I'm watching a House of Representatives hearing on climate change legislation on c-span.org -- it is the most recent in a long string of such hearings that has incorporated the entire week. Former vice president Al Gore and former senator John Warner, a Republican who urges action on climate change, have just delivered extraordinary statements. Gore listed study after study that are already finding real, concrete effects of climate change. He supplied the assembled lawmakers with as much science as they could possibly want. The much older Warner spoke of growing up during the Great Depression and WWII, and the courage and inspiration that were required to meet the challenges of that time. He argued that fighting back climate change requires the same qualities today. Listening to these two men makes it's hard not to think a cultural shift has occurred and we're finally on our way to a real solution.

And then you stumble on something like the video below, and you realize why a solution has been and will continue to be so immensely difficult. Below is a man who does not care about Gore's science or Warner's call to duty. Below is a man who has found text in the Old Testament that says God, not man, will determine the end of the world, and because that text is infallible in his view all this business about global warming is a bunch of hokum.

That's Rep. John Shimkus. And in case it's not clear how he feels about global warming from the video, he said earlier this week, "I think [climate change legislation] is the largest assault on democracy and freedom in this country that I've ever experienced. I've lived through some tough times in Congress -- impeachment, two wars, terrorist attacks. I fear this more than all of the above activities that have happened." That's not just kind of nutty. It's dangerous.

With any luck, I'll be on a plane to Georgia by the time you read this.  I'm attending a conference this weekend with fellow members of the VLWC on — let's see, what does it say here?  Ah, yes: "Attendees will discuss major themes such as the restructuring of the financial industries, the development of regulatory systems, transparency in stimulus contracting, and the impacts of the stimulus on jobs and housing in local communities."  Exciting!

But you didn't think I'd let you all face the weekend without Friday Catblogging, did you?  Of course not.  Today is portrait day, and they're trying to look serious and businesslike.  Did it work?

And hey — as long as I've got a captive audience here, a question: can anyone recommend a cheap and simple keystroke logger for Windows?  I'm tired of losing posts, so I'd like to keep a continuous keystroke logger running so that I have at least a fighting chance of recovering stuff that disappears into the ether.  Any help much appreciated.

Stress Test Update

The Treasury plans to release the broad results of its stress tests on Friday.  The New York Times reports:

Analysts are already betting that the stress tests will show that banks need to raise significant amounts of new capital, as profits made in the first three months of the year give way to more losses, tied to credit card, commercial real estate and corporate loans. An assessment by [Keefe, Bruyette & Woods], which calculated its own stress test for the industry, concluded Thursday that United States banks might need as much as an additional $1 trillion in capital.

As part of their exam, regulators have been poring over bank balance sheets to spot financial problems that may not surface for months. Officials are assessing the financial condition of the banks based on their potential losses and earnings over the next two years. That is why some banks that recently announced blockbuster earnings may still need to raise sizable amounts of fresh money.

As the dust settles from the shakeout on Wall Street, the 19 banks subject to stress tests are starting to divide into three groups: the strong that can weather the storm; the weak that will need new, perhaps significant, support; and the ones on the verge, whose fate will be decided by regulators.

I'm still shaking my head trying to figure out how this is going to work out.  If KBW is right — and their estimate certainly seems to be in the right ballpark — and a substantial fraction of that capital turns out to be needed by half a dozen of the biggest banks, where is it going to come from?  The Times report is very antiseptic, but it's a fantasy to think that any bank "on the verge" will be able to raise private capital, and the Treasury's TARP money is nearly exhausted.  So then what?

The next couple of weeks are going to be very interesting.  If this report is even roughly accurate, I really have no idea how Tim Geithner is going to tap dance his way around the N-word much longer.

James Surowiecki sez:

The Great Depression [] wouldn’t have become the Great Depression had the Federal Reserve and the Hoover Administration acted in 1930 the way the Federal Reserve and the Obama Administration are acting today.

Is this true?  Discuss.

From Barclays analyst Craig Huber in a research note:

"We view the 17.75 percent stake in the Boston Red Sox as having among the very best long-term asset appreciation potential at the company."

Unfortunately, he's talking about the New York Times.  (Via Ryan Avent.)

Via Boing Boing comes this goofy video that answers the question, "What would happen if we took T-Pain's favorite studio toy, the Auto-Tune, and ran the news through it?" Haven't you ever wondered that? Well, I have, but I've always found the robotic warble that the Antares software produces via its forcing of any sound to its nearest pitch in a pre-defined scale to be a legitimate mode of artistic expression, but then again, I'm just generally pro-robot. This video, by Michael and Andrew Gregory, features some politicians and sports figures having their blabbering turned into robotic song, with varying success: who knew Joe Biden was a natural pop music talent? Get that guy on American Idol!! The work is apparently part of an ongoing project to pitch-correct all broadcasts, perhaps ultimately aiming for the pitch-correction of all sound, everywhere, all the time, into some sort of National Key. I vote for Am7!

Ashamed as I am to admit it, I actually clicked on a piece about the First Puppy. Seems he's all hyper and stuff, chewing tootsies and waking folks up in the middle of the night. But here's the line that activated my pomposity meter: "The president and I came out and we thought somebody was out there."

"The President"? Not Barack or Barry or my husband? The President?

Michelle: Back away from the Kool-Aid. I'll cover you.

I know we're not supposed to be advocates around here, but I can't help it. I think I love Jonathan Mann. He's like our own hometown Flight of the Conchords. The SF Bay Area musician and self-videographer set out in January to compose a song and music video a day, something a once-a-quarter songwriter like yours truly can barely comprehend. And Mann has delivered, too, producing 113 ditties so far this year about culture and current events (posted at his website, RockCookieBottom.com) thus catching the attention of our good friend Rachel Maddow, who invited him on her show last Friday to perform a song that calls on Paul Krugman to step up and help America with its fiscal policy and I think this is a run-on sentence isn't it? Mann told Maddow he was awaiting the release of the torture memos so that he could set 'em to music. And here's what he came up with: Mann channeling John Yoo on waterboarding. If it's a hit, Yoo, being a lawyer, will probably demand a cut of the royalties. Indeed, he may well need it for his legal defense fund.

Good Methane Burps

We’ve been hearing for a while how warming temperatures might release huge burps from methane deposits on the seafloor and from permafrost—frozen reservoirs known as clathrates.

This is not something we want. Methane is 20 times more powerful than carbon dioxide as a greenhouse gas. In the last 150 years it’s more than doubled in the atmosphere until today it totals about half the greenhouse effect caused by carbon.

The good news is that the latest belch 11,600 years ago appears to have been caused by expanding wetlands not melting methane ice. This according to a Scripps Institution of Oceanography study measuring carbon-14 isotopes in methane from air bubbles trapped in glacial ice. They found the surge 11 millennia ago was more chemically consistent with an expansion of wetlands. The paper’s in Science.

Wetlands profusely produce methane as bacteria breakdown organic matter. Wetlands also tend to spread during warming periods.

Not this one though. We’re destroying coastal and inland wetlands faster than any other ecosystem on Earth, according to the 2005 Millennium Ecosystem Assessment.

So we’re killing off the methane factories. But also the biodiversity factories, the water filtration factories, the storm-buffer factories. Wetlands provide ecosystem services estimated at $14 trillion a year.

Sigh. Burp.
 

Risk

Like pretty much everyone else on planet Earth, I've been thinking about risk a lot lately.  And I suppose I've been thinking pretty much the same thing as everyone else.  The following excerpt, from a speech to a bunch of bond dealers, is a bit jargony, but gets the basic point across.  Take it away, Felix Salmon:

You and I and Alan Greenspan all thought that credit derivatives were wonderful things because they moved credit risk out of the hands of people who didn’t want it, like banks, and into the hands of people who did want it.

In reality, however, the appetite for risk was never nearly as great as we all thought. $10 billion of loans becomes less than $200 million of credit-risk instruments, and everybody else reassures themselves that they’ve managed to reduce their credit risk to zero, even as the people holding that $200 million in synthetic CDO tranches are reassured by their own single-A or triple-B credit ratings that theyaren’t taking a particularly large amount of risk either.

And of course you know what happens next: some bright spark invents the CDO-squared, which seems to reduce the total amount of risk even further. You take the mezzanine debt, the triple-B stuff, and you do all manner of securitization magic to it, and it turns out that you can turn most of that into triple-A paper, too!

Because it was all triple-A, no one felt much in the way of need to do any analysis of their own: it’s almost impossible to overstate the power of the laziness of the bond investor. You know this from your own work with municipal issuers: the reason for those monoline wraps is not because the issuers have a lot of credit risk, but because the investors are lazy, and don’t want to do their homework, and reckon they can get out of doing their homework so long as there’s a monoline guarantee. Essentially, they’re outsourcing their own job to the monolines. Which might be reasonable for a small retail investor, but is not a good idea if your job is to invest in fixed-income instruments which carry a higher yield than Treasury bonds.

Of course, we all know how reliable those monoline guarantees turned out to be — and that’s a related story. The monolines, just like the ratings agencies, believed far too much in the power of models.

This kind of thing isn't new.  The basic idea is that you take, say, a BBB-rated bond (decent quality but not great) and get a monoline to insure it, and suddenly you've got a AAA bond.  It's now risk free because even if the bond defaults, the monoline will pay you off.  In theory, this is great: somebody who wants less risk in their portfolio is able to buy insurance from someone who wants more risk in return for a greater potential return.  Everybody gets what they want — party A gets exactly the investment it wants and party B gets exactly the investment it wants — which makes the bond market more efficient and more liquid.

But although this is true theoretically, in the real world it turns out that risk is usually best measured by whoever is closest to it.  In the past, bond buyers were pretty careful about evaluating default risk because they were the ones who'd have to bear it.  Then they started selling off that risk, and the monolines, who were eager for business and comforted by the fact that their models had always worked, were just a little less careful.  Then credit default swaps were invented and popularized, and risk was sold off even further.  And then further.  And when you get three or four steps down the line, nobody is seriously analyzing the underlying securities themselves.  They're just relying on increasingly on abstract models.

So a system that theoretically makes the market more efficient ends up, for all too human reasons, with no one truly evaluating the risk of all the securities underlying the rocket science.  And eventually it comes crashing down.

All of which makes me wonder: is Felix still as bullish about credit default swaps as he has been in the past?  Unlike some credit derivatives, there's no question that CDS serves a useful purpose.  In theory.  But in practice, when their use becomes nearly universal and they start getting packaged two and three vehicles deep, they're deadly even if there's no conscious fraud or abuse going on.  They don't so much allocate risk as simply encourage people to ignore it.  It's just human nature.

As for me, I'm increasingly wondering if insurance of financial assets (as opposed to physical assets, which are a different story) is a good idea, period.  Sure, the upside is that it makes debt markets more efficient, but it's worth asking if we even want these markets to be more efficient in the first place.  What has that gotten us aside from gigantic profits for financial firms?  And if there's no upside to balance a potentially catastrophic downside, why allow it at all?  Maybe, human nature being what it is, there's no substitute for forcing debt buyers to be extremely, personally, conscious of the risk they're assuming when they make an investment.  Maybe, in the end, that's the only thing that can keep a credit bubble from overinflating.

I'm not sure.  Pushback welcome on this score.  But it's certainly worth thinking about the big picture here.