Kevin Drum - November 2008

Financial Meltdown Blogging

| Thu Nov. 13, 2008 2:12 PM EST

FINANCIAL MELTDOWN BLOGGING....Hi there. Kevin here. Turns out the jury room here in the Orange County Superior Court has free WiFi and plenty of desks and carrels to work at. Hooray! So, since my number hasn't been called yet, here's some miscellaneous financial meltdown blogging for you. Today, Atrios says:

I think it's important to keep in mind the fact that this looming economic disaster was preventable. The Wise Old Men of Washington and Wall Street have fucked everything up due to a combination of greed and and adherence to ideology regardless of what the facts are. There were many moments in the past few years when something could have been done to at least minimize the problems, and at every step they've done the wrong thing.

No argument on the greed and ideology front, but I'm curious: was there really anyone who made the right call on all this at a policy level? There were, of course, plenty of people who recognized the housing bubble for the idiocy that it was (Alan Greenspan notably not one of them), but were there any major voices making specific policy proposals to slow down the bubble? Or rein in the mortgage market? Or regulate the CDO/CDS market in a way that would have prevented some of the damage? I'm talking specifics here, not just general observations that the FIRE sector was out of control. Arguments about interest rates being too low count, if they were made for the right reason, but I'm interested mainly in more detailed recommendations.

I don't have any big point to make here. I'm genuinely curious. There were many moments in the past few years when perhaps something could have been done, but what? And who was proposing serious measures that would have helped? Any major Dems? Economic pundits? Wall Street mucky mucks? Who were the unsung heroes? Help me out here.

By the way, I'm typing this on the netbook I bought yesterday, an MSI Wind U100. About 400 bucks, the size of a trade paperback, decent keyboard (slightly smaller than full size), good battery life, readable 10" screen, and — annoyingly but not surprisingly — it outperforms my desktop PC in almost every way. So far, the only drawback is that the touchpad is maddeningly sensitive, but hopefully I'll eventually figure out a way to tweak that. More later after I've used it more.

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Revitalized Public Financing

| Thu Nov. 13, 2008 2:01 PM EST

REVITALIZED PUBLIC FINANCING... I have a post on that subject up now on what Kevin calls the mother blog (aka MoJo Blog). Fred Wertheimer, president of good government group Democracy 21, takes to the Washington Post today to sketch out what a functioning public financing system looks like in the next decade. I point out the highlights.

Transition Dollars

| Thu Nov. 13, 2008 1:00 PM EST

TRANSITION DOLLARS... You're probably aware that Obama is still using his network of supporters to raise money. The Capital Eye blog at the Center for Responsive Politics tells us how this works:

According to the Presidential Transitions Effectiveness Act, a single donor can contribute a total of $5,000 to the transition effort, even if the donor already gave money to Obama's candidate committee or leadership PAC. Unlike contributions to these committees, however, donations to the nonprofit won't have to be reported to the Federal Election Commission as political contributions because the organization is set up as a 501(c)(4), as designated by the Internal Revenue Service (these contributions are generally not tax-deductible as charitable contributions). Instead, Obama will have to disclose the source, date and amount of each contribution to the General Services Administration by February 20, a month after he's already taken office.
Obama's transition chief, John Podesta, told the Washington Post the team would be disclosing the names of all donors at the end of every month.

Podesta noted in a conference call with reporters earlier this week that the transition will cost a total of $12 million, and that because Obama will receive some assistance from the federal government, he is hoping to raise roughly $7 million. My boss in MoJo's DC bureau, David Corn, asked the appropriate question two days ago: "Given that the nation is spending trillions of dollars to rescue the financial industry, it shouldn't be too hard to fund fully the transition effort. Can't Congress just appropriate another $7 million—which is chump change these days—and let Obama get on with the show?"

Information Overload

| Thu Nov. 13, 2008 10:37 AM EST

INFORMATION OVERLOAD... The New York Times has gotten its ink-stained hands on the seven-page application form for high-level Obama Administration job seekers. (You can download the PDF at the NYT site.) The phrase "application form" is misleading. The document isn't seven pages of questions and their corresponding answer fields. It's seven straight pages of highly invasive questions/demands for information about the applicant's past. No figurative stone is left unturned. Here's a sample.

obama_admin_application.jpg

I wonder if the Obama folks leaked this intentionally, to demonstrate how committed they are to keeping conflicts of interests out of their White House and how adamant they are about avoiding drama (letting an appointee suck up news-space because of a nanny problem is definitely not the Obama Way). Alternatively, an applicant leaked this because he or she was aghast at how over-the-top it is. If that's the case, it's another teachable moment in a lesson Obama is quickly coming to learn: preventing leaks in a campaign is infinitely easier than preventing them in an administration.

Honor

| Thu Nov. 13, 2008 10:10 AM EST

HONOR... I don't have anything to add to this, other than it makes me sick to my stomach. The UN Dispatch on an honor killing in Somalia:

Last week, 13-year old Aisha Ibrahim Duhulow was stoned to death in Somalia by insurgents because she was raped.
Reports indicate that was raped by three men while traveling by foot to visit her grandmother in conflict capital, Mogadishu. When she went to the authorities to report the crime, they accused her of adultery and sentenced her to death. Aisha was forced into a hole in a stadium of 1,000 onlookers as 50 men buried her up to the neck and cast stones at her until she died.
When some of the people at the stadium tried to save her, militia opened fire on the crowd, killing a boy who was a bystander.

Disappointment Watch

| Thu Nov. 13, 2008 9:28 AM EST

DISAPPOINTMENT WATCH... If you're looking for an indication of what the first schism between the Obama Administration and the Democratic Congress will be, consider the question of investigations.

Congressional Democrats are gearing up for a season of post-Bush inquiries (at least that's what they're saying — remember this?), but Obama has indicated in the past that he isn't excited about the possibility. Earlier this year, he told the press that there needs to be a distinction between "really dumb policies and policies that rise to the level of criminal activity." The latter should be investigated, Obama said, but "I would not want my first term consumed by what was perceived on the part of Republicans as a partisan witch hunt, because I think we've got too many problems we've got to solve."

I side with Congress on this. There is enough evidence to suggest that the Bush Administration may have broken the law and violated the Constitution — investigations, with subpoena power, are the only way to know for sure. No one is suggesting that Congress grill Department of Education bureaucrats about the implementation of No Child Left Behind. Democrats on the Hill aim to examine our torture and detention policies, the wiretapping of American citizens, and the improper firing of US Attorneys — areas where legal experts have already suggested the Bush Administration crossed lines.

Don't get your hopes up, though. Presidents in the past have gone easy on their predecessors. President Bush, for example, blocked a 2001 subpoena by Congressional Republicans seeking to investigate the Clinton administration. I fully expect Obama to embrace the amity that exists between presidents and ex-presidents. And even if Obama gives Pelosi and Co. the green light, history suggests that ex-presidents take with them certain lingering powers that allow them to block investigations. The precedent, established by Truman and outlined by the always excellent Charlie Savage, is flimsy. But if there is one president and vice-president who can be counted upon to stretch executive privilege using dubious legal reasoning, it's our departing duo.

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Guest Blogging

| Thu Nov. 13, 2008 1:33 AM EST

GUEST BLOGGING....Having done my national civic duty last week (was it really only last week?), today I'm scheduled to do my local civic duty. The Superior Court of Orange County has requested the pleasure of my company in their jury room for the day, so that's where I'll be. Blogging in my place today will be Jonathan Stein, a reporter and blogger in our Washington bureau who normally writes over at the mother blog.

I'll be back on Friday. Don't let Wall Street collapse again while I'm gone.

One More for the Dems

| Thu Nov. 13, 2008 1:24 AM EST

ONE MORE FOR THE DEMS....It looks like Mark Begich is going to beat Ted Stevens in the Alaska senatorial race after all. Which begs the question: Is there anything that Nate Silver isn't right about?

Even Yet More on Credit Default Swaps

| Wed Nov. 12, 2008 6:09 PM EST

EVEN YET MORE ON CREDIT DEFAULT SWAPS....Admit it: you can't get enough of credit default swaps, can you? Well, after yesterday's post on the subject, a bunch of people insisted that I needed to read Michael Lewis's latest piece in Portfolio right away, and since I'm a big Michael Lewis fan I got right on it. As usual, it's great, so do yourself a favor and drink in the whole thing sometime soon.

For now, though, let's focus just on the CDS part of Lewis's piece. Here's the backstory: a hedge fund manager named Steve Eisman, who believed the entire subprime house of cards was due to implode, wanted a way to bet against the market. So he shorted the stocks of subprime originators like New Century and Indy Mac and then looked around for even more targeted ways to make money on the coming collapse. The Holy Grail came from Greg Lippman, a mortgage-bond trader at Deutsche Bank:

The smart trade, Lippman argued, was to sell short not New Century's stock but its bonds that were backed by the subprime loans it had made. Eisman hadn't known this was even possible — because until recently, it hadn't been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision....Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

But why was a bond trader recommending that Eisman short bonds in his own market? The answer came after Eisman had a conversation at an industry dinner:

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.'s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, "the equivalent of three levels of dog shit lower than the original bonds."....[But] not only did he not mind that Eisman took a dim view of his C.D.O.'s; he saw it as a basis for friendship. "Then he said something that blew my mind," Eisman tells me. "He says, 'I love guys like you who short my market. Without you, I don't have anything to buy.' "

That's when Eisman finally got it. Here he'd been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren't enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them....The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. But that's when I realized they needed us to keep the machine running. I was like, This is allowed?"

I still won't pretend that I fully understand this. In fact, every time I read a story like this, it seems to get right up to the good stuff — "They were creating them out of whole cloth. One hundred times over!" — and then suddenly moves on. But I want more! I want an entire 10,000 word piece on how the combination of CDOs and CDS allowed Wall Street to magnify their underlying subprime losses so catastrophically. Instead, I just get a teaser and then the story meanders off in a more colorful direction.

Better than nothing, I suppose. And you should read Lewis's entire piece regardless. But I still wish someone could explain in layman's terms what this all means.

UPDATE: Further explanation here on what Eisman was doing and how the swaps he bought "synthesized" subprime mortgages. It doesn't explain exactly how big CDS losses are or which sectors of the financial industry lost most of the money from them, but it does explain the mechanics a bit better.

What Just Happened

| Wed Nov. 12, 2008 3:36 PM EST

WHAT JUST HAPPENED....Despite all the grief she's gotten, I continue to think that the selection of Sarah Palin as John McCain's running mate represents the breaking of a consensual cultural barrier far more fundamental than most people realize. It's not just that she was inexperienced (Spiro Agnew and John Edwards weren't much more experienced than Palin when they ran for VP) but that she was — obviously, transparently, completely — uninterested in and uninformed about national policy at nearly every level. We've simply never seen someone so completely unmoored from the normal requirements of national office before. She was chosen purely at the level of celebrity, and an awful lot of people seemed to be just fine with that.

Unfortunately, I've never really been able to find the words to describe just how corrosive I think her choice was. The whole affair just left me gobsmacked. So instead I'll turn the floor briefly over to Andrew Sullivan:

Let's be real in a way the national media seems incapable of: this person should never have been placed on a national ticket in a mature democracy....The impulsive, unvetted selection of a total unknown, with no knowledge of or interest in the wider world, as a replacement president remains one of the most disturbing events in modern American history. That the press felt required to maintain a facade of normalcy for two months — and not to declare the whole thing a farce from start to finish — is a sign of their total loss of nerve.

....This deluded and delusional woman still doesn't understand what happened to her; still has no self-awareness; and has never been forced to accept her obvious limitations. She cannot keep even the most trivial story straight; she repeats untruths with a ferocity and calm that is reserved only to the clinically unhinged; she has the educational level of a high school drop-out; and regards ignorance as some kind of achievement. It is excruciating to watch her — but more excruciating to watch those who feel obliged to defend her.

Andrew's obsession with Palin was often hard to take, and I sometimes wished I could reach through the screen and strangle him whenever he started talking about Trig Palin again. Still, aside from the "clinically unhinged" crack, I agree with all of this. Disturbing hardly begins to describe what we've gone though with Palin over the past two months.

UPDATE: Via email, here's an excerpt from Wolf Blitzer's interview today with Palin:

BLITZER: Another question. What are your new ideas on how to take the Republican Party out of this rut that it's in right now? Give me one or two new ideas that you're going to propose to these governors who have gathered here in this hotel.

PALIN: Well, a lot of Republican governors have really good ideas for our nation because we're the ones there on the front lines being held accountable every single day in service to the people whom have hired us in our own states and the planks in our platform are strong and they are good for America. It's all about free enterprise and respecting the ...

BLITZER: Does that mean you want to come up with a new Sarah Palin initiative that you want to release right now.

PALIN: Gah! Nothing specific right now. Sitting here in these chairs that I'm going to be proposing but in working with these governors who again on the front lines are forced to and it's our privileged obligation to find solutions to the challenges facing our own states every day being held accountable, not being just one of many just casting votes or voting present every once in a while, we don't get away with that. We have to balance budgets and we're dealing with multibillion dollar budgets and tens of thousands of employees in our organizations.

Should I laugh or should I cry? I think it depends on whether Palin disappears back into well-earned obscurity over the next few months.