On Wednesday, President Barack Obama released his proposal (PDF) for new regulation of financial instruments, including derivative products like credit default swaps that many believe contributed to the financial meltdown. But separate sets of rules for two types of derivatives could undermine the effectiveness of the administration's regulatory reform. Obama's Derivatives Loophole.

On Wednesday, the White House released its plan for reviving financial regulatory reform. And the plan nicely sums up how credit default swaps--complex financial instruments traded between financial firms to cover possible losses--helped grease the way to the current economic disaster:

One of the most significant changes in the world of finance in recent decades has been the explosive growth and rapid innovation in the market for financial derivatives. Much of this development has occurred in the market for OTC derivatives, which are not executed on regulated exchanges. In 2000, the Commodity Futures Modernization Act (CFMA) explicitly exempted OTC derivatives, to a large extent, from regulation by the Commodity Futures Trading Commission. In addition, the law limited the SEC’s authority to regulate certain types of OTC derivatives. As a result, the market for OTC derivatives has largely gone unregulated.
The downside of this lax regulatory regime for OTC derivatives – and, in particular, for credit default swaps (CDS) – became disastrously clear during the recent financial crisis. In the years prior to the crisis, many institutions and investors had substantial positions in CDS – particularly CDS that were tied to asset backed securities (ABS), complex instruments whose risk characteristics proved to be poorly understood even by the most sophisticated of market participants. At the same time, excessive risk taking by AIG and certain monoline insurance companies that provided protection against declines in the value of such ABS, as well as poor counterparty credit risk management by many banks, saddled our financial system with an enormous – and largely unrecognized – level of risk.
When the value of the ABS fell, the danger became clear. Individual institutions believed that these derivatives would protect their investments and provide return, even if the market went down. But, during the crisis, the sheer volume of these contracts overwhelmed some firms that had promised to provide payment on the CDS and left institutions with losses that they believed they had been protected against. Lacking authority to regulate the OTC derivatives market, regulators were unable to identify or mitigate the enormous systemic threat that had developed.

A few days ago David Letterman told a crass joke about Bristol Palin.  It was, as Paul Farhi points out, similar to a million other crude jokes told about the Palin family over the past year.  But this time Sarah Palin went ballistic and last night Letterman apologized. James Joyner comments:

A week ago, I wrote a post titled Letterman Palin Jokes Cross the Line, both excoriating Letterman for his remarks but defending him from the ridiculous charge that he was some sort of pervert who liked to joke about 14-year-olds.  Since then, Letterman first explained his remarks and subsequently apologized for them profusely. And rightly so.

But I have a hard time believing Palin was legitimately confused days later about the target of the joke and, in light of the previous jokes told about Bristol’s out-of-wedlock pregnancy, particularly outraged at this one.   Instead, she took advantage of the initial media brouhaha over the Willow/Bristol confusion and made a big spectacle, hoping to both remove the Bristol mess out of the realm of legitimate ridicule and reframe herself as an aggrieved party rather than a rather cartoonish figure.

Letterman may have gone over the line, but that plainly wasn't what bothered Palin.  She was just looking for some free publicity, and getting her supporters worked up over a supposed insult from a dissolute member of the East Coast liberal elite played directly into her standard class resentment schtick.  It shows impressive political instincts, in a way.  It's a good thing she's not as ruthless, smart, or tireless as Richard Nixon or we might all be in real trouble.

In related news, check out the Sarah Palin shrine at the New York Stock Exchange.

U.S. Army 1LT Jared Tomberlin (left) from Bravo Company, 1st Battalion, 4th Infantry Regiment gets a first hand view of the land with outgoing commander 1LT Larry Baca from Charlie Co. 1-4, on top of a ridge near Forward Operation Base Lane, Zabul Province, Afghanistan, on February 21, 2009. (U.S. Army photo by Staff Sergeant Adam Mancini / Released)

What's making American kids fat? Some blame food deserts, while others implicate fast-food restaurants, lack of exercise, or poor parental eating habits. But a few recent studies seem to suggest that the childhood obesity epidemic may be more complicated than we thought.

In the New York Times, Tara Parker-Pope reports that among kids under 13, burgers and fries are out, while yogurt, soup, and grilled chicken are in. This, she says, is good news:

To be sure, pizza, burgers, fries and kids’ meals are still the most popular items ordered by children; the percentage gains for items like soup and yogurt are from a smaller base. But the trends bolster an argument that children’s health researchers have made for years: if you offer more healthful food, kids will eat it.

But will they? Another recent study suggests that parental eating habits actually have little to do with kids' food choices. And according to a study released today by the Indiana University-Purdue University Indianapolis, household proximity to fast-food restaurants doesn't have much bearing on whether a child is obese, either. (And get this: The Purdue researchers found that living near a gym or rec center was actually associated with weight gain.)

So, what to make of these counterintuitive findings? While any one of these factors might not explain childhood obesity on its own, it's also not realistic to think of them as existing in a vacuum. Instead, they act in concert, along with other variables, like genetics. It's not totally out of the question that a kid who is genetically predisposed to obesity might also live near McDonald's and watch his dad eat Quarter Pounders three times a week. A wholistic study that figures out which factors matter most, and how they interact—that's a tall order. It'd take a long time, and a whole lot of research power to boot.

Till that happens, is it really useful to isolate these variables? Post your thoughts in the comments.

Iran's powers that be are not very good at Photoshop:This is a pretty obvious Photoshop fail. Begun, the clone war has. (h/t BoingBoing)

The New York Times reports today that National Security Agency "monitoring" of domestic email messages is "broader than previously acknowledged" and the agency is still examining "large volumes of Americans’ e-mail messages without court warrants." The fact that this kind of thing is no longer surprising is a sad commentary on the state of the Fourth Amendment.

As a rule, people don’t boo Barack Obama, the first rock star president. But on Monday, that’s exactly what happened. On a charm offensive in support of his health care reform efforts, Obama addressed the American Medical Association, the nation’s largest physician lobby. The doctors in the audience booed him for revealing that he didn’t support the group’s pet cause—caps on damages in medical malpractice lawsuits. Nonetheless, he did win some applause by adopting the doctors’ language and referring to the “defensive medicine” that is supposedly driving up health care costs.

In a carefully parsed speech, he said, “Some doctors may feel the need to order more tests and treatments to avoid being legally vulnerable. That’s a real issue. And while I’m not advocating caps on malpractice awards which I believe can be unfair to people who’ve been wrongfully harmed, I do think we need to explore a range of ideas about how to put patient safety first, let doctors focus on practicing medicine, and encourage broader use of evidence-based guidelines. That’s how we can scale back the excessive defensive medicine reinforcing our current system of more treatment rather than better care.”

It was a cagey move. In throwing the docs a bone, Obama embraced one of their most cherished arguments: that “defensive medicine” is driving up health care costs. But this bone doesn’t have much meat on it. Defensive medicine is doctors’ favorite anti-lawsuit argument. It goes something like this: The mere threat of malpractice lawsuits drives physicians to overprescribe expensive tests and procedures, ergo, making it harder for malpractice victims to sue would bring down health care costs. 

A quick round up of quick MoJo reads:

Those meddling kids at the State department asked Twitter to postpone the Fail Whale's Tehran cameo; Wall Street breathed a sigh of relief; and this week's adorably endangered animal is the Hawaiian monk seal.

Meanwhile, Blackwater lost a federal-issue fryer (and $55 million), health care reform is feeling a bit faint, and Chastity Bono's sex change = shrug.

And the question of the day: Are there any senators whose Tweets aren't cringeworthy? This guy, not so much.

Stories on health, the environment, and science from our other blogs you might have missed yesterday:

Pay more, get less: Only about 1/5 of charter schools perform better than public schools.

Death and taxes: Musings on the taxes necessary for universal healthcare.

Grassley's tweets: A translation of tweets by 75-year-old senator Chuck Grassley.

Palin's pain: While Palin is complaining, real women are actually being raped in Africa.

Obama's 1st climate report: Press nearly wets itself in excitement.