Kevin Drum

Goldman Sachs vs. the Taxpayers

| Mon Feb. 8, 2010 5:10 PM EST

In the New York Times this weekend, Gretchen Morgenson and Louise Story write about how Goldman Sachs both helped along the collapse of AIG and profited from it at the same time. Basically, Goldman acquired lots of mortgage-backed securities they thought were likely to tank, then bought CDS contracts from AIG to insure against that decline. summarizes the rest:

  • When Goldman’s investments declined, they submitted insurance claims for the losses, but insisted on determining the amount of their damages on their own, without any input from AIG, any auditor or the market.
     
  • After Goldman got as much money out of AIG as they thought they could, their stock analysts issued a report about how AIG was bleeding cash and their creditors wouldn’t negotiate, without mentioning that AIG was bleeding cash because of them and that Goldman was the creditor that wouldn’t negotiate. AIG’s stock tanked.
     
  • The government stepped in, took an 80 percent share in AIG and then paid Goldman and the other creditors all the money they’d asked AIG for at the start of the negotiations in 2007, without using their power to force AIG’s creditors to negotiate.

Given the scope of AIG's problems, I guess I doubt if any of this really mattered in the long run. AIG was going to collapse no matter what Goldman did or didn't do, so in a sense this is a bit of sideshow. But then there's this:

When the federal government, including then-Treasury Secretary Hank Paulson (who once served as chairman and CEO of Goldman Sachs), directed AIG to pay Goldman exactly what it wanted, it overrode significant and long-standing misgivings by AIG’s lawyers and accountants that Goldman’s estimates of its losses were correct. Morgenson and Story note that the prices on the very securities for which Goldman demanded insurance payments have since rebounded — but under the terms of the deal struck by the federal government, Goldman doesn’t have to pay a cent of its insurance settlement back to either AIG or the taxpayers. That’s quite the sweetheart deal for Goldman Sachs, if not taxpayers.

Now, of course, the question is what did Tim Geithner know about this and when did he know it? That story is still developing.

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Quick Hits

| Mon Feb. 8, 2010 2:38 PM EST

A few quick hits:

  • The Economist's Erica Grieder is at a Sarah Palin rally in Houston and reports that she's a lot better in person talking to an adoring crowd than she is on television being grilled by skeptical journalists. (And who wouldn't be, after all?) But there's also this: "Although Mrs Palin often attacks other politicians and says that her policies would be better than theirs, she doesn't welcome debate, and her preferred oppositional strategy is abrupt withdrawal. Think about the resignation from the Oil & Gas commission and from the statehouse, or her choice to "go rogue" rather than convince the McCain campaign of the merits of her approach. That's how you get 30% of the vote, not 51%."
     
  • A state department SUV plowed into a Daily Caller reporter last week. Result: a broken left knee, lacerations, bruises, and a ticket for jaywalking. Nice.
     
  • Healthcare premiums paid by employers aren't taxed. This lowers its effective cost, and simple economics says that it therefore increases consumption of employer-based healthcare. Austin Frakt is trying to figure out how much less healthcare we'd consume if we did away with its tax subsidiy, and comes up with a rough guess of $100 billion per year. "And that’s the price tag of health reform." So we'd spend less and the government would get an additional revenue stream. That's why so many of us like the idea of the excise tax, which is basically a start at taxing employer healthcare premiums like ordinary income.
     
  • Felix Salmon reports that Citigroup plans to start selling risk protection against a financial crisis. What could possibly go wrong?

Why Do We Subsidize Debt?

| Mon Feb. 8, 2010 1:41 PM EST

I talk about leverage as the source of all evil in the financial sector fairly frequently, but it's been a while since I've had a post reminding everyone about the tax treatment that makes debt so attractive. Today, Pete Davis revisits this issue:

The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study. See Table 1. That negative tax rate is the root of the fiscal crisis. Taxpayers paid a large subsidy for Wall Street investors to take those risks.

....The hard part of tax reform is that you have to raise taxes on those getting the subsidies. There are far fewer of them than the many taxpayers who stand to get slightly lower tax rates, so Wall Street corporations will finance the lobbying to kill tax reform before it has to chance to prevent the next financial crisis. We'll end up with watered down quick fixes at best, and the roots of the next financial crisis will remain in the Tax Code.

I'm not sure that I buy the tax code as the "root" of the financial crisis, but it's certainly a contributing factor — and at the very least, removing its tax favored status would remove some of the incentive for the enormous gearing that made the housing bubble so catastrophic. If we want to address leverage abuse, this is one of the arrows that should be in our quiver.

Quote of the Day: Living With DADT

| Mon Feb. 8, 2010 1:11 PM EST

From Andrew Sullivan, responding to Rich Lowry's claim that the military's Don't Ask Don't Tell policy isn't a substantial burden on gays because, after all, "we all have aspects of our lives we don't talk about":

Rich says that it's no big deal to live hiding one's sexual orientation. If you're straight, try it for one day.

Try never mentioning your spouse, your family, your home, your girlfriend or boyfriend to anyone you know or work with — just for one day. Take that photo off your desk at work, change the pronoun you use for your spouse to the opposite gender, guard everything you might say or do so that no one could know you're straight, shut the door in your office if you have a personal conversation if it might come up.

Try it. Now imagine doing it for a lifetime. It's crippling; it warps your mind; it destroys your self-esteem. These men and women are voluntarily risking their lives to defend us. And we are demanding they live lives like this in order to do so.

To be honest, it didn't look to me like Lowry's heart was really in this one. He didn't even have the talking points down. Why not come out of the closet, Rich, and admit that you're actually OK with repealing DADT?

Healthcare's PR Battle

| Mon Feb. 8, 2010 12:09 PM EST

As regular readers know, I'm skeptical of Barack Obama's continued insistence that the way forward on healthcare is to keep talking with Republicans in the hopes that eventually they'll start cooperating. But hey — maybe his political instincts are the right ones. Maybe he understands better than me that the public needs to see graphically that Democrats did everything they could to work with the GOP and were completely rebuffed. Maybe.

In any case, he's proposed yet another meeting with Republicans later this month to chew the fat over healthcare reform and incorporate the very best ideas they have to offer. The problem, as Ezra Klein points out in detail this morning, is that the current Senate bill actually incorporates most of the four big ideas that Republicans have put on the table: buying insurance across state lines, allowing small businesses to pool together to buy insurance, allowing states more autonomy to implement their own ideas, and tort reform:

On Sunday, John Boehner and Mitch McConnell responded to Barack Obama's summit invitation by demanding Obama scrap the health-care reform bill entirely. This is the context for that demand. What they want isn't a bill that incorporates their ideas. They've already got that. What they want is no bill at all. And that's a hard position for the White House to compromise with.

Now, as Ezra explains, Republicans didn't get 100% of what they wanted. There's no real tort reform in the Democratic bills, at least not the kind that Republicans want, and the other three items are more limited than the original Republican proposals. Still, with the exception of tort reform, I think it's fair to say that GOP negotiators extracted quite a few concessions during the Gang of Six negotiations with Max Baucus. Certainly as much as any party should expect that controls only 40% of Congress.

Barack Obama wants a chance to make that clear to the country on national television. Republicans, understandably, are rejecting his invitation to meet because they're scared silly that he might succeed. But if they refuse to meet at all, they play into his hands as well.

I'm still not convinced this is the right way to go, but there's no question that Obama has put the GOP into a tough position. And since it's basically a PR move, it's largely going to succeed or fail based on how well Democrats and Republicans are able to make their case in the media. Stay tuned.

Who Do You Trust?

| Mon Feb. 8, 2010 11:46 AM EST

AdAge reports that Edelman's "Trust Barometer" has grim news: we don't trust much of anybody anymore when it comes to product and company recommendations. But for a lucky few, there's also some good news:

Conversely, CEOs — who have of late been trotted out as public faces of their companies in times of stress, such as General Motors CEO Ed Whitacre — saw the biggest year-over-year increase from 17% in 2009 to 26% this year. Other groups seeing increases in the level of consumer trust were government officials (22% vs. 27%), a financial/industry analyst (46% vs. 52%)....

In some cases, social networks themselves may be contributing to the decline in trust. Platforms such as Facebook and Twitter have allowed people to maintain larger circles of casual associates, which may be diluting the credibility of peer-to-peer networks. In short, the more acquaintances a person has, the harder it can be to trust him or her. Mr. Edelman believes the Facebook component has "absolutely" played a role in diluting trust levels.

If this is really true, it's beyond bizarre. Consumers trust each other less but trust CEOs, government officials, and financial analysts more? In other words, they trust the very people who were most responsible for our recent financial collapse? WTF?

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FBI Procedure 101

| Mon Feb. 8, 2010 11:08 AM EST

White House counterterrorism chief John Brennan, apparently a little tired of Republican grandstanding over the fact that the Christmas bomber was taken into custody by the FBI, told Meet the Press yesterday that he had personally briefed the GOP leadership about this the day after Christmas and nobody had complained about it. Spencer Ackerman reports their response:

Sure enough, Sen. Chris Bond (R-Mo.) and Rep. Pete Hoekstra (R-Mich.), the ranking Republicans on the congressional intelligence committees, insisted that Brennan never specifically told them the FBI would Mirandize Abdulmutallab. “If he had I would [have] told him the Administration was making a mistake,” Bond said. The entire Republican leadership, including fact-averse Sen. Mitch McConnell (R-Ky.) and House GOP leader John Boehner (R-Ohio) echoed Bond’s claims in one form or another. Apparently these men, who claim leadership on national security, know less about FBI procedure than the average movie-goer. Obviously the FBI Mirandizes suspects in their custody.

I suppose facts don't really matter in this case, since Republicans have decided that yammering about Obama being soft on airplane bombers is a winning strategy and they don't plan to stop no matter what. Still, just for the record, it would be nice if the FBI could tell us if it Mirandized all the terrorist suspects it held during the Bush administration. I'm pretty sure the answer is yes, and I'm pretty sure no Republicans ever complained about it then.

Deficit Fever

| Mon Feb. 8, 2010 1:11 AM EST

Paul Krugman wonders why everyone is suddenly panicked over the long-term deficit:

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama’s image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

It's more than that, of course. Guys like David Walker and Pete Peterson have been banging the deficit drum for years and were mostly dismissed as tedious cranks. Editors would barely grant them a squib on A16 for their speeches and PowerPoint presentations. Likewise, the long-term problems of Medicare and Social Security have been common knowledge for a long time and haven't changed a whit in the past year. The other causes of the deficit — Bush-era tax cuts, Bush-era war spending, Bush-era Medicare expansion, and a Bush-era recession — are also common knowledge. And the global recession makes short-term deficits far more defensible than they ever were under Bush.

Given all this, the fact that Republicans think deficit mongering is a handy political tool isn't enough to explain the sea change in media attention. Reporters are all properly cynical about political opportunism, after all. The far more important cause of the change is conservative media. Despite the fact that the operation of the noise machine is hardly a secret, reporters and editors remain curiously obtuse about the effect it has on them. But when the machine goes into overdrive, as it has with the deficit, its memes take on a life of their own. The fact that "regular people" are talking about the deficit is what makes it news, but of course they're only talking about it because every conservative outlet in the country suddenly contracted deficit fever last year on January 20th. And to appropriate a saying, when the Drudge/Fox/Rush axis catches a fever, the rest of the media catches pneumonia. So more people talk about it. And the media pays even more attention to it. Nice work if you can get it.

Climate Change and its Discontents

| Sun Feb. 7, 2010 11:04 PM EST

I haven't been following in detail the various recent disputes about specific global warming claims, but if Walter Russell Mead is to be believed, there are more than I thought:

The former head of IPCC has publicly said the IPCC risks losing all credibility if it can’t clean up its act.  The head of the largest British funder of environmental research has joined the head of Greenpeace UK in criticizing the IPCC.  (At Greenpeace, they want Pachauri to resign.)  The Dutch government has demanded that the IPCC correct its erroneous assertion that half of the Netherlands is below sea level.  Actually, it’s only about a quarter.  A prediction about the impact of sea level increases on people living in the Nile Delta was taken from an unpublished student dissertation.  The report contained inaccurate data about generating energy from waves and about the cost of nuclear power (this information was apparently taken without being checked directly from a website supported by the nuclear power industry). The deeply environmentalist Guardian carries a story documenting the decline in both public and Conservative Party confidence in need to address global warming.

....When the IPCC has its former chief, the Guardian newspaper and the Dutch government demanding change, something has got to give.

This is in addition to the CRU emails, the Himalayan glacier debacle, the Chinese weather station controversy, and a problem with claims about north African crop reductions. Apparently, when it rains, it pours.

But as I said, I haven't been following this stuff closely. The CRU emails mostly seemed overblown to me, and taken by themselves they'd probably have blown over pretty quickly. But start adding all this other stuff — even if none of it really affects the core claims of climate change — and the public is going to tune out even more than it already has unless the climate community either provides some explanations post haste or else makes credible commitments to clean up its act in the very near future.

For now, though, since I haven't spent a lot of time digging into these disputes myself, I'm just posting this in order to generate comments and responses. Is there anything to them? Or just a whole bunch of mud being thrown on the walls by the usual suspects?

Obama's Inner Circle

| Sun Feb. 7, 2010 10:14 PM EST

If you hate Rahm Emanuel — and I know lots of you do — you're going to love Edward Luce's Financial Times piece that blames Barack Obama's reliance on a small inner circle of aides for his first-year growing pains:

In dozens of interviews with his closest allies and friends in Washington — most of them given unattributably in order to protect their access to the Oval Office — each observes that the president draws on the advice of a very tight circle. The inner core consists of just four people — Rahm Emanuel, the pugnacious chief of staff; David Axelrod and Valerie Jarrett, his senior advisers; and Robert Gibbs, his communications chief.

....Administration insiders say the famously irascible Mr Emanuel treats cabinet principals like minions. “I am not sure the president realises how much he is humiliating some of the big figures he spent so much trouble recruiting into his cabinet,” says the head of a presidential advisory board who visits the Oval Office frequently. “If you want people to trust you, you must first place trust in them.”

In addition to hurling frequent profanities at people within the administration, Mr Emanuel has alienated many of Mr Obama’s closest outside supporters. At a meeting of Democratic groups last August, Mr Emanuel described liberals as “f***ing retards” after one suggested they mobilise resources on healthcare reform.

“We are treated as though we are children,” says the head of a large organisation that raised millions of dollars for Mr Obama’s campaign. “Our advice is never sought. We are only told: ‘This is the message, please get it out.’ I am not sure whether the president fully realises that when the chief of staff speaks, people assume he is speaking for the president.”

This comes via Steve Clemons, who says Luce's observations aren't getting as much currency as they should:

This Luce piece is unavoidably, accurately hard-hitting, and while many of the nation's top news anchors and editors are sending emails back and forth (I have been sent three such emails in confidence) on what a spot-on piece Luce wrought on the administration, they fear that the "four horsepersons of the Obama White House" will shut down and cut off access to those who give the essay 'legs.'

....President Obama needs to take stock quickly. Read the Luce piece. Be honest about what is happening. Read Plouffe's smart book again. Send Rahm Emanuel back to the House in a senior role. Make Valerie Jarrett an important Ambassador. Keep Axelrod — but balance him with someone like Plouffe, and get back to putting good policy before short term politics.

Noted without comment, since I don't really know if Luce and Clemons have it right. But both pieces are worth a look, and anyway, I figure there's a good audience out there for a bit of good anti-Rahm porn. Enjoy.