Was Obama Economic Envoy Part of the Problem?

| Wed Nov. 12, 2008 12:17 PM EST

The Obama transition office announced on Wednesday that the president-elect will send two representatives to meet with delegates attending the G-20 economic summit being held this weekend: former Secretary of State Madeleine Albright, a Democrat, and former Congressman Jim Leach, a Republican. The pair, according to a press release, will hold "unofficial meetings to seek input from visiting delegations on behalf of the President-elect and Vice President-elect." Afterward, Albright and Leach will brief Barack Obama and Joe Biden.

Leach is both a curious and obvious choice. First, the obvious: he's a Republican who led the Republicans for Obama effort during the presidential campaign. By calling on Leach, who had a long career in the House as a liberal GOPer, Obama can show he does believe in bipartisanship. Now the curious: during part of his stint in Congress, Leach chaired the House banking committee and shared responsibility for passage of the Gramm-Leach-Bliley legislation, which broke down the wall between commercial banks and investment banking.

Since the current Wall Street collapse began, policy wonks have debated whether this 1999 law led to the present troubles. But let's look at an Obama campaign statement released last March (when he gave a speech on financial regulation) that referred to the Gramm-Leach-Bliley Act:

Instead of finding the right level of government oversight in a vibrant free market, we've let the special interests set the agenda. Changes in the financial landscape, driven by technology and globalization, made the 1930's era Glass-Steagall Act--the New Deal era law that required that investment banking be kept separate from commercial banking--increasingly inefficient. While reform was desirable, the banking, insurance and securities industries spent over $300 million lobbying Congress to shape that reform to meet their own interests. In the two years before Glass-Steagall was repealed in 1999, financial service industries gave $58 million to congressional campaigns; $87 million to political parties; and spent $163 million lobbying Washington. But though the regulatory structure was outdated, the need for oversight was not. Unfortunately, in the rush to repeal the law to create immediate opportunities for certain Wall Street firms, little effort went into modernizing the government's supervision of the financial industry--to guard against the potential for conflicts of interest, to insist on transparency, or to ensure proper oversight of new and complex financial products or the dramatic rise of investment banks and non-bank financial institutions, like hedge funds and Structured Investment Vehicles. Nearly a decade later, our financial markets--and everyday Americans--are paying the price.

Paying the price--for a bill that Leach helped to usher through Congress. That's a tough critique.

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Rumors and Reports of Rumors

| Wed Nov. 12, 2008 12:05 PM EST

RUMORS AND REPORTS OF RUMORS....I'm a little torn about whether I should blog more about transition scuttlebutt. On the one hand, this stuff matters a lot for the future course of the administration. If Robert Gates is Secretary of Defense or Tom Vilsack is Secretary of Agriculture, that says a lot about the tone and direction of Obama administration policy.

On the other hand, I'd guess that about 99% of these rumors are completely bogus, just random guesses from people with only a tenuous connection to the transition team. In that sense, reacting to the rumors is just dumb. It's the kind of thing that makes us all stupider, not better informed.

Still, chatting about who might go where, and what it all means, isn't such a bad conversation to have, even if the spark is sort of random and poorly sourced. So I dunno. What do you all think of the possibility of Gates staying on as SecDef or Vilsack being appointed Secretary of Agriculture?

TARP is Dead, Long Live TARP

| Wed Nov. 12, 2008 11:15 AM EST

TARP IS DEAD, LONG LIVE TARP....Henry Paulson has apparently given up completely on buying up troubled assets, the original rationale for the $700 billion bailout fund, and instead wants to inject yet more capital into the banking system and expand the bailout program to other sectors:

U.S. Treasury Secretary Henry M. Paulson Jr. said he wants to expand the government's $700 billion bailout program to include credit card, student loan and car loan companies, part of an effort to ensure that households and businesses have access to a broad array of borrowing options.

...."This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

But has this market ground to a halt because of capital losses among the lenders, or has it ground to a halt because there's no demand for new loans among consumers? If it's the latter, all the capital injections in the world won't make any difference.

Treasury: We Can Haz Do-Over?

| Wed Nov. 12, 2008 9:59 AM EST

The Treasury Department will not buy any troubled assets from banks as part of the bailout, according to the Wall Street Journal, thus negating the central premise behind Secretary Paulson's original rescue plan for Wall Street. It's almost as if Paulson was unprepared for the crisis and that his three-page plan put forward to Congress wasn't particularly well thought out. Who would have expected incompetence from the Bush Administration?

What Color is the Sky in Red Republican World?

| Wed Nov. 12, 2008 8:38 AM EST

Less than a week after Obama's win, the unreconstructed were already out to play in this new, racism-free world of which that victory is undeniable proof. Don't believe me? Well, believe George (there he goes again) Will: "...the election of Barack Obama is an American majority's self-emancipation: We are free at last from the inexpressible tedium of the preoccupation with skin pigmentation."


This from those who were so preoccupied with race as to take the time to "scientifically" coin and enforce categories like mulatto, quadroon, and octaroon? To individually mark a huge nation's water fountains, doorways and, like, entire parts of town 'Colored' and 'Whites Only.' To sail for months to a specific continent for specifically pigmented people to pick their cotton, whip, and rape. Oh well. I guess 'preoccupation' is in the squinted eye of the beholder. Mr. Will: I know it's a waste of both your time and mine to say this, but we're only preoccupied with race because our lives revolve around your preoccupation with it. Being white and decrying non-whites 'preoccupation with pigment' is like thieves decrying non-thieves preoccupation with locking their doors.

Wearily predictable and annoying as this is, the nerd in me finds it best to spend her time wondering about the following minutiae.

Chart of the Day - 11.12.2008

| Wed Nov. 12, 2008 1:27 AM EST

CHART OF THE DAY....According to a new CNN poll, 59% of the public thinks one-party rule by the Democrats is a dandy idea. Furthermore, 62% have a favorable view of the Democratic Party, vs. 38% for the Republican Party. "When has the Republican Party image ever been that bad?" asks CNN political analyst Bill Schneider. "Answer: when the Republican Congress impeached President Clinton at the end of 1998."

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Pesticide Cocktails Kill At "Safe" Doses

| Tue Nov. 11, 2008 8:47 PM EST

591px-Rana_sphenocephala.jpg Combinations of ten of the world's most popular pesticides decimate amphibian populations even if the concentrations are within EPA safe limits for each chemical individually. These supposedly safe low-dose cocktails kill 99 percent of leopard frog tadpoles. One pesticide alone—endosulfan, a neurotoxin banned in several nations but still used extensively in US agriculture—killed 84 percent of the leopard frogs all on its own.

Obviously we can't get a new EPA chief fast enough.

Biologist Rick Relyea at the U of Pittsburgh exposed gray tree frog and leopard frog tadpoles to small amounts of the 10 most widely used pesticides on Earth. He chose five insecticides (carbaryl, chlorpyrifos, diazinon, endosulfan, and malathion) and five herbicides (acetochlor, atrazine, glyphosate, metolachlor, and 2,4-D). He then administered: each of the pesticides alone, all the insecticides combined, a mix of the five herbicides, or all 10 of the poisons.

West Coast Offense

| Tue Nov. 11, 2008 5:49 PM EST

WEST COAST OFFENSE....Adam Serwer writes today about the pros and cons of class-based affirmative action (vs. race/gender-based AA), and Atrios offers some advice:

If, say, a left of center magazine or some other Washington institution wanted to engage in a bit of class-based affirmative action, I have a fairly simple suggestion. Just make sure you reach out beyond elite schools. I've attended and taught at a variety of institutions, and some excellent students can be found most places. And while I don't know the hiring practices of random left of center magazines, or for Congressional staffs, or for the Washington Post, it wouldn't surprise me if first round resume weeding is frequently done based on the college the applicants attended.

I'll second that. Sure, the East Coast centrism of opinion magazines is easy to understand, since they're almost all based on the East Coast. But while I can't say for sure that things haven't changed recently, a few years ago I was noodling around on this subject and was astonished at the hegemony of the Ivy League in the mastheads of most progressive magazines. I expected it to be heavy, but my recollection is that my (admittedly unscientific) sample was something like three-quarters Ivy League. Considering the number of top notch universities elsewhere in the country, that's pretty hard to defend.

So yeah: recruit on the West Coast. Lots of smart liberals out here! And at public universities, which might produce a wider range of sensibilities. It's true that East Coast weather sucks and us Californians are more than a little crybabyish about snow and sleet and whatnot, but Ezra Klein managed to make the transition. I'll bet plenty of others can too.

UPDATE: But not just California! Recruit from all the other states too!

TV on the Radio and Portishead Battle It Out for Album of the Year

| Tue Nov. 11, 2008 5:38 PM EST

Perhaps you aren't aware of it, but deep in the trenches of music criticism, there's a war being fought. With only a month and a half left in 2008, nerds around the world will soon be forced to choose an Album of the Year, and there are two major contenders: Portishead's Third, an utterly bleak comeback album that makes the band's earlier work look like High School Musical, and TV on the Radio's Dear Science, a step forward for a band of Gloomy Gusses who suddenly seem almost optimistic. In the interest of helping music critics and music-critic-wannabes, here's a helpful graph comparing different aspects of the two albums.

Yet More on the CDS Market

| Tue Nov. 11, 2008 5:09 PM EST

YET MORE ON THE CDS MARKET....I've been meaning to link to yet another Felix Salmon post about credit default swaps, since I know what a fascinating subject they are for everyone, but one thing led to another and I haven't done it yet. Basically, "one thing and another" means that I spent several hours yesterday trying to understand the whole CDS issue better, but I failed miserably. So instead of pretending otherwise, I'm just going to link. Salmon conducted an IM conversation with Robert Waldmann about the CDS market, and part of it went like this:

Felix Salmon: So, have I brought you around to the idea that CDS really aren't a major cause of the current crisis?
As you know, Kevin Drum calls me "disturbingly persuasive"

Robert Waldmann: Ah well that is ambitious. You have convinced me that there is a perfectly legitimate reason which can explain why face value is so huge. As to the cause of the crisis, I remain confused. Stupid CDS tricks could have done it. So could stupid CDO tricks and what all.

Felix Salmon: I will concede that there were indeed stupid CDS tricks

Robert Waldmann: I mean the situtation is I don't understand the new financial instruments and it sure looks like the trader types didn't understand them as well as they thought.

Felix Salmon: But the stupidity was in understanding credit risk, not in understanding CDS.

Well....sure, but this seems like a bit of a dodge. After all, pretty much all financial bubbles are based on mispricing risk in some way or another. It seems like we need to dig a little deeper and try to figure out if there were specific aspects of the way modern financial markets are regulated that encouraged even more risk mispricing than usual.

The question, then, isn't whether credit default swaps are useful instruments. They are. The question is whether there's something about the way they're managed in real life that makes them potentially more dangerous than, say, stocks or pork belly futures. And if so, what can we do to limit "stupid CDS tricks"? Here's one possibility:

Robert Waldmann: OK a reform proposal. CDS must come with collateral even if you find a sucker willing to buy one without collateral (this is a regulatory restriction).

Felix Salmon: Yes yes yes.
That's why I'm so astonished Berkshire Hathaway is STILL writing CDS without collateral requirements.
But a move to an exchange would have the same effect.

If I understand this right, the benefit of requiring collateral is twofold. First, it keeps the CDS market from going too crazy, since CDS sellers can only sell protection if they have collateral to back their positions. Second, it reduces counterparty risk, since even if the CDS seller goes bust there's collateral that's been posted to make good on the swap. The big problem with AIG, for example, which has been the most spectacular example of a financial firm losing its shirt due to CDS exposure, is that they were writing CDS willy nilly without having to post collateral (thanks to their AAA rating). When their rating started going south, and they had to post collateral to make up for it, the company went down the toilet. If they'd had to post collateral in the first place, that wouldn't have happened.

So I guess that's a good start: make CDS exchange traded and insist on collateral posting requirements for all writers of CDS.

But what I still don't have a handle on is the scale of the losses in the CDS market. Clearly, AIG and the monoline insurers lost a ton of money. But Salmon suggests that the broader banking industry didn't. Partly this is because only a small segment of the financial industry were net sellers of CDS protection:

Felix Salmon: There's AIG, there's the monolines, and there's the synthetic CDOs bought by institutional investors.
Given the zero-sum nature of any derivatives market, that means that everybody else, on net, was a buyer of credit protection.

So far, this seems to be right: net losses in the broader financial industry on CDS trades seem to be pretty modest. So far. Unfortunately, though, that still leaves the CDOs, which we don't know much about yet, and it also leaves everyone else, who might be choosing not to settle CDS contracts yet that have big losses associated with them. I have a feeling we might need to wait a while longer to know for sure if the broader CDS market is as benign as Salmon thinks.

But it might be. Obviously it's cheating a bit to single out the particular areas where CDS sales caused big problems and then say, "well, aside from those areas everything was fine" — after all, it's always the case in every industry that aside from the problems there are no problems — but still, if it turned out that the big abuses came from noncollateralized CDS sales and synthetic CDOs, that would make me happy. After all, I'm already on record as thinking that CDOs are the devil's spawn. Anything that heaps more abuse in their direction is fine with me.

Bottom line: I'm still confused. For one thing, an awful lot of smart people seem to disagree with Salmon. I'd like to see some of them engage with his arguments. For another, the CDS market is so opaque that we still don't really know how much exposure is out there and who has it. At the very least, that seems unacceptable. And finally, even if there were only three segments of the financial market that were net sellers of CDS protection, just how much is it going to cost us to bail them out?

One way or another, the losses in the financial markets appear to be far wider than just subprime loans. After all, the size of subprime losses in the U.S. seems to be about half a trillion dollars, but in the past year banks have raised something like $300-400 billion in new private capital and another $200 billion so far in government capital. So that means their overall capitalization levels should be OK. But apparently that's not the case. So where are all the rest of the losses coming from? CDS? CDOs? Currency forwards? What? Does anybody actually know? And if not, what will it take to find out?

POSTSCRIPT: And one more thing. It's really annoying that the plural of CDS is CDS. "CDS market" is fine, and CDS when referring to an individual swap is fine, but why not CDSes when referring to multiple swaps? As in, "Sellers of CDSes should be required to post adequate collateral for each CDS they sell"? What does Wall Street have against plural acronyms?