Kevin Drum

Miscellaneous AIG Stuff

| Wed Sep. 17, 2008 9:11 PM EDT

MISCELLANEOUS AIG STUFF....Here are some random links related to the AIG bailout. When it's all said and done, by the way, I suspect that the Fed is going to end up making a tidy profit on the deal. But that's a few years down the road. In the meantime, here are some worries, offered without comment because they're above my pay grade:

  • Stephen Bainbridge has some very specific questions about the legality of the Fed's takeover of AIG. For example: "How can the federal government take a security interest in AIG's assets? Presumably AIG had debt securities outstanding that include negative pledge covenants. If so, why doesn't this deal violate the trust indentures? This one really bugs me."

  • Tyler Cowen has some more general concerns about the legality of what happened: "First, the referee is on the playing field. Second, while Dodd and others are on board, basically we have the executive branch of our government — the Treasury — operating without formal checks and balances....The broader implications here are very worrying, both for governance and for the future of the Fed itself. Maybe there is no better alternative, but these developments are a sign of just how dysfunctional American government has become."

  • Jim Manzi notes that the Fed has been forced to ask the Treasury for additional funds to backstop its AIG bailout: "The reason this is so important is that, in effect, it materially undermines the independence of the US central bank, while central bank independence is a widely-accepted predicate for anti-inflationary policies over time in a modern democracy. If the Fed becomes just a part of the Treasury Department (though this announcement is only a move in that direction), we could have real problems."

  • Reuters reports that the federal government's AAA credit rating is under pressure. Also this: "The cost of insuring 10-year U.S. Treasury debt against default rose Wednesday to a record high, a day after the government rescued insurer AIG with an $85-million loan....Ten-year credit default swaps, or CDS, on Treasury debt widened three basis points to 26 basis points, according to data from CMA DataVision. This means it costs $26,000 per year to insure $10-million of U.S. Treasury debt against default."

You know, I never even realized there was a market for insurance against U.S. Treasury default (let alone that the cost of a CDS on American debt is now twice as high as that on German debt). I mean, think about it: what would have to happen for the U.S. government to start defaulting on its bonds? The only scenarios I can think of are so cataclysmic that (a) you'd have way bigger things on your mind than whether your T-bills are going to get paid off, and (b) the odds that the insurer would still be solvent while the U.S. government collapsed around it are about nil. So what's the point of buying it?

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Financial Reforms

| Wed Sep. 17, 2008 6:21 PM EDT

FINANCIAL REFORMS....Bob Kuttner proposes three fundamental reforms for our broken financial system:

Reform One: If it Quacks Like a Bank, Regulate it Like a Bank. Barack Obama said it well in his historic speech on the financial emergency last March 27 in New York. "We need to regulate financial institutions for what they do, not what they are." Increasingly, different kinds of financial firms do the same kinds of things, and they are all capable of infusing toxic products into the nation's financial bloodstream....

Reform Two: Limit Leverage. At the very heart of the financial meltdown was extreme speculation with esoteric financial securities, using astronomical rates of leverage. Commercial banks are limited to something like 10 to one, or less, depending on their conditions. These leverage limits need to be extended to all financial players, as part of the same 2009 banking reform.

Reform Three: Police Conflicts of Interest. The conflicts of interest at the core of bond-raising agencies are only one of the conflicts that have been permitted to pervade financial markets. Bond-rating agencies should probably become public institutions. Other conflicts of interest should be made explicitly illegal.

These are guidelines, not specific reforms, but they're the right guidelines. Kuttner calls this a "Roosevelt-scale counterrevolution," and I'd only add that we also need a Roosevelt-scale reform of our basic economic priorities. An economy that relentlessly favors a tiny class of the super-rich is fundamentally unstable. Conversely, one that relentlessly favors job and wage growth is not only stable, but benefits everyone, including the rich. If we continue to have an unbalanced economy, all the financial system reforms in the world won't keep meltdowns like this from happening over and over again. It really is time for a change.

Construction Bonds

| Wed Sep. 17, 2008 5:25 PM EDT

CONSTRUCTION BONDS....Andrew Sullivan is amused by a CBS report that Sarah Palin actually answered a question from the press today, "prompting concerned looks from staffers." I can well imagine. However, I'm more perplexed by the answer itself:

"Disappointed that taxpayers are called upon to bail out another one. Certainly AIG though with the construction bonds that they're holding and with the insurance that they are holding very, very impactful for Americans, so you know the shot that has been called by the Feds — it's understandable but very, very disappointing that taxpayers are called upon for another one."

Construction bonds? What is she talking about? Maybe performance bonds? Not that that makes any more sense. What's more, I'm pretty sure that AIG's consumer and commercial insurance business wasn't in any danger. So why focus on that? I mean, if you're only going to give the press a single sentence, why not spit out something about counterparty risk and leave their jaws hanging?

Drudge

| Wed Sep. 17, 2008 3:48 PM EDT

DRUDGE....Many years ago I had the bright idea that if you really wanted to understand everyday Americans, you ought to read the National Enquirer regularly. So I did for a few weeks — and then gave up. It was just too boring.

I feel the same way about Drudge. I read him from time to time because I know that other people do, but I always drift away because there's really nothing much there. He only occasionally has exclusive news, and most of what he does have comes from sources inside MSM newsrooms and consists of a few sentences blurbing a story that shows up in its full form an hour or two later at the MSM site itself. Big deal. His roundups of basic news are no better than just reading a few front pages yourself. Sure, conservatives like him because he helped bring down the Clintons, but he hasn't done much since then. For the rest of us, it's basically kind of a boring site.

In other words, count me in Steve's camp. I mean, I get it, but I still don't get it. Why do people still read the guy? Isn't he sort of the disco of right-wing news sites?

TED Spread Update

| Wed Sep. 17, 2008 3:18 PM EDT

TED SPREAD UPDATE....Our old friend the TED spread is a simple gauge of financial market jitters. (More here.) You will therefore be unsurprised to learn that, for the fourth time in the past year, it's spiking. Even at high prices, nobody wants to make short-term loans to banks. Can you blame them?

Soothing Words for a Crisis

| Wed Sep. 17, 2008 1:45 PM EDT

SOOTHING WORDS FOR A CRISIS....Pretend you are an ordinary American. I know that's hard: as a reader of an elitist coastal blog you're barely even an American at all. But pretend. You just spent a hundred bucks yesterday to fill up your gas tank. You didn't get a raise this year. You've got some unpaid bills you're juggling. Your neighbor across the street just got laid off. Property taxes are coming due next month. Your car is making a funny noise. You just got a memo from HR telling you that the paycheck deduction for healthcare premiums is up again and your take-home pay will be $100 lighter next week.

You turn on the TV. At the commercial break there's a two-minute ad from Barack Obama about the meltdown on Wall Street. If you actually sit through it, here's what he says he's going to do to make things better:

  • Provide a $1000 tax cut for the middle class

  • End the "anything goes" culture on Wall Street

  • Fast track a plan to end our dependence on Mideast oil

  • Crack down on lobbyists

  • End the war in Iraq

Jonathan Stein comments: "It is everything Obama has been criticized for being on the stump these past several weeks: thoughtful, measured, and post-partisan. It takes no jabs at John McCain or George W. Bush. In the last few days, though, Obama and his ads have hit harder; obviously the campaign felt the content of this ad is too serious to be presented in that style. Key question: Does it hold your attention?"

Well, ordinary American, what do you say? Does it?

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Campaigning in Wonderland

| Wed Sep. 17, 2008 1:02 PM EDT

CAMPAIGNING IN WONDERLAND....Yesterday — or was it the day before? It's getting hard to keep track — Sarah Palin told a fib about the teleprompter breaking down during her acceptance speech. Megan McArdle comments:

What I don't get about this lie is the pointlessness. I expect politicians to lie. But I expect them to tell the standard sort of lies about how they will give us all $5 solar cars by 2010, and never, ever sleep with their staff. This seems like some sort of bizarre compulsive disorder.

There was a period during Bush's first term when his administration acted the same way. I don't mean the big lies, I mean the drumbeat of minor misrepresentations about almost everything. I remember there were times when I'd listen to something one of them said and think, the truth would have actually served them better. But for some reason they made up a less effective lie instead. It was like a reflex with them.

The same thing is starting to happen with the McCain campaign. Most of his lies are easy to understand. But now they've drifted into this kind of pointless stuff that doesn't even seem to provide any real benefit. I guess they're just creating their own reality.

History of Russia

| Wed Sep. 17, 2008 12:31 PM EDT

HISTORY OF RUSSIA....American conservatives have been complaining for years about the teaching of American history to our impressionable youth. We should make our kids proud of America, not fill their heads with the Trail of Tears and Jim Crow and whatnot.

Apparently Vladimir Putin feels the same way about the teaching of modern Russian history and has endorsed a new textbook that emphasizes Russian greatness. Don't like it? Pavel Danilin, who wrote one of the chapters, has this to say:

"You may ooze bile but you will teach the children by those books that you will be given and in the way that is needed by Russia. And as to the noble nonsense that you carry in your misshapen goateed heads, either it will be ventilated out of them or you yourself will be ventilated out of teaching.... It is impossible to let some Russophobe shit-stinker (govnyuk), or just any amoral type, teach Russian history. It is necessary to clear the filth, and if it does not work, then clear it by force."

Sounds like a man of action. It's nice to know that Russian pedagogy is in such good hands.

The Meltdown

| Wed Sep. 17, 2008 2:33 AM EDT

THE MELTDOWN....OK, this is probably sort of a dumb question, but: Has anyone figured out yet how America's financial giants all managed to misprice the risk of the subprime mortgage market so spectacularly? Yes, I know bankers have been doing this forever. Centuries of experience tell us that they have the impulse control of five-year-olds. And yes, the rating agencies screwed up in a big (and possibly fraudulent) way. That certainly helped things along.

Still: it's not as if the bubbly nature of the U.S. housing market was a secret or something. It's been a hot topic of conversation for years. Everyone knew that there was at least a decent chance that the bubble would burst at some point. Even if you were an optimist, you'd concede the possibility.

So what happened? I don't buy the "black swan" theory. What happened wasn't that unusual or that unlikely. Anyone with access to a Case-Shiller chart and even a vague notion of what was going on in the mortgage market knew that a bursting of the bubble was a distinct possibility. So why did bankers get into a frenzy bidding each other down on the size of that possibility? Were their risk managers all out to lunch? Or did they all get overruled by the suits in mahogany row? What's the deal?

Tough Day at the Office

| Wed Sep. 17, 2008 12:30 AM EDT

TOUGH DAY AT THE OFFICE....First she gets fired from HP, now Carly Fiorina has been fired from the McCain campaign. Maybe the Fed should hire her to run AIG next?