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Lehman Brothers

LEHMAN BROTHERS....I've now read in three different places credible suggestions that last week's financial meltdown was caused not by generic "worsening credit conditions," but by the Fed's ill-advised decision to let Lehman Brothers go into bankruptcy. This led to a...

| Mon Sep. 22, 2008 12:29 PM EDT

LEHMAN BROTHERS....I've now read in three different places credible suggestions that last week's financial meltdown was caused not by generic "worsening credit conditions," but by the Fed's ill-advised decision to let Lehman Brothers go into bankruptcy. This led to a wave of defaults that rippled through the industry and eventually froze the credit markets.

Question: has anyone seen anything detailed and plausible that either refutes this or backs it up? I'm just curious. For now, I remain agnostic on the question.

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Poorly Timed McCain Ad Hits Obama on Corruption

It's a case of really bad timing. John McCain's campaign put out yet another slashing anti-Obama ad on Monday morning...

| Mon Sep. 22, 2008 12:12 PM EDT

It's a case of really bad timing.

John McCain's campaign put out yet another slashing anti-Obama ad on Monday morning that accused Barack Obama of being part of "the corrupt Chicago machine." The evidence? William Daley, an Obama policy adviser, is a lobbyist and brother to the mayor of Chicago. (He also was commerce secretary during the Clinton years.) The ad goes on to note that Obama's "money man" is Tony Rezko, a convicted felon--making the disgraced developer sound like Obama's main fundraiser, which he was not. The ad also declares that "his governor, Rod Blagojevich" has "a legacy of federal and state investigations." His governor? Well, that's true, since Obama is a resident of Illinois. But this is guilt by association. Under such a standard, Obama could run an ad saying, "John McCain--part of a corrupt political machine. His fellow Republican legislator in Arizona--indicted for money laundering." (That would be Rick Renzi, who was cochairman of McCain's 2008 presidential campaign in Arizona.)

In response to this ad, Obama spokesman Bill Burton issued a statement: "Barack Obama was elected to the Illinois Senate as an independent Democrat. He took on the Chicago Democratic organization in a primary to win a seat in the US Senate. And in both Illinois and Washington, he has challenged the Old Guard for landmark ethics reforms."

But, more to the point, the ad came out the morning The New York Times reported that McCain's campaign manager was paid nearly $2 million for running a Washington outfit set up by Fannie Mae and Freddie Mac to stop stricter regulation of these two entities. Talk about the corrupt Washington machine. McCain's right hand was one of its major players. Yet McCain accuses Obama of being part of a corrupt system. No doubt, Davis approved that message.

AP Poll: Obama Loses 6 Points Due to Race

If you haven't read about the AP poll on race and the election, go take a look. To be frank,...

| Mon Sep. 22, 2008 12:03 PM EDT

If you haven't read about the AP poll on race and the election, go take a look.

To be frank, it's pretty disheartening. And not just in terms of Obama's electoral chances. It says some pretty awful things about America. Did you know that more than a quarter of white Democrats feel that "if blacks would only try harder, they could be just as well off as whites"? And that nearly four in 10 white independents feel the same way? When given an opportunity to label blacks, 22 percent of whites agreed with the word "boastful," 29 percent reach for "complaining," and 13 percent go with "lazy."

Why Should We Limit Executive Pay on Wall Street? Here's Why

From ABC News: In 2007, Wall Street's five biggest firms ? Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and...

| Mon Sep. 22, 2008 10:57 AM EDT

From ABC News:

In 2007, Wall Street's five biggest firms — Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley — paid a record $39 billion in bonuses to themselves.
That's $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.
Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines — their worst year since 2002.

The bonuses paid by these five firms averaged $201,500 per employee. ABC points out that the figure is more than four times the median household income in America.

Regulatory Reform

REGULATORY REFORM....Congress seems likely to pass some version of Henry Paulson's Wall Street bailout bill. Maybe not precisely his version, but something close, maybe with some oversight added and a few restrictions on exactly how the money can be used....

| Mon Sep. 22, 2008 2:04 AM EDT

REGULATORY REFORM....Congress seems likely to pass some version of Henry Paulson's Wall Street bailout bill. Maybe not precisely his version, but something close, maybe with some oversight added and a few restrictions on exactly how the money can be used. We will, of course, be promised that although the bailout has to be passed this instant and there's no time to add regulatory reform into the enabling legislation, reform will be taken up just as soon as we've all caught our breath. I figure there are three ways this could turn out:

  • Option A: Republicans will filibuster, Democrats will wither, and basically nothing much will get passed at all. In other words, suckered again.

  • Options B: There will be some kind of panic and we'll end up with a gigantic snarl of regulation that sounds tough but doesn't really do anyone any good, sort of like Sarbanes-Oxley.

  • Option C: Everyone will take a deep breath, Democrats will stand up to the financial industry, and some reasonable set of new regulations will be hammered into place.

I'd put the odds at about 60% for Option A, 35% for Option B, and 5% for Option C. My only reservation is that maybe I'm being a little too optimistic about all this.

Wall Street vs. The Democrats: Don't Hold Your Breath

On Monday the House and Senate began considering the $700 billion gift to Wall Street otherwise known as the bailout...

| Sun Sep. 21, 2008 11:54 PM EDT

On Monday the House and Senate began considering the $700 billion gift to Wall Street otherwise known as the bailout package, presented to them in recent days by Treasury Secretary Henry Paulson. How will it fare on the floor of Congress? A clue to what we can expect can be found in the congressional response to the 1999 Gramm-Leach-Bliley Act, which helped pave the way for the current economic crisis.

This now infamous piece of legislation repealed part of the Glass-Steagall Act, passed in 1933 in response to the banking collapse of the Great Depression. Glass-Steagall enforced a firewall between investment banks, commercial banks, and insurance companies, in order separate high-flying Wall Street risk-takers from the banks where Americans keep their money in checking and savings accounts.

Phil Gramm, then a Republican senator from Texas, and recently an economic advisor to the McCain campaign, took the lead in undoing Glass-Steagall, a move the financial services industry had been lobbying for since at least the 1980s. (James Leach, a former Republican congressman from Iowa, introduced the House version of the bill. He is now a leader of Republicans for Obama.) Bill Clinton was also an enthusiastic supporter of banking deregulation. And it was Clinton Treasury Secretary Robert Rubin who brokered the compromise that allowed the legislation to move forward in Congress—shortly before he left the administration to join Citigroup. (In November 1999, Mother Jones published a piece on the dangerous implications of Gramm-Leach-Bliley, under the headline "Robert Rubin Rewrites the Rules.")

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Blank Check

BLANK CHECK....There seems to be a growing consensus on the left that if the American taxpayers are going to give Henry Paulson a blank check to bail out a bunch of investment banks, then the American taxpayers ought to get...

| Sun Sep. 21, 2008 6:28 PM EDT

BLANK CHECK....There seems to be a growing consensus on the left that if the American taxpayers are going to give Henry Paulson a blank check to bail out a bunch of investment banks, then the American taxpayers ought to get a piece of the action in return. For example, here's Robert Reich:

The government (i.e. taxpayers) [should get] an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk.

Maybe this makes sense. But I wonder: do we really want equity stakes in all these firms? I don't. I'd rather have senior debt. Besides, I'm not sure I especially want the federal government to own half of Wall Street anyway.

So here's another idea. Instead of an equity stake, we offer ailing banks the following deal: the taxpayers will buy your toxic waste for 20 cents on the dollar. (Or 10 cents or 30 cents. Whatever.) We'll hold it for a maximum of 24 months, at which point you can buy it back from us at, say, a 10% premium, and then sell it off yourselves. If you choose not to buy it back, Uncle Sam will sell it off. If we sell it at a profit, we'll keep the upside. If we sell it at a loss, you guys will make up the difference. The payback terms will be, oh, let's say three points above LIBOR over five years.

And what control do the banks have over how much we sell this stuff for? None. They have to trust us to get the best possible price. To coin a term, they have to give us a blank check. Seems like a fair exchange.

Hedge Funds Next?

HEDGE FUNDS NEXT?....Henry Paulson announced today that the Great Wall Street Bailout will also be a City bailout and a Bankenviertel bailout and a Ginza bailout:"The American people don't care who owns the financial institution," he told ABC's "This Week."...

| Sun Sep. 21, 2008 3:27 PM EDT

HEDGE FUNDS NEXT?....Henry Paulson announced today that the Great Wall Street Bailout will also be a City bailout and a Bankenviertel bailout and a Ginza bailout:

"The American people don't care who owns the financial institution," he told ABC's "This Week." "If the financial institution in this country has problems, it'll have the same impact whether it's U.S.- or foreign-owned." The United States is also working with foreign governments to take actions of their own.

That's not too surprising. Unfortunately, he went on to say this:

Paulson made clear that he did not expect to use the program to purchase assets from hedge funds.

That's what they usually say right before they're finally forced to admit that some particular corner of the financial industry is actually in big trouble, right? So I assume this means that a bailout of a few big hedge funds is right around the corner. After all, some of them are almost certain to be hanging on by their eye teeth right now, and at least a few of those hangers-on are Too Big To Fail. So cue up the money machine.

Will Her VP Run Hurt Palin in Alaska?

The fact that the McCain campaign essentially speaks for Sarah Palin — answering any question directed at her office by...

| Sun Sep. 21, 2008 3:09 PM EDT

The fact that the McCain campaign essentially speaks for Sarah Palin — answering any question directed at her office by everyday Alaskans — is hurting her popularity in-state. And Democratic legislators, accustomed to partnering with Palin, have soured on the Governor. From the LA Times:

In stubbornly independent Alaska, the sudden intrusion of a political campaign into so many corners of state government -- not to mention Wasilla, where a dozen or more campaign researchers and lawyers have also begun overseeing the release of any information about Palin's years as mayor -- has touched a raw nerve. McCain staffers have even been assigned to answer calls for Palin's family members, who have been instructed not to talk.
"Why did the McCain campaign take over the governor's office?" the Anchorage Daily News demanded in an editorial Saturday. "Is it too much to ask that Alaska's governor speak for herself, directly to Alaskans, about her actions as Alaska's governor?"

Petty and Childish

PETTY AND CHILDISH....Matt Stoller passes along an email about the Wall Street bailout from "a lawmaker":I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the...

| Sun Sep. 21, 2008 2:44 PM EDT

PETTY AND CHILDISH....Matt Stoller passes along an email about the Wall Street bailout from "a lawmaker":

I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.

Hey, nothing wrong with petty and childish! There's a time and place for everything.

But while we're on this subject, one of the popular memes making the rounds right now is that in return for bailing out Wall Street, we should institute draconian restrictions on executive compensation in the financial industry. I'm skeptical. Any rule you can make, the rocket scientists will eventually figure a way around. Besides, I'd rather try to attack the root cause: compensation for these guys is astronomical because the finance industry itself has become so astronomically profitable, as the NYT chart on the right shows. But it's a mystery why this should be. After all, as finance becomes ever more efficient, as it has over the past few decades, arbitrage opportunities should get thinner and the industry should get more competitive. This should reduce profit margins and overall profitability — and aggregate bonus payouts along with it — shouldn't it?

The reason it hasn't appears to be a combination of fraud, vastly increased leverage, asset bubbles, and the increasing use of finance-for-the-sake-of-finance to tap into the global savings mega-glut in any way possible — regardless of whether the investment vehicles are of any real-world use or not. I may be off base here, but it strikes me that if the industry is properly regulated, reducing allowable leverage ratios and forcing managers back to using finance as a tool to provide capital to actual businesses, rather than as an end in itself, this would go a long way toward reining in compensation in a way that's more robust than artificial rules. Add in mortgage reforms, a legislative mandate (with regulatory teeth) for the Fed and the Treasury to pay more attention to asset inflation, and higher tax rates on extremely high incomes, and not only would compensation packages become halfway reasonable, but we'd actually reduce the insane bubble psychology that prompted the current collapse in the first place.

Can this be done? Would it work? I don't know, but I'd like to hear more about it from people who understand the intricacies of modern finance. But the bottom line is that skyrocketing compensation is a symptom of the problem, not the problem itself. So why not attack the problem directly?