Kevin Drum

Corker and Financial Reform

| Thu Apr. 15, 2010 10:14 AM EDT

Poor Bob Corker. He's the rare Republican senator who actually seems to be serious about financial reform, but his own party is undermining him with the usual Luntz-inspired deceptions about "endless taxpayer-funded bailouts," coddling of Wall Street, and so forth. Corker has basically asked the GOP leadership to put a sock in it, explaining exactly how his proposals to wind up failing banks would work and how it would protect taxpayers. Matt Yglesias:

Corker is exactly right about this. Chris Dodd’s bill, as written, would make bailouts less likely not more likely. But Corker is also correct that there are a lot of doubts as to exactly how much punch it really packs. This is a concern that responsible Senators should actually look at and try to address, rather than just fling around vaguely as a cover for the fact that they don’t want banks to be regulated at all. But will Corker stand his ground on this, or will he follow the lead of so many of his past colleagues and end up giving in to Rush/Fox/Tea Party pressure to simply obstruct?

And more to the point, even if Corker does defy expectations and continue to work on financial reform seriously, can he persuade any of his fellow Republicans to join him? And if he can, will the price be the watering down of legislation that's already too weak to really have much of an impact? Stay tuned for answers to these exciting questions.

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Quote of the Day: Tea Party Economics

| Wed Apr. 14, 2010 11:16 PM EDT

From tea party supporter Jodine White of Rocklin, California, trying to explain how she reconciles her desire for smaller government with her support for Social Security:

That’s a conundrum, isn’t it? I don’t know what to say. Maybe I don’t want smaller government. I guess I want smaller government and my Social Security. I didn’t look at it from the perspective of losing things I need. I think I’ve changed my mind.

More tea party info here.

J.K. Rowling's Patriotism

| Wed Apr. 14, 2010 11:12 PM EDT

Harry Potter billionaire J.K. Rowling on why she chooses to continue living in Britain even though she could reduce her tax bill considerably by residing elsewhere:

I chose to remain a domiciled taxpayer for a couple of reasons. The main one was that I wanted my children to grow up where I grew up, to have proper roots in a culture as old and magnificent as Britain’s.

....A second reason, however, was that I am indebted to the British welfare state; the very one that Mr Cameron would like to replace with charity handouts. When my life hit rock bottom, that safety net, threadbare though it had become under John Major’s Government, was there to break the fall. I cannot help feeling, therefore, that it would have been contemptible to scarper for the West Indies at the first sniff of a seven-figure royalty cheque. This, if you like, is my notion of patriotism.

Fraud and the Financial Meltdown

| Wed Apr. 14, 2010 8:07 PM EDT

A few days ago a reader asked me what I thought of Bill Black. Answer: he's a pretty fascinating guy. I met him at a conference last year, and probably the best time I had was the hour I spent sitting next to him and Dean Baker one night at dinner as they regaled each other with stories about financial fraud and the S&L crisis of the 80s. (Black was a bank regulator at the time.) As it happens, I don't think fraud is the be-all-and-end-all of the 2008 meltdown, but it was a significant piece of it and it doesn't get as much attention as it should.

Black isn't in the news much, which means I don't get a chance to link to him much. But TRNN recently did an interview with him, so this is my chance. And yours. Watch the video and hear him toss out Taibbi bait like this about the finance industry: "Think of it as a giant engorged leech on Main Street." Or listen to him explain that "We now have sociopaths in control of our major financial institutions." Booya! Part 2 of the interview is here.

Obama and Taxes

| Wed Apr. 14, 2010 7:32 PM EDT

Peter Suderman calls out President Obama as a tax cheat today. "If you make less than a quarter of a million dollars a year," Obama said on the campaign trail, "you will not see a single dime of your taxes go up." But according to the Joint Committee on Taxation, taxpayers earning less than $200,000 a year will pay nearly $4 billion more in taxes in 2019 thanks to a change in the medical expense deduction mandated by the recently passed healthcare reform bill. J'accuse!

Well, maybe. But I need some help here. When Obama made his campaign pledge, he was talking about his comprehensive tax plan. He wasn't promising that no bill he ever signed would ever raise taxes in any way for the under-$200,000 crowd, was he?

I'd like to set the record straight on this because it keeps coming up over and over and over. It came up in the context of an increase in cigarette taxes. It came up in the context of cap-and-trade. Now it's come up in the context of the healthcare bill — which has other tax increases that would hit middle class families too. (Why do you think unions were opposed to the excise tax?) So: did Obama promise to never raise taxes in any context for any purpose for all time for everyone making less than $200,000? Or was it always just in the context of his specific campaign tax plan?

Killing Terrorist Leaders

| Wed Apr. 14, 2010 3:59 PM EDT

Via Matt Yglesias, Robert Wright takes a look at whether drone strikes aimed at killing terrorist leaders are effective. A tentative answer comes from Jenna Jordan of the University of Chicago, who examined the results of 298 attempts between 1945 and 2004 to weaken terrorist groups through "leadership decapitation":

Her work suggests that decapitation doesn’t lower the life expectancy of the decapitated groups — and, if anything, may have the opposite effect.

Particularly ominous are Jordan’s findings about groups that, like Al Qaeda and the Taliban, are religious. The chances that a religious terrorist group will collapse in the wake of a decapitation strategy are 17 percent. Of course, that’s better than zero, but it turns out that the chances of such a group fading away when there’s no decapitation are 33 percent. In other words, killing leaders of a religious terrorist group seems to increase the group’s chances of survival from 67 percent to 83 percent.

Of course the usual caveat applies: It’s hard to disentangle cause and effect. Maybe it’s the more formidable terrorist groups that invite decapitation in the first place — and, needless to say, formidable groups are good at survival. Still, the other interpretation of Jordan’s findings — that decapitation just doesn’t work, and in some cases is counterproductive — does make sense when you think about it.

Italics mine. Jordan's sample size for religious groups is 35 — which isn't too bad — and if you combine both the ones that were targeted for decapitation and those that weren't, a grand total of eight collapsed. This suggests that religious terrorist groups are just pretty hardy organizations regardless of how you fight them. In fact, that really seems to be one of her main findings: only 22% of religious terrorist groups collapsed, compared to 70% for all the other kinds of terrorist groups. So al-Qaeda is going to be a pretty tough nut no matter how we go about fighting them.

Similar results come from a study by Aaron Mannes, which Wright mentioned last year. Mannes' conclusion:

The result that consistently stood out from this research was the propensity of decapitation strikes to cause religious organizations to become substantially more deadly. There are several possible reasons to explain this outcome. Many religious organizations are robust, such as Hezbollah and Hamas, which is an important criterion for surviving the loss of a leader as well as having the resources to strike back....The indication that killing religious organization’s leaders rather than arresting them is more likely to lead to a surge of deadly violence may be worth further exploration.

So then: killing the leaders of a religious terrorist group doesn't cause them to collapse but it does cause them to embark on even more deadly attacks. What's more, the collateral damage on civilian populations is, as Defense Secretary Robert Gates put it yesterday, "one of the greatest risks to the success of our strategy." That's worth further exploration, all right.

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Ratings Agency Followup

| Wed Apr. 14, 2010 2:50 PM EDT

Earlier this morning I wrote about the practice of banks shopping around to get the best ratings for their latest structured investment vehicles. But Robert Waldmann says it was much worse than that:

If only the ratings agencies had waited for financial firms to come through their doors bearing rocket science securities the conflict would have been less severe. The ratings agencies decided to consult too (remember how well that worked out for Arthur D Anderson). So they charged large fees to help financial firms design financial instruments. This was a new practice and the blatant conflict of interest was obvious.

Not only is the conflict of interest worse, but Robert says there's an additional, subtler problem here: when both the bank and the rater use the same models, there's only one opinion about how safe a security it. If they used separate models, at least you'd have a little bit of a check.

However, I think the problem mostly remains. If all three of the ratings agencies had been tougher on new rocket science assets, the whole huge industry would never have existed and all of them would have been poorer. A reasonable rule would be that no asset gets AAA unless an asset which is identical except for maturity dates paid on time and in full in each of the past 3 recessions — that is no AAA for new stuff for decades — no exceptions. Obviously with or without agency shopping, they wouldn't have done that. So I don't really have a solution.

Neither do I. For the moment, anyway.

The Nuclear Summit

| Wed Apr. 14, 2010 1:19 PM EDT

Via Spencer Ackerman, here is Sen. Jon Kyl (R–Ariz.) kvetching about the recently completed Nuclear Security Summit:

“The summit’s purported accomplishment is a nonbinding communique that largely restates current policy and makes no meaningful progress in dealing with nuclear terrorism threats or the ticking clock represented by Iran’s nuclear weapons program,” said Sen. Jon Kyl (R-Ariz.), a prominent critic of Obama’s nuclear policies.

Well now. China agreed to sanctions on Iran. Ukraine agreed to give up their HEU. Russia agreed to close down its last plutonium plant. And the entire conference agreed to focus far more attention on keeping fissile material out of the hands of terrorists.

But, yeah, it didn't solve every world problem instantly in its first meeting. By that yardstick the whole thing was a failure.

And that sound you just heard? It was Kyl's knee jerking so hard he gave himself a concussion. Crikey.

The Muzzles

| Wed Apr. 14, 2010 12:50 PM EDT

Via Jon Fasman, here are this year's Muzzles, given each year by the Thomas Jefferson Center for the Protection of Free Expression. I suppose this won't be a widespread opinion, but I'd say they go to show that the First Amendment is doing pretty well these days. Some of the items are infuriating (Texas basing tax breaks on whether you say nice things about Texas, Southwestern College banning peaceful protests practically everywhere on campus), but really, if the ten things on this list are the worst offenses of the entire year then free speech is in pretty good shape. I was expecting a lot worse.

Five Fights to Watch

| Wed Apr. 14, 2010 11:25 AM EDT

Andy Kroll has a good piece up about "Five Fights to Watch" in the upcoming battle over financial regulatory reform. The whole thing is worth reading, but it's #2 that I have the hardest time figuring out how to fix:

2) The Ratings Agencies' Conflict of Interest Problem
The toxic mortgage bonds and other products that helped demolish the economy were stamped with blue-chip ratings from the big three ratings agencies — Moody’s, Standard and Poor’s, and Fitch. Why did they affix their seal of approval to junk investments? The answer is complex, but largely centers on the fundamental conflict of interest with the rating agencies: they get paid by the same firms that are seeking ratings for their products. This arrangement allowed banks to shop around for the highest score regardless of whether the product deserved it or not.

It’s not clear whether the Senate bill will fix this problem. Senate banking committee chair Chris Dodd (D-Conn.) has proposed creating a new watchdog within the Securities and Exchange Commission to keep an eye on the agencies. The bill would also give investors the right to sue them for “a knowing or reckless failure” to thoroughly investigate a product before issuing a rating. But will that SEC watchdog address the conflict of interest in how rating agencies get paid? Will it revisit the pseudo-governmental role played by the Big Three agencies, whom the SEC has used as official arbiters of safety in the markets? These questions, raised by academics, experts, journalists, and others, have yet to be fully addressed by the Senate.

This is a head scratcher. Ratings agencies made a ton of money out of the housing bubble. Basically, banks came to them with a swelling array of rocket-science securities and paid them to provide a rating. Because these structured securities were complex, the fees for figuring out the rating were high, and it turned into a lucrative source of business.

The conflict of interest is obvious: banks wanted high ratings and the agencies wanted lots of deal flow. That meant they were motivated to push the envelope in order to insure a steady stream of business. After all, if you get a little too picky about things, clients will just head across the street to see if a different agency might treat them a little better.

So the problem is pretty clear. But what's the solution? Ideally, someone else should pay the ratings agencies. But there's no one to do that, so that's out. Regulation might work, but then again, it might not. Complex securities really are complex, and figuring out the right model to apply is genuinely difficult. What's more, the guys structuring the deals are a lot smarter than the working stiffs at the agencies. It's really not a fair fight. Another idea is to open up the industry to more competition, but I've never really understood how that would improve things. The basic conflict of interest is still there no matter how many federally approved ratings agencies there are.

The lawsuit idea is an interesting one, though. Ratings agencies are immune from suits right now because years ago the courts bought their argument that ratings are just opinions and therefore protected by the First Amendment. You know, just like George Will and Paul Krugman are protected for their opinions. That sounds silly, but hey — the law is an ass. But even if that gets changed, "knowing or reckless failure" is a pretty high standard and it's not clear to me that it would really provide much of a brake on reckless behavior. Maybe worth a try, though.

Luckily, I don't think ratings agencies were really at the core of the financial meltdown. They helped things along for sure, but other stuff was a lot more fundamental. It would still be nice to come up with some kind of compelling fix for the conflict of interest at the heart of the ratings business, though. I'm just not sure what it is.