2009 - %3, March

Leverage

| Mon Mar. 23, 2009 10:58 AM EDT
In Tim Geithner's Public-Private Investment Program for buying up toxic waste, just how much is public and how much is private?  The Washington Post seems to have the right answer:

With the government financial support, private investors could end up putting down only about 7 percent of the price of an asset, with the rest contributed by the government and by private lenders who receive government guarantees.

This appears to be based on TARP funds providing half the equity stake and the FDIC loaning money for the rest at leverage not to exceed 6:1.  But is this enough?

We'll see.  One of the key sources of tension in this plan is getting this number right.  If private investors have too low a stake, the opportunity for gaming the system is high.  They might overbid on assets, for example, because their stake is small enough that they can make more money on side bets than they can on the main investment.  Conversely, if the private investors are required to put up too much money, they won't participate.  Without some leverage, the projected returns just aren't good enough.

Overall, Geithner's plan provides leverage of about 12:1.  That strikes me as too high.  I'd rather see private investors having at least a 10-15% stake.  But I guess time will tell if Geithner got this component of the plan right.

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Bat Mitzvahs for Seniors?

| Mon Mar. 23, 2009 10:48 AM EDT

Ohio women from 90 to 97 are finally getting their bat mitzvahs. Apparently, the ritual for girls wasn't something with much Jewish cultural traction until the 50s and 60s when these women were already grown. Even a Southern Baptist apostate like myself knows how central the bar mitzvah is for Jewish males. Thankfully for them, these women have a rabbi who gives a damn. From the NYT:

A challenge, perhaps, but not all the women see it quite that way. "My first thought was boy, what a hoot!" said Millie Danziger Fromet, 90...A self-described "feminist all my life," Evelyn Bonder, 90, said she "always thought girls should have the chance to participate" in something that Conservative, Orthodox, and Reform congregations embraced in stages.
Ms. Agin said: "My daughter had a bat mitzvah. But it was on a Friday instead of a Saturday. It wasn't held inside the synagogue, and she wasn’t allowed to read from the Torah."
...Next came the speeches, which traditionally respond to the Torah passage read in synagogue that week. Rabbi Kutner had consulted old calendars to determine the week in which each woman would have spoken at age 12. He asked them to prepare messages based on the passages they would have addressed eight decades ago.
...Class members argued intensely over whether to limit each woman's speech to three minutes. The concern was not whether aging bladders could handle a ceremony that lasts an hour and a half, but whether relatives, some of whom are flying in from as far as Boston and California for the event, might be bored.

I've never been to either a bar or bat mitzvah, but I'd pay money to see this one.

Oops! Sometimes, We Fag Hags Just Make Things Worse

| Mon Mar. 23, 2009 10:07 AM EDT

It's been so long since I hit the clubs that I didn't know women were choosing gay bars for their bachelorette parties. When I first read about the pheomenon today, I thought: Brilliant! I shudda thought of that, though my own was from rowdy (by choice). What a great idea! Turns out, not so much. 

Not only are women getting drunk and handing out the same kind of pawings they passed on hetero-bars for, they're (we're) just rubbing salt in the wounds of our fellow citizens who can't marry. From the Chicago Tribune (via Salon's Broadsheet):

"The women are a hoot, and some can be just delightful," said Geno Zaharakis, the owner of Cocktail, a gay bar on North Halsted Street. "But because not everybody can get married, watching them celebrate, it's such a slap in the face. Prop 8 just reopened the wound."
Zaharakis told me that Cocktail stopped hosting bachelorette parties a couple of years ago when he noticed his gay patrons weren't just complaining about the women being minor irritants but about them "flaunting" their right to marry. So Zaharakis hung a sign on the front door of his establishment that says, "Bachelorette Parties Are Not Allowed."
If that message isn't resonant enough, he offers a written statement: "Until same-sex marriage is legal everywhere and same-sex couples are allowed the rights as every heterosexual couple worldwide, we simply do not think it's fair or just for a female bride-to-be to celebrate her upcoming nuptials here at Cocktail. We are entitled to an opinion, this is ours."...Indeed some gay men and straight women have a friendship that's reminiscent of the old television show "Will & Grace." And many men make the distinction between their "girlfriends" who frequent gay bars and are sensitive to the marriage issue and other women who are merely seeking good music and "go-go boys" (translation: nearly naked male dancers) for a bachelorette party.
"We appreciate that these women are not homophobic and … want to party with us," said Jens Hussey, a gay man who's in a four-year relationship and worries about being able to make medical and other decisions regarding his partner. "But with all that's going on [in] the media about us not being able to marry, are [these women] willing to march with us or raise money with us or work to change somebody's attitude to help us get equal rights?"

Just goes to show, no matter how well-intentioned you might be, there's always something to be learned. I wouldn't have given a second thought to attending a bachelorette party at a gay bar. I'd try to talk them out of it now. Sorry guys.

On a different point though, in my younger days I did hit the gay bars with gay friends and did indeed enjoy the go-go boys. But I never wondered if they'd rather not have to 'tend' to the female guests, many of whom were quite...uninhibited with them. I gave my gay friends the bills to 'offer' to the dancers but lots of women don't. From what I understand, female 'dancers' don't mind tending to women clubbers.

I'll have to call "my gays." I don't have as many as Kathy Griffin, but I got a couple that'll do.

You Say You Want a Revolution?

| Mon Mar. 23, 2009 12:35 AM EDT
Is class warfare — the real kind, not the phony conservative talking point kind — close to becoming reality? Felix Salmon has a short post on the subject that's worth reading.

The Road to Nationalization?

| Mon Mar. 23, 2009 12:09 AM EDT

I've already made my semi-defense of Tim Geithner's toxic waste buyup plan, and I won't repeat myself here. But there is one point that I think deserves a post of its own.

It's this: Do supporters of bank nationalization really think it's either legally or politically feasible at this point in time? I'm skeptical on both counts. Legally, I'm not sure Obama has the statutory authority to take over a big bank. He may well need congressional authorization of some kind first. And even if he doesn't, does anyone really think it would be wise to go down this road without broad congressional support anyway? I don't.

Like it or not, there's only one way to get this support: show that (a) one or more of the big banks really is insolvent and (b) every other option for rescuing them has been exhausted. Geithner's plan does both.  If it works — well and good. But if it fails — if nobody is willing to participate, or if the auction demonstrates that the market price for toxic assets really is accurate — then banks will be forced to mark their assets to those prices. Plug in those marks to Geithner's stress tests and it's likely to prove to everyone's satisfaction that some of our big banks really are insolvent. At that point, even skeptics will be forced to accept nationalization as the only remaining alternative.

Politically, I don't see any other way forward. Bank nationalization will be complex, costly, and contentious. To work, it will almost certainly have to include a broad guarantee of all bank system obligations, something the public won't be happy about.  Congressional support won't be easy to come by. Geithner's plan will either work or else it will pave the road for that support. It might not be pretty, but that makes it a plan worth trying.

Eating It

| Sun Mar. 22, 2009 2:35 PM EDT
Atrios pungently describes the main objection to the Geithner plan:

Aside from setting up an overly complicated plan to try to disguise what they're really doing, the utility of the Geithner plan rests (or pretends to rest, not sure) on one fundamental premise: that Big Shitpile is greatly undervalued by "the market" and that these mortgage securities really have expected revenues which justify higher prices. One could have reasonably believed this months ago, I have no idea why anyone would believe this now. The housing bubble burst, and now recession is here. There's a lot of shit to be eaten, the question is who will eat it? Timmeh wants to make sure it's not the banksters.

Although I'm less sure than Atrios that we should accept the market's verdict on this stuff unquestioningly, he certainly might turn out to be right. But it's worth noting that taxpayers are going to eat almost all of this shit no matter what happens. If Geithner's plan fails, we eat it. If we nationalize the banks and become owners of all the toxic waste, we eat it. This financial crisis is going to cost the government a ton of money no matter what we do at this point.

Now, it's true that if we nationalize we'd wipe out the shareholders of the bad banks. But although that's the right thing to do, it's also pretty small potatoes since stock prices have dropped so far that shareholders in bad banks have virtually no equity left at this point. (Sweden didn't even bother trying to wipe out shareholders when they nationalized Nordbanken in 1992, for example. They just bought out the minority shareholders at the highly depressed market price.) What's more, a lot of those shareholders are mutual funds and pension funds anyway. The amount of bankster wealth that would be wiped out in a nationalization is probably pretty small.

It's not so much that I disagree with Atrios about this, just that I think he overstates the issue here. Nationalization would hurt bankers a little bit, and it would give taxpayers a bigger upside than the current plan. That's good. But it would also be ungodly complex and create plenty of problems of its own. It's worth avoiding if there's another solution.

If Geithner's plan fails because it turns out that the market price for all this toxic waste is really correct, then his stress tests will almost certainly show that Citigroup and Bank of America are insolvent. At that point, he's out of options and it's time to nationalize. Paul Krugman's fear about Geithner's plan is that "this will be the administration’s only shot," but I think that's wrong. In fact, far from making nationalization more difficult, its failure would make it both inevitable and broadly acceptable. All by itself, that's probably a good reason to let Geithner give this his best shot.

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Valuing the Toxic Waste

| Sun Mar. 22, 2009 1:45 PM EDT
The details of Tim Geithner's plan to buy up banks' toxic waste are still a little vague, but liberal reaction (Krugman, Baker, Smith) has mostly been pretty harsh regardless. Their primary criticism is simple: banks aren't willing to sell their mortgage-backed assets at market prices because they think the market is panicked and only willing to buy at fire sale prices. And fire sale prices will ruin them. But if the government buys at the price banks value this stuff at, they're almost certainly paying too much. It might rescue the banks, but only by essentially giving away lots of free money.

This is all true, but it's a little too glib. After all, if markets can overvalue assets on the way up — and obviously they can — then they can also undervalue them on the way down. There's a pretty good chance that the toxic waste in question really is worth more than the market is currently willing to pay for it.

I think this sometimes get obscured because of a lazy shorthand that a lot of us have fallen into: namely the notion that the value of mortgage-backed securities is certain to keep plummeting because home prices themselves still have another 20-30% to fall. But these securities aren't backed by the value of the homes they represent. They're backed by mortgage payments. Home prices could fall by half, but the value of the securities wouldn't drop by a dime if homeowners kept making their monthly payments. Their value only drops if default rates go up.

So what causes default rates to rise? Falling home prices are certainly a factor, since it's more tempting to mail in the keys when your loan is way underwater. Rising unemployment is an even bigger factor: if you lose your job, you're more likely to stop paying the mortgage. And the crappy lending practices at the height of the bubble produced a surplus of buyers who have always been more likely to default than average.

But there are also forces that can reduce default rates. Fannie Mae and Freddie Mac are buying up billions of dollars worth of mortgages and renegotiating their terms. Barack Obama has committed $75 billion in direct aid for distressed homeowners. Congress is likely to allow bankruptcy judges to rewrite the terms of mortgage loans. And the Fed is trying to reduce long-term interest rates, which will allow homeowners to refinance their loans at lower rates.

Obviously, then, there's tremendous uncertainty about future default rates. But the market appears to be valuing most mortgage-backed securities these days at something like 30 cents on the dollar. That's crazy. When you factor in recovery rates, it assumes that over three-quarters of all homeowners will default on their loans. That might be true of the absolute worst of the toxic waste, and it's certainly true of the equity tranches of even the better stuff, but on average? No way. 30 cents on the dollar simply doesn't represent a reasonable long-term value for most of this stuff.

But everyone is scared, and when there are no buyers prices get unreasonable. So maybe with some nudging (along with plenty of leverage from Uncle Sam), Geithner's plan will motivate private investors to spend more time really trying to figure out what this stuff is worth and making fair bids for it. It's true that there are tricky aspects to running the auctions that Geithner may or may not be able to solve, but if his plan works it will help clean up bank balance sheets and keep taxpayers from getting fleeced. And if it doesn't work? There's always nationalization.

So it's probably worth a try. In the meantime, I'll recommend again Brad DeLong's FAQ, which explains the mechanics of the plan pretty well (though it might be wrong on some of the details since it's based on conflicting press reports). And I'll also re-recommend James Galbraith's post suggesting that we might not have to guess so much about the value of all this toxic waste if banks were forced to allow independent examiners to look at the loan tapes and find out just how vulnerable all these mortgage are.

UPDATE: Robert Waldmann makes the case that the market is actually valuing this stuff pretty accurately. That certainly might be true.  But if it is, then Geithner's plan will fail, the value of the toxic waste will be settled beyond question, and insolvent banks will be exposed for what they are.  That's a good thing, no?

Predator Update

| Sun Mar. 22, 2009 12:06 PM EDT
Greg Miller of the the LA Times reports that the CIA says its stepped up Predator attacks in Pakistan have been enormously successful:

An intense, six-month campaign of Predator strikes in Pakistan has taken such a toll on Al Qaeda that militants have begun turning violently on one another out of confusion and distrust, U.S. intelligence and counter-terrorism officials say.

....The stepped-up Predator campaign has killed at least nine senior Al Qaeda leaders and dozens of lower-ranking operatives, in what U.S. officials described as the most serious disruption of the terrorist network since 2001.

....Officials said that the surge in strikes has less to do with expanded capabilities than with the decision to skip Pakistani approval. "We had the data all along," said a former CIA official who oversaw Predator operations in Pakistan. "Finally we took off the gloves."Officials said that the surge in strikes has less to do with expanded capabilities than with the decision to skip Pakistani approval. 

....The effect was immediate....CIA officials had suspected that their targets were being tipped by Pakistani intelligence to pending U.S. strikes; bypassing the government ended that concern.  It also eliminated delays. Former CIA officials said getting permission from Pakistani authorities could take a day or more, sometimes causing the agency to lose track of the target.

I find this pretty believable.  There's really not much question that there are plenty of high-level ISI operatives who are sympathetic to al-Qaeda and likely to tip them off to upcoming attacks.  And as the article mentions, the Pakistani government knows this perfectly well.  Its objections to the drone attacks have been decidedly pro forma.

But even if this is all true, it's still not clear that the short-term success of the Predator program outweighs its long-term potential for blowback.  For now, though, I'll let smarter people than me try to figure that out.

Valuing the Toxic Waste

| Sun Mar. 22, 2009 1:47 AM EDT
A combination of user idiocy and lame blog software just wiped out a long post I wrote about the Geithner plan to buy up toxic waste, and I'm too tired and annoyed to try to recreate it tonight.  Instead, I'll just recommend two other posts for now: Brad DeLong's FAQ and James Galbraith's plea to open up the loan tapes.  As for the mechanics of the plan itself, who knows?  I've read three different articles about it, and since all three disagree on some of the details and are vague on others I'm not sure there's much point in getting too deeply into it at this point anyway.  So for now, just read those other guys and wait for Monday when the plan will be officially announced.

How Clean Energy Ruined "Watchmen"

| Sat Mar. 21, 2009 10:38 PM EDT
I just saw Watchmen and—spoiler alert!—it kind of sucked. But not just for the obvious reasons (it's based on an impossible-to-adapt comic book; it's terribly acted, pointlessly violent, and infuriatingly shallow; and it ruins a great Leonard Cohen song). It was awful because it turned an unnecessary subplot about clean energy into a major plot point that's the foundation of its unsatisfying climax. Bear with me: In the original Watchmen book, we learn that atomic demigod Dr. Manhattan (owner of a hard to ignore, possibly offensive, glowing blue penis) has figured out a way to make mass quantities of efficient lithium batteries, and as a result, by the 1980s, electric cars have made gas guzzlers obsolete. Goodbye climate change! Yet in the movie, electric cars are nowhere to be seen, though we learn that Dr. Manhattan is working with impossibly skinny crimefighter-turned-tycoon Ozymandias (AKA "the world's smartest man") to come up with some new form of vague yet CGI-intensive clean energy. And that's where things start to get really dumb.