Kevin Drum

Pillow Talk

| Thu Oct. 9, 2008 3:59 PM EDT

PILLOW TALK....Does the NSA intercept telephone calls between Americans? Of course not! That's against the law. Unless, of course, you happen to be an American in one of the NSA's "areas of intercept" when you call home. ABC News talks today to a couple of NSA whistleblowers who say that eavesdropping on Americans was commonplace:

"These were just really everyday, average, ordinary Americans who happened to be in the Middle East, in our area of intercept and happened to be making these phone calls on satellite phones," said Adrienne Kinne, a 31-year old US Army Reserves Arab linguist assigned to a special military program at the NSA's Back Hall at Fort Gordon from November 2001 to 2003.

...."We knew they were working for these aid organizations," Kinne told ABC News. "They were identified in our systems as 'belongs to the International Red Cross' and all these other organizations. And yet, instead of blocking these phone numbers we continued to collect on them," she told ABC News.

And there's this from a former Navy Arab linguist named David Murfee Faulk:

"Calling home to the United States, talking to their spouses, sometimes their girlfriends, sometimes one phone call following another," said Faulk.

....Faulk says he and others in his section of the NSA facility at Fort Gordon routinely shared salacious or tantalizing phone calls that had been intercepted, alerting office mates to certain time codes of "cuts" that were available on each operator's computer.

"Hey, check this out," Faulk says he would be told, "there's good phone sex or there's some pillow talk, pull up this call, it's really funny, go check it out. It would be some colonel making pillow talk and we would say, 'Wow, this was crazy'," Faulk told ABC News.

The official NSA response is to stay mum. Sen. Jay Rockefeller (D-WV) promises to investigate. Stay tuned.

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Slicing and Dicing

| Thu Oct. 9, 2008 3:03 PM EDT

SLICING AND DICING....The Washington Post editorializes today against John McCain's mortgage rescue plan, and among its bill of particulars it tosses in this:

At least as Mr. Holtz-Eakin described it, it lacks a clear mechanism for reassembling and extricating whole mortgages from the welter of securities "tranches" into which Wall Street slices and dices them.

As I understand things — and I might not — this is a serious problem with any plan to force noteholders to write down their losses and restructure their mortgages to help out distressed homeowners. The problem is that there's no banker to negotiate with. It's not just that mortgages today are bundled up and securitized, it's that the resulting securities are then chopped up and sold into various CDOs. These CDOs are hedged with hundreds of pages of legal covenants, and the end result is that you can't force the mortgages to be restructured unless all of the bondholders agree. And since every CDO has hundreds of bondholders, that's basically impossible.

Obviously this doesn't apply to all subprime mortgages, but I wonder how many it does apply to? And legally and administratively, what's the answer? I really haven't been able to find a coherent explanation of this stuff, but it seems like it's a pretty big deal. Anyone have any reading recommendations?

Sarah's Airplane

| Thu Oct. 9, 2008 12:57 PM EDT

SARAH'S AIRPLANE....Alaska's First Dude has finally been forced to give testimony in the Troopergate scandal, and apparently getting ex-brother-in-law Mike Wooten fired from his job as a state trooper became a serious Ahab-like obsession with him:

Todd Palin talked with over a dozen state officials, many of them repeatedly, in his crusade to get a state trooper fired whom he considered to be a bad cop, a dishonest person and a threat to the Palin family, according to his sworn statement given Wednesday to a legislative investigator....Todd Palin's efforts started before his wife became governor and accelerated during the first 19 months of her administration.

...."I had hundreds of conversations and communications about Trooper Wooten over the last several years with my family, with friends, with colleagues, and with just about everyone I could — including government officials," Palin said.

Hundreds! But that's actually not the most interesting part of the story. Todd Palin continues to insist that his anti-Wooten jihad had nothing to do with Sarah Palin's eventual firing of public safety commissioner Walt Monegan, which he says was motivated by an entirely different kind of bad blood: her difficulty getting Monegan to provide her with a plane for official trips:

On the trooper airplane, "It seemed that whenever Sarah needed this plane, it was unavailable," Todd Palin said. "We were concerned that the Department of Public Safety was retaliating against Sarah for selling the Murkowski jet that Department of Public Safety officials enjoyed using." In 2007, the governor sold a jet her predecessor, Frank Murkowski, bought in a controversial defiance of the Legislature.

Please, please, can we hear more about this tussle over airplane use? Apparently Todd Palin thinks that's an entirely proper reason for firing Monegan, and I'm eager to hear Sarah's take on that. Please?

Sarah Palin's Foreign Policy Cred

| Thu Oct. 9, 2008 12:16 PM EDT

SARAH PALIN'S FOREIGN POLICY CRED....Interested in learning about Sarah Palin's real foreign policy experience? David Corn has her official calendar for 2007-08 and spills the beans. Bottom line: she's spent an average of 37 minutes per month on foreign-ish activity during her tenure as governor. There were no meetings with Russian officials of any kind, but her schedule did include 30 minutes at a reception held by the Italian embassy, a meeting with foreign exchange students, and a speech at the Eighth Conference of Arctic Parliamentarians. Plus several miscellaneous meetings with Canadians. Exciting stuff!

McCain's Rescue Plan

| Thu Oct. 9, 2008 11:56 AM EDT

McCAIN'S RESCUE PLAN....It's now clear that John McCain's $300 billion homeowner rescue plan really does envision paying mortgage lenders full face value for their subprime loans, even though they've all cratered badly during the housing bust. How do we know? Because his website originally said that mortgage lenders would be required to write down their loans, but that language was removed on Wednesday. It was "a simple mistake," the campaign said.

But here's what I don't get: why? This was plainly a middle class pander, and not one that McCain would have been obligated to follow through on. This kind of stuff changes at the detail level all the time. So why include such a blatant giveaway for Wall Street? Even if you have some technical reason for thinking it's a good idea, it doesn't make any political sense at all. What's going on?

The Rumble in the Corner

| Thu Oct. 9, 2008 1:51 AM EDT

THE RUMBLE IN THE CORNER....As regular readers know, I'm a fan of NRO's The Corner, which I think of as sort of a direct pipeline into the conservative id. Lately, as an Obama victory has become more and more likely, the Cornerites have started going completely around the bend, venting their frustration in lunatic conspiracy theories and manic love notes that are increasingly untethered from the real world. This afternoon, after reading their latest bunch of posts about Obama being a secret Maoist, I thought maybe I should finally write something about it. In the end I was too lazy to do it, but luckily Hilzoy came through with a post that hits all the high points I was going to make anyway. Go check it out to get a sense of how the impending doom of an Obama victory is sending conservatives into cloudcuckooland.

But why are they going so stone batty? My theory is that Obama is driving them crazy the same way that Ali drove Foreman crazy in the Rumble in the Jungle. You remember that fight, don't you? Foreman was the heavy favorite, a brawler who had dropped Joe Frazier in two rounds and seemed likely to beat Ali to a pulp. But Ali won by playing mind games on Foreman. He sat on the ropes, took hit after hit, and then taunted Foreman in the clinches to hit him even harder. An enraged Foreman kept swinging wildly, but nothing worked. Ali took everything he could dish out, and the furnace-like heat finally did Foreman in. In the eighth round, drained and exhausted, he was knocked cold by an Ali combination that ended the fight.

The same thing is happening to McCain and his supporters. They're throwing everything they have at Obama, and he's just taking it. Nothing seems to have an effect, so they keep swinging ever more wildly. But that isn't working either, and it's driving them crazy. Who is this guy? Why won't he go down? It's enraging. They just can't believe they're losing to this punk. And so they become ever more unhinged, making up wilder and wilder stories and becoming more and more enraged when they can't get any traction with them. At this rate, their next stop is a padded cell at Arkham.

Personally, I wish Obama were doing more than playing rope-a-dope: it's going to win him an election, but it might not win him the war. Still, it is pretty likely to win him the election, and it's driving lots of conservatives crackers at the same time. We could do worse, I guess.

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Another Finger in the Dike

| Wed Oct. 8, 2008 11:59 PM EDT

ANOTHER FINGER IN THE DIKE....A couple of days ago we learned the startling news that AIG has already blown through $61 billion of its $85 billion bailout cash. What to do? Answer: give 'em more money:

The Federal Reserve Board said Wednesday that it would provide up to $37.8 billion to the embattled insurer the American International Group to help it deal with a rapidly dwindling supply of cash.

....A.I.G. said Wednesday that it would use the $37.8 billion from the Fed to improve the liquidity of its securities lending business, which is losing cash rapidly. By stopping that flow, A.I.G. said, it would be able to preserve more of the Fed loan and use that money more effectively to wind down the affairs of A.I.G.'s troubled structured finance division, known as the financial products unit.

"Financial products unit" = credit default swaps, just in case the terminology is a little opaque here. That one unit was basically responsible for bringing down the entire company.

More Capitalization

| Wed Oct. 8, 2008 5:36 PM EDT

MORE CAPITALIZATION....Speaking of capitalization, I see that Justin Fox answers a question today that's been on my mind for a while. The bailout plan passed last week was designed to buy up troubled assets, but are the powers it gives to the Secretary of the Treasury so broad that the funds can be used to directly recapitalize banks instead? Apparently so:

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"?

That wasn't how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn't the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return.

....Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it....I take it as one more sign that we're headed toward a Swedish solution of our banking crisis — recapitalization and temporary nationalization of much of the banking system. This is the right thing to do, I think. But I'm still a little bit confused as to why Paulson had to back into this instead of asking for it in the first place. Maybe because he thought President Bush would never sign a bill to nationalize the banks? Just a thought.

Very interesting.

Capitalization

| Wed Oct. 8, 2008 5:23 PM EDT

CAPITALIZATION....A couple of days ago I complained about pundits and economists who (seemingly) couldn't make up their minds about whether the real problem preventing banks from making loans in the current market was (a) fear or (b) lack of capitalization. I got a few emails asking me what I was talking about, and it occurs to me that a lot of people are just assuming that all us non-economists understand why capitalization is important. But that's certainly not the case, so here's the kindergarten version of what it means.

Suppose that Acme Bank has $2 billion in capital and is leveraged at 20:1. This means they have $40 billion in assets, primarily consisting of loans of one kind or another.

Now, suppose that due to trading losses their capital is reduced to $1 billion. Unless they want to increase their leverage even further, that means they need to reduce their loan portfolio to $20 billion.

But it's worse than that. 20:1 is an insane amount of leverage. It ought to be closer to 10:1, and lots of banks are now in the process of deleveraging to get there. But with $1 billion in capital and leverage of 10:1, Acme can only have $10 billion in outstanding loans.

In other words, over the course of a few months, they need to reduce their loan portfolio from $40 billion to $10 billion (for example, by declining to roll over commercial paper when it comes due), and until they get there they can't loan out any more money. It doesn't matter if the borrower has a AAA rating. It doesn't matter if Acme's CEO is calm or frightened. Until they get their asset base down to $10 billion, they can't make any more loans.

(The grown-up version of this is way beyond my pay grade and includes a working knowledge of things like Basel risk-weighted asset requirements and our own local version of them. Obviously you're not going to get that from me. But hopefully the kindergarten story at least provides the basic picture.)

This is the theory behind recapitalizing banks rather than buying up their bad assets, as the Paulson plan does. If the government buys a bunch of preferred shares in Acme in return for $1 billion, then its capital is, once again $2 billion. They still need to deleverage, but that's going to happen regardless. The happy news is that even at 10:1, the extra capital expands their lending capacity by $10 billion.

Now, fear is obviously still a part of the picture. That capital injection doesn't do any good if Acme has so many toxic assets that it barely knows what its capital base is in the first place. Maybe it's so close to insolvency that it's going to go bust next week regardless. And even if that's not the case, they still won't want to lend money to other banks if they don't know how strong those banks are.

Still, one is primary and one is secondary. If capitalization is the fundamental problem, then calming down the markets won't do any good. There still won't be any money to loan out. If it's not, then confidence building measures are obviously of some value. Most likely, the story is somewhere in between. But it's kind of scary that nobody really seems to know for sure, isn't it?

UPDATE: Why do banks like high leverage? Because it allows them to make lots of loans, and therefore lots of money, with only a little bit of capital at stake. In good times, high leverage is a great way to make fantastic investment returns.

In bad times, though, it's not so great. The problem is that even small losses on a highly leveraged portfolio can wipe out your capital completely and make you insolvent. This is what's happening now, and it's why more stringent regulations on allowable leverage ratios are a good idea. Good times never last forever, after all.

Attack Ads vs. Attack Debates

| Wed Oct. 8, 2008 4:46 PM EDT

ATTACK ADS vs. ATTACK DEBATES....A lot of people seem to be surprised that John McCain didn't pull out all the stops last night and lay down a barrage of attacks against Barack Obama for palling around with terrorists, taking loans from crooks, abandoning our troops, and so forth. But I think this misses something important: debates are a terrible place to do this.

TV ads are a different story. In fact, they've been practically conventionalized over the years with their grainy photos, creepy music, and scary sounding announcers. Sure, at the end you have to say "I'm John McCain and I approve this message," but that's not much. The ad still seems almost completely impersonal. It's an attack, but it's not really an attack from anyone.

But a debate is a whole different story. The stage is a small, intimate setting, and if you want to attack somebody, it has to come straight out of your mouth and it has to be directed against someone standing just a few feet away. People react way differently to that than they do to an ad, and for the most part they react badly. It's like watching married friends arguing with each other: it makes you uncomfortable and edgy. You just want it to stop.

That's probably why McCain didn't light into Obama last night. Despite what I said yesterday, it's not that he didn't want to, but that he's smart enough to know that unless you pull it off perfectly, all you accomplish is to make yourself unsympathetic. And whatever else you can say about him, John McCain is very much not a guy who can pull this off perfectly.