Kevin Drum

Valuing the Toxic Waste

| Wed Feb. 11, 2009 1:59 PM EST | Scheduled to publish Wed Feb. 11, 2009 1:38 PM EST

VALUING THE TOXIC WASTE....Part of the Geithner bank bailout plan is apparently a scheme to partner up with the private sector to buy up the toxic assets on bank balance sheets. Will this work? John Hempton thinks it might. Right now, he says, a lot of these assets are modestly underpriced by the market and might well make decent investment opportunities — but only if the feds provide enough low-priced leverage to turn a decent investment into a great one:

So how are those assets really? Underpriced but hardly exciting....No — to be exciting you need to borrow against them. You need to be able to use leverage. Cheap leverage. Lots of leverage. And it can’t be margin loans or the like — because the asset prices are so volatile that your funding might go away.

But — with permanent cheap funding at government rates it should be profitable to buy those assets. Seven to one levered at government rates (which are a couple of percent) the returns will be spectacular.

So if the Geithner plan is to attract say one hundred and fifty billion of private risk capital and allow it permanent and secure access to say a trillion dollars of government money at a government rates then hey — I am in. (I would require the interest rate risk be matched too.)

It would be a pretty big gift from the government — as nobody — a good bank or a bad bank — can borrow at the same (extraordinarily low) rate as the US Treasury. But as a plan it might just work. And because 150 billion of real private spondulicks is at risk there are some pretty strong incentives for the private sector manager to get it right.

Basically, the idea here is that private investors are better at ferreting out the true value of the toxic waste, while the feds are the ones with the money. And I guess maybe that makes some sense. But you still have a pretty serious problem on your hands: banks don't want to sell this stuff at honest prices. So even if you get both the valuation and the funding in place, how do you force banks to sell? And if you do force them to sell, are you just driving them into insolvency?

It's possible, I suppose, that this is the real point. Use private investors to figure out the valuation. Use the Fed's balance sheet to provide funding. Use Geithner's "stress test" to figure out which banks are bust, and force them to recognize the true value of their assets whether they sell them or not. Then let the private investors buy the junk and take over the remaining husk to be run as a nationalized bank.

But....if that's the plan, why not just nationalize in the first place, skip the process of valuing the junk, and set it aside to be sold off in a few years? And perhaps that's all this is: a piece of kabuki designed to get the private sector to make the determination that some of these banks are insolvent and have to be taken over. After all, if the private sector makes the valuation, no one can claim it was just some bureaucratic maneuver by a power-obsessed Obama administration.

Or something. Like everyone, I'm just guessing here.

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Awards, Not Bonuses

| Wed Feb. 11, 2009 1:54 PM EST | Scheduled to publish Wed Feb. 11, 2009 1:08 PM EST

AWARDS, NOT BONUSES....What do two failed investment banks that have received $60 billion in federal bailout cash do when they merge? Pay their people more! Sam Stein reports:

The soon-to-be-merged financial giants — Morgan Stanley and Citigroup's Smith Barney — announced the payments during an internal conference call last week, but warned advisers against describing them in terms that would cause PR headaches.

"There will be a retention award. Please do not call it a bonus," said James Gorman, co-president of Morgan Stanley. "It is not a bonus. It is an award. And it recognizes the importance of keeping our team in place as we go through this integration."

Yeah, there's nothing more important than keeping all these folks in place. There are so many other lucrative opportunities for them in the rest of the financial industry, after all. Yeesh.

Fallen Soldiers

| Wed Feb. 11, 2009 1:53 PM EST | Scheduled to publish Wed Feb. 11, 2009 12:06 PM EST
FALLEN SOLDIERS....Following a question at Monday's press conference, the Obama administration is reviewing a longstanding policy that prevents the media from photographing flag-draped coffins being returned from war zones:

Defense Secretary Robert Gates suggested today that he was open to allowing the media to photograph the flag-draped coffins of fallen soldiers as their bodies and remains are returned to the United States.

"If the needs of the families can be met and the privacy concerns can be addressed, the more honor we can accord these fallen heroes, the better," Mr. Gates told reporters.

That's the right attitude. I've been in favor of allowing reporters to record the return of fallen soldiers for years, and the Bush administration stand on this never made any sense to me. Yes, of course the pictures could be used to stoke antiwar sentiment, but the same can be said for any war-related photography. At the same time, they can also do just the opposite. But in a democracy, this is all irrelevant anyway. These are American soldiers fighting an American war, and the American public has a right to see the price of that war. This is a policy that deserves to be overturned forthwith.

Today's Healthcare News

| Tue Feb. 10, 2009 6:19 PM EST

TODAY'S HEALTHCARE NEWS....Just in case you've been getting a little too optimistic about the prognosis for serious healthcare reform this year, here's a couple of pieces of light reading to bring you down to earth.

First up, the Wall Street Journal explains that a $1.1 billion provision in the stimulus bill to fund research comparing medical treatments is in trouble. Why? Because pharma and device companies don't really want anyone finding out just how effective their treatments are. Full story here.

Second, Michelle Cottle deconstructs a story about a lobbying war over electronic medical records. Pretty much everyone from Tom Daschle to Newt Gingrich is in favor of this, so what's the problem? Answer: drug companies want to make sure that privacy provisions don't prevent them from paying hospitals and pharmacies to hawk their latest wonder drugs to their customers. Full post here.

Just another day in the healthcare trenches. I can hardly wait til we get to the hard stuff.

More Bailout

| Tue Feb. 10, 2009 5:43 PM EST | Scheduled to publish Tue Feb. 10, 2009 1:54 PM EST

MORE BAILOUT....According to the fact sheet accompanying the new bailout plan, all banks with assets over $100 billion will be required to undergo a "comprehensive stress test" to make sure they're solvent enough to continue lending even in the face of future losses. This applies to about the 20 biggest banks in the country. So what happens then?

While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital.

....Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009.

Well, that's clear as mud, isn't it? After a thorough investigation that will supposedly force banks to face up to their losses (but not in an "overly conservative" way), they'll then be available for government bailout money. Who qualifies? Apparently everyone. What are the terms? We'll make that up on a case-by-case basis. How long will banks continue to be bailed out? No telling. What restrictions will be placed on bailed-out banks? None, apparently.

I'll wait for smarter people than me to explain this stuff further, but at first glance it sure looks an awful lot like "trust us." But we'll see. A big part of the Geithner plan is a promise to "improve public disclosure by banks," which will "include measures to improve the disclosure of the exposures on bank balance sheets." If that's done honestly, there are likely to be quite a few banks that need more than just a "preferred security investment" from the Treasury. Stay tuned.

Press Conference

| Tue Feb. 10, 2009 5:40 PM EST | Scheduled to publish Tue Feb. 10, 2009 1:19 PM EST
PRESS CONFERENCE....Longtime reporter Walter Shapiro was decidedly unimpressed with President Obama's press conference last night:

Through most of his inaugural primetime press conference, Barack Obama seemed like he was channeling a particularly loquacious combination of Joe Biden, Bill Clinton, and the ghost of Hubert Humphrey. The president's response to the first question from the Associated Press about the risks of sounding too apocalyptic about the economy ran (or, to be more accurate, crawled) for nearly 1,200 words.

....What Obama was decidedly not Monday night was Kennedy-esque. When JFK unveiled the live presidential primetime press conference 48 years ago, he answered 37 questions in the space of 40 minutes; Obama only half-responded to 13 questions in the space of an hour....As a result, the reporters and their questions were little more than potted palms as President Obama declaimed from the East Room.

I confess that this was my initial reaction too: Obama seemed to ramble and hesitate endlessly last night. But I wonder if that's a reaction unique to someone who pays a lot of attention to politics and has heard all this stuff before? In the same way that Beltway types never liked Bill Clinton's longwinded State of the Union addresses, but ordinary voters did, I wonder if ordinary voters appreciated Obama's long, serious answers more than guys like Shapiro and me? I can't say for sure, but it wouldn't surprise me.

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Earnings

| Tue Feb. 10, 2009 5:27 PM EST | Scheduled to publish Tue Feb. 10, 2009 12:50 PM EST

EARNINGS....Via Ezra, Rick Hertzberg asks a question:

Why is that a manual worker gets paid wages and a middle manager or cop or teacher earns a salary, but a corporate boss condescends to accept “compensation”?

This really isn't so hard. "Wages" refers to hourly earnings. "Salary" is typically a fixed yearly amount for exempt employees. "Compensation" is used for corporate honchos because you need a word that encompasses the fact that a big part of their earnings are in stock, deferred salary, capital gains, pension payments, and various perks. There's really nothing very sinister about all this.

Bailout 2.0

| Tue Feb. 10, 2009 5:22 PM EST | Scheduled to publish Tue Feb. 10, 2009 12:31 PM EST

BAILOUT 2.0....I've been avoiding comment on Tim Geithner's new bank bailout program because the rumors of what's in it have been changing on practically an hourly basis. So why not just wait and see what he announces? Today he did, and here's the New York Times summary of his four point program:

  • A new program, jointly run by the Treasury and the Federal Reserve, with financing from private investors, to buy up hard-to-sell assets that have bogged down banks and financial institutions for the past year. The program, often described as a “bad bank,” is expected to spend $250 billion to $500 billion.
  • Direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program.
  • A vast expansion of lending program that the Treasury and Federal Reserve had already announced, which is aimed at financing consumer loans. The two agencies had originally announced their intention to finance as much as $200 billion in loans for student loans, car loans and credit card debt. Instead the program will be expanded to as much as $1 trillion.
  • A separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages is to be announced next week.

I'm not sure the "bad bank" is really a bad bank, but I guess that depends on the details of how it's going to work. More later.

State Secrets

| Tue Feb. 10, 2009 5:19 PM EST | Scheduled to publish Tue Feb. 10, 2009 2:30 AM EST

STATE SECRETS....In the pre-Bush era — from 1953 to 2000, including the entire period of the Cold War — the government invoked the state secrets privilege about once a year. Since that time, its use has been massively increased, with the government invoking it more than six times per year in the post-9/11 era.

By itself, this is bad enough. But it's not the worst part of the Bush administration's use of the privilege. Before 2001, the state secrets privilege was mostly used to object to specific pieces of evidence being introduced in court, something that nearly everyone agrees is at least occasionally necessary. But the Bush administration changed all that. In their typical expansive way, they decided to apply the privilege not just to individual pieces of evidence, but to get entire cases thrown out of court. What's more, they did this not merely when a state secret was incidental to some unrelated complaint, but when the government itself was the target of the suit.

Now Barack Obama is president, and unfortunately he's decided to continue the Bush administration's expansive reading of the privilege. The case involved the rendition and torture of Binyam Mohamed and four other detainees:

In a closely watched case involving rendition and torture, a lawyer for the Obama administration seemed to surprise a panel of federal appeals judges on Monday by pressing ahead with an argument for preserving state secrets originally developed by the Bush administration.

....A government lawyer, Douglas N. Letter, made the same state-secrets argument on Monday, startling several judges on the United States Court of Appeals for the Ninth Circuit.

“Is there anything material that has happened” that might have caused the Justice Department to shift its views, asked Judge Mary M. Schroeder, an appointee of President Jimmy Carter, coyly referring to the recent election.

“No, your honor,” Mr. Letter replied.

Judge Schroeder asked, “The change in administration has no bearing?”

Once more, he said, “No, Your Honor.” The position he was taking in court on behalf of the government had been “thoroughly vetted with the appropriate officials within the new administration,” and “these are the authorized positions,” he said.

So Obama is adopting the same expansive interpretation of the privilege as the Bush/Cheney administration, and using it in order to cover up American involvement in torture and rendition programs that have been in the public record already for years and can hardly even be said to be secrets, let alone state secrets that are vital to U.S. national security. This is decidedly not change we can believe in. Greenwald has more.

Asia

| Tue Feb. 10, 2009 3:24 PM EST | Scheduled to publish Mon Feb. 9, 2009 9:38 PM EST

ASIA....You think our economy is in trouble? Things look even worse in Asia.