Kevin Drum

THE COST OF THE BAILOUT....Here's a sentence from the Guardian today:

The glut of government initiatives, which included a $326bn bail-out of Citigroup on Monday....

Can we please stop this? Calling this a "$326 billion" bailout is crazy. It's a $20 billion capital injection plus a bunch of asset guarantees with a maximum cost of $250 billion and a probable cost in the low billions. (Possibly zero, in fact.) The capital will probably be repaid eventually, but even if it isn't it's highly unlikely that Uncle Sam is on the hook for more than $30-40 billion.

This stuff has gotten completely out of hand, with "estimates" of the bailout these days ranging from $3 trillion to $7 trillion even though the vast bulk of this sum comes in the form of loan guarantees, lending facilities, and capital injections. The government will almost certainly end up spending a lot of money rescuing the financial system (I wouldn't be surprised if the final tab comes to $1 trillion over five years, maybe $2 trillion at the outside), but it's not $7 trillion or anything close to it. People really need to stop throwing around these numbers as if the bailout is comparable to World War II or something. That's not reality based, folks.

• Print
• Email
• Tweet

SMILING OBAMA....Fred Davis III, John McCain's advertising guy, tells Time's Michael Scherer that he felt handcuffed in several ways during the campaign:

Davis says that concern about race played a major role in the entire aesthetic of McCain's ads. The photographs of Obama that the ads used, for instance, which often showed Obama elongated and smiling, were carefully selected, he recalls. "We chose them with only one thing in mind, and that is to not make them bad pictures because bad pictures would be seen as racist," Davis says.

I'm disappointed to hear this. I had assumed all along that his use of a smiling Barack Obama was a masterstroke. Instead of the tired old schtick of using awkward or glowering photos in grainy black-and-white, he was instead trying to portray Obama as slick and shallow, a beaming tent preacher trying to sell you a bill of goods. Not only did it play up the stereotype they were trying to sell, but it made them impervious to criticism. How can you complain that your opponents are making you look too good, after all?

But no. That wasn't it at all. They were just trying to avoid charges of racism. How banal.

• Print
• Email
• Tweet

LETTERS OF CREDIT....A reader at TPM provides three reasons why allowing Lehman Brothers to collapse was a bad idea, including this one:

Third, global trade is (still) largely conducted via letter of credit. With the possibility of well-known names disappearing, that system has broken down catastrophically. (Pull up the Dry Goods Shipping Index for confirmation.)

Right. I've read about this problem before, so I pulled up the Baltic Dry Index to see what he was talking about. This is a measure of the cost of shipping raw goods (iron ore, grain, coal, etc.), and sure enough, it's cratered: from a peak of nearly 12,000 in May, it's plummeted to a value of 824 this week.

But what's the cause? Partly it was the commodity bubble earlier this year, which was unsustainable. Partly it might be weak demand from China. And partly it's just a reflection of the recession we're entering. It's not easy to mothball ships, so even a small downturn in shipping demand can have an outsized effect on shipping prices. But what about those letters of credit? Are problems with the LoC market shutting down the shipping industry even beyond normal recessionary levels? Here's John Dizard's take in the Financial Times from a couple of weeks ago:

While the BDI has been dropping for months, the real collapse took place from the week after the Lehman bankruptcy....I had followed shipping in past years, but had never seen a rate of change like that. So I called friends of mine in that world to get closer to the car wreck. I had wondered if the BDI was truly representative of real-world values, or if it was oversold in the way some credit default swap indices might be. Nope. Ships really are that cheap. As one broker told me: "I just chartered a Handymax to go to the US Gulf from India for $1,000 a day. So the BDI really is pretty accurate."

A Handymax vessel would typically displace about 40,000 deadweight tonnes. You would notice it if it dropped anchor near your dock. The cash operating costs are at least $1,500 to $2,000 a day. On top of that, figure another couple of thousand dollars a day for the capital costs....Those low charter rates indicate that not much is being shipped, apart from cargoes going from one corporate subsidiary to another, or from one highly creditworthy entity to another. It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business.

There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, clerks and computers shuffle the paper around. A fee is charged and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

So here's a question I can't find an answer to with my meager Google skills: Is there some direct measure of the availability of letters of credit? Problems in the shipping industry suggest that LoCs are in trouble, but is there some index that actually tracks the total volume of LoCs over time? Is it really true that no one wants to accept anyone else's LoCs anymore, or is this more rumor than fact? Anybody know of any pointers to hard evidence on this score?

POSTSCRIPT: As long as we're at it, how about some measure of total global shipping? Is this a gigantic black hole, the way it is for the oil segment of the shipping market, or do we actually have any decent hard data for the total volume of shipping worldwide?

• Print
• Email
• Tweet

PUBLIC SERVICE....In the New York Times today, David Kocieniewski tells us the story of the Charles B. Rangel School of Public Service at City College of New York. The school was having trouble raising money, so in the summer of 2006 a friend of Rangel's, Manhattan district attorney Robert Morgenthau, suggested that he hit up Eugene Isenberg, CEO of Nabors Industries.

Isenberg, unsurprisingly, was open to the idea of helping out the future chairman of the House Ways and Means Committee. Nabors Industries, you see, was one of the companies that had rushed to reincorporate offshore in 2002 even though they knew legislation was in progress that would retroactively prevent them from doing so. Rangel, who loudly blasted the companies who were moving offshore, favored the anti-Nabors legislation, but Republicans eventually killed it and Nabors retained its tax haven.

Fast forward to 2007, and the same legislation was introduced again. This time, though, Rangel opposed it:

On Feb. 12, the day the bill was being marked up by the committee he leads, Mr. Rangel held two discussions at the Carlyle Hotel in Manhattan. First, the congressman sat down for breakfast with Mr. Isenberg and Mr. Morgenthau to further talk about Mr. Isenberg's support for the Rangel center, Mr. Morgenthau said. Mr. Isenberg said that after breakfast, he escorted Mr. Rangel across the room, where the lobbyist for Nabors, Kenneth J. Kies, was waiting.

Over sweet rolls and coffee, Mr. Kies asked Mr. Rangel if he would maintain his opposition to the efforts to take away the company's loophole. Mr. Rangel said he would, Mr. Kies and Mr. Isenberg said in interviews.

.... Eleven days later, a check for $100,000 from Mr. Isenberg was cashed by City College....The next month, Mr. Rangel presided over Ways and Means hearings during which he presented four witnesses who testified that the effort to eliminate the loopholes was bad policy because it was a retroactive tax increase. No testimony was taken from those on the other side, and nothing was offered to explain why Mr. Rangel was now defending Nabors and the other companies.

In their defense, Isenberg committed the money to CCNY before the breakfast with Rangel, and Rangel says that he's philosophically opposed to retroactive tax increases. But this still doesn't look good, does it? As Michael Kinsely likes to say, the real scandal is what's legal.

• Print
• Email
• Tweet