Kevin Drum - April 2009

A Question for Goldman Sachs

| Fri Apr. 17, 2009 12:31 AM EDT

Back in September, Goldman Sachs received a $5 billion capital investment from Warren Buffett that requires interest payments of 10%.  A month later they received a $10 billion capital injection from the Treasury that requires interest payments of only 5%.  Given that Buffett's terms are far more onerous, Richard Bove wants to know why Goldman is planning to pay back the Treasury's investment:

"If you were thinking of shareholders first, you would get rid of the most onerous amount first, and that would benefit shareholders....However, if you pay off TARP you are eliminating all of the restrictions on paying management," Bove told TheStreet.com. "You shouldn't be diluting existing shareholders to pay off TARP so you can pay management more money."

This should become a case study in principal-agent research.  If Goldman management were primarily concerned with shareholder value, they'd pay off Buffett.  But if they're more concerned with their own personal welfare, they'll pay off Treasury.  Apparently they've made their choice.

Needless to say, though, they're not planning to give up all the other government aid they're getting.  From the Washington Post:

Even as they clamor to exit the most prominent part of the bailout program by repaying government investments, firms continue to rely on other federal programs to raise even larger amounts of money....The Federal Deposit Insurance Corp. has helped companies [] borrow more than $336 billion through the end of March, by guaranteeing to repay investors if the firms defaulted. And financial firms hold more than $1 trillion in emergency loans from the Federal Reserve.

Goldman Sachs declared a "duty" to repay the Treasury after posting a first-quarter profit. The chief executives of several large banks at a meeting last month urged President Obama to accept repayments. But no company has similarly pledged to leave the government's other aid programs.

The explanation appears to be simple: Only the capital investments by the Treasury require the companies to make significant sacrifices, such as restricting executive pay.

"The capitalization efforts are actually the most important and are doing the most good, but they come with strings attached, and because they come with substantial strings attached they are getting the most push-back from the banks," said Douglas Elliott, a financial policy expert at the Brookings Institution. The other programs "have no strings attached," he said. "What's not to like about it from the perspective of the banks?"

Perhaps it's time to attach strings to anyone who takes advantage of any extraordinary aid from the government.  If that happened, I wonder how many of these rock-jawed titans of capitalism would still be willing to put their money where their mouths are?

UPDATE: It turns out this is less mysterious than I thought.  Apparently Goldman Sachs paid back the Treasury money first because they were required to under the terms of the TARP agreement.  Details here.

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All About Fundraising

| Thu Apr. 16, 2009 9:36 PM EDT

CQ reports:

“Raise money early” is probably the most oft-repeated advice given to the 40 House Democrats singled out by party officials to receive special assistance, as they prepare to defend against potentially serious challenges in the 2010 elections.

A CQ Politics analysis of campaign finance reports filed by the midnight deadline shows that these members are fast learners — they gathered an average of $266,000 in campaign receipts for the first three months of this year.

How depressing.  They've been in town for all of 12 weeks, and instead of spending their time on the million and one real problems we have, they're spending their time raising $20,000 a week.  How many hours a day do you think that takes?

Actually, I read a great piece on exactly this subject once.  I forget where, though.  Washington PostNew Republic?  Not sure.  But it was all about a freshman House member and the endless hours he spent down in the basement of party headquarters (or somewhere), where they have a room full of little booths furnished with nothing but a desk and a telephone.  He'd go down there every day armed with a list of phone numbers of car dealers and bank presidents and assorted other potential donors from his district, and he'd methodically work his way down the list, calling each one and cajoling them for a few hundred or a thousand bucks.  He did this every single day.  For hours.  It gave new meaning to word demeaning.

Anyway, like I said, I don't remember where I saw it.  Which is too bad, because it was a really great piece.  If it rings a bell with anyone, let us know in comments.

Quote of the Day - 4.16.09

| Thu Apr. 16, 2009 6:17 PM EDT

From Megan McArdle, after noting that virtually everyone these days is holding sales allegedly to help us all through the recession:

The one industry not ostentatiously offering to help me save money is the banking industry, which hasn't been trying to entice me into their savings vehicles with high rates and low fees.  We have a long way to go before the American savings culture turns into what it should have been all along.

It's almost as if there isn't any real competition in the banking industry at all.  Funny that.

Defining Torture Down

| Thu Apr. 16, 2009 6:00 PM EDT

Reading the OLC torture memos is enough to make you ill.  The techniques in question are plainly and instinctively abhorrent by any common sense definition, and the authors of the memos obviously know it.  But somehow they have to conclude otherwise, so they write page after mind-numbing page of sterile legal language designed to justify authorizing it anyway.  It's not torture if the victim survives it intact.  It's not against the law if it takes place outside the United States.  Waterboarding is OK as long as it isn't performed more than twice in a 24-hour period.  Sleep deprivation of shackled prisoners for seven days at a time is permissible as long as the victim's diaper is changed frequently.  And on and on and on.

Do they know this is torture?  Of course they do.  Glenn Greenwald is right when he says the excerpt below is probably all you need to read.  What it says, in a nutshell, is that when other people do this stuff, we naturally call it torture.  But when we do it, it's not.  Sickening.

UPDATE: More here from David Corn.

The OLC Memos

| Thu Apr. 16, 2009 2:49 PM EDT

It looks like the Obama administration will be releasing those Bush-era OLC torture memos after all.  Statement here.  Good for them.  Also this:

In releasing these memos, it is our intention to assure those who carried out their duties relying in good faith upon legal advice from the Department of Justice that they will not be subject to prosecution. The men and women of our intelligence community serve courageously on the front lines of a dangerous world. Their accomplishments are unsung and their names unknown, but because of their sacrifices, every single American is safer. We must protect their identities as vigilantly as they protect our security, and we must provide them with the confidence that they can do their jobs.

Generally speaking, I think I agree with this — though there might be specific circumstances where prosecution is called for regardless of legal guidance.  I can't honestly say that I base this on any kind of coherent principle, though, and I'm not entirely happy I feel this way.  It just seems as if tackling the practical issues involved in figuring out who did what, and under what circumstances, is too vast an undertaking for too small a probable return.  So, reluctantly, I think Obama's decision is probably for the best.

But I'm going to think about this some more before I pretend my opinion is set in stone.  In the meantime, feel free to slag away in comments.

UPDATE: The ACLU has all four memos here.

Middle East Update

| Thu Apr. 16, 2009 1:33 PM EDT

M.J. Rosenberg passes along a report from Yedioth Achronoth, Israel's largest circulation daily:

Rahm Emanuel told an (unnamed) Jewish leader; "In the next four years there is going to be a permanent status arrangement between Israel and the Palestinians on the basis of two states for two peoples, and it doesn't matter to us at all who is prime minister."

He also said that the United States will exert pressure to see that deal is put into place. "Any treatment of the Iranian nuclear problem will be contingent upon progress in the negotiations and an Israeli withdrawal from West Bank territory," the paper reports Emanuel as saying.

....So far neither the White House or the Israeli government has commented on the report which, it should be noted, comes from Shimon Shiffer, one of Israel's most highly respected journalists.

Seriously?  Rahm Emanuel said that?  We're going to somehow put in place a two-state solution whether the Israeli government likes it or not?  And to make it happen, we're going to make negotiations on Iran's nukes contingent on Israel playing ball?

That would certainly be a change of policy from the United States, wouldn't it?  But I'll bet it turns out this isn't quite what Emanuel said.  Probably best to hold off on comment until we hear a little more about this.

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The Nutcase Right

| Thu Apr. 16, 2009 12:26 PM EDT

Responding to a David Frum column about the recent outbreak of freak-show hysteria among conservatives, Matt Yglesias says:

Now to be fair, during the Bush years more than one person passed me this “14 Characteristics of Fascism” document in order to prove that under George W. Bush the United States had become a fascist regime. Overreaction to policies you don’t like is a pretty understandable human impulse. The difference is that mainstream, prominent outlets usually try to restrain that kind of impulse. But this sort of over-the-top rhetoric isn’t burbling from the grassroots up, it’s being driven the very most prominent figures in conservative media and also by a large number of members of congress.

Never were truer words spoken.  I was never a fan of the whole "Bush is a fascist" line, and over six years of blogging I was able to ignore it almost completely because it never broke out of its niche among the activist left.  You may or may not approve of that, but the simple reality is that aside from occasionally covering lefty protests and marches, mainstream pundits and politicians never took up this theme.  On the contrary, most of them ridiculed it if they ever noticed it at all.

But today's wingers, after Obama has been in office a grand total of 12 weeks, have already decided that we aren't merely on the road to serfdom, we're on the road to confiscation, tyranny, domestic gulags, and jackbooted thugs coming to take their guns away.  This time, though, it's not just fringe nutbaggery.  There's a whole brigade of right-wing pundits and politicians who are not only taking up the theme, but leading the charge.  They've gone completely crackers.

I still can't decide whether this makes the right more dangerous or less.  After all, if they go too far overboard, their crackpotism becomes so apparent that the whole movement becomes a joke.  On the other hand, if they aren't a joke yet, what's it going to take?

Besides, maybe they have a point.  Don't let this get around, but did you know that Barack Obama's Secretary of Defense has taken to quoting Joseph Stalin approvingly?  True story!  Click the link if you don't believe me.  And don't say that Glenn Beck didn't warn us about this.

Tick Tick Tick

| Thu Apr. 16, 2009 11:47 AM EDT

Obama sure is taking his sweet time deciding whether to release those Bush-era OLC memos authorizing various torture techniques, isn't he?  Is he planning to wait until 11:59 pm, or what?

In the meantime, what's your guess?  (a) No release, (b) limited release with lots of redactions, or (c) pretty close to full release with only a few redactions?  Vote in comments.

Cutting Back

| Thu Apr. 16, 2009 11:09 AM EDT

Yesterday, as I was talking to an economist about something, he explained that some research he had done had demonstrated a particular small effect.  "It really only affected things at the margin," he said.

"OK," I asked, "But doesn't everything work at the margin?"  He sort of laughed.  "Are you an economist?  That's how economists talk."

Nope, not me.  I just quote 'em on my blog.  Still, that seems to be the best explanation for this story in the Washington Post today:

Denise Kimberlin and her husband, Craig, of Woodbridge are government contractors who make nice livings. They recently got raises. They don't fear losing their jobs.

Yet, something is driving them to change their spending habits. They have cut back by at least $250 a week on clothes, dinners out and other discretionary spending.

....Economists say many still-flush consumers are handcuffed by psychological traps that cause them to tighten their purse strings even though economic hardship is not their reality....Psychologists explain that people fall prey to what is known as social proof. The most famous study pointing at the effect was done in the 1960s by psychologist Stanley Milgram. He had one or two people stand on a busy city block in New York and stare up at a sixth-floor building window. Most pedestrians ignored them. But when he had 15 people stand and stare at the window, nearly everyone walking down the street looked up at it, too.

I guess that might be the explanation.  But here's another one: when there's massive, objective evidence of a huge recession and rising unemployment, even people with good jobs act to cut their spending on the margin.  Why?  Because they also fear bad news on the margin.  The Kimberlins might not be afraid of losing their jobs, but I wouldn't be surprised if they're, maybe, 1% afraid of losing their jobs.  Or 5% afraid of getting a pay cut.  Or 10% afraid that their bank will raise the rate on their credit card debt.  Or 90% afraid that they can't use their home as an ATM machine anymore.  So they're cutting back spending a little bit, right in line with that limited amount of fear.  Social cues might have something to do with this, but surely a rational response to tangible, predictible outside events has even more to do with it?

No More King

| Thu Apr. 16, 2009 10:42 AM EDT

California may be a big state, but we still only get two statues in the Capitol building's Statuary Hall.  And now one of them is being swapped out:

After 78 years of standing in the Capitol, Thomas Starr King is about to be ousted by a better known Californian — Ronald Reagan.

...."Those of who us who love Thomas Starr King and know about his life are really sorry to see him go," said the Rev. Roger Fritts, senior minister of Cedar Lane Unitarian Universalist Church in Bethesda, Md.

....Rep. Ken Calvert (R-Corona) launched a campaign nearly five years ago, shortly after Reagan's death, to replace the statue of King, described as "the orator who saved the nation," with one of "The Great Communicator."

Well.  My mother attended Thomas Starr King Middle School in Los Angeles, so we take this personally around here.  I guess Unitarians just don't have the clout they used to.