2008 - %3, November

Stimulus Update

| Mon Nov. 24, 2008 2:51 AM EST

STIMULUS UPDATE....Jake Tapper reports that Barack Obama wants to hit the ground running, stimulus-wise:

Democratic sources tell ABC News that President-elect Obama's transition team is working with lawmakers on Capitol Hill so that on Obama's first day in office, Jan. 20, 2009, an economic stimulus package has passed both houses of Congress and is awaiting his signature.

And how big will the package be? The Washington Post speculates:

New Jersey Gov. Jon Corzine (D), an Obama adviser, and Harvard economist Lawrence H. Summers, whom Obama has chosen to lead his White House economic team, both raised the possibility of $700 billion in new spending. Yesterday, Obama adviser and former Clinton administration Labor secretary Robert Reich and Sen. Charles E. Schumer (D-N.Y.) also called for spending in the range of $500 billion to $700 billion.

....Austan Goolsbee, a spokesman for Obama on economic issues who is in line to serve on the White House Council of Economic Advisers, yesterday acknowledged that Obama's jobs plan will cost substantially more than the $175 billion stimulus program he proposed during the campaign. "This is as big of an economic crisis as we've faced in 75 years. And we've got to do something that's up to the task of confronting that," Goolsbee said on CBS's "Face the Nation." "I don't know what the exact number is, but it's going to be a big number."

This is a welcome sign of pragmatism from Obama's team, but not everyone is happy. Check this out:

"Democrats can't seem to stop trying to outbid each other — with the taxpayers' money," House Minority Leader John A. Boehner (R-Ohio) said in a statement. "We're in tough economic times. Folks are hurting. But the American people know that more Washington spending isn't the answer."

Jeebus. No wonder Republicans have lost 50 House seats in the past two elections. There's not even a hint that Boehner realizes we're facing a massive financial meltdown, not just business as usual. Somebody asked him about a Democratic spending plan, so he consulted the index cards that have been implanted in his brain for the past 30 years and spit out a robotic statement decrying "Washington spending." How out of touch can you get?

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Citigroup Bailed Out

| Mon Nov. 24, 2008 2:21 AM EST

CITIGROUP BAILED OUT....The feds have finally agreed on a plan to bail out Citigroup. The Wall Street Journal has the details:

Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — will take on any additional losses, though Citigroup could have to share a small portion of additional losses.

....In exchange for that protection, Citigroup will give the government warrants to buy shares in the company. In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the the broader U.S. banking-industry bailout.

....The government didn't require Citigroup to make changes to its executive ranks or its board in return for government assistance. However, Citigroup agreed to "comply with enhanced executive compensation restrictions," the government said Sunday, and also will implement a government-backed plan to modify distressed mortgages that is designed to curb foreclosures.

First take: this appears to be a pretty sweet deal for Citi: $20 billion in new capital and a potentially huge asset guarantee, all at what looks to be a pretty small price. My guess is that the distressed mortgage stuff and the "enhanced executive compensation restrictions" are little more than window dressing, and considering that the feds are handing over $20 billion to a company whose entire market cap at the moment is around $20 billion, the preferred shares they're giving up in return are a good deal for Citi unless they pretty much wipe out the equity of its current shareholders. And since the New York Times reports only that the shares "will slightly erode the value of shares held by investors," it looks like Uncle Sam isn't getting anywere near enough to do that.

What else? The government is guaranteeing 90% of all losses above $29 billion out of a $306 billion pool, which means that Citigroup now has about $250 billion in government-guaranteed assets in that pool. Presumably this can be turned into cash at a very favorable rate indeed, which should do wonders for Citi's liquidity.

So that's that. But I guess I have one more question. Up until a couple of days ago, Citigroup was insisting that they were very adequately capitalized, thankyouverymuch. But tonight they accepted $20 billion in fresh capital. So either (a) their position deteriorated a lot in the past 48 hours, (b) the government's terms were so spectacularly generous that they figured they'd be stupid to turn it down, (c) Paulson insisted they take it even though they didn't want it, or (d) they've been lying. Which do you think it is?

27 Votes

| Sun Nov. 23, 2008 8:31 PM EST

27 VOTES....Nate Silver says that in Minnesota precincts where no challenges have been raised, Al Franken is gaining votes. In precincts with more challenges, he's not doing as well:

In other words, the fewer the number of challenged ballots, the better Franken is doing....We can address this phenomenon more systematically by means of a regression analysis....The independent variables considered in the regression are as follows: t...c_f...c_c...In addition, the regression analysis contains interaction terms between each combination of two variables, as well as an interaction term for all three variables.

....Now, we can attempt to solve this equation at the statewide level. When we plug in a t of .499956 — Franken was picked on just slightly very less than half of the ballots during the initial count — we get a value for franken_net of .837. That is, Franken will gain a net of .837 votes for every 10,000 cast. With a total of 2,885,555 ballots having been recorded in the initial count, this works out to a projected gain of 242 votes for Franken statewide. Since Norm Coleman led by 215 votes in the initial count, this suggests that Franken will win by 27 votes once the recount process is complete (including specifically the adjudication of all challenged ballots).

I will just say this. If this turns out to be right — if Al Franken really does win by 27 votes — then I suggest we eliminate elections entirely and simply allow Nate Silver to tell us who our congressional and presidential winners are in the future. It would be a lot cheaper, and probably just as accurate.

POSTSCRIPT: Nate weasels a bit at the end, warning us that "the error bars on this regression analysis are fairly high." Sure, sure. I'm not buying. Franken by 27 votes, my friends.

Capital Losses

| Sun Nov. 23, 2008 3:39 PM EST

CAPITAL LOSSES.....This post is a couple of months old, but John Hempton says that our ongoing financial crisis is not a problem of bank capitalization:

Nobody I know calculates the total system losses plausibly above 2 trillion dollars....If I add the private equity disasters, GSE losses and things like car loans to [all the mortgage losses] I still can't get end credit losses above 1.5 trillion.

That is a vast amount of money — enough for instance to solve most of Africa's education and water problems. But in the context of the huge industry that is America's finance system it is just not that big.

So far financial institutions have raised (well) above 400 billion in fresh capital – its probably nearing 500 billion. The Federal Government has absorbed losses through the takeover of Fannie, Freddie, contingent liabilities on Wachovia, AIG and others of maybe 50-200 billion (lets use the low number).

The pre-tax, pre-provision operating profit of S&P financials used to be above 400 billion and is probably still above 350 billion. Two years of that and there is another 700 billion.

The banks had some capital to start with — in some cases excess capital against regulatory standards.

All up — we have almost certainly raised or passed to the government — or within two years will have earned — something approaching 1.5 trillion.

There is no capital shortage. Get used to it.

Mark Thoma says of this, "I don't agree with his diagnosis of the fundamental problem," but doesn't explain further. I myself don't have the smarts to either agree or disagree. Still, Hempton's observation here is one that's been bugging me for a while. It's true that in this particular post he doesn't seem to be taking account of forced selling and systemic deleveraging, which would be causing problems even if overall capitalization were adequate. What's more, even if overall capitalization were OK, it might still be the case that the capitalization of the big money center banks is inadequate, and those banks occupy a special place in our financial system.

So I'm not sure. But I'd still like to have some idea — even a vague, provisional idea — of just what the experts think the capital position of the American banking system is right now. How big are the losses so far? How much uncertainty is there in these estimates? Why? Is it because banks don't provide the needed information, even to regulators, or because it's fundamentally difficult to calculate regardless? As a layman, it's been pretty eye opening over the past few months to realize just how little even the experts seem to know about what's really going on and what the scope of our current problems are, but certainly a basic understanding of the scale of banking system losses is an absolute minimum piece of information we need before we can figure out what to do next. Isn't it?

The Torture Commission

| Sun Nov. 23, 2008 1:04 PM EST

THE TORTURE COMMISSION....Newsweek's Michael Isikoff reports on the likely direction the Obama administration will take regarding state-sanctioned torture and detention of terrorist suspects:

Despite the hopes of many human-rights advocates, the new Obama Justice Department is not likely to launch major new criminal probes of harsh interrogations and other alleged abuses by the Bush administration. But one idea that has currency among some top Obama advisers is setting up a 9/11-style commission that would investigate counterterrorism policies and make public as many details as possible.

...."If there was any effort to have war-crimes prosecutions of the Bush administration, you'd instantly destroy whatever hopes you have of bipartisanship," said Robert Litt, a former Justice criminal division chief during the Clinton administration. A new commission, on the other hand, could emulate the bipartisan tone set by Tom Kean and Lee Hamilton in investigating the 9/11 attacks.

I find myself surprisingly torn by all this. My instinctive reaction is to turn over every last shred of paper in open court and mercilessly toss into jail anyone associated in any way with this stuff. But I suspect Obama is reacting more wisely than me in this matter. Not only would trials and jail sentences set off a firestorm of protest, but in the end they might not accomplish much either. That's discouraging as hell to write, but at bottom we still have a public opinion problem here: like it or not, half the country still seems to think that torturing al-Qaeda suspects was perfectly acceptable.

So in the end, perhaps we'll get half of a Truth and Reconciliation commission: we'll get the truth, but not the reconciliation, since I doubt that any of the perpetrators of this stuff are inclined to show the slightest remorse for what they did. I suppose that here in the real world this might be the most we can expect, but I don't have to like it. And I don't.

Obama's Treasury Nominee Tim Geithner: Yet More Power for the Federal Reserve

| Sun Nov. 23, 2008 1:03 PM EST

Barack Obama's reported latest cabinet pick shows that even the collapse of the U.S. economy is not enough to challenge the unbridled power of the Federal Reserve. The president-elect's choice for Secretary of the Treasury is Tim Geithner, head of the New York Federal Reserve Bank, the most powerful bank in the system. The nation's leadership in both parties spent the better part of two decades unquestioningly following the man they called "the Oracle"—Fed chair Alan Greenspan--down the road to ruin. Now, they eagerly await the arrival of another Fed insider to lead them back into the light.

Clearly, the new administration and the Democratic Congress do not plan to in any way challenge the fundamentally undemocratic and fatally compromised nature of the Fed, which is not a government agency, but a "quasi-public" system effectively owned and run by the banking industry itself. It's no surprise, then, that the Fed so often operates in the interests of the private banks, even when they run counter to the public interest—as it did under Greenspan, when its policies fueled, rather than reigned in, the credit bubble and accompanying fiscal disasters. What is more suprising is the fact that those sworn to serve the public still show so little inclination to demand more transparency or accountability from this all-powerful institution.

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Down South

| Sun Nov. 23, 2008 12:48 PM EST

DOWN SOUTH....The voters of California might be able to ban gay weddings, but they can't ban gay wedding receptions, can they? So that's where I was yesterday, down in San Diego at a reception for my sister-in-law and her partner, who squeezed in under the wire and got married before Prop 8 passed. Huzzah! Needless to say, the republic seems to have survived the event so far.

So everyone join me in congratulating Ginny and Cindy. Huzzah again! I'll spare you the picture of them feeding each other pieces of the wedding cake, but I will show you the eye-catching cake itself, which was designed by a good friend of theirs (it was lemon flavored and delicious). As you can guess, a lovely time was had by all.

Chart of the Day - 11.22.2008

| Sat Nov. 22, 2008 1:41 PM EST

CHART OF THE DAY....This comes from David Sirota, who has been watching the outbreak of the "center right" meme ever since November 4th, which you might recall as the day that America elected a liberal president, a liberal Congress, and a liberal Senate. David asked a friend who works with a company called Trendrr to track mentions of the term, and the results are on the right:

The media has exponentially increased the amount of times it claims that this country is a "center-right nation" — at the very same time public opinion data shows the country is a decidedly center-left nation.

Indeed. I guess a desire for less Bush, less war, better healthcare, competent governance, acknowledgment that global warming isn't fiction, and economic stimulus in the face of a massive recession is now evidence of a center right world view. As John Maynard Keynes famously said, "We are all center rightists now."

Citigroup's Collapse

| Sat Nov. 22, 2008 3:07 AM EST

CITIGROUP'S COLLAPSE....The New York Times explains the proximate cause of Citigroup's imminent demise:

The current turmoil can be traced back to the last weekend of September, when it sought to reassert itself by swallowing Wachovia, the stricken bank based in Charlotte, N.C., whose vast deposit base would have turned Citi into one of America's dominant lenders.

As the global financial crisis drove Wachovia toward collapse, the government frantically engineered their marriage. At a bargain price of $1 a share, Vikram S. Pandit, Citigroup's chief executive, was happy to oblige: The deal would have greatly enhanced Citi's retail banking presence and added more stable consumer deposits to a balance sheet staggered by billions in write-downs on bad mortgage loans and related securities.

But like so many other things for Citigroup over the last several years, it fell apart. Less than a week later, Wells Fargo, the powerful San Francisco-based bank, swooped in with a higher offer. Citi was left in the lurch, without a business that was vital to its future.

And why was Wells Fargo able to swoop in? You remember the Treasury notice a few weeks ago that modified Section 382 of the tax code, don't you? Pretty much every tax attorney in the country thinks the change was illegal, but Treasury went ahead with it anyway:

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo.

I'd like to hear more about this before jumping to any conclusions. Citigroup's problems run deeper than merely the failed merger with Wachovia, after all. Still, if these two stories are right, it was the sudden and illegal change in Section 382 that allowed Wells Fargo to conclude their deal with Wachovia, and it was the loss of Wachovia that sparked the downward spiral of Citigroup, one of America's three big money center banks. Was this yet another own goal from the Treasury Department?

Obesity Linked To Grandparent's Diet

| Fri Nov. 21, 2008 10:12 PM EST

600px-Lab_mouse_mg_3135.jpg At least in mice. So far. Nature reports on research presented at the annual meeting of the Society for Neuroscience. Mice fed on a high-fat diet during pregnancy and lactation had larger-than-normal offspring. Those offspring also went on to have larger-than-normal offspring.

The 1st-generation offspring also tended to overeat, whether they were fed a high-fat or normal diet. Plus they were insulin-insensitive, a feature of diabetes that often leads to obesity. The 2nd-generation offspring did not overeat, but were large and insulin-insensitive too. Male pups born to mothers on a high-fat diet also transmitted the traits to their own offspring.

The U of Pennsylvania team wants to know which genes were involved in passing on these traits. So far they've found epigenetic changes in the hypothalamus, which controls feeding behaviour. Epigenetic changes are biochemical modifications that affect how DNA functions without actually altering its nucleotide sequence. Epigenetic changes can be induced by environmental and/or genetic factors.