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Miscellaneous AIG Stuff

| Wed Sep. 17, 2008 8:11 PM EDT

MISCELLANEOUS AIG STUFF....Here are some random links related to the AIG bailout. When it's all said and done, by the way, I suspect that the Fed is going to end up making a tidy profit on the deal. But that's a few years down the road. In the meantime, here are some worries, offered without comment because they're above my pay grade:

  • Stephen Bainbridge has some very specific questions about the legality of the Fed's takeover of AIG. For example: "How can the federal government take a security interest in AIG's assets? Presumably AIG had debt securities outstanding that include negative pledge covenants. If so, why doesn't this deal violate the trust indentures? This one really bugs me."

  • Tyler Cowen has some more general concerns about the legality of what happened: "First, the referee is on the playing field. Second, while Dodd and others are on board, basically we have the executive branch of our government — the Treasury — operating without formal checks and balances....The broader implications here are very worrying, both for governance and for the future of the Fed itself. Maybe there is no better alternative, but these developments are a sign of just how dysfunctional American government has become."

  • Jim Manzi notes that the Fed has been forced to ask the Treasury for additional funds to backstop its AIG bailout: "The reason this is so important is that, in effect, it materially undermines the independence of the US central bank, while central bank independence is a widely-accepted predicate for anti-inflationary policies over time in a modern democracy. If the Fed becomes just a part of the Treasury Department (though this announcement is only a move in that direction), we could have real problems."

  • Reuters reports that the federal government's AAA credit rating is under pressure. Also this: "The cost of insuring 10-year U.S. Treasury debt against default rose Wednesday to a record high, a day after the government rescued insurer AIG with an $85-million loan....Ten-year credit default swaps, or CDS, on Treasury debt widened three basis points to 26 basis points, according to data from CMA DataVision. This means it costs $26,000 per year to insure $10-million of U.S. Treasury debt against default."

You know, I never even realized there was a market for insurance against U.S. Treasury default (let alone that the cost of a CDS on American debt is now twice as high as that on German debt). I mean, think about it: what would have to happen for the U.S. government to start defaulting on its bonds? The only scenarios I can think of are so cataclysmic that (a) you'd have way bigger things on your mind than whether your T-bills are going to get paid off, and (b) the odds that the insurer would still be solvent while the U.S. government collapsed around it are about nil. So what's the point of buying it?

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Top 5: New Music

| Wed Sep. 17, 2008 6:40 PM EDT

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This week, drum 'n' bass meets Coldplay, a sweet dream of Buenos Aires, Madlib gets impatient, and a reminder of the good times at the raves back in '92, since it's unlikely anyone actually remembers that.

1. The Walkmen – "In the New Year" (from You & Me on Gigantic Music)
On their new album, the New York band have gotten a little more epic while retaining their appealing rawness. "New Year" soars like Interpol but has the 6/8 rhythm of an old drinking song. (mp3 from The Sound of Marching Feet)

2. Surkin feat. Chromeo – "Chrome Knight" (single)
Techno producer Surkin's instrumental "White Knight" nodded to classics like Inner City's "Big Fun," so it makes sense to grab Dave from electro duo Chromeo for some vocals. Chromeo's usual strutting retro-silliness is calmed down by the rolling electro, and the track's suddenly got pop appeal. (mp3 from Voules Random)

3. Juana Molina – "Un Dia" (from Un Dia out 10/6 on Domino)
The Argentinian singer/songwriter moves further into surreal territory with this dreamlike lead single from her upcoming fifth album. It's both deeply experimental and oddly traditional, something I could imagine dancing to in a Buenos Aires bar, after enough mate. (mp3 from Stereogum)

Federal Action Against Iranian Global Procurement Network Suggests That Deadly Iraq IED Components of US Origin

| Wed Sep. 17, 2008 5:43 PM EDT

Today, the Commerce Department Bureau of Industry and Security (BIS) announced that, in cooperation with the US attorney in Miami and other federal agencies, it had broken up an Iranian global procurement network used to illegally acquire US-origin dual use and military components. "This extensive, effective government effort has broken up a lethal international ring seeking to harm American and allied forces as well as innocent civilians by acquiring sensitive U.S. technology capable of producing improvised explosive devices (IED) similar to those being used in Iraq and Afghanistan," said Commerce Under Secretary Mario Mancuso.

A corresponding Justice Department press release today announced the unsealing of a 13-count indictment "charging eight individuals and eight corporations in connection with their participation in conspiracies to export U.S.-manufactured commodities to prohibited entities and to Iran. ... The defendants are charged with purchasing and causing the export of U.S. goods to Iran through middle countries, including the United Arab Emirates, Malaysia, England, Germany, and Singapore." None of the eight defendants reside in the U.S.

The announcements were forwarded by a Washington trade lawyer, aware of my interest in the issue. A couple months ago I reported on a curious phenomenon: why was so much US sensitive military equipment and technology ending up in Iran, the subject of extensive US sanctions? One major soft underbelly of US efforts to restrict the sale of US military equipment to Iran turns out to be the United Arab Emirates, where both the US and Iran have extensive trade ties. In my report, I cited a former Commerce Department official who noted:

"The rhetoric from Commerce…is all about national security ... US bureaucrats don't want to find their names in press for not enforcing when a US soldier is killed [in Iraq] by US technology that was exported to Iran through UAE. So, the rhetoric is very tough for UAE enforcement. On the other hand, we desperately want the oil dollars…So, mixed messages galore."

The scenario the former Commerce Department official suggested in passing was disturbing. Were some of the components in the improvised explosive devices (IEDs) blamed for killing US forces in Iraq - that the US military alleged were being supplied to Shiite militants in Iraq by Iran - in fact of American origin? Is that why the US military has repeatedly indicated it would display the evidence of the Iranian origin of some of these weapons, and then halted the full presentation?

Today's announcement by the Commerce Department raises just such questions. Stay tuned.


Financial Reforms

| Wed Sep. 17, 2008 5:21 PM EDT

FINANCIAL REFORMS....Bob Kuttner proposes three fundamental reforms for our broken financial system:

Reform One: If it Quacks Like a Bank, Regulate it Like a Bank. Barack Obama said it well in his historic speech on the financial emergency last March 27 in New York. "We need to regulate financial institutions for what they do, not what they are." Increasingly, different kinds of financial firms do the same kinds of things, and they are all capable of infusing toxic products into the nation's financial bloodstream....

Reform Two: Limit Leverage. At the very heart of the financial meltdown was extreme speculation with esoteric financial securities, using astronomical rates of leverage. Commercial banks are limited to something like 10 to one, or less, depending on their conditions. These leverage limits need to be extended to all financial players, as part of the same 2009 banking reform.

Reform Three: Police Conflicts of Interest. The conflicts of interest at the core of bond-raising agencies are only one of the conflicts that have been permitted to pervade financial markets. Bond-rating agencies should probably become public institutions. Other conflicts of interest should be made explicitly illegal.

These are guidelines, not specific reforms, but they're the right guidelines. Kuttner calls this a "Roosevelt-scale counterrevolution," and I'd only add that we also need a Roosevelt-scale reform of our basic economic priorities. An economy that relentlessly favors a tiny class of the super-rich is fundamentally unstable. Conversely, one that relentlessly favors job and wage growth is not only stable, but benefits everyone, including the rich. If we continue to have an unbalanced economy, all the financial system reforms in the world won't keep meltdowns like this from happening over and over again. It really is time for a change.

Construction Bonds

| Wed Sep. 17, 2008 4:25 PM EDT

CONSTRUCTION BONDS....Andrew Sullivan is amused by a CBS report that Sarah Palin actually answered a question from the press today, "prompting concerned looks from staffers." I can well imagine. However, I'm more perplexed by the answer itself:

"Disappointed that taxpayers are called upon to bail out another one. Certainly AIG though with the construction bonds that they're holding and with the insurance that they are holding very, very impactful for Americans, so you know the shot that has been called by the Feds — it's understandable but very, very disappointing that taxpayers are called upon for another one."

Construction bonds? What is she talking about? Maybe performance bonds? Not that that makes any more sense. What's more, I'm pretty sure that AIG's consumer and commercial insurance business wasn't in any danger. So why focus on that? I mean, if you're only going to give the press a single sentence, why not spit out something about counterparty risk and leave their jaws hanging?

Dow Finishes Day Lower Than When Bush Took Office

| Wed Sep. 17, 2008 4:00 PM EDT

The Dow Jones Industrial average just closed for the day at 10609.66, about 50 points lower it was the week George W. Bush took office as president of the United States.* In seven and a half years, GOP stewardship of the economy has produced negative results in the stock market. Remember, this is the same stock market that the Bush administration (and John McCain) wanted to invest your Social Security money in. That money would have been managed, in part, by now-bankrupt Lehman Brothers and no-longer-independent Bear Sterns and Merrill Lynch.

If you invested in the stock market in 2001, betting that Republicans are better for the economy, you bet wrong. Instead, we're in the midst of what Alan Greenspan has called a "once-in-a-century" crisis. But since you're a well-informed reader of MoJo Blog (or perhaps of Kevin Drum), you already know that Democrats are better for the economy.

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Remember, it's not just the stock market that's done poorly under Republican leadership. It's also most Americans. GOP economic policies have redistributed wealth upwards, benefiting the private-jet-and-personal-megayacht set but leaving almost everyone else, including many who would technically be considered "rich", behind. Between 2002-2006, the bottom 90 percent of Americans got 4 percent of the nation's income growth, according to figures from the Center for American Progress (PDF). (The great chart to the right is from that same report). The 15,000 richest families in America got 25 percent of the income growth, and the median household income was 0.6 percent lower in 2007 than in was in 2000. And all these figures were calculated before the turmoil of 2008 and the chaos of the past week.

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Can the FDIC Weather the Financial Storm?

| Wed Sep. 17, 2008 3:01 PM EDT

The federal bailout of American Insurance Group (AIG) is like putting a finger in the dike. Next to potentially require government intervention is Washington Mutual, the nation's sixth largest bank with some $143 billion in deposits, which hangs by a thread. When—not if—it goes, the government is committed to protecting its depositors through the Federal Deposit Insurance Corporation. According to one estimate in The New York Timeson Wednesday morning, paying off Washington Mutual depositors could eat up half the FDIC's reserves, which currently stand at $45.2 billion. In August, the FDIC identified 117 banks and thrifts that could be in trouble. "A few more IndyMacs or 20 or 30 smaller collapses will wipe out [FDICs] reserves," predicts Dean Baker of the Center for Economic and Policy Research. That means the FDIC could bottom out, unless Congress steps in.

Commercial banks, already straining from the crisis, are now being encouraged by Treasury Secretary Henry Paulson, to take on crumbling Wall Street investment companies. That was the message in the Bank of America's recent takeover of Merrill Lynch. One of Washington Mutual's oft-mentioned suitors is Chase. That means that bank portfolios could become swollen with the junk bonds, lousy mortgages, and other speculative investments held by the unregulated collapsing investment banks on Wall Street. The already weakened commercial banks will find it difficult to survive with this additional load. If they fail, the FDIC's reserves are not big enough to cover the deposits of their customers.

Drudge

| Wed Sep. 17, 2008 2:48 PM EDT

DRUDGE....Many years ago I had the bright idea that if you really wanted to understand everyday Americans, you ought to read the National Enquirer regularly. So I did for a few weeks — and then gave up. It was just too boring.

I feel the same way about Drudge. I read him from time to time because I know that other people do, but I always drift away because there's really nothing much there. He only occasionally has exclusive news, and most of what he does have comes from sources inside MSM newsrooms and consists of a few sentences blurbing a story that shows up in its full form an hour or two later at the MSM site itself. Big deal. His roundups of basic news are no better than just reading a few front pages yourself. Sure, conservatives like him because he helped bring down the Clintons, but he hasn't done much since then. For the rest of us, it's basically kind of a boring site.

In other words, count me in Steve's camp. I mean, I get it, but I still don't get it. Why do people still read the guy? Isn't he sort of the disco of right-wing news sites?

TED Spread Update

| Wed Sep. 17, 2008 2:18 PM EDT

TED SPREAD UPDATE....Our old friend the TED spread is a simple gauge of financial market jitters. (More here.) You will therefore be unsurprised to learn that, for the fourth time in the past year, it's spiking. Even at high prices, nobody wants to make short-term loans to banks. Can you blame them?

Sarah Palin's Yahoo Accounts Hacked

| Wed Sep. 17, 2008 1:34 PM EDT

palin-screenrab.jpgSo, you know those Yahoo accounts Sarah Palin was using to keep her official business safe from subpoenas? Turns out they're not so safe after all. Palin's Yahoo accounts (gov.palin@yahoo.com and gov.sarah@yahoo.com) were successfully hacked last night and you can see the screengrabs here. Since then, the accounts have been deleted, which could be considered destruction of evidence if a court chose to pursue it.

The evidence, at first glance, looks pretty solid that the accounts were authentic. Photos of Palin's family were pulled from e-mails, plus a "sent" e-mail to aide Amy McCorkell was confirmed by a call to McCorkell herself, reports Wired.

Who knew the GOP was so in favor of government transparency? Maybe the McCain/Palin team is a real "maverick" ticket after all.