Kevin Drum

The Swedish Model

| Tue Mar. 24, 2009 1:08 PM EDT
The interview of the day is Benjamin Sarlin's short chat with Bo Lundgren, the finance minister who oversaw Sweden's temporary bank nationalizations in the early 90s:

"There are similarities [to Sweden's case]," Lundgren said. "There are three things any plan must do — the first is to maintain liquidity, that's taken care of by the Fed. The second thing is to restore confidence, and that hasn’t been done so far and obviously the first proposal to buy toxic assets wasn't enough. And then you need capital injections so banks can keep lending at the levels needed for the economy as a whole."

However, Lundgren said that Obama was correct in observing that a similar nationalization scheme might be more difficult given America's size and preeminent role in world finance compared to Sweden.

"With Japan and Sweden, the crises we had, even if it was a very long process with Japan, they were crises that we had on our own," Lundgren said. "The rest of the world economy managed to be not perfectly good but still reasonably good. This time it's worse; it's a kind of financial tsunami."

I suppose you could equally make the case that the worldwide nature of this crisis makes dramatic action like bank nationalization more necessary than it was in Sweden's case.  Still, Lundgren is almost certainly right that it would be a lot more difficult.  Nationalizing a $2 trillion institution that's a commercial bank, an investment bank, a hedge fund, an insurance company, a brokerage, and owner of a portfolio of other banks around the world is a lot trickier than nationalizing a midsize regional bank in the era before the explosion of credit derivatives.

In fact, here's an assignment desk job for someone with the background to know the details: What would it take to nationalize an outfit like Citigroup?  What are the likely legal, financial, diplomatic, and operational issues that would have to be resolved?  It would be a real public service if someone with a credible background in this stuff could lay out the details in a way that's understandable for all the rest of us.

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Toxic Waste for All

| Tue Mar. 24, 2009 12:09 PM EDT
Will ordinary citizens be able to invest their hard-earned shekels in Tim Geithner's sweetheart deal to buy up toxic waste legacy assets from distressed banks?  Here's a quick followup:

Two of the country's biggest money managers — Newport Beach-based Pacific Investment Management Co., known as Pimco, and New York-based BlackRock Inc. — say they may launch funds that would allow individuals to have a stake in some of the bad assets to be purchased from banks.

....Bill Gross, co-chief investment officer at Pimco, said his firm was looking into the idea of creating mutual funds that would tap into the program. BlackRock is doing the same, said Curtis Arledge, co-head of fixed income at the firm.

The story goes on to suggest that the funds may be closed-end with a minimum buy-in of $25,000.  If that's how it turns out, it wouldn't exactly allow Joe Sixpack to get in on this deal.  Still, it's a step in the right direction.  It'll be interesting to see if Treasury encourages other retail funds get in on this action.

Yet Another Scandal

| Tue Mar. 24, 2009 11:25 AM EDT
ABC News reports on the sordid past of Obama's Chief Information Officer, Vivek Kundra:

When Kundra was 21 years old, records show, he was caught stealing four shirts from a J.C. Penney store.

...."Thirteen years ago, Vivek committed a youthful indiscretion. He performed community service, and we are satisfied that he fully resolved the matter."

What's going on here? The new administration has a lot of work to do, but it keeps being sideswiped by issues in its appointees' pasts. Police records provided to ABC News show that those shirts from Penney's were worth less than $140. Kundra was fined $100 plus $55 in court costs, and ordered to do 80 hours of community service. He reportedly told the White House about the incident while he was being vetted for his current job.

I thank God daily that we have a vigorous and enterprising free press to look into these critical matters.  It's a source of inspiration to us all.

Another Mile Down the Road

| Tue Mar. 24, 2009 1:54 AM EDT
Yesterday I wrote that one problem with nationalizing big financial corporations is that the government probably doesn't have the legal authority to do it even if it wants to. They can seize banks, but they can't necessarily seize all the other components of big financial institutions. The Washington Post reports that the White House is about to ask Congress to change that:

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document

....Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.

The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

If, several weeks ago, you had charged a task force with figuring out how to successfully nationalize a big bank, what do you think they'd say you had to do? Three things, at least: (1) you have to figure out a widely acceptable way to value the toxic assets on bank balance sheets, (2) you have to set up a fair and consistent test for evaluating bank solvency based on those values, and (3) you need to make sure you have the legal authority to take over a huge, multinational financial conglomerate in an orderly way.  Is it just a coincidence that these are precisely the things Tim Geithner has set in motion over the past month?  I wonder.

Letting the Little Guy Invest

| Tue Mar. 24, 2009 1:10 AM EDT
One of the persistent criticisms of the Geithner plan is that it's a sweetheart deal for investors.  The government puts up most of the money, downside risk is limited thanks to the non-recourse funding, and there are probably lots of ways the auctions can be gamed.  Matt Yglesias points to a comment at The Baseline Scenario that suggests a way to deal with this:

If Geithner’s taxpayer subsidized toxic public/private plan goes forward, I think it would be fair if the federal government allow non-institutional investors to participate via a no-fee investment vehicle.  I think if Americans had the option of investing in this program (without having to pay the egregious fees to the investment advisors/PE shops), it would be much easier to swallow since they would at least get the same deal the sharks are getting.

Like James Kwak, I think this is a brilliant idea, and one that Treasury should not merely allow, but actively encourage.  At least one of the fund managers chosen to participate in the program should be one that agrees to allow investment by retail customers.  In the end, Geithner's plan may or may not turn out to be a sweetheart deal, but surely us little guys should have the same chance to find out as the well-heeled crowd.

Acorn

| Mon Mar. 23, 2009 10:43 PM EDT
I thought that "Going Galt" was pretty much as stupid as conservatives could possibly get, but I was wrong. This has it beat.  Jeebus.

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Suckitude

| Mon Mar. 23, 2009 9:48 PM EDT
Have I mentioned lately that computers suck? Well, they do.

And what's the deal with everyone wanting super-widescreen monitors these days? It's practically impossible to get a native 1280x1024 monitor when your old one breaks. Like mine just did. Blecch.

Price Discovery

| Mon Mar. 23, 2009 2:31 PM EDT
Felix Salmon writes:

How Treasury's Bank Bailout Could Make Things Worse

....The minute the Treasury plan is put into action, we'll have a lot of public price discovery for the banks' bad assets. And if the prices don't clear — if the minimum price the banks will accept is higher than the maximum price that the public-private partnerships are willing to pay — then no one will any longer be able to perpetuate the fiction that America's banks are solvent.

....The big hope of the Treasury plan is that the private sector will be willing to pay a higher price for leveraged assets than it would for unleveraged assets....During boom years, that was a wager that many investors were willing to take. But now? I'm not sure. Chalk it up as yet another thing-which-has-to-go-right in order for this scheme to work. There are far too many of those for comfort.

Um, how is this a bad thing?  Isn't a whole bunch of very public price discovery exactly what we want?  Then we get to find out for sure whether banks are solvent, as they claim, or irredeemably underwater, as a lot of us suspect.  Right now they can lie about their books and no one can really prove them right or wrong.  After these auctions, though, smoke and mirrors will be a lot harder.

I don't have any more insight than anyone else about whether this is a deliberate part of Geithner's plan.  Oddly enough, though, his tongue-tied interviews about it make me suspect that it might be.  Geithner might not be the most silver-tongued spokesman in the Obama orbit, but he's not a doofus.  If he's having trouble explaining the plan in public, one reason might be that he's unable to fess up to the central pillar of the whole thing: forcing banks to put up or shut up.

Somebody is wrong about all this stuff, after all.  Either the critics are wrong, and banks are actually perfectly solvent, or else the banks are wrong, and all their memos about how they're practically sagging under the weight of all their Tier 1 capital are just a bunch of hooey.  Geithner's plan goes at least part of the way to figuring this out.

The Byrd Rule

| Mon Mar. 23, 2009 1:46 PM EDT
Perhaps unsurprisingly, I have never roused myself to understand the intricacies of the budget reconciliation process and the Byrd rule. The reconciliation process is basically designed to eliminate Senate filibusters on budget resolutions, but it's the Byrd rule that specifies what counts as a budget issue and what doesn't. But who decides what the Byrd rule itself says?  Ezra Klein:

The Byrd rule allows senators to challenge the acceptability of any provision (undefined) of a reconciliation bill based on whether or not its effect on government revenues is "merely incidental" (undefined). Thus, if you enter reconciliation with a health-reform bill, it's not clear what's left after each and every provision — however that is defined — is challenged and a certain number of them are deleted altogether: the tax portions, certainly. And the government subsidies. But is regulating insurers "merely incidental" to government revenues? How about reforming hospital delivery systems? How about incentives for preventive treatment? Or the construction of a public plan? An individual mandate?

It's hard to say. The ultimate decision is left up to the Senate parliamentarian, whose rulings are unpredictable. Under George W. Bush, Republicans managed to ram tax cuts, oil drilling, trade authority, and much else through reconciliation. But they were as often disappointed: The GOP leaders fired two successive Senate parliamentarians whose Byrd rule rulings angered them.

Ah, I see. The Senate parliamentarian will decide whether we get healthcare reform this year. That's comforting to know. Perhaps Ezra's next task should be an in-depth profile of Alan Frumin, apparently the people's representative for all things healthcare related.

Housing News

| Mon Mar. 23, 2009 12:56 PM EDT
Looking for some good news?  Well, there isn't much, so this will have to do:

The National Association of Realtors said Monday that sales of existing homes increased 5.1 percent to an annual rate of 4.72 million last month, from 4.49 million units in January. It was the largest sales jump since July 2003.

Sales had been expected to fall to an annual pace of 4.45 million units, according to Thomson Reuters.

....February’s median sales price was up slightly from January, which recorded the lowest median price since September 2002. Prices are down about 28 percent from their peak in July 2006.

It's not clear what caused this, since home prices are almost certainly going to keep falling another 20% or so.  In fact, this might even be bad news in a way, since the faster we hit bottom and get back to trend growth, the faster we're likely to see the end of the recession.  But really, these days, who knows?