2010 - %3, April

The Case For Elena Kagan

| Tue Apr. 27, 2010 1:38 PM EDT

Larry Lessig, a good friend of possible Supreme Court nominee Elena Kagan, makes the case today that liberals shouldn't be afraid of her:

Some have suggested we can know Kagan from the policy advice she offered President Clinton. That inference is a mistake....Likewise, some have wondered about Kagan's progressive credentials because as Dean of the Harvard Law School, she didn't take a lead in criticizing the policies of the Bush Administration. Here again, the inference is flawed....Finally, some have worried that Kagan has not pushed strongly enough to the progressive side as Solicitor General. But once again, the inference from her job to her views is unfair.

....In all of these cases, my point is not that Kagan's work shows she is the progressive I know her to be. My point is different: That inferences from these cases that might conflict with a view of her as a modern progressive are invalid. They are not evidence of her views, they are evidence of how she did her job. And while they may not strengthen your confidence about her position as a modern progressive, neither should they weaken it.

....In drawing an inference about who someone is, you can't confuse what they say when they're free to speak with what they say when they work for someone else. Dissembling and pandering is a sin no doubt. But excessive personalization is a kind of self-importance that none should reward.

Fair enough, as far as it goes. Still, if Kagan's career has been marked mostly by positions in which she felt unable to publicly construct a track record of how she views the law, where does that leave the rest of us? Lessig himself may be convinced that Kagan has a sound judicial philosophy, but those of us who don't know her personally can be excused for wanting a little more.

It's also worth mentioning, however, that the first half of Lessig's essay is devoted to Kagan's ability to shift a court majority in a more progressive direction. This is the aspect of Diane Wood's character that many people (including me) find especially attractive, so it's worth reading just for that.

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Apple vs. Gawker

| Tue Apr. 27, 2010 1:00 PM EDT

Let me just say at the outset that I don't like Apple Computer. Not the products, the company. Basically, I think they're dicks. Now, it's their company, they run it well, they make lots of money for their shareholders, and they don't break any laws. So if they want to act like dicks, they have every right. But I don't have to like it. And I especially don't like it when they try to position themselves as hip individualists while running their corporation with about the same subtlety that J. Edgar Hoover ran the FBI.1

End of rant. That said, I'm a little unsure that Apple is really doing anything all that wrong by going after Gawker in the case of the missing iPhone. They are, it's true, being dicks. Still, paying some guy $5,000 for an iPhone prototype that was "found on a barstool"? Seriously? Gawker just accepted that story and forked over the cash? I mean, this is pretty much the same story a guy told me once who offered me a Blu-Ray player out of the backseat of his car for twenty bucks. Perhaps a little skepticism is legitimately in order here?2

1Just to give equal time, as a longtime PC user I also hate Microsoft, Symantec, and Adobe. In fact, I sometimes wonder just which one I hate the most. So really, I guess I'm just a hater.

2Note that this is in no way meant as a comment on the legal aspects of the case. I believe Gawker is unquestionably a media outlet protected by California's shield law. Exactly how that law applies in this case, however, I really don't know.

Map of the Day: Cousin Lovin'

| Tue Apr. 27, 2010 12:40 PM EDT

As a research nerd, and kind of a weirdo, writing a post about gay marriage inequality and sulking about how many states I can't marry my ex-girlfriend in got me wondering: Hm, how many states could I marry my cousin in? Turns out the answer, despite all that stigma and a slightly increased risk of birth defects in offspring, is, most states. Some have caveats, like that we wouldn't be allowed to get married unless we were really old or unable to reproduce, and some wouldn't let us get married but WOULD legally recognize our marriage as long as we had the ceremony somewhere else. Way to not extend that courtesy to the gays, Arkansas, Indiana, Kansas, Louisiana, Nebraska, Oklahoma, Washington, West Virginia, and Wyoming!

I am absolutely not saying that I think first cousins shouldn't be allowed to get married. What I am saying is, I made a map.

Cousin Lovin' Map

Hating on Ratings

| Tue Apr. 27, 2010 12:15 PM EDT

One of the big villains in the housing bubble was the ratings agencies. Providing ratings for complex securities is lucrative business, and in order to get it the agencies implicitly — or sometime explicitly — colluded with issuers to provide higher ratings for their securities than they deserved. The conflict of interest is obvious: having the issuer of a security pay for its rating is like having a student pay his professor for a grade. Dean Baker explains what to do:

The obvious way to fix the conflict is to take away the hiring decision from the issuer. The issuer would still pay the rating agency but a neutral party — the SEC, the stock exchange on which the company is listed, the local baseball team — would make the decision as to which agency gets hired.

I guess this is my question: if you do this, the ratings agencies no longer have any incentives to do much of anything. There are three of them, and presumably each one would get a third of the business at a price set by the SEC. So their incentive would be to hire the cheapest possible analysts and cut costs to the bone. The result would be ratings agencies even less able to cope with complex modern securities than the current ones.

This is what stonkers me about the ratings dilemma: there just doesn't seem to be any good answer. Turning the ratings agencies into regulated utilities might be better than the current situation, but not by much. And if you're going to do that, why bother with ratings agencies at all? Why not just have the SEC provide ratings?

I've read other proposed solutions too. Open up the business to more firms, for example, or pay the agencies based on the accuracy of their ratings. But the first doesn't really get at the conflict of interest, and the second is difficult because it often takes years before you know if a rating is accurate.

I remember once someone telling me that after every financial crisis ever, the ratings agencies are always rolled out as sacrificial lambs. They had always been too optimistic, or too stupid, or too corrupt, or something. And then there'd be a hue and cry about "fixing" them, even though the real problem was that every single person on Wall Street, buyers and sellers alike, had wanted them to do exactly what they did: help inflate a bubble that made everyone truckloads of money. The hue and cry, he suggested, was more a way of deflecting blame from the real villains than it was a serious attempt to address an underlying problem.

I don't remember who told me that, and I don't even know for sure if it's true. It's stuck with me, though. I'm just not sure what the answer is here.

Who Should We Blame for the Financial Crisis?

| Tue Apr. 27, 2010 11:59 AM EDT

Bethany McLean, a contributing editor at Vanity Fair, is writing a book about the financial crisis with the New York Times' Joe Nocera. She has a piece in Tuesday's Times that must preview the thrust of the book to some extent. The gist of McLean's argument is that the government, not Wall Street (read: Goldman Sachs), is the "real villain of the financial crisis":

It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government.

What follows is a long list of the government's failings before, during, and after the financial crisis:

[I]t was the purported regulators, including the Office of the Comptroller of the Currency and the Office of Thrift Supervision, that used their power not to protect, but rather to prevent predatory lending laws. The Federal Reserve, which could have cracked down on lending practices at any time, did next to nothing, thereby putting us at risk as both consumers and taxpayers. All of these regulators, along with the S.E.C., failed to look at the bad loans that were moving through the nation’s banking system, even though there were plentiful warnings about them.

More important, it was Congress that sat by idly as consumer advocates warned that people were getting loans they’d never be able to pay back. It was Congress that refused to regulate derivatives, despite ample evidence dating back to 1994 of the dangers they posed. It was Congress that repealed the Glass-Steagall Act, which separated investment and commercial banking, yet failed to update the fraying regulatory system.

It was Congress that spread the politically convenient gospel of home ownership, despite data and testimony showing that much of what was going on had little to do with putting people in homes. And it’s Congress that has been either unwilling or unable to put in place rules that have a shot at making things better.

This is right. Government—the executive branch, Congress, the Fed, and independent regulators—all fell down on the job. But McLean's overall thesis is dubious. You'd be hard-pressed to find anyone who is "pretending" that "Goldman is the only bad actor." That's ridiculous. McLean goes on to suggest that Congress should "have its turn on the hot seat as well." Does she know there's an election in November? One reason that there's so much voter anger out there right now is because people don't just blame Wall Street for the crisis—they blame Congress and the government, too. And as David has written, people are actually less angry with Wall Street than you might expect.

McLean is arguing against a straw man. Even the leftiest of lefties don't need convincing that government and regulators screwed up. Liberals just believe that stronger, simpler, blunter rules would make it harder for regulators to avoid doing their jobs.

Turning Off the Texting

| Tue Apr. 27, 2010 11:17 AM EDT

K C Cohen, a counselor at Riverdale Country School in New York, recently asked students to participate in an experiment: spend two days without texting. The results:

This text-free Sunday, the Riverdale students said, was unusually relaxing. They were shocked at how quickly they finished their homework, undistracted by an always-open video chat, or checking in on Facebook or responding to the hundred messages they typically get in a day. Kayla and her mother went for a stroll in SoHo, a rare outing, with them both off the computer.

I think we can count this as a data point against the idea that multitasking is a productivity boon. Kids today might multitask more than earlier generations, but that doesn't mean they're getting more done. Probably a good deal less, in fact. But this, I thought, was even more interesting:

The experiment left Kayla Waterman, a 12-year-old sixth grader, with a new appreciation for the convenience of texting over calling. On Monday morning, instead of texting, she called her mom to let her know there were “a gazillion fire trucks at school.” Then she called right back: false alarm — fire drill. “I could tell she was getting annoyed because I kept calling,” Kayla said. How many times during the school day does she usually text her mom? About 10, Kayla said; a friend nodded in agreement.

Boundaries between work and home have long since fallen, so maybe it should not be surprising that the same is true for school and home. But what middle school student 20 years ago would have voluntarily reached out to her mother 10 times between 9 a.m. and 3 p.m.? If school had any universally agreed upon upside, it was that it gave a 12-year-old some much-needed space to revel in independence or struggle with rejection — space in which, presumably, that 12-year-old could start to figure out who she was, or how he wanted to navigate the world.

I don't really have anything profound to say about this. But it does strike me that, in general, teenagers these days frequently have closer relationships with their parents than they did in the past. Obviously that has a good side as well as a bad one. They're more comfortable around adults at an earlier age, for example. But I wonder what the downside is?

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Goldman Brass Denies Shorting Housing Market

| Tue Apr. 27, 2010 10:51 AM EDT

All seven Goldman Sachs executives and staffers testifying before the Senate investigations subcommittee today will say they never actively "shorted," or outright bet against, the US housing market in 2007 and 2008, according to their prepared remarks. They all say their investments that profited from the subprime mortgage meltdown, and later the housing collapse, were merely hedges against risk on their books and countering "long" investments, those that would profit if the housing market's gains continued. "The fact is we were not consistently or significantly net 'short the market' in residential mortgage-related products in 2007 and 2008," Goldman CEO Lloyd Blankfein will testify today.

Goldman's stance is directly at odds with that of Sen. Carl Levin (D-Mich.), the chairman of the Senate investigations subcommittee. Levin said in his opening remarks today that Goldman wasn't merely getting "closer to home," or reaching a neutral point where long and short risk balanced out. To the contrary, Levin said Goldman "blew right past a neutral position on the mortgage market and began betting heavily on its decline, often using complex financial instruments, including synthetic collateralized debt obligations, or CDOs...It was what one top executive described as 'the big short.'"

Goldman Trader Fires Back at SEC

| Tue Apr. 27, 2010 9:42 AM EDT

Fabrice Tourre, the Goldman Sachs trader at the heart of the Securities and Exchange Commission's blockbuster lawsuit, will outright reject the SEC's allegations that he misled Goldman clients and committed securities fraud in a 2007 mortgage-related transaction, according to prepared remarks for a Senate hearing on Tuesday. The SEC's suit alleges that Tourre and Goldman let a hedge fund trader betting heavily against the mortgage markets, John Paulson, pick the bonds underlying a complex product peddled by Goldman called a synthetic collateralized debt obligation (CDO). More importantly, the suit says Tourre failed to disclose to the CDO's two investors—an American institutional investor named ACA and German bank IKB—that Paulson had picked the bonds, which were of such poor quality that they were essentially rigged to fail. (The SEC said 83 percent of the bonds in the deal had been downgraded six months later by rating agencies, and 99 percent had been downgraded a year later.)

Testifying before the Senate investigations subcommittee Tuesday, Tourre will reject the notion that Paulson, who made $3.7 billion in 2007 by betting against the housing market, picked the bonds. Instead, Tourre will say Paulson had input, but that ACA "ultimately analyzed and approved every security in the deal." He adds, "ACA had sole authority to decide what securities would be referenced in the transaction, and it does not dispute that point... If ACA was confused about Paulson's role in the transaction, it had every opportunity to clarify the issue."

Tourre, set to face a barrage of questions during Tuesday's hearing, concludes his remarks by defending himself in the deal, one of several dozen deals called Abacus. "I wish to repeat—I did not mislead IKB or ACA, two of the most sophisticated investors in these products in the world," he will say.

 

Beyoncé's Beach House Brouhaha

| Tue Apr. 27, 2010 8:15 AM EDT

Matthew Knowles, the manager and father of the pop star Beyoncé, is not the kind of guy who needs a handout from Uncle Sam. His daughter and her husband, the rapper Jay-Z, are reportedly worth $265 million, his record company has sold 200 million albums, and his investments include an entire city block near downtown Houston.  Even so, Knowles is in line for a lucrative taxpayer-backed bailout. A federally-funded disaster relief program is set to purchase his home in Galveston, Texas, which was rendered nearly worthless by damage from Hurricane Ike, for something close to its original value: A cool $425,000.

Knowles' bailout is far from unique. In the name of disaster relief, the federal government routinely subsidizes some of the country's wealthiest and most irresponsible property owners. In Texas alone this year, the Federal Emergency Management Agency is spending $100 million to buy and demolish more than 750 flood-prone buildings insured by the National Flood Insurance Program, many of them expensive waterfront homes. The land will be permanently set aside as open space.

FEMA argues that the buyout program will easily pay for itself. After all, the NFIP is already on the hook to repair many of the properties, most of which private insurers have long been too smart to cover. In 1993, FEMA realized that repairing similarly flood-prone homes along the Mississippi River was costing more than they were worth. Over the next eight years, a buyout program that targeted some of the swampiest properties achieved a 200 percent return on investment, FEMA says, preventing millions in insurance claims across the Midwest.

But along the Gulf Coast, FEMA's buyouts make much less sense. Here's the problem: FEMA is still insuring new homes that are all but certain to be underwater by the end of the century, submerged by a three-foot rise in sea level caused by climate change.  Until FEMA starts accounting for climate change, its buyout program provides homeowners with a strong incentive to ignore the problem. Why worry about sea level rise when you know that, in the worst case scenario, the government will pick up the tab?

The situation is the screwiest in Texas, where FEMA is undermining the state's own curbs on coastal development. As I explain in today's Climate Desk piece, the Texas Open Beaches Act bans all homes on Texas beaches, even when the beach comes to the home, rather than vice versa.  Knowles' home, which ended up on the beach after Hurricane Ike eroded the coastline, would probably have been removed under the law. Texas' hard-line approach to beach protection is also a low-cost way to force even the wealthiest property owners to plan for sea level rise. But it won't work very well until FEMA stops using our tax money to pay people off.

Finance Reform: Dem Concessions Next?

| Tue Apr. 27, 2010 5:30 AM EDT

After Senate Republicans killed the Democrats' first attempt to begin debating financial reform, members of both parties now head back to closed-door negotiations in an effort to bridge the differences between the Ds, nearly all of whom support the bill, and the Rs, who mostly don't. Sen. Richard Shelby (R-Ala.), a top GOP player in the battle to rewrite financial regulation, told reporters after Monday's cloture vote that he looked forward to a few more days of talks in order to reach some kind of bipartisan agreement. In the days ahead, both parties are going to "try to put that bill together," Shelby said.

In the same breath, though, the affable Alabaman said he wanted to see more concessions from the Democrats. "What I would like to do is reach an agreement on three big sections," he said. He didn't elaborate on what those three "big" sections were, but it's likely Shelby meant resolution authority (how future regulators wind down and euthanize failing big banks without bailing them out); a new consumer protection agency (GOPers and Dems have clashed over the agency's power to write new rules); and, potentially, new oversight of derivatives (the financial products that let manufacturers and utility companies hedge risk but allow financial firms to gamble on the markets). A second cloture vote is likely to happen later on Tuesday. Are Democrats poised to concede more ground to Republicans on a bill some experts say is already miles from ideal?