Financial "Experts" Need to Seek Professional Help

AARP stands unrivaled as a public voice for old folks. Yet so much of what they have to say about the current economic crisis, which has hit us geezers especially hard, is just godawful drivel. On my own blog last week, I commented on AARP magazine’s relentlessly upbeat take on being old and out of work. A recent bulletin piece was full of the same kinds of useless pick-me-ups. What really took the cake for me this time, though, was the financial planning advice offered to recession-battered geezers:

Avoid early withdrawals. “Taking hits on your retirement accounts, especially when the stock market is falling, generally isn’t a good idea,” says Matt D’Arcy, of Greybridge Financial in Cleveland. Seek professional help. “There are a lot of strategies that might help people avoid touching retirement investments,” he says. “The point is to sit down with someone who can help you map a plan.” If possible, delay Social Security. Benefits are reduced before full retirement age.

OK, let's just take these statements one-by-one. First, "Avoid early withdrawals." Nice advice if you can afford it. Or maybe not even then: These financial “experts” have been warning us for more than a year not to take our money out of the market. I just checked to see where the Dow Jones Average was a year ago–hovering around 12,000. I don’t need to tell you where it is now. Here’s a chart that tells the story all too clearly:

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Now, don’t you wish you’d made a couple of “early withdrawals” some time in the last year? Instead, we’ve been told again and again that we have to “hold tight” and “wait it out.” Not very useful for people who are already retired and depending on their savings–and could die before this thing hits bottom.

Senior Senators Face Serious 2010 Challenges

Former Rep. Rob Simmons, a Republican who represented Connecticut's very blue (it went for Obama by 19 points) second congressional district from 2000 to 2006, announced on Sunday that he will challenge Sen. Chris Dodd in 2010. Despite the (R) next to his name, Simmons stands a chance: a recent poll showed him ahead of the once-popular incumbent.

Zombie Banks

Over at our main site, I've got a piece up that I think of as "Nationalization 101."  (The official title is "Real Capitalists Nationalize," a phrase I stole from Steve Randy Waldman.) It's a quick overview of how banks work, why toxic assets have frozen the credit market, and what the options are for dealing with it.  Option #4 is the Swedish solution: selective, temporary nationalization of the weakest banks:

President Obama clearly has considered the Swedish experience: "They took over the banks," he said on Nightline last month, "nationalized them, got rid of the bad assets, resold the banks, and a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model." Yet, he went on, the United States has a "different set of cultures" than Sweden, and Americans would find nationalization a hard pill to swallow.

Unsaid but implicit in Obama's statement, though, is that Americans could likely be persuaded to accept nationalization if they understand that all the alternatives are worse. In fact, this may have been exactly the point of the bank rescue plan Obama's treasury secretary, Timothy Geithner, announced shortly after that interview. A key element of the plan involves a mandatory "stress test" for the country's biggest banks, which sounds remarkably similar to Hempton's third-party auditor and Sweden's Bank Support Authority. It could turn out to have been a smart PR move as much as anything: Get everyone talking about the stress tests, worrying about the stress tests, gossiping about the stress tests — and by the time the results become public, it's hard to imagine any recourse other than nationalization for the banks that don't pass.

The stress test is also a way to address both of the two big problems with nationalization. Not only can it fairly decide which banks are solvent and which ones aren't, but it also addresses the dreaded "contagion" problem: Since investors are wiped out when a bank is nationalized, the mere fear of nationalization can scare private investors away from every bank, even the good ones. But if stress tests are done on every bank and the bad ones are all nationalized at once, the good banks are freed from fears that they might be next on the government chopping block.

You'll notice that in this piece I'm still holding out hope that Geithner's stress tests are basically designed to give him an excuse for selective nationalization.  I'm still hoping that's true, I think, but it's hard to say what's really going on.  Last night, for example, Ben Bernanke was asked on 60 Minutes if all the big banks the Fed regulates are solvent, and he answered flatly, "I believe they are, yes."  But then he followed up by mentioning the stress tests and suggesting that if a big bank is insolvent, they'd  "try to wind it down in a safe way." What's that supposed to mean?

Add to that the fact that Citigroup and Bank of America, the two banks most often mentioned as basket cases, have recently sworn on stacks of Bibles that their capital position is rock solid.  No more bailouts for them!  And considering that their toxic asset pool was guaranteed by the government a few months ago, which limits their downside losses, they might even be right.  Or, they might be lying through their teeth.  Who knows?

In any case, the full Swedish solution will be a tough sell.  Not only would it involve temporary nationalization of one or two big banks, but it would also feature a systemwide guarantee of all bank obligations.  But that's basically what we did for AIG, and bailing out all of AIG's counterparties hasn't exactly gone down well in the heartland.  Doing the same thing for the rest of the financial system, nationalized or not, would certainly help restore confidence in the banking system, but getting Congress to agree won't be easy.

The Pirates of Somalia: A Photo Essay

The Boston Globe has assembled a spectacular photo essay of the chaos afloat off the shores of Somalia, where pirates have stepped up attacks on commercial shipping in the last year. Enjoy it for yourself here.

You bail it out, you own it.

That's the problem that Barack Obama is encountering. The federal government on his watch has poured tens of billions of dollars into AIG. And then comes the news that the failed insurance giant has awarded its execs hundreds of millions of dollars in bonuses. Though these rewards were set up by contracts established before the feds showered AIG with taxpayer dollars, the Obama administration is in a position to get blasted for this. After all, it's hard for the Obama White House to defend shoring up AIG with $170 billion in money from the Federal Reserve while its executives are scoring big.

Assuming propping up AIG is good policy, Obama has to sell this rescue--and all the others--to the public, and that's not any easier if AIG execs are lining their own pockets at the same time. Treasury Secretary Timothy Geithner has tried to pressure AIG chief Edward Liddy on these bonuses, and Liddy has attempted to hold firm, claiming much of these bonuses are necessary for the firm to retain talent. (Obvious response: if this is what you call talent, perhaps it's time to hand AIG over to amateurs.)

So Obama has to attack AIG while aiding it. He took a stab at this on Monday morning. At a White House appearance, when he was supposed to be talking about his plans to bolster small businesses, he took the opportunity to poke at AIG:

[AIG] is a corporation that finds itself in financial distress due to recklessness and greed.

Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?

In the last six months, AIG has received substantial sums from the US Treasury. I’ve asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole....This isn’t just a matter of dollars and cents. It’s about our fundamental values.

All across the country, there are people who are working hard and meeting their responsibilities every day, without the benefit of government bailouts or multi-million dollar bonuses....All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules. That is an ethic we must demand.

What this situation also underscores is the need for overall financial regulatory reform, so we don’t find ourselves in this position again, and for some form of resolution mechanism in dealing with troubled financial institutions, so we have greater authority to protect the American taxpayer and our financial system in cases such as this. We will work with Congress to that end.

Will this approach--slam AIG, help it survive, and push financial reregulation--work politically? It probably depends on how much feeling--and what sort of feeling--Obama puts into the slamming part. A little anger won't hurt. There may be building--or seething--outrage beyond the Beltway. Obama has to make sure he's not blind-sided by it. And those recipients of federal largess at AIG are not helping.

Quote of the Day - 03.16.09

From Fareed Zakaria, himself a Very Serious Person in good standing, breaking ranks with the Very Serious People who have a chokehold on American foreign policy:

The problem with American foreign policy goes beyond George Bush. It includes a Washington establishment that has gotten comfortable with the exercise of American hegemony and treats compromise as treason and negotiations as appeasement.

On a related note, I think this partly accounts for one of my pet peeves: the popularity of the "carrot and stick" metaphor that gets used so often when politicians and pundits talk about how we should deal with foreign powers.  Most national leaders are comfortable with the idea of negotiating with us based on competing interests, but I don't think there's a leader in the entire world who doesn't bristle at the idea of being bribed like a schoolboy into cooperation with the United States.  It's a fantastically counterproductive way of publicly describing foreign relations, but nobody on this side of the Atlantic even seems to notice how fundamentally demeaning and offensive it is, or how difficult it makes it for foreign leaders to avoid the charge that they're "caving in" if they come to terms with us.

A better description of the bargaining process is simple: we have things we want, they have things they want, maybe we can strike a deal.  That's the way adults negotiate.  It's time for the carrot and the stick to be buried for good.

Alcopops

Last year California decided to raise taxes on "alcopops," sweet alcoholic drinks that are largely designed to appeal to teenagers.  But guess what?  No new taxes have flowed into state coffers:

Beverage makers admit they aren't paying the new taxes. They say they don't have to because they have reformulated the drinks — more than 6,000 varieties — to transform them into simple beers by limiting the amount of distilled spirits they contain.

They won't explain how. The formulas, they say, are trade secrets. And beverage-industry officials and federal regulators say there are no tests to determine how much distilled spirits the drinks contain.

....Board member Bill Leonard, who voted against the initial tax hike, said that although he is curious about how the industry managed to change thousands of drink formulas in a year, "it is probably impossible for us to ever figure out whether the formula is what they say it is."

I have to admit that my first reaction when I read this story was to laugh.  I know, I know: that's totally inappropriate.  It's a serious issue.  Etc.  But the brazenness on display here is really something, isn't it?  If the alcopop business ever fizzles out, maybe industry executives can all find jobs at AIG instead.

AIG Reveals Creditors, Plans Bonuses

As Kevin Drum notes, "AIG" (really the mostly government-owned company's government-appointed executives) released the names of its largest counterparties on Sunday. So it looks like the Project on Government Oversight's Michael Smallberg was right on the money when he told me on Friday: "With members of Congress from both sides of the aisle asking for the list, they'll only be able to avoid these questions for a limited amount of time."

Now we know what many observers already suspected: not only were companies receiving billions from the insurance company in what's been dubbed a "backdoor bailout," but some of those banks weren't even US-based. The meat of the "backdoor bailout," Portfolio's Felix Salmon writes, is in Appendix B of AIG's list (PDF): the amounts of bad mortgage-backed securities AIG bought from its counterparties to cancel out the bad insurance contracts it had written for those very same mortgage-backed securities. France's Société Générale got $6.9 billion, Germany's Deutsche Bank got $2.8 billion, and Swiss UBS got $2.5 billion. Goldman Sachs, as POGO suspected, also did quite well: it got $6.8 billion. The benefit for AIG's counterparties here is twofold: they offloaded bad assets, which improves their financial situation, and were most likely compensated for those assets in excess of what were actually worth.

I know I'm late to this, but I'm a big fan of this Norm Eisen character. From a profile in last Friday's WaPo:

Eisen is the White House ethics adviser, the guardian of Obama's integrity, and he is called for consultation every time the new administration has a question regarding more than 1,000 pages of government ethics rules and regulations....

Eisen almost never leaves his office without a binder of ethics statutes and a badly mangled copy of "5 CFR," the code of federal regulations. It's a dense collection of complicated rules. One chapter on gift bans is followed by a long addendum of exceptions, which are then followed by their own exceptions. Gifts from lobbyists are not allowed, unless they're worth less than $20, and only then if they result from a spouse's business or employment.

After he accepted the ethics job, Eisen "got comfortable" with his copy of the 5 CFR -- meaning he tore off the cover, ripped out pages that did not apply to the White House and annotated sections he liked. He crossed out rules in pencil that he planned to change. No longer, he decided, could White House employees receive small gifts, honorary degrees or awards from lobbyists.

"No way," he said. "Some of these things are just scams."

Ultimately, it is Norm Eisen's work that has the power to separate Obama's administration from all the other administrations in recent history, including the Democratic ones. He is the Secretary for Ending Politics As Usual. And I wish him all the luck in the world.

Proud socialist Billy Wharton took to the pages of the Washington Post yesterday to argue that Barack Obama is not a socialist. Frankly, he'll thank everyone for dropping the phony comparison.

All this speculation over whether our current president is a socialist led me into the sea of business suits, BlackBerrys and self-promoters in the studio at Fox Business News. I quickly realized that the antagonistic anchor David Asman had little interest in exploring socialist ideas on bank nationalization. For Asman, nationalization was merely a code word for socialism. Using logic borrowed from the 1964 thriller "The Manchurian Candidate," he portrayed Obama as a secret socialist, so far undercover that not even he understood that his policies were de facto socialist. I was merely a cudgel to be wielded against the president -- a physical embodiment of guilt by association.

The funny thing is, of course, that socialists know that Barack Obama is not one of us. Not only is he not a socialist, he may in fact not even be a liberal. Socialists understand him more as a hedge-fund Democrat -- one of a generation of neoliberal politicians firmly committed to free-market policies.

Wharton points to Obama's refusal to nationalize the banks, his rejection of single-payer health care, and his unwillingness to withdraw all troops from Iraq and Afghanistan immediately. All are areas that represent deep divides between the president and America's socialist minority. Wharton continues, "The president has... been assigned the unenviable task of salvaging a capitalist system intent on devouring itself." Fundamentally reshaping that system is out of the question for Obama. Any political observer who has been watching Obama closely but still doesn't accept that either (1) doesn't understand the president, (2) doesn't understand socialism, or (3) understands both but is willing to disregard reality for the sake of a partisan talking point.