb way for a majority shareholder to act when he hopes to sell the company for top dollar.

But there is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman SachsBank of America,Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?

He is, as he has been in earlier articles, defending the high salaries. I think those salaries only need to be high if those of others are high. These are good jobs and people would do them well ,in a sane economy, for say 250.000. And this good conclusion

What the country really needs right now from Congress is facts instead of rhetoric. Instead of these “raise your hand if you took a private jet to get here” exercises of outraged populism, we need hearings that educate and illuminate. Hearings like the old Watergate hearings. Hearings in which knowledge is accumulated over time, and a record is established. Hearings that might actually help us get out of this crisis. It’s happened before. In 1932, Congress established the Pecora committee, named for its chief counsel, Ferdinand Pecora. It was an intense, two-year inquiry, and its findings — executives shorting their own company’s stock, for instance — shocked the country. It also led to the establishment of the Securities and Exchange Commission and other investor protections. One person who has been calling for a new Pecora committee is Senator Richard Shelby of Alabama, a Republican and key member of the Senate Banking Committee.

“As we restructure our regulatory system, we need to be thorough,” he told me. “We need to understand what caused it. We shouldn’t rush it.”

That quote is good for the strategy center, and also reminds me of Fromm’s The Sane Society. Time to reread. The following is just the beginning of a long discussion, as see Krugman later in the notes.


Published: March 20, 2009

This article is by Edmund L. Andrews, Eric Dash and Graham Bowley.

WASHINGTON — The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.

The plan is likely to offer generous taxpayer subsidies, in the form of low-interest loans, to coax private investors to form partnerships with the government to buy toxic assets from banks.

To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

The uproar over American International Group‘s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.

This will be the selling of low priced assets to those who came out of the last few years with lots of money.It means a further concentration of wealth which means a deconcentration at the lower end.

The three-pronged plan is perhaps the most central component of President Obama’s plan to rescue the nation’s banks from the mountain of money-losing assets that are weighing down their balance sheets, crippling their ability to make new loans and deepening the recession.

Industry analysts estimate that the nation’s banks are holding at least $2 trillion in troubled assets, mostly residential and commercial mortgages made at the height of the housing bubble.

The plan to be announced next week involves three approaches. In one, the Federal Deposit Insurance Corporation would set up special-purpose investment partnerships and lend about 85 percent of the money those partnerships would need to buy up portfolios of mortgage assets that banks want to sell.

So you hae to pay back the 85% (but there will be guaanteesI suspect) whch means if the asset can be spun out at twice the cost, the gain is 200-85+15 =100% profi on the total transaction, but 1000% on real investment. We are already seeing OneWest selling in this range,and finding buyers.

In the second, the Treasury would hire four or five investment-management firms, matching the capital that each of the private firms puts up on a dollar-for-dollar basis with government money.

And in the third piece, the Treasury plans to expand lending through an existing joint venture with the Federal Reserve, the Term Asset-Backed Secure Lending Facility. That program seeks to jump-start the market for business and consumer loans.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

But the details have been treacherously difficult, politically and financially, and some of the big decisions are the same as those that bedeviled the Treasury Department under President George W. Bushlast year.

Timothy F. Geithner, the Treasury secretary, provoked scathing criticism from investors in February by announcing the broad outlines of the plan without addressing the tough questions, like how the government planned to share the risk with investors or arrive at a fair price for the assets that would neither cheat taxpayers or harm the banks.

Although the details of the F.D.I.C. part were still being finalized on Friday, it is expected the government would provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors would be bidding in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.

To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

The government would receive interest payments on the money it lends to a partnership and it would share profits and losses on the equity portion of the investment with the private investors.

Ever since last fall, industry analysts and policy makers in Washington have argued that the banking system’s biggest problem was the huge pile of troubled mortgages and other loans on bank balance sheets.

Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers were still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.

The result has been a paralyzing impasse. Banks, unwilling to sell their loans at firesale prices, have had less capital available to make new loans. Mortgage investors, unable to leverage their investments with borrowed money, have been unwilling to pay more than firesale prices.

To break that impasse, the government’s crucial subsidy is meant to provide investors with the kind of low-cost financing that has been utterly unavailable in today’s panic-stricken credit markets.

Adminstration officials refused to comment on the details of the plan, and refused to say what kind of interest rates the government would be charging investors.

But government officials have long maintained that they could charge slightly more than the Treasury’s own cost of money and still be far less than what the private markets would demand.

To start the program, Treasury will ask Wall Street banks, likeCitigroup or JPMorgan Chase, to identify individual pools of residential and commercial real estate loans that they would be willing to sell through an auction. Private investors would bid against each other, setting a market price. No bank will be required to participate.

The Treasury Department’s biggest obstacle may be the current political environment in Washington, where Democratic lawmakers are furious about the pay packages and bonuses received by executives at companies being rescued by taxpayers.

Many investment executives said they are deeply worried that participating in any government bailout program will expose them to political wrath and potentially steep new restrictions on their own pay.

Treasury and Fed officials have remained firmly against imposing any restrictions on pay for companies that are investing money in the rescue effort rather than receiving money from it.

The plan comes as financial institutions continue to buckle under the weight of bad mortgages. Federal regulators late Friday seized control of the two largest wholesale credit unions — U. S. Central FederalCredit Union and Western Corporate Federal Credit Union — which together had $57 billion in assets. They provide financing, check-clearing and other tasks for retail credit unions.

But we have the following. (need to google for source)

Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG’s supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being “healthy,” as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it “a house of cards.” Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG’s own 300-page annual reports, Gober argues that AIG’s 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.

And, for thoughtfullness,

“The best fiction is far more true than any journalism.” 

— William Faulkner

Two interesting articles, hopefully critiques coming up.

Why Has Critique Run out of Steam?

From Matters of Fact to Matters of Concern

by Bruno Latour

For What it’s Worth… 

by Mary Poovey





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