Tag Archives: Barry Ritholtz

Stop! Panel Time!

Uri Friedman at The Atlantic:

Explaining something as tangled, technical, and multi-dimensional as the 2008 financial crisis is fraught with difficulty. Some have tried comparing toxic assets to supermodels, while others have given musical theater a shot.

This morning we have another answer–in the form of a 576-page book–from the congressionally appointed panel charged with investigating the roots of the meltdown. Were it not for corporate incompetence, inadequate government regulation, and excessive risk-taking by Wall Street banks in the housing market, the commission concludes, the country could have avoided financial calamity.

Keith Hennessey:

At long last, here is the dissent filed by Vice Chairman Bill Thomas, Dr. Doug Holtz-Eakin, and me to the Financial Crisis Inquiry Commission Report.  (I know, you’ve been holding your breath waiting for this.)  This dissent will be transmitted to the President and the Congress later today (Thursday, January 27th) along with the majority’s document and Peter Wallison’s separate dissent.

Our dissent is 27 pages long as a PDF.  The majority’s document is 20 times longer.  Their endnotes are 98 pages.  I am not making this up.  The full report will be available on FCIC.gov tomorrow around 10 AM EST.  Peter Wallison’s dissent is available now.

Since I know that 27 pages is too long for the overwhelming majority of readers on the web, I’ll try to suck you in by telling you that our core argument is in the first seven pages.  The last twenty flesh out in more detail each of our “ten essential causes of the crisis.”  You could stop after seven pages (I hope you won’t) and have our basic argument.

If you have followed any of the press coverage of the FCIC over the past six weeks, you may think you know what we’re going to say.  This dissent, however, makes a fundamentally different argument than the four-man document I signed onto in December.  For me this document supersedes that December document, which I looked on as a temporary placeholder.

Mark Thoma on the dissent:

Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin have a dissenting statement in response to the final report of the Financial Crisis Inquiry Commission:

What Caused the Financial Crisis, by Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin, Commentary, WSJ: Today, six members of the Financial Crisis Inquiry Commission … are releasing their final report. Although the three of us served on the commission, we were unable to support the majority’s conclusions and have issued a dissenting statement. …

We recognize that … other … narratives have popular appeal:… Had the government not supported housing subsidies (the first narrative) or had policy makers implemented more restrictive financial regulations (the second) there would have been no calamity.

Both of these views are incomplete and misleading. … We believe the crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating… Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed? Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. … We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing…

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10). …

[I]t is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies.

I don’t think the conclusion that better regulation would not have stopped the crisis follows from the factors they list.

By their own admission, the reason that factors 1 and 2 led to factor 3 was “an ineffectively regulated primary mortgage market.” So right away better regulation could have stopped the chain of events the led to the crisis.

Factor 3 was “nontraditional mortgages that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.” Sure seems like regulation might help to prevent deception and confusion (through, among other things, a financial protection agency). One thing is clear in any case. The market didn’t prevent these things on its own.

On to factor 4: Securitizers lowering credit standards, a failure of credit agencies, and buyers failing to do their own due diligence. Once again, regulation can help where the private market failed. The ratings agencies exist because they help to solve an asymmetric information problem. The typical purchaser of financial assets does not have the resources needed to assess the risk of complex financial assets (which is why saying that they should have performed their own due diligence misses the mark). Instead, they rely upon ratings agencies to do the assessment for them. Unfortunately, the ratings agencies didn’t do their jobs — perhaps due to bad incentives arising from to how they were paid — and this is where regulation has a role to play.

Factor 5 is the accumulation of correlated risk — again something a regulator can stop once the accumulation or risk is evident. This seems like an easy one — when regulators see this type of risk building up, they should do something about it. The question, however, is how to give regulators better tools for assessing these risks. Backing off on regulation, as implied above, won’t help with this.

M.V. at Newsbook at The Economist:

IT IS not the most promising script for a whodunit. Ten experts are brought together to solve a mystery, but they can’t get along and ultimately reach three different conclusions. That, sadly, is the story of America’s Financial Crisis Inquiry Commission, whose book-length report was released on January 27th.

When the six Democratic and four Republican appointees began their work, there was hope that they could clarify the causes of the financial crisis in the same way as the authors of the 9/11 commission’s report had shed light on the terrorist attacks of September 2001.

It was, though, evident well before they had finished 19 days of public hearings and over 700 interviews that ideological spats would get in the way. By November Republican members were moaning that the Democrats were more interested in crafting a document  that would bolster their party’s attacks on the new Republican majority in the House of Representatives than in revealing the truth. When a majority of the panel voted to push the report’s release beyond the December 15th deadline, the four Republicans produced their own preliminary report. Then they began to fracture too.

The result is an unfortunate loss of credibility and, confusingly, three competing narratives. The main report, endorsed by the Democrats only, points to a broad swathe of failures but pins much of the blame on the financial industry, be it greed and sloppy risk management at banks, the predations of mortgage brokers, the spinelessness of ratings agencies or the explosive growth of securitisation and credit-default swaps.

The report takes swipes at politicians, too, for overseeing a long period of deregulation that allowed Wall Street to run riot; and at regulators for not using the powers they had to curb risk-taking and for blithely assuming that markets could police themselves. It points to the Federal Reserve’s “pivotal failure” to rein in reckless mortgage lending, and to the Securities and Exchange Commission’s lax supervision of investment banks. It also fingers an over-reliance on short-term debt. These, however, are hardly novel conclusions.

Rick Moran:

You may recall the Democrats telling us that the FinReg bill would make it impossible for banks to be “too big to fail” ever again. Nobody believed it then and this inquiry apparently proves it a lie.

Despite a slowly improving economy, it could all fall apart again with another shock to the system. If that happens, the taxpayers will be left holding the bag.

Richard Eskow at Huffington Post:

his report has had a long and sometimes challenging history. But to paraphrase an old gospel song, it “may not be here when you want it, but it’s right on time.”Useful Utopians

Over three decades, our government was captured by a libertarian-inspired economic philosophy that had previously been considered radical and impractical — correctly so, as it turns out. That philosophy’s most prominent spokesman, former Ayn Rand acolyte Alan Greenspan, was celebrated as a “maestro,” until the house of cards he came to symbolize finally collapsed.

The prevailing economic myth, of an impossibly wise and genuinely free market, was as useful as it was Utopian. It provided ideological cover for the deregulation that both parties embraced. Government leaders were compromised by the lure of huge campaign contributions, and by a revolving door that ensured future wealth for cooperative politicians and regulators from both parties. The result enriched Wall Street and the Washington elite and left the rest of the country wounded.

The deregulation of the 90s allowed banks to take risks they couldn’t possibly survive. But they had been rescued in previous crises, and the cozy relationship between government and bankers assured them they’d be bailed out again. Freed from the consequences of their own actions, they gambled… and we lost.

Money for Nothing

The most surprising thing about the FCIC hearings for me personally was the lack of competence shown by so many top bankers. The Wall Street executives I worked for were smart, demanding, and driven, but bankers like Citi’s Robert Rubin and Chuck Prince… not so much. Their FCIC testimony displayed a shaky grasp of their business and a lack of concern about the risks facing their own organizations. Many of them seemed to lack even the most basic level of intellectual curiosity. A big bank is a fascinating, complex entity, but one executive after another seemed to shrug off the details of their own banks’ operations with bored indifference.

Sure, their testimony may have been especially vague because of their understandable desire to avoid self-incrimination. But even allowing for that, the low level of managerial skill they displayed was disconcerting. Today’s generation of financial executives may be enjoying the greatest disparity between income and executive performance since indolent princes inherited vast kingdoms through the divine right of kings.

Yet despite this embarrassing record, these executives want to be pampered and flattered by Washington again — and they’re getting their wish. The president and his party took some steps toward genuine financial reform with last year’s bill, but a great deal of work is still needed and their recent appointments aren’t encouraging. Meanwhile, the Washington consensus is pressuring the administration to assuage the “hurt feelings” of CEOs with some success, despite record profits that should provide more than adequate compensation for any injuries to their pride.

Unfinished Business

The president only mentioned financial reform in passing, in his comments about regulations:

When we find rules that put an unnecessary burden on businesses, we will fix them. But I will not hesitate to create or enforce commonsense safeguards to protect the American people. That’s … why last year we put in place consumer protections against hidden fees and penalties by credit card companies, and new rules to prevent another financial crisis…

Last year’s bill was a start, but more reform is urgently needed — to break up “too big to fail” banks, end runaway speculation, protect consumers, and end the incestuous relationship between banks and government. Prosecutions are needed, too. They’re the only way to ensure that bankers can’t violate laws with impunity, knowing that even if they’re caught their shareholders will pay the fines.

Barry Ritholtz at The Big Picture:

It appears we got hit with another 10-12 inches of snow overnight. Schools are cancelled, and my trains are not running into the city yet.

I need to go blow the snow off the driveway, then figure out what I am gong to do today. I was hoping to read the FCIC report, but it does not look like I will get to the store today.

And speaking of Snow Jobs, the dissenters in the FCIC continue their embarrassing foolishness.

The NYT devotes two paragraphs to Peter Wallison — they mention he was “chief lawyer for the Treasury Department and then the White House during the Reagan administration” and that he is “now at the conservative American Enterprise Institute.”

But nowhere do they mention that he was co-director of the AEI’s Financial Deregulation Project.  This is a serious omission by a major publication.

The New York Times should be much better than this . .

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On The Third Wednesday Of Christmas, My Wall Street Elite Gave To Me…

Louise Story in NYT:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.

But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.

“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.

Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.

Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.

Emily Lambert at Forbes:

Forget baseball, football, or any other sport. For the past two decades, the most interesting rivalry involving these cities has been in derivatives. It’s been the most important rivalry, too. Sports match-ups affect civic pride, but the derivatives battle affects the structure and stability of the financial system.

The rival teams are like the blue bloods versus the scrappy underdogs. The Wall Street club includes the country’s biggest dealers and needs little introduction. The Wall Streeters represent banks, institutions and exclusivity. They play the game of unregulated (or differently regulated, they argue) derivatives, to the tune of $600 trillion.

The Chicago team, based on and around La Salle Street, include the small traders and street fighters. They also have a club, and it too was private and pretty exclusive for years. It’s now the publicly-traded CME Group. But their club included its fair share of taxi drivers, policemen, train conductors, and other everyday folks. This team trades regulated derivatives, better known as futures and options. That market is huge but nowhere near as big as the unregulated (or differently regulated!) side.

These rivals have butted heads since the 1970s, when the Chicago club expanded beyond the world of agriculture and into financial products, New York’s domain. Chicagoans have had a chip on their shoulder for over a century, and traders often portray this head-butting as epic, their struggle to bring much-needed transparency to New York’s murky markets.

The teams fought it out at the Chicago Board of Trade, long the dominant exchange in Chicago, in the boardroom and in the clearinghouse. On one side, you had smaller firms owned by Chicago guys. On the other side, you had representatives from New York firms like Goldman Sachs and Morgan Stanley. A few years ago, the New York firms won the clearinghouse. That became, to a large extent, the reason that the two Chicago futures exchanges merged in 2007. The rallying cry was to save Chicago from New York.

The current derivatives duel is the latest fight, and it could have been Chicago’s moment of triumph. The Chicago crowd made a jab for transparency when CME Group teamed up with Kenneth Griffin at neighboring Citadel Group to create an exchange that would make the derivatives trade less murky. Congress, in its attempt to bring order, took a page from Chicago’s playbook and instructed the bankers to use clearinghouses, a staple in futures.

But as Story recounts, the banks didn’t like the exchange idea. “So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse.” CME Group, she later writes, dropped the effort with Griffin to create an exchange and instead has allowed its clearinghouse’s risk committee be “mainly populated by bankers.”

Chicago has represented something special over the years, a counterpoint to Wall Street. Its futures market wasn’t perfect, but it worked. When Wall Street’s derivatives market broke down in 2008, Chicago rightly held its regulated market, its way of doing things, up as a potential model. It may be too simplistic to say that one model is right and the other wrong, but the challenge itself is vital. Especially in a complex business like this one, you need different ideas and sparring to keep the game honest.

Now Chicago’s exchange is a public company. Duffy and Donohue are tasked with maximizing shareholder value. The banks are directly or indirectly responsible for the vast majority of derivatives trading, and CME Group has to involve them in decisions. But it doesn’t have to sell out to them. In Story’s story, CME Group looks less like a counterpoint to Wall Street than like the Midwestern arm of it. I hate to think that the rivalry is dead. There are plenty of people in Chicago who seem to hate New York with a passion I associate more with religion or the Bears (ouch, by the way). I hope that in this fight, which could prove decisive, those people recover their voice.

Kenneth Anderson:

Although I have a few reservations about the tone of the article being just slightly conspiratorial, Louise Story’s front page NYT story today on the evolution of derivatives clearinghouses is highly informative and very well done.  The graphics showing how the bilateral trades would turn into centralized clearing are quite good and would be useful with a class.  On balance,  I think the overall shift to centralized clearing is a good move.  But I also have a bad, bad feeling about this in the context of Dodd-Frank and future expectations.  As I have said in past posts, in a future of financial regulation in which the central question of systemic risk and moral hazard has not been addressed, the result of what is otherwise a sensible move (yes, yes I’m skipping over all the concerns about end-users and Main Street, etc.) could turn out to create not so much a central clearing house but instead … a central address for depositing unwanted risk.

After all, why should any of these leading market participants believe at this point that the government would allow the central clearinghouse to burn down in a crisis?  And if they don’t believe that, then what is their incentive to set terms that will adequately address the risk as a matter of private ordering of fees, margin, whatever form of insurance the central risk-clearer needs? Having a central clearing counterparty is a great idea — if it and the actors that run and control it have the private incentives to make sure it is not a mechanism for accumulating and compounding risks.

Presumably the answer is that government regulators will set those requirements and solve the problem.  But the general theory of financial regulation used to be that systems would be monitored for risk-taking, after private parties (with well-structured incentives forcing them to internalize the risks) had already made the first round of risk-decisions.  Regulators would be kicking the tires for safety and soundness, as a second line of regulatory defense, not the first.  I am an admirer overall of Gensler’s efforts, but he cannot be Batman to Financial Gotham.  The peculiarity is that a structure that ought, in principle, to reduce risk might wind up leveraging it.  The clearing house might turn out to be the one address market participants need to send their unwanted risks.

Kevin Drum:

Banks can talk all they want about capital requirements and governance structures, but if they’re unwilling even to admit publicly who runs their clearinghouses, it’s pretty obvious their primary interest is focused on keeping the derivatives club very, very small and very, very private. In other words: no aggressive competition needed here, thankyouverymuch. Big commissions and big bonuses will remain the order of the day.

Unless, of course, regulators take a tough line and force banks to genuinely open up derivatives trading. What do you think are the odds?

Anthony McCarthy

Barry Ritholtz at The Big Picture:

I keep coming back to this simple fact: If you understand what caused the crisis, the first step in preventing another is working backwards and undoing each of the causes. Front and center is the Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop. It still needs to be overturned . . .

Philip Davis at Seeking Alpha:

The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits and the banks guard that secrecy very closely. In theory, the Dodd-Frank bill will eliminate much of the abuse that is going on in the derivatives market. But already, the newly-elected House and Senate Republicans are looking to turn back to clock. This is apropos because, as Barry Ritholtz points out: It was the dreaded Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop.

John Carney at CNBC:

Half of Story’s piece seems built around the complaints by financial companies—such as Bank of New York Mellon and State Street—that want to become clearing dealers for derivatives. The other half is built around customers who feel the fees they pay to existing dealers are too high—thanks to the anti-competitive cabalization of the derivatives market.

The irony of all this, of course, is that the cabalization of the derivatives market was one of the goals of regulators, who demanded that market participants set up centralized derivatives clearing houses in an effort to contain counter-party risk. Central to the successful operation of any such clearing house, however, is the exclusion of would-be dealers who seem too risky.

One of the ways a centralized clearing house reduces counter-party risk—that is, the risk of someone on the other side of your trade not doing your deal—is by being the strongest and biggest counter-party that is on the other side of every trade. The idea is that even if a single seller fails—and doesn’t deliver on the sale—the derivatives clearing house has access to enough capital and liquidity that the trade itself can still be completed. You don’t have to worry, in other words, who is on the other side of your trade—it’s always the clearing house.

Importantly, however, a clearing house has to guard against the possibility of its members failing. Without proper capitalization and collateralization requirements, the clearing house could find itself unable to complete trades in a time of financial distress. It would go from being a risk-reducer to a risk-multiplyer, with all the risk concentrated in one place.

The odds of getting a clearing house that is properly capitalized are rather low on the face of it. Competition between clearing houses will result in a downward pressure on fees, collateral requirements, and dealer capitalization requirements. In short, the clearing house will be captured by its customers in a manner that undermines its financial soundness.

To make matters even worse, the natural market counter-balance to this pressure toward riskiness on the part of the clearing house is undermined by the perception—indeed, the reality—that any important clearing house is too big to fail. In a free market, the customers of a clearing house would balance out the demand for lower collateralization/capitalization/fees with a wariness about the increased risk associated with this lowering. But in reality, customers don’t worry about a major clearing house failing because the US government will intervene to bail it out.

This is, ordinarily, an argument made by proponents of government regulation. The tendency toward riskiness plus moral hazard means the clearing house cannot be self-policing. To balance out this situation, the government steps in an imposes collateralization and capitalization requirements on the clearing house. There’s even a sort of fairness argument here—the higher costs associated with the regulations are paying for the implicit guarantee.

If we could be confident in the competence of regulators, the story might end there. Unfortunately, regulators have a poor track record of regulating risk. On the one hand, they often simply lack the tools to effectively predict risk—which means they are simply guessing about the types and levels of capital and collateral that should be required. On the other hand, they are subject to political pressures that influence their view of risk. So what starts out as an educated guess winds up as a politicized guess.

If that’s too theoretical, here’s an example drawn from history. In the 1980s, global regulators were meeting to discuss bank capital requirements. One of the issues at hand was what risk weighting different assets should get. All of the countries agreed that their own highly rated sovereign debt should get zero percent risk weighting—which essentially meant that banks didn’t have to set any capital against losses. Ask the banks with Irish and Greek debt how that is working out.

The same global regulators argued about what risk weighting to give mortgages. The Federal Reserve thought mortgages should get a 100 percent risk weighting—the same assigned for highly-rated corporate debt, and requiring an 8 percent reserve against losses. The West Germans, however, wanted to gin-up interest in their residential real estate market and pushed for a 50% risk weighting. This risk weighting more or less held through the later capitalization reforms, resulting in banks over-investing in mortgage-backed securities. How’d that work out?

So we’re left with a problem from hell. Market participants cannot be trusted to govern a clearing house. The clearing house itself cannot be trusted to be self-governing. And the regulators cannot be trusted to govern properly either.

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They Won’t Let The Sun Go Down On Them

Alexander Bolton at The Hill:

Democrats are considering a plan to delay tax hikes on the wealthy for two years because the economic recovery is slow and they fear getting crushed in November’s election.

It could mean a big reprieve for families earning $250,000 and above annually.

President George W. Bush’s tax cuts will expire at the end of the year unless Congress acts to delay their sunset.

Some Democrats are now arguing forcefully that a delay is a win-win plan that would help the federal budget without hurting the economy.

Wealthy families would not have an incentive to cut back on spending and budget writers could assume an inflow of tax funds in future years, making five- and 10-year budget projections look less scary.

Rep. John Yarmuth (D-Ky.), a member of the Ways and Means Committee, which has jurisdiction over taxes, said some of his Democratic colleagues have discussed the idea out of fear of impeding the nation’s economic recovery.

“I’ve heard some sentiment about raising the rate but not making it effective until 2012,” he said.

Derek Thompson at The Atlantic:

Sen. Kent Conrad (D., N.D.) said in an interview Wednesday that Congress shouldn’t allow taxes on the wealthy to rise until the economy is on a sounder footing. Sen. Ben Nelson (D., Neb.) said through a spokesman that he also supported extending all the expiring tax cuts for now, adding that he wanted to offset the impact on federal deficits as much as possible.

Brian Beutler at Talking Points Memo:

Has Kent Conrad done an about face and become a supporter of the Republican plan to endlessly extend tax cuts for the rich? Far from it.

“The Republicans’ proposal to me is a formula for the decline of the United States,” Conrad said last night in response to a question from TPMDC.

Conrad is among the only Senators whose hawkish rhetoric on deficits closely matches his voting record, and he surprised many — even senior members of his own party — when he was quoted widely supporting a continuation of the Bush tax cuts, including for high income earners.

“The general rule of thumb would be you’d not want to do tax changes, tax increases … until the recovery is on more solid ground,” he told reporters outside the Senate chamber yesterday afternoon.

And indeed, he reiterated that position at length when TPMDC caught up with him last night. But he also made it clear that he’s in no way supportive of the GOP position on taxes.

“In the short term, most economists would say raising taxes or cutting spending during an economic downturn is counterproductive,” Conrad said. “Now if you break it down, the high income would be the least problematic in terms of…a change in the tax rates, because they’re the least likely to spend the money. Middle income, far more important. And with [unemployment insurance], that’s actually the most important thing, because that money’s all going to get spent.”

In other words, a deficit-financed tax cut for the wealthy (as the GOP currently proposes) is the least stimulative of the options Conrad listed and ,though he’d like to preserve all of the current tax rates temporarily, tax cuts for the rich ought to be the first to go.

“[M]ost economists are saying that for the next 18 months or two years, we’re going to have continued economic weakness,” Conrad said. However, “the analysis has been done by CBO and others show that deficit-financed tax cuts actually hurt long term growth.

“I was answering what would be my reaction to the circumstance we face,” Conrad explained. “My reaction would be don’t cut spending, don’t raise taxes and that would mean on anyone. But this is the time to prepare to pivot, to put together a plan that does bring deficits and debt down over the more extended period of time.”

Jennifer Rubin at Commentary:

Nevertheless, these two plus Sen. Evan Bayh are “a departure from what appeared to be an emerging unified Democratic stance.” Maybe not so unified after all.

Remember Rep. Joe Sestak bemoaning the plight of small businesses the other day? Hmm, maybe he could join the reality-based Democrats. After all, those small businesses are the ones that will be hit if the top rate rises to 39.6%. (”Republicans and many business groups favor extending all the breaks, contending that increasing tax rates will hit small businesses hard.”) But I haven’t heard any of that from him. And really, is a guy who voted with Nancy Pelosi 97.8 percent of the time the lawmaker who is going to break with liberal orthodoxy? Not likely.

Blue Texan at Firedoglake:

Yeah, God forbid we restore the already historically low Clinton-era levels. The ’90s economy really sucked.

Jonathan Chait at TNR:

This isn’t the worst idea in the world, if they do sunset the tax cuts in 2012. There are a couple problems, though. First, it’s not a cost-effective way to stimulate the economy. The Bush tax cuts were not designed to encourage consumption. They were designed to incentivize the rich to work harder and more productively, out of the theory that Clinton-era tax rates had dampened the entrepreneurial spirit and the desire to invest. (Obviously, right? Nobody was trying to get rich in the 1990s.) Alternatively, this theory was a handy excuse to enact a policy designed to make rich people richer. In either case, nobody was claiming that it was a way to increase consumer spending. Indeed, one prevailing right-wing justification from the era was that upper-bracket tax cuts were needed because the rich save more money than the poor and middle class. (That was true, though if you want to promote saving, deficit reduction was far more efficient.)

John Cole:

We enacted these tax cuts, there was no job creation, debt exploded, and only the wealthiest of the wealthy profited. So tell me, Mr. Fiscal Conservative Kent Conrad, why should we not let the tax cuts for the rich expire?

And if it is not evident to you by now, the best way to get our finances back in order is to systematically ignore anyone who calls himself a fiscal conservative. If I could find a bank run by dirty hippies I would put my money there, because I just don’t trust these people in pinstripes anymore.

UPDATE: David Stockman at NYT

Barry Ritholtz at Big Picture

Bruce Bartlett

Sam Stein at Huffington Post

UPDATE #2: Derek Thompson at The Atlantic

Ezra Klein

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These Maps Look Like The Flight Plans In Those Airline Magazines

Map comes from Jon Bruner at Forbes

Free Exchange at The Economist:

Lately I’ve been spending lots of time in Austin, Texas. Enough so that I’ve had to start driving again. When you go many years without driving, it becomes terrifying. So to refresh my skills I took lessons with a wonderfully patient and brave woman who has taught driving in Austin for nearly thirty years. I expected to be one of her few adult students, but no. My instructor claimed in the past few years the number of adult students increased exponentially, not quite rivalling the number of teenagers. Most are tech workers who come from all over the world, drawn by the vigorous labour market. Adult driving students struck me as a rather interesting economic indicator.

It doesn’t tell us anything we didn’t already know. Migration statistics reveal that people are moving in droves to Texas. Why? Jobs and no state income taxes. High earning New Yorkers and Californians can take home between 9% and 11% more of their income by moving to Texas. Every trip down I speak to at least one bitter New Yorker/Californian fed up with high taxes and cost of living.

Brad DeLong responds:

At Free Exchange, A.S. punches her internal Economist credentials by telling only half the story:

[…]

No, not half the story. Much less than half the story. The Tax Foundation tells us that “Tax Freedom Day” in Texas is April 5–that is, that Texans pay 26.0% of their income in taxes–while “Tax Freedom Day” in California is April 14–that is, that Californians pay 28.5% of their income in taxes. Roughly half of that difference comes from the fact that our federal tax system is somewhat progressive: the amount by which Texas is a low-tax state is not (as a naive reader of A.S. would suppose) 10% of income but rather about 1.3% of income.

And, of course, to at least some extent you get what you pay for.

And then there is the other half of the story: costs of living in New York and (coastal, metropolitan) California are high because there isn’t much space and because they are very nice places to be:

Matthew Yglesias:

I suspect A.S. is being somewhat misled by this fascinating interactive tool which charts domestic migration only and thus gives the impression that certain places are experiencing massive net population flight when in fact they’re just attracting a lot of immigrants.

What’s more, though Texas certainly has lower-than-average taxes, it’s hardly the lowest tax state in the union. According to the tax foundation that prize is owned by Alaska (which is an unusual case) followed by Louisiana, Mississippi, South Dakota, West Virginia, New Mexico, Tennessee, Nevada, Alabama, and Kentucky which I don’t think is anyone’s top ten list of economic and civic dynamism. Conversely, the most-taxed states, Connecticut and New Jersey, are also the most prosperous.

The issue tax-wise, especially when it comes to state government that’s not involved in so much pure transfers, is value rather than levels. Paying relatively high taxes in exchange for excellent services is going to be fine for your state. Having subpar services paired with low taxes is also workable. The problem arises if your high taxes don’t actually deliver good schools or nice parks or functioning transportation.

Andrew Sullivan

James Joyner looks at a different map:

Below is the graphic for Los Angeles County:

Two things strike me as interesting here.  First, the outward migration appears to be vastly outweighing the inward migration. Second, the outward flow is much more scattered than the inward flow.   Both of those surprise me, given the incredible attractiveness of Southern California.

It appears that, in 2008 at least, most of the people moving to LA were doing so from the Boston-New York-Washington corridor whereas most leaving LA were staying either on the West Coast or somewhere else in the Sun Belt.   I would have guessed that LA would be getting a much larger chunk of people from the Upper Midwest.    Maybe the graphic is just overwhelmed by population clusters.

Barry Ritholtz at The Big Picture:

Forbes doesn’t go into the qualitative factors, but one would imagine it includes things like employment opportunities, social options, housing costs, taxes, etc.

>>

Manhattan: Young people move in, older marrieds move out

>>

click thru for Detroit, LA and Seattle

Detroit: (Everyone Out of the Pool!)

>>

Seattle: So that’s Where everyone else went!

>>

Los Angeles: Last person out of Cali please turn off the lights!

>>

And for those of you who blame high California taxes for their exodus, how do you explain Miami ?

UPDATE: Kevin Drum

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I Ain’t Saying They’re A Golddigger…

Max Fisher at The Atlantic with the round up. Fisher:

Democratic Congressman Anthony Weiner of New York declared in a press conference Tuesday that his office will be targeting Goldline–a gold-selling company he accuses of ripping off customers–and its prominent backers in the conservative media. He particularly focused on Glenn Beck’s connections to Goldline. Weiner says the company falsely portrays itself as a credible investment adviser, while selling gold to customers at 190% of its market value and exploiting public fears for monetary gain. He also accuses Beck and other pundits of being complicit.

Kenneth Vogel at Politico:

Talk show host Glenn Beck and Goldline International, a California-based gold retailer, have colluded to use fear mongering tactics to bilk investors, according to a stinging report issued Tuesday by Rep. Anthony Weiner (D-N.Y.).

The report alleges that Goldline grossly overcharges for the gold coins that constitute the bulk of its business, uses misleading sales techniques and takes advantage of fears about President Barack Obama’s stewardship of the economy – which are stoked by its stable of paid conservative endorsers including Beck, Mark Levin, Laura Ingraham and Fred Thompson – “to cheat consumers.”

Goldline is the exclusive gold sponsor of Beck’s radio show. But, as POLITICO detailed in December, a number of gold selling companies pay other conservative commentators as sponsors and also advertise on a variety of conservative talk radio shows, as well as Fox News, which airs Beck’s television program.

“Goldline rips off consumers, uses misleading and possibly illegal sales tactics, and deliberately manipulates public fears of an impending government takeover – this is a trifecta of terrible business practices,” said Weiner. He said a December report in POLITICO report prompted his scrutiny of Goldline.

“This industry goes beyond Goldline, but the Goldline circle has been particularly cynical in its cultivation of these conservative commentators,” he said. “There are two industries that are intertwined here in this cynical play: the media industry and the online gold industry, and there is a lot of blame to go around.”

As for Beck, Weiner asserted he “should be ashamed of himself.”

Glenn Beck:

GLENN: Forget Goldline. Weiner is shooting a bit lower in the finance food chain going after gold dealers. His latest target, Goldline, which has made its name profiling with the help of conservative talkers, made its money off of fees for buying and selling gold against public anxiety. A representative of the company has just circulated this e mail this afternoon. Tomorrow, May 18th, Congressman Weiner will either be having a press conference and sending out press releases that will involve Goldline International and Glenn Beck. Congressman Weiner will also be going after other conservative supporters that endorse Goldline. We are not sure exactly what Weiner will be saying, but we know that it will not be favorable to either Goldline or the conservative personalities that support Goldline.

STU: You think?

PAT: What a Weiner.

GLENN: This is incredible. This is incredible. This is again another arm of this administration coming out to try to shut me down. This is absolutely incredible. Is there anybody that is going to say anything in the press at any time if you stand up against this White House? They have three, count them, three advisors of this president that have launched official campaigns boycotting my sponsors! Any sponsor that stays with me, now they are targeting through — you want to talk about the McCarthy era! Look at what this country is becoming! Is there anyone, anyone that has the courage to stand up against these monsters? Look at what they are doing! It’s incredible! Incredible.

In response to Weiner’s accusations — or really as part of his response — which have received wide-ish play in the media, Beck has launched (it’s run by his staffers) WeinerFacts.com: “world wide weiner web.” The site is devoted to “facts” about Rep. Weiner interspersed with pictures of wieners. Yes. Glenn Beck has gone opposition 2.0 (literally! He showed off the new site on his iPad). One can only look forward to the day his chalkboard gets its own Twitter account.

Fear not, however, Beck did not let Weinerfacts.com do all his trash talking for him. Chalkboard and funny voices at the ready, Beck also demonstrated why Weiner’s connections to President Obama and Media Matters (and inevitably Van Jones) may be evidence he is the new…Joe McCarthy: “How afraid they really must be.” Or, you know, looking for for the sort of attention that results in campaign donations down the line. Video below.

David Corn at Politics Daily:

Beck is free to give whatever economic advice to his fans, but he has blended his analysis with self-serving commerce, promoting a particular gold coin retailer called Goldline, which has too often ripped off customers by peddling coins at much higher prices than their true value and selling them as solid financial investments. Not coincidentally, Goldline is a major sponsor of Beck’s radio and TV shows. My Mother Jones colleague Stephanie Mencimer has written a thorough exposé of Goldline and the Beck connection, and the story has hit at a propitious moment: just as Beck has attacked a Democratic congressman who has investigated Beck and Goldline.

[…]
Weiner has the goods on Beck and Goldline. Mencimer does, too. This is a sleazy business. Beck and Fox rake in the bucks, and viewers who take Beck seriously have been rooked by Goldline. Their motto could be: We exhort, you get taken for a ride.

Weiner is not going to let go of this. On Tuesday night, “Countdown” host Keith Olbermann asked him if he’s prepared for a battle of wits with Beck. “He comes only half-prepared to that battle,” Weiner quipped. And no doubt, Beck will squeeze what he can out of this fight (or crusade of persecution). After all, he’s all about turning bad news into gold.

Stephanie Mencimer at Mother Jones:

For more than a century, gold has held a special allure for the conservative fringe. Amid economic downswings and social upheaval, the precious metal has come to be seen as a moral and political statement as much as an investment. Ever since the late 19th century, when the gold standard became the center of a ferocious debate about the country’s financial future, gold has been mythologized as bulwark against inflation, federal meddling, and the corrosive effects of progressivism. In the late 1970s, South African Krugerrands became a refuge from soaring interest rates and oil prices. In the ’90s, militia groups fearful of big banks and the Federal Reserve hoarded gold.

And now, with the economy limping along and a black Democrat in the White House, gold mania has gone mainstream. Gold prices hit a recent high last December and remained strong as the European debt crisis unfolded this spring. John Paulson, the hedge-fund giant who made billions bundling and betting against Goldman Sachs subprime mortgage securities, has invested heavily in gold, even starting a new fund devoted solely to it. A recent New York Times poll found that 1 in 20 self-identified Tea Party members had bought gold in the past year. Cashing in on all this is a raft of entrepreneurs who have tapped into financial insecurity and fever dreams of approaching tyranny. Nearly every major conservative radio host, including Rush Limbaugh, Sean Hannity, Michael Savage, and Dr. Laura Schlessinger, has advertised gold. But none has done more to cheer on the new gold rush than Glenn Beck.

Beck, whose various media enterprises brought in $32 million last year, according to Forbes, has a particular interest in plugging gold. Since 2008, Goldline has been one of his most reliable sponsors, underwriting his comedy tours and investing heavily in his radio show. Last year, after Beck called President Obama a racist, and mainstream advertisers bailed on his cable show, Goldline stuck by him. And its loyalty appears to have paid off. In an email, Goldline’s executive vice president Scott Carter says that while its Beck sponsorship doesn’t bring in the majority of its customers, it “has improved sales,” which exceed $500 million a year.

In turn, Beck, has stood by Goldline. Last year, he made a promo video for the company in which he stated, “This is a top-notch organization”—a quote featured prominently in Goldline ads on its own website. Until last fall, Goldline’s website identified Beck as a paid spokesman. After the liberal watchdog Media Matters complained of a potential conflict of interest, Goldline modified its ad copy to indicate that it sponsors Beck’s radio show, not Beck himself. Beck posted a video on his website in which he unapologetically noted that he’d started buying from Goldline long before it was his sponsor, back when gold was $300 an ounce.

But there’s still a powerful feedback loop between Beck and Goldline. The more worked up Beck gets about the economy or encroaching socialism, the more Goldline can employ those fears in pitching their products to his audience. But in putting his seal of approval on Goldline, “the people I’ve trusted for years and years,” Beck has gone beyond simply endorsing an advertiser. A Mother Jones investigation shows that Beck is recommending a company that promotes financial security but operates in a largely unregulated no-man’s land, generating a pile of consumer complaints about misleading advertising, aggressive telemarketing, and overpriced products.

[…]

What Goldline doesn’t say upfront is that for its own bottom line, collector coins are a lot more lucrative than mere bullion. Profits in the coin business are based on “spread,” the difference between the price at which a coin is sold and the price at which the dealer will buy it back. Most coin dealers, including Goldline, will sell a one-ounce bullion coin for about 5 percent more than they’ll buy it back for, a figure that closely tracks the price of an ounce of gold on the commodities markets. That 5 percent spread doesn’t leave a lot of room for profits, much less running dozens of ads a week on national radio and cable programs, with endorsements by everyone from Beck to Mike Huckabee, Fred Thompson, and Dennis Miller. So, Goldline rewards its salespeople for persuading would-be bullion buyers to purchase something with a bigger markup.

Twenty-franc Swiss coins are a little smaller than a nickel and contain a little less than two-tenths of an ounce of gold. The coins are about 60 to 110 years old and not especially hard to find (though Goldline describes them as “rare”). They are not fully considered collectors’ items nor commodities, making their value more subjective than bullion’s. Goldline sets a 30 to 35 percent “spread” on the coins, meaning that it will pay $375 to buy back coins it’s currently selling for $500. At that rate, gold prices would have to jump by a third just for customers to recoup their investment, never mind making a profit. Investing in Goldline’s 20 francs would be like buying a blue chip stock that lost a third of its value the minute it’s purchased. It’s difficult to think of any other investment that loses so much value almost instantly. So what persuades people to buy anyway?

Kevin Drum

Marc Perton at Consumerist:

Goldline, a company that sells gold coins, has an important announcement: coin collectors made out well in the 1930s and were protected from “the whims and vagaries of a spendthrift government.”

So why should anybody care about this now?

One reason is that gold prices are hitting record highs, so sellers of the precious metal are shifting their marketing into high gear. While we’re not about to tell you whether or not gold is a good investment (we’re sure you’ll tell us in the coments, though), we’re pretty confident of one thing: The government is not about to come and confiscate your bullion.

Goldline shares this history lesson:

Times were very good for many Americans in the mid- to late-1920s: the stock market had grown exponentially — driven, in part, by a frenzy of investing which sent stock prices well beyond their true value. In 1929, the frenzy ended. Black Tuesday started a stock market crash which ultimately led to the Great Depression. By 1933, the demoralized nation looked to Washington, D.C. and President Franklin D. Roosevelt for salvation. Seeking to inflate the dollar in an effort to combat the depression, the United States government issued an order confiscating gold bullion from American citizens under threat of fines or imprisonment. There were certain limited exceptions. One of the most notable exceptions was that Americans could continue to own: “gold coins having a recognized special value to collectors of rare and unusual coins.”

For the most part, though, the law was never enforced, and was later overturned. Today, Americans can own as much gold as they can fit in their hidden book safes, safe deposit boxes, or buried backyard bunkers.

But never mind that. According to Goldline, “the events of the 1930s and the decades that followed help to prove the importance of owning collectible gold coins.” Goldline customers can even get a free copy of Executive Order 6102 printed on faux parchment. We really want to say something about this not being worth the paper it’s printed on, but we’re sure Goldline has already beaten us to it.

Wonkette:

Yeah yeah yeah what do you know, Weiner. Have you ever run a comically trashy if not illegal international gold & silver business? It is a trifecta of Profit.

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Banks Play Hide The Rancid Salami In The Hudson Castle

Kate Kelly, Tom McGinty and Dan Fitzpatrick at WSJ

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

Andrew Ross Sorkin at Dealbook at NYT:

“You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you’re taking less risk,” William Tanona, a former Goldman analyst and head of financial research in the United States at Collins Stewart, told The Journal.

The newspaper suggests this practice is a symptom of the 2008 crisis in which banks were harmed by their high levels of debt and risk. The worry is that a bank displaying too much risk might see its stocks and credit ratings suffer.

There is nothing illegal about the practice, though it means that much of the time investors can have little idea of the risks the any bank is really taking.

Michael Scherer at Swampland at Time:

Some advice* for you the next time you need a loan: Before you go to the bank, move about 42 percent of your existing debts “off balance sheet,” so you don’t have to report them. That pesky credit card bill you will never be able to pay off–hide it. Those car payments you probably won’t be able to make–make ’em disappear, if only for a few days.

Even if your banker eventually finds out that you fooled him, you won’t have to sweat it. After all, banks make it a policy to hide their debt from the public, as the Wall Street Journal explains today in a story that you should not miss.

[…]

* I am joking. Do not take this advice. It is illegal for you to lie to your bank. But of course, it is perfectly legal for the bank to misrepresent its own level of risk before making public reports. Why the disparity? When you run the casino, you play by different rules. And the bonuses are really good.

Jennifer Taub at Baseline Scenario:

These revelations by Martin Kelly, Lehman’s controller, and Marie Stewart, the global head of accounting policy, invited many questions.

First, how reliable are they? Recall that Kelly is the first addressee listed on the May 2008 letter from Lehman whistleblower, Matthew Lee. Second, how could they know what the practices were at the competitor CSEs (CSE was the regulatory designation from 2004 – 2008 of the five large independent investment banks – Bear, Lehman, Merrill, Morgan Stanley and Goldman)? Third, if there was no legal change at that time, what was the magic of 2007? In other words, if the examiner, Anton Valukas, is correct in suggesting the “repo 105” practice was actionable, are these other investment banks vulnerable to litigation for pre-2007 practices? Fourth, was it possible that the other investment banks had been hiding billions of dollars of debt off balance sheet? Fifth, what was the connection between these practices and the financial crisis? Sixth, was this still going on at the firms?

Prior to finding the answers to these questions, I noticed that the SEC had posted a sample letter that it sent to “certain public companies requesting information about repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets.” The illustrative letter was signed by the Senior Assistant Chief Accountant. Pleased that the SEC was on the job, I turned my attention to other matters, until this morning.

It is hard to predict what will happen next. However, it is quite possible, that the Valukas Report will be the global financial crisis analog to the Pecora Hearings, helping to energize robust regulatory reform. At the very least, this reinforces the need that all debt and all transactions that have the economic effect of debt or leverage must be on balance sheet. Only time will tell.

Annie Lowrey at The Washington Independent:

The Securities and Exchange Commission — in the wake of the revelation last month that Lehman Brothers used such transactions to park billions of debt off its balance sheet shortly before its collapse — is investigating banks’ use of the tactic. In my mind, there is one dead simple way to preclude banks from skewing their debt and leverage levels using repo transactions (which are, I should note, common, important and perfectly legal): Require banks to report not just their debt levels at the time the reports come out, but their quarterly average debt levels, thus removing the incentive to alter them.

Naked Capitalism:

The fact that the existence of widespread fraud is finally being addressed in polite company is a good first step.

But where are the prosecutions?

Neither happy talk nor propaganda will fix the economy. The governments of the world have spent trillions trying to wallpaper over the fraud, and have become insolvent doing so.

But it’s not working. Indeed, polls show that people no longer trust our economic “leaders”. See this and this.

Only honest talk – and holding the people who committed fraud accountable – will stabilize the economy.

Barry Ritholtz at The Big Picture

Louise Story and Eric Dash in NYT:

It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

Felix Salmon:

This is all, obviously, extremely complicated. Hudson Castle was borrowing short and then lending that money out to banks like Lehman, which would post securities as collateral. (That’s the first thing that doesn’t make sense: since when are repo rates higher than CP rates?)

But obviously Hudson was lending unsecured as well, or else its security interest wasn’t well structured, because now it’s a major Lehman creditor.

Yet at the same time Hudson — or its Fenway subsidiary — borrowed $3 billion from Lehman. And those notes “were used to back a loan from Fenway to a Lehman subsidiary” — this is the point where I completely fail to understand what’s going on. And that loan from Fenway to Lehman was also secured by another loan, to a California property developer — so now it was secured twice? And the Fenway notes were used as security twice over, as well, since besides being pledged back to Fenway they were also pledged to JP Morgan?

Certainly there was some very crazy stuff going on around Hudson Castle — and knowing what we know about Lehman, it’s entirely plausible that the crazy stuff was all designed “to shift investments off its books”. But the main reason I have to believe that story that is that I trust the NYT. If I read this story on a blog somewhere, I’d dismiss it as borderline-incomprehensible conspiracy-theory rambling; but since I saw it featured prominently in the NYT, I know that some highly respected and respectable journalists and editors really believe there’s a story here.

I just wish they’d done a better job of showing us what Lehman was doing, rather than just telling us — and then trying to support their assertions with a series of details which really doesn’t make any sense.

John Cole:

Look- I know I’m just a layman, but this sounds like EXACTLY what Andrew Fastow, the Chief Financial Officer at Enron, did for years before Enron finally crashed and burned. He’s in jail.

But these guys raped everyone, walked away with millions, and are probably thick as thieves with a new crowd in some other organization where we are told it would be Stalinesque to tax their bonuses.

John Lounsbury at Seeking Alpha:

The next item reminds me of the child’s argument: “But Mom, everybody does it. It must be okay.”

Last week Kate Kelly, Tom MCGinty and Dan Fitzpatrick had a report in The Wall Street Journal showing how all banks manipulate their balance sheet to accommodate the accounting cycle. In this case, banks use repos to raise cash for trading during the quarter and then close out the positions in time for the quarterly accounting date.

According to the WSJ article, the total of repos in banks averages 42% higher at the highest point in the quarter compared to the accounting date. The following graph shows the total repo activity by banks, plotted weekly.

(Click to enlarge)

It’s Okay Mom, It’s Not Illegal

There is apparently nothing illegal about all of this. If that is the case, then the term “a nation of laws” is itself a deception. It should not be legal to hide assest off the books by maneuvers such as Repo 105. It should not be legal to hide the fact that excess leverage is used every month for trading, hidden from the official balance sheet.

Disclosure: No positions

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The AIG Files: The Truth Is Out There

Matthew Goldstein at Reuters:

U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.

The request to keep the details secret were made by the New York Federal Reserve — a regulator that helped orchestrate the bailout — and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that “special security procedures” would be used to handle the document.

The SEC, according to an email sent by a New York Fed lawyer on January 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG’s confidentiality request.

The SEC had also agreed that if it determined the document should not be made public, it would be stored “in a special area where national security related files are kept,” the lawyer wrote.

David Frum at FrumForum:

Let’s get this straight. The underwear bomber’s information is so unimportant to the security of the United States that he can be read a Miranda warning and urged to stop talking. But the details of the AIG deal – they are national security secrets so important that the SEC wanted to classify them top-secret???

Rachael Granby at Seeking Alpha

The Cunning Realist:

The SEC, whose mission is to protect investors, has an entire area of files related to “national security” and an outside lawyer apparently was familiar with this? What’s in those files?

Barry Ritholtz at The Big Picture:

In a little noticed story over the weekend, Reuters has discovered that the New York Federal Reserve want to invoke national Security rules to keep the details of the bailout a secret.

It reveals the degree to which the NY Fed was a) In a state of sheer Panic; b) Captured by the banks they regulate; and c) Failed to understand the basic premise of Democracy.

Aside from what this means to the ongoing tenure of Tim Orwell Geithner at Treasury, it shows how utterly clueless the people who bailed out the banks and their bond holders actually are.

Naked Capitalism:

Sports fans, this request can point to only one of two conclusions. Either the folks at the Fed are suffering from a massive case of grandiosity, or something very incriminating is in that file. There is simply no bailout-related information that legitimately warrants that level of security treatment AFTER THE FACT (even in the very unlikely event AIG officials possessed information related to terrorist financial networks, which is legitimately limited to parties with high-level security clearances, I can’t imagine that it would be the sort of thing that would also be subject to disclosure in SEC filings, and hence would be subject to back and forth among the Fed, AIG, and the SEC).

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