2008...essiah-complex - %2

Shadow Banking

| Wed Dec. 24, 2008 12:17 PM EST

SHADOW BANKING....Like Ezra Klein, Dean Baker, and me (and a cast of thousands) Paul Krugman is puzzled that so many economists failed to see the housing bubble in real time. But even those who did see it mostly didn't realize that the bursting of the bubble would lead to such an epic financial meltdown. Here's Krugman's explanation:

I think it's understandable, though not entirely forgivable, that economists didn't see the risks of a broad financial breakdown. We're accustomed to thinking of banks as big marble buildings with "member of the FDIC" signs in the window; besides, those are the institutions on whom the standard data series report. (Indeed, some economists still fixate on those data, which is why there are still economists denying that there's a credit crunch.) So neither the size nor the vulnerability of the "shadow" or parallel banking system were widely understood.

I don't know if this is right or not, but it's the first time I've really seen someone take a crack at addressing this question. So I thought I'd pass it along.

Advertise on MotherJones.com

What Gays Can Teach Blacks About Civil Rights

| Wed Dec. 24, 2008 12:11 PM EST

I've been mulling over this column by Andrew Sullivan on Rick Warren. He gets it right; his logic is elegant and even moving.

"And this Rick Warren flap at its core, I think, is about the difference between those who see a civil rights movement as a means to wield power and those who see it as a means to spread freedom."

"My long conflict with some parts of the gay left is precisely about this distinction, and [his book] Virtually Normal was an attempt to construct a theory for gay civil rights which rests on as much freedom and as little power as possible. I want to live in a free society alongside people who genuinely believe I am a sinner destined for hell - and I want to get along with them. I am concerned (but not obsessed) with changing their minds, but totally repelled by the idea of coercing or pressuring them to do so. I am simply interested in having the government treat me as it would treat them. Once we establish that, we can all believe and say and argue for precisely what we want."

Amen, brother. The civil rights movement wasn't about forcing America to love black people. It was about forcing America to treat us like other citizens and otherwise leave us the hell alone. So what if the guy next door hates blacks or faggots? Hate on, moron. Unless he takes some sort of action that infringes on my rights—like burning a cross or gay-bashing me. Then my government better damn well ride to the rescue.

Too many blacks, I think, have forgotten this essential truth about our quest for justice. It's not about power. It's about freedom. And it shames me the extent to which blacks are using their all too new power to help oppress others. Any time a black person invokes the phrase 'civil rights', they should be required to define the term. I got a dollar that says most will wax eloquent on black rights and the wrongs done them. All too few would speak in universal terms. Don't let them (us) get away with it. They'll thank you later.

Question

| Wed Dec. 24, 2008 11:54 AM EST

QUESTION....What's the deal with fusion power these days? Is it still 30 years off, same as always?

Stupid Ratings Agency Tricks

| Wed Dec. 24, 2008 12:35 AM EST

STUPID RATINGS AGENCY TRICKS....In an obvious effort to avoid being tarred and feathered by an angry mob, Wall Street apparatchik Noah Millman engages in a lengthy self-criticism session tonight regarding "structured finance" — you know, mortgage securitization, credit default swaps, synthetic CDOs, and all the other financial weapons of mass destruction that have helped melt down the world lately. "I thought it would be of interest," he says, "to relate two stories from my long career in structured finance, one that may help explain why, if you asked me in 2004 or 2005, I would have staunchly defended structured finance technology as having real social benefit and why, by a couple of years later, it was clear to anyone looking honestly at the business that something had gone very wrong."

Yes! It would be! And all kidding aside, we've actually seen very little about this stuff written by the people who actually engineered it all. So it really is interesting.

Noah promises to tell us about the "promise and peril" of structured finance, and the "promise" part has to do with the way CDOs and CDS helped make it possible for banks to expand lending in the dismal wake of the Enron/Worldcom/dotcom bust in 2002. That's fine, but let's be honest: it's not what we're interested in, is it? We want to hear about how structured finance destroyed the planet. So let's skip right to the "peril" part.

And it's pretty good. Noah tells the story of the constant-proportion debt obligation, aka CPDO, a cute little invention of the end stage bubble industry. In a nutshell, here's how it worked: the issuer bought up a bunch of BBB securities, and every six months they sold off both the poor performers and the good performers, replacing them with more BBB securities. The idea was to keep the yield roughly the same over time, but since they lost money on the junk and made money on the good stuff, on average they came out even. Or even took a small loss, what with fees and all. So why bother?

Enter the rocket scientists. Even BBB securities are unlikely to default in the short term, which means that the CPDO is basically pretty safe since it sells stuff off every six months. And since it's safe, the issuer can borrow lots of money against it to invest in longer-term bonds. That's called leverage, my friends:

And, if you can get a high enough degree of leverage, the excess in current yield from the differential between where you borrow and the yield on your portfolio should more than pay for the cost of rolling out of your losers every six months. And if you do that successfully, you've got a trading strategy that never loses principal, but has a surprisingly high expected yield. Sound good?

Well, it sounded great to the ratings agencies, who blessed this strategy by giving it a AAA rating.

How did they justify that AAA rating? By looking at the historic cost of rolling credit derivatives on indices of investment-grade corporate issuers, which generally have a high-BBB rating. These had been around for about three years when the first CPDOs were rated, and the roll had never cost more than 3 basis points. Factoring in that cost, at a leverage of 15-to-1, and using historic 6-month default rates for the portfolio (since the index would be rolled every six months), the proposed trading strategy would never lose money. Hence a AAA rating.

Let me reiterate that, just to drive the point home. The ratings agencies said: you can take a BBB-rated index, leverage it 15-to-1, and follow an entirely automatic trading strategy (no trader discretion, no forecasting of defaults or anything, just a formula-driven adjustment to the leverage ratio and an automatic roll of the index), and the result is rated AAA.

....When I first heard about this product, I thought: whichever agencies rated this thing have lost their minds. When people asked me whether it made sense as an investment, I said: it's an outright fraud. You're practically guaranteed to lose money. I never bought or sold one of these things myself, and neither did anyone else in our group. But the existence of such a ridiculous product should have been a wake-up call about just how divorced from reality the agencies were. And if they were out to lunch on something as straightforwardly absurd as the CPDO, how out to lunch were they on other products, ones that were far more significant to the markets and the economy, where the absurdity of their assumptions was less-obvious.

The moral of this particular story is: back during the bubble the ratings agencies were idiots. And today, they might even be worse. Read the whole thing for more.

Monitor Your Health With A Cell Phone

| Tue Dec. 23, 2008 11:27 PM EST

Mobile_phone.png Here's the house call of the future. A prototype cell phone that monitors HIV and malaria patients and tests water quality in undeveloped areas or disaster sites. Data is then be sent via the cell phone to a hospital for analysis and diagnosis.

The imaging platform is already here. It's called LUCAS and has been experimentally installed in a cell phone and a webcam, each of which then takes an image of blood, saliva or other fluids using short-wavelength blue light. LUCAS can identify and count the microparticles instantly by using a decision algorithm to compare the captured images to a library of images.

The technology is the brainchild of electrical engineer Aydogan Ozcan of UCLA. His latest version, called holographic LUCAS, is described in the journal Lab On A Chip. Holographic LUCAS can identify smaller particles than before, such as E. coli. Ozcan's next step is to build a handheld device for people in remote areas to use to monitor the spread of disease, allowing doctors to know where they're most needed fast.

Julia Whitty is Mother Jones' environmental correspondent, lecturer, and 2008 winner of the PEN USA Literary Award, the Kiriyama Prize and the John Burroughs Medal.

Blago Update

| Tue Dec. 23, 2008 7:22 PM EST

BLAGO UPDATE....In a turn of events that should surprise no one, Barack Obama has investigated himself and discovered that his staff engaged in no wrongdoing in the Rod Blagojevich affair. According to investigation czar Greg Craig, the accounts he received from staff members "contain no indication of inappropriate discussions with the Governor or anyone from his office about a 'deal' or a quid pro quo arrangement in which he would receive a personal benefit in return for any specific appointment to fill the vacancy."

The reason Craig uncovered nothing wrong is almost certainly because nobody did anything wrong. Unfortunately, investigating oneself isn't likely to convince anyone who doesn't want to be convinced in the first place, which makes me think there really ought to be some way for prosecutor Patrick Fitzgerald to weigh in on this. I guess the rules don't allow it, and rules are rules, but still. In the Valerie Plame case, he at least released enough information in the charging documents to allow people to draw their own conclusions about who did what to whom, and perhaps, eventually, he'll do it this time too. It really doesn't seem right to just leave this hanging forever.

Advertise on MotherJones.com

Melissa Etheridge Meets with Rick Warren, Responds to Controversy

| Tue Dec. 23, 2008 6:37 PM EST

mojo-photo-etheridgewarren.jpgSinger Melissa Etheridge has posted a statement about the Rick Warren "wrangle" at HuffPo in which she describes meeting the pastor at an event for the Muslim Public Affairs Council over the weekend. She called the pastor "very thoughtful" and said he "regretted" comparing gays to pedophiles:

On the day of the conference I received a call from Pastor Rick, and before I could say anything, he told me what a fan he was. He had most of my albums from the very first one. What? This didn't sound like a gay hater, much less a preacher. He explained in very thoughtful words that as a Christian he believed in equal rights for everyone. He believed every loving relationship should have equal protection. He struggled with proposition 8 because he didn't want to see marriage redefined as anything other than between a man and a woman. He said he regretted his choice of words in his video message to his congregation about proposition 8 when he mentioned pedophiles and those who commit incest. He said that in no way, is that how he thought about gays. He invited me to his church, I invited him to my home to meet my wife and kids.

Hooray?

2008 Box Office Champs Prove Americans Like Flying Guys, Talking Animals

| Tue Dec. 23, 2008 5:07 PM EST

mojo-photo-darkknightdollars.jpgBox Office Mojo's chart of the past 365 days at the box office has a couple surprises, and none of them are reassuring about our nation's taste in movies. While even a cave-dweller would know that The Dark Knight snagged the most of our hard-earned cash in its batty claws this year, I bet you can't guess the #2 movie, or tell me what three (or four?) kiddie flicks giggled their computer-generated, disturbingly-anthropomorphic ways into the Top 10. It's all pretty depressing, to be honest, so take a deep breath and click "continues" to find out.

This is Almost Too Easy

| Tue Dec. 23, 2008 5:00 PM EST

Yesterday I wrote about writer Nomi Prins' amazing challenge gift to help raise money to plug the budget hole left by some major funders who pulled out from supporting our Washington bureau. Now it's even easier to pitch in: we have PayPal! You can give any amount (of course). I just tried it--and trust me, if I could handle it, so can you.

The Decline and Fall of the Newspaper

| Tue Dec. 23, 2008 2:51 PM EST

THE DECLINE AND FALL OF THE NEWSPAPER....I was going to write a post about the subject du jour, namely whether or not newspapers could have done a better job of reacting to the rise of the internet, but via Matt, I see that Tim Lee has pretty much done it for me. Nickel version: Yes, it would have been great if railroads had converted into airline companies, if IBM had taken PCs more seriously, and if newspapers had embraced the web, but that kind of thing is really, really hard to do. That's why it so rarely happens. Cannibalizing your own business is almost impossible for both institutional and economic reasons, and knowing that you're in the generic transportation business, not the train business (or the generic computing business or the generic information business) isn't nearly as profound an insight as some people think. Anyone who thinks differently needs to run an actual business first and then report back on how they did converting its core business into something brand new.

In any case, I have my doubts that there was ever a long-term business model that could have successfully transitioned newspapers onto the web. Sure, the print news media could have done more — though simply asserting that newspapers could and should have been way more awesome isn't very helpful — but the advertising revenue just isn't there to support the kind of reporting infrastructure that the print version of newspapering supported. This isn't for lack of trying, either. Everyone and his brother has tried to figure out a more lucrative web-based advertising model for news, and so far no one has succeeded. Bright ideas are still welcome, of course, but most likely even the best newspapers will eventually die off and be replaced by something entirely different. I'm not as convinced as some that the replacement will be as good, but I suppose old fogies have said that before too more than a few times. We'll just have to wait and see what our brave new bloggy/twittery/decentralized news biz manages to deliver.