Kevin Drum - April 2009

Intimate Homicide

| Mon Apr. 27, 2009 10:55 AM PDT

Via Matt Yglesias, sociologist Jay Livingston says that 30 years ago wives killed their husbands almost as frequently as husbands killed wives.  Today, there's a huge gap:

What's going on?  There's some free-form speculation in the original post, and in that spirit I'll offer some of my own.  I'll bet that part of the overall decline has to do with improved medical care: husbands and wives are still trying to kill each other, but the advent of universal 911 and better trauma care means that a lot more people survive these attempts.  So then the question becomes: why are men surviving murder attempts better than women?

Perhaps women are just less skilled murderers than men?  Perhaps women who try to kill their husbands are more likely to feel immediate remorse and call 911?  Maybe it has to do with choice of murder weapons.  I dunno.  But I wouldn't be surprised if differential survival rates are part of the story here.

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Basel Squared

| Mon Apr. 27, 2009 10:35 AM PDT

Ezra Klein gets geeky:

One of the pieces of the crisis that I hadn't understood until recently, for instance, was the role that Basel II banking regulations played in the growth of the structured securities market. In essence, Basel II, which went into effect a couple years ago, held that a bank only had to keep half as much capital on hand for AAA-rated securities as for other types of assets. That created a huge incentive for banks to get more things rated AAA....

And that in turn made the creation of allegedly AAA-rated securities a growth industry.  If a bank holds a $100 BBB-rated security, for example, they're required to maintain $8 in capital reserves to back it up.  However, if they ring up their friendly broker at AAA-rated AIG and buy a credit default swap on that bond, it's suddenly rated AAA too and the bank only has to hold $1.60 in capital.  That $6.40 freed up, and with leverage of 20:1 that's $128 available for productive investments in America, my friend!  What a bargain.

(Though it's worth noting that European banks engaged in this kind of regulatory arbitrage at least as much as American banks.  Maybe more, in fact, which is why AIG ended up paying out so much money to Société Générale and Deutsche Bank.  American banks have gotten the lion's share of the attention so far for their shoddy asset portfolios, which is fair enough since America was the focal point for the subprime crisis, but European banks were pretty eager consumers of regulatory shenanigans as well.)

In any case, there are plenty of reasons to be skeptical of Basel II, and among other things it goes to show the difficulty of setting international standards in the world of finance.  One of the reasons Basel II is weaker than Basel I is that every country has its own financial industry idiosyncracies, and every country wants banking accords to treat their particular idiosyncracies lightly.  Basel II did that, and then took things even further by allowing banks to use their own internal models for credit risk because, you know, internal models had proven themselves so sophisticated and reliable.  Oops.

On the other hand, the Basel II accords weren't even published until 2004, and didn't get adopted in most countries for several years after that.  As weak as Basel II is, the credit bubble and its associated financial rocket science far predates it.  I'm not really sure how far you can go in blaming it for our current meltdown.

Hunkering Down

| Mon Apr. 27, 2009 9:40 AM PDT

Lawrence Wilkerson, Colin Powell's former chief of staff, thinks we need a special prosecutor to investigate Bush-era torture policies.  My MoJo colleague David Corn, the guy who first broke the Valerie Plame story, isn't so sure:

There's one problem with a special prosecutor: it's not his job to expose wrongdoing. A special prosecutor does dig up facts — but only in order to prosecute a possible crime. His mission is not to shine light on misdeeds, unless it is part of a prosecution. In many cases, a prosecutor's investigation does not produce any prosecutions. Sometimes, it leads only to a limited prosecution.

That's what happened with Patrick Fitzgerald. He could not share with the public all that he had discovered about the involvement of Bush, Cheney, Karl Rove, and other officials in the CIA leak case. Under the rules governing federal criminal investigations, he was permitted to disclose only information and evidence that was directly related and needed for the indictment and prosecution of Libby. Everything else he had unearthed via subpoenas and grand jury interviews had to remain secret. Repeatedly, Fitzgerald said that his hands were tied on this point. A special prosecutor, it turns out, is a rather imperfect vehicle for revealing the full truth.

David also says that lawyers he's talked to suggest that prosecutions would be difficult, which could leave us in the worst of all possible worlds: a long, drawn-out investigation that, in the end, produces not even a report or a set of indictment, let alone convictions.  No one would be satisfied.

David suggests an independent commission of some kind as the best way forward, and I'm tentatively inclined to agree.  Unfortunately, President Obama seems distinctly non-thrilled by the idea, and I doubt that Congress is especially eager to move forward either.  Porter Goss's op-ed last Friday in the Washington Post, where he insisted that both Democratic and Republican members of Congress knew what the CIA was doing and didn't object to it, may have been disingenuous in places, but I wouldn't be surprised if he's right about his essential point — or at least, close enough to right to make a genuinely independent commission as frightening a prospect for Dems as it is for the GOP.  It's probably the right thing to do, but if Obama's opposed and Republicans are opposed and Democrats are mostly running for cover, who's going to make it happen?

There's always the Senate Intelligence Committee, of course, but I wouldn't hold my breath that they're going to produce anything definitive.  Washington is hunkering down and hoping that this will all blow over as soon as the next crisis of the moment hits the front pages.  Unfortunately, they're probably right.

Withdrawing from Iraq

| Mon Apr. 27, 2009 8:48 AM PDT

The New York Times reports that the June 30 deadline to remove all U.S. combat troops from Iraqi cities may get watered down a bit:

The United States and Iraq will begin negotiating possible exceptions to the June 30 deadline for withdrawing American combat troops from Iraqi cities, focusing on the troubled northern city of Mosul, according to military officials. Some parts of Baghdad also will still have combat troops.

....The spokesman for the Iraqi military, Maj. Gen. Muhammad al-Askari, who is also the secretary to the committee’s Iraqi contingent, said also that a decision on Mosul would be made at Monday’s meeting, which he called “critical.”

“I personally think even in Mosul there will be no American forces in the city, but that’s a decision for the Iraqi government and the Iraqi prime minister,” General Askari said.

General [David] Perkins also expressed specific concerns about Mosul, noting how important the city is to Al Qaeda in Mesopotamia, the homegrown group that American intelligence officials say is led by foreigners.

“For Al Qaeda to win, they have to take Baghdad. To survive they have to hold on to Mosul,” he said. “Mosul is sort of their last area where they have some maybe at least passive support.”

I don't really feel like panicking at the moment about whether this is the camel's nose that keeps us in Iraq forever, but June 30 sure seems like the perfect opportunity to stop screwing around and make it clear that we're going to do what we said we were going to do.  At every step of this process, there are going to be enormous forces pushing in the direction of staying in Iraq for just a little bit longer, or in just a few more places, or with just a few more missions, and if we start giving in to them it's going to be hard to stop.  We've got a plan and a schedule.  Let's stick with it.

 

Miscellaneous Thoughts

| Sun Apr. 26, 2009 10:02 PM PDT

I'm back!  The Georgia coast is beautiful.  Lotsa bugs, though.

The Vast Left Wing Conspiracy is powered by Macintoshes.  If it weren't for us liberals, Apple probably would have been in Chapter 11 years ago.

I think the seat pitch in Delta's airplanes is about three inches.  Or so.

John Thain is pissed.  The Wall Street Journal has the story.  I'm looking forward to many more public feuds like this as Wall Street continues to melt down.

Normal blogging will resume Monday.

 

Friday Cat Blogging - 24 April 2009

| Fri Apr. 24, 2009 7:00 AM PDT

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.

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Stress Test Update

| Thu Apr. 23, 2009 10:06 PM PDT

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.

Contrafactual of the Day

| Thu Apr. 23, 2009 5:58 PM PDT

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.

Quote of the Day - 4.23.09

| Thu Apr. 23, 2009 2:47 PM PDT

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.)

Risk

| Thu Apr. 23, 2009 12:22 PM PDT

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.