Tag Archives: Bloomberg

And Now For News Other Than Sarah Palin…

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

Lebanon’s government is on the verge of collapse as Hezbollah, the paramilitary group and national political party, threatens to withdraw from the shaky government coalition. At the heart of the political dispute is Hezbollah’s objection to an ongoing United Nations investigation that is expected to indict Hezbollah members for the 2005 bombing that killed Lebanese Prime Minister Rafik Hariri. Hariri’s son, current Lebanese Prime Minister Saad Hariri, met today with President Obama to discuss the political crisis. Obama is getting involved after negotiations, sponsored by Syria and Saudi Arabia, failed to resolve the dispute. As is so often the case with Lebanon, the situation is tenuous and the dangers of escalation are high

Tony Karon at Time:

Even as Lebanese Prime Minister Saad Hariri was meeting with President Barack Obama in Washington on Tuesday for urgent talks over the future of his government, Hizballah decided to pull the plug on that government and leave Hariri’s status uncertain. Eleven ministers from the Shi’ite Islamist party and its allies resigned from the Cabinet and demanded the formation of a new government, leaving Hariri unable to govern. The collapse of yet another fragile consensus government once again raises the specter of Lebanon’s descending into a new cycle of sectarian violence — but it could also simply be a hardball negotiating tactic by Hizballah to cement its position and highlight the limited power of its enemies, including the U.S., to manage events in Lebanon.

The Hizballah walkout was prompted by the collapse of a deal brokered by Saudi Arabia and Syria under which the Lebanese government would distance itself from the U.N. tribunal investigating the murder of Hariri’s father, former Prime Minister Rafiq Hariri, in February 2005. Although Syria was initially widely blamed for the killing, it has been reported that the U.N. tribunal will in fact indict members of Hizballah, the Iran-backed movement whose militia remains the single most powerful military force in Lebanon, and whose electoral support in the Shi’ite community gives it a central role in government. Hizballah had warned for months that it would not allow the arrest of any of its members, and branded the U.N. tribunal a Western-Israeli plot to undermine the movement. The U.S. has insisted throughout the crisis that the interests of political stability cannot be allowed to impede the pursuit of justice in the Hariri murder.

Richard Spencer at The Telegraph:

Lebanon is becoming the Berlin Wall of the new Cold War: the frightening, potentially nuclear proxy struggle between allies of the West and Iran.

The West came to West Berlin’s short-term rescue with the 1948 airlift, but then could do little but stand and watch as the Soviet Union boxed Germany’s former capital into a corner for four decades.

Now Lebanon’s democratically elected government has had its legs taken away from under it by Hizbollah, Iran’s local front organisation. The country faces its own division, stand-off and stagnation, if not worse.

Like Berlin after the Second World War, Lebanon is a fractured place, with the major world powers – in this case, the US, Saudi Arabia and Iran/Syria – having their own local front men.

Saad Hariri, the prime minister, inherited the country’s largest fortune when his father, Rafiq, was murdered in 2005. His enemies were Syria and Hizbollah: both have been blamed. Hariri, a Sunni, made his fortune in Saudi Arabia which has backed him and then his son ever since. The Saudis, of course, loathe Iran.

Hariri’s not without support. He won the last election – though, rather like Northern Ireland, that only has the effect of rearranging the seats around the power-sharing cabinet table. He has majority support from Middle Eastern governments, including the big Gulf oil players. And, of course, he has America behind him.

Hizbollah made itself extremely popular after taking on Israel in 2006. But that popularity may have peaked – many Lebanese and others can see the danger of having a separate armed militia pursuing its own agenda. No-one wants a civil war, while if starts a conflict with Israel, it won’t exactly be taking a vote from the people who will be on the receiving end of Israeli air force strikes.

Scaremongers say that war would bring in Syria on its side – but does Syria, which has good self-preservatory instincts these days, really think that is a good idea?

Mark Memmott at NPR

Qifa Nabki:

The current crisis has its roots in Hizbullah and AMAL’s cabinet walkout of late 2006, which led to over a year and a half of government paralysis, a huge downtown sit-in and protest, escalating street violence, the May 7 clashes, and, eventually, the Doha Agreement. The opposition’s principal demand at that stage was greater representation in cabinet — the so-called “blocking third” — so as to be able to meaningfully block legislation proposed by Hariri’s majority March 14 coalition. More fundamentally, the opposition was seeking a “nuclear option”: the ability to bring down the government in precisely this kind of situation, whereby Saad al-Hariri and his allies would remain committed to supporting the Special Tribunal for Lebanon all the way until the release of indictments.

If the opposition resigns later today, they will have finally exercised the option that they fought to gain between 2006 and 2008.

Many questions come to mind:

  1. Why now? What prompted the breakdown of the Saudi-Syrian initiative that was supposedly drawing close to some kind of temporary solution in Lebanon? Did the negotiations fall apart as a result of US pressure (as some are suggesting) or was the whole thing a charade from the beginning?
  2. Where do the local parties go from here? Will the opposition call for protests and strikes in an effort to display popular support for their call to end Lebanon’s cooperation with the STL? How will March 14th respond?
  3. When will the STL release its indictments? Rumors suggest that this could be imminent, but we are unlikely to learn the content of the indictments for weeks, given that the pre-trial judge will probably review them privately.
  4. Finally, and more crassly, who will come out on top in this confrontation between March 14 (and its allies in Washington and Riyadh on one hand) and March 8 (and its allies in Damascus and Tehran)? Are we headed for a “Doha 2″ agreement?

Let’s not jump the gun. The opposition still needs to make good on its threat. Until then, the floor is open for discussion.

Roger Runnigen at Bloomberg:

President Barack Obama said the collapse of Lebanon’s unity government today shows Hezbollah’s fear of a united country acting for all Lebanese people.

“The efforts by the Hezbollah-led coalition to collapse the Lebanese government only demonstrate their own fear and determination to block the government’s ability to conduct its business and advance the aspirations of all of the Lebanese people,” Obama said in a statement issued after he held a private meeting at the White House with Prime Minister Saad Hariri.


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” Take A Load Off Fannie, Take A Load For Free, Take A Load Off Fannie, And You Put The Load Right On Me”

Lorraine Woellert and John Gittelsohn at Bloomberg:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Daniel Foster at The Corner:

You’d think reversing the thrusters and getting us away from the event horizon of this fiscal black hole would be higher-up on the list congressional priorities than telling Macy’s how much it can charge you to use your debit card, wouldn’t you? Well, you’d be wrong. The Goldman-Sachs endorsed Dodd Bill barely lays a finger on the GSEs (though, if you’re lucky, maybe the newly-created consumer protection agency will send you a little pamphlet outlining the risks of investing in the housing sector).

But hey, thank Kevin for giving us a little perspective here. That $1 trillion is little more than a rounding error against the figure of our total public debt.

Matt Welch at Reason

James Poulos at Ricochet:

One treeeeeeelion dollars. It’s one thing for a government to spend more money than we have. It’s another to spend more than we can imagine. Cross that threshold, and people will start to ask: how imaginary is the value of this unimaginable amount of money?

Rod Dreher

Mike Shedlock at Howe Street:

The amazing thing to me is the credit given to Bernanke for doing nothing but kicking the can down the road. We had an easy chance to do the right thing which was to make the Fannie and Freddie bondholders share in the pain.

Instead, Bernanke, Congress, and the Treasury collectively forced broke taxpayers to bail out wealthy bondholders. Now Bernanke is scrambling for an exit and praying for a miracle, but no exit or miracle will be found.

How the hell can Fannie and Freddie pay a 10 percent annual dividend on the shares owned by taxpayers when they are losing billions of dollars a year? Secondly, can the Fed unload the $trillion in Fannie and Freddie debt on its balance sheet without disrupting the market?

What can’t happen, won’t happen.

Meanwhile, Congress, the Fed, and the Obama administration all foolishly wants to “support” housing although we have more houses sitting vacant than anyone knows what to do with. To top it off, FHA Volume is Sign of ‘Very Sick System’; Fannie, Freddie, FHA Account for 90% of Mortgage Market

Without government guarantees, there would be no mortgage market. With government guarantees taxpayer losses mount by the minute. … And supposedly Bernanke is a genius for this setup.

Scott Sumner at Wall Street Pit:

We could pump up the economy through monetary policy, or we can have Fannie and Freddie continue to throw $100s of billions down the drain, socialize the auto industry, extend unemployment benefits to 99 weeks, etc.  And if that isn’t enough there are also calls to move away from free trade policies.  And then there’s the higher taxes we’ll pay in the future to cover the costs of debts run up in a futile attempt to stimulate the economy.

Just as in the 1930s, the right seems to have decided that a little bit of socialism is better than a little bit of inflation.  What do I mean by a little bit of inflation?  I mean enough so that the post-September 2008 trend rate of inflation is the same as the pre-September 2008 trend rate of inflation.  Apparently even that little bit of inflation is more distasteful than massive government intervention in the economy.

And the irony is that many of the policies I describe, such are Fannie and Freddie propping up the housing market, unemployment insurance extensions, and trade barriers, are themselves slightly inflationary.  But they don’t just raise the price level, they also cause all sorts of distortions—they move prices away from their free market equilibrium.   (I’m looking at you Morgan.)

The even greater irony is that this isn’t even one of those pick your poison cases.  The inflation I am calling for would be nothing more than a continuation of the inflation that occurred in the previous two decades.  We’d want it even if we hadn’t had a housing crisis and recession.  I don’t recall conservatives complaining loudly that 2% inflation was a disaster when Clinton was president.  So why the sudden and hysterical opposition to 2% inflation?  Is that really a fate worse than socialism?


Just to get serious for a moment; when I get upset at “Those People,” I am thinking about the Congressmen who created Fannie, Freddie and the CRA.  And yes, I know that the CRA was only a minor factor in the crisis, but everyday it becomes clearer that Washington’s attempts to enlist Fannie and Freddie into their crusade to make every American a homeowner lies at the center of this crisis.  Indeed the misdeeds of the “too-big-to-fail” banks (and their associated bailout with TARP funds), now comes in a distance third (or fourth if you include the Fed), far less costly to taxpayers than even the misbehavior of smaller banks that exploited the incompetence of the FDIC.

The experts say we can’t eliminate F&F right now, and I suppose they are right.  But only because we don”t have a monetary policy that stabilizes NGDP growth expectations.

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We’ve A Super Weed, Super Weed, We’re Super-Weedy, Yow

William Neuman and Andrew Pollack at NYT:

Just as the heavy use of antibiotics contributed to the rise of drug-resistant supergerms, American farmers’ near-ubiquitous use of the weedkiller Roundup has led to the rapid growth of tenacious new superweeds.

To fight them, Mr. Anderson and farmers throughout the East, Midwest and South are being forced to spray fields with more toxic herbicides, pull weeds by hand and return to more labor-intensive methods like regular plowing.

“We’re back to where we were 20 years ago,” said Mr. Anderson, who will plow about one-third of his 3,000 acres of soybean fields this spring, more than he has in years. “We’re trying to find out what works.”

Farm experts say that such efforts could lead to higher food prices, lower crop yields, rising farm costs and more pollution of land and water.

“It is the single largest threat to production agriculture that we have ever seen,” said Andrew Wargo III, the president of the Arkansas Association of Conservation Districts.

The first resistant species to pose a serious threat to agriculture was spotted in a Delaware soybean field in 2000. Since then, the problem has spread, with 10 resistant species in at least 22 states infesting millions of acres, predominantly soybeans, cotton and corn.

The superweeds could temper American agriculture’s enthusiasm for some genetically modified crops. Soybeans, corn and cotton that are engineered to survive spraying with Roundup have become standard in American fields. However, if Roundup doesn’t kill the weeds, farmers have little incentive to spend the extra money for the special seeds.

Roundup — originally made by Monsanto but now also sold by others under the generic name glyphosate — has been little short of a miracle chemical for farmers. It kills a broad spectrum of weeds, is easy and safe to work with, and breaks down quickly, reducing its environmental impact.

Sales took off in the late 1990s, after Monsanto created its brand of Roundup Ready crops that were genetically modified to tolerate the chemical, allowing farmers to spray their fields to kill the weeds while leaving the crop unharmed. Today, Roundup Ready crops account for about 90 percent of the soybeans and 70 percent of the corn and cotton grown in the United States.

But farmers sprayed so much Roundup that weeds quickly evolved to survive it. “What we’re talking about here is Darwinian evolution in fast-forward,” Mike Owen, a weed scientist at Iowa State University, said.

Some Room For Debate at NYT:

American farmers’ broad use of the weedkiller glyphosphate — particularly Roundup, which was originally made by Monsanto — has led to the rapid growth in recent years of herbicide-resistant weeds. To fight them, farmers are being forced to spray fields with more toxic herbicides, pull weeds by hand and return to more labor-intensive methods like regular plowing.

What should farmers do about these superweeds? What does the problem mean for agriculture in the U.S.?

Michael D.K. Owen:

The solution to the problem for farmers who have yet to cause the evolution of glyphosate-resistant weeds is to adopt a more diverse weed management program that includes tactics other than glyphosate. By altering the selection pressure on the weeds, glyphosate resistance will be slow to evolve.

For those increasing number of farmers who have glyphosate-resistant weeds, the solution is similar but more difficult: adopt alternative tactics that will control those weeds. Of course, often these weeds have also evolved resistance to other herbicides, which, again, is attributed to the historic use of one herbicide as the sole management tactic. In this case, weed control may be more challenging and costly.

Michael Pollen at Room For Debate:

A few lessons may be drawn from this story:

1. A product like Roundup Ready soy is not, as Monsanto likes to claim, “sustainable.” Like any such industrial approach to an agronomic problem — like any pesticide or herbicide — this one is only temporary, and destroys the conditions on which it depends. Lucky for Monsanto, the effectiveness of Roundup lasted almost exactly as long as its patent protection.

2. Genetically modified crops are not, as Monsanto suggests, a shiny new paradigm. This is the same-old pesticide treadmill, in which the farmer gets hooked on a chemical fix that needs to be upgraded every few years as it loses its effectiveness.

3. Monocultures are inherently precarious. The very success of Roundup Ready crops have been their undoing, since so many acres were planted with the same seed, and doused with the same chemical, resistance came quickly. Resilience, and long-term sustainability, comes from diversifying fields, not planting them all to the same kind of seed.

Marion Nestle at The Atlantic:

Yesterday’s New York Times ran an article disclosing the rise and spread across the United States of “superweeds” that have developed resistance to the herbicide Roundup. The article comes with a nifty interactive timeline map charting the spread of Roundup resistance into at least 10 species of weeds in 22 states. Uh oh.

Roundup is Monsanto’s clever way to encourage use of genetically modified (GM) crops. The company bioengineers the crops to resist Roundup. Farmers can dump Roundup on the soil or plants. In theory, only the GM crops will survive and farmers won’t have to use a lot of more toxic herbicides. In practice, this won’t work if weeds develop Roundup resistance and flourish too. Then farmers have to go back to conventional herbicides to kill the Roundup-resistant weeds.

In 1996, Jane Rissler and Margaret Mellon of the Union of Concerned Scientists, wrote “The Ecological Risks of Engineered Crops” (based on a report they wrote in 1993). In it, they predicted that widespread planting of GM crops would produce selection pressures for Roundup-resistant weeds. These would be difficult and expensive to control.

At the time, and until very recently, Monsanto, the maker of Roundup, dismissed this idea as “hypothetical.”

I know this because in the mid-1990s, I traveled to Monsanto headquarters in St. Louis to talk to company scientists and officials about the need for transparent labeling of GM foods. Officials told me that Roundup had been used on plants for 70 years with only minimal signs of resistance, and it was absurd to think that resistance would become a problem. I pointed out that Roundup resistance is a “point” mutation, one that requires minimal changes in the genetic makeup of a weed.

Carl Zimmer at Discover:

Neuman and Pollack left the story of this fast-forward evolution at that–but it’s actually a fascinating tale. A century ago, Melander could only study natural selection by observing which insects lived and died. Today, scientists can pop the lid off the genetic toolbox that insects and weeds use to resist chemicals that were once thought irresistible. Stephen Powles, a scientist at the University of Western Australia, has been studying the evolution of Roundup resistance for some years now, and he’s co-authored a new review that surveys what we know now about it.

What’s striking is how many different ways weeds have found to overcome the chemical. Scientists had thought that Roundup was invincible in part because the enzyme it attacks is pretty much the same in all plants. That uniformity suggests that plants can’t tolerate mutations to it; mutations must change its shape so that it doesn’t work and the plant dies. But it turns out that many populations of ryegrass and goosegrass have independently stumbled across one mutation that can change a single amino acid in the enzyme. The plant can still survive with this altered enzyme. And Roundup has a hard time attacking it thanks to its different shape.

Another way weeds fight off Roundup is through sheer numbers. Earlier this year an international team of scientists reported their discovery of how Palmer amaranth resists glyphosate. The plants make the ordinary, vulnerable form of the enzyme. But the scientists discovered that they have many extra copies of the gene for the enzyme–up to 160 extra copies, in fact. All those extra genes make extra copies of the enzyme. While the glyphosate may knock out some of the enzymes in the Palmer amaranth, the plants make so many more enzymes that they can go on growing.

It’s also possible for weeds to evolve resistance to Roundup without any change whatsoever to the enzyme Roundup attacks. When farmers spread Roundup on plants, the chemical spreads swiftly from the leaves all the way down the stems to the roots. This fast, widespread movement helps make Roundup so deadly. It turns out that some species of horseweed and other weeds have evolved a way to block the spread. Scientists don’t yet know how they manage this. It’s possible that cells in the leaves suck the Roundup in through their membranes and then tuck it away in safe little chambers where they can’t cause harm. However they do it, the weeds can continue to grow with their normal enzymes.

What makes the evolution of Roundup resistance all the more dangerous is how it doesn’t respect species barriers. Scientists have found evidence that once one species evolves resistance, it can pass on those resistance genes to other species. They just interbreed, producing hybrids that can then breed with the vulnerable parent species.

In a recent interview, Powles predicted that the Roundup resistance catastophe is just going to get worse, not just in the United States but everywhere where Roundup is used intensively. It’s not a hopeless situation, however. Farmers may be able to slow the spread of resistance by mixing up the kinds of seeds they use, even by fostering vulernable weeds in the way Melander suggested. Resistance is a manageable problem–once you recognize the problem and its evolutionary roots.

Tom Laskawy at Grist:

Grist coverage on the issue of superweeds can be found here, here, here, here and here. Strangely, given that the New York Times Magazine recently did a story about a pair of commodity rice growers who switched over to organic methods for some of these very reasons, the current Times piece omits discussion of any organic or agro-ecological alternatives to chemically intensive agriculture.

For example, the Rodale Institute has for years been growing commodity crops in an organic, no-till style with the same or better yields as conventional and genetically engineered seed. Much of the problem relates to a lack of information on the benefits or techniques required to convert. The “conventional wisdom” among growers is that it’s too costly, in terms of labor and reduced yields, to convert to organic. Kurt and Karen Unkel, the farmers featured in the Times Magazine piece, used a sophisticated custom-built software application to arrive at the financial benefits to conversion.

Rodale itself supplies a conversion calculator right on its website. The costs of new, patented seeds from Monsanto, plus a whole host of new chemicals, plus the additional fuel costs from the need to abandon chemical no-till farming are high — the future of seeds genetically engineered to withstand six different pesticides is a particularly bleak one for eaters as well as farmers. Indeed, the competitive advantage for conventional ag may no longer exist, if it ever did.

Jack Kaskey at Bloomberg:

Dow Chemical Co. plans to add a gene to its corn, cotton and soybean seeds that will allow growers to use a second herbicide to control weeds not killed by Monsanto Co.’s Roundup product.

DHT, or Dow Herbicide Tolerance, will be combined with Roundup tolerance, allowing growers to kill problem weeds with Dow’s 2,4-D herbicide, Antonio Galindez, president of Dow AgroSciences, said today in a webcast of a UBS AG conference presentation. DHT may be available by 2012 in SmartStax corn, by 2013 in soybeans and by 2015 in cotton, he said.

“DHT will bring an unsurpassed solution for weeds that are hard to control,” Galindez said. “We want to see our DHT trait in as many acres as possible.”

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Petting The Fat Cats

Julianna Goldman and Ian Katz at Bloomberg:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Obama sought to combat perceptions that his administration is anti-business and trumpeted the influence corporate leaders have had on his economic policies. He plans to reiterate that message when he speaks to the Business Roundtable, which represents the heads of many of the biggest U.S. companies, on Feb. 24 in Washington.

Greg Sargent:

The White House is making a transcript of the interview available to anyone who asks, and the comments seem a bit more nuanced than the headlines suggest:

QUESTION: Let’s talk bonuses for a minute: Lloyd Blankfein, $9 million; Jamie Dimon, $17 million. Now, granted, those were in stock and less than what some had expected. But are those numbers okay?

THE PRESIDENT: Well, look, first of all, I know both those guys. They’re very savvy businessmen. And I, like most of the American people, don’t begrudge people success or wealth. That’s part of the free market system. I do think that the compensation packages that we’ve seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.

QUESTION: Seventeen million dollars is a lot for Main Street to stomach.

THE PRESIDENT: Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don’t get to the World Series either. So I’m shocked by that as well. I guess the main principle we want to promote is a simple principle of “say on pay,” that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay.

The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs’ success and ultimately will make the performance of American businesses better.

It seems like there’s a bit more of an emphasis here than the initial story suggested on his support for specific measures to check the long-term trend of inflated bonuses, and the thrust of his comments seem aimed at combating the perception that such policies are anti-business.

That said, that substance was bound to be overshadowed by Obama’s praise for the businessmen as “savvy,” his general unwillingness to “begrudge” wealth, and his discussion of their outsized bonuses in the context of the “free market system,” which seems off key, given the massive taxpayer bailouts of the financial industry.

Simon Johnson at Baseline Scenario:

Does the president truly not understand that Dimon and Blankfein run banks that are regarded by policymakers and hence by credit markets as “too big to fail”?

This is the antithesis of a free-market system.  Not only were their banks saved by government action in 2008-09 but the overly generous nature of this bailout (details here) means that the playing field is now massively tilted in favor of these banks.  (I put this to Gerry Corrigan of Goldman and Barry Zubrow of JP Morgan when we appeared before the Senate Banking Committee last week; there was no effective rejoinder.)

Not only that, but the incentives for the people running these megabanks is now to take on reckless amounts of risk.  They get the upside (for example, in these compensation packages) and – when the downside materializes – this is belongs to taxpayers and everyone who loses a job.  (See my testimony to the Senate Budget Committee yesterday; there was no disagreement among the witnesses or even across the aisle between Senators on this point.)

Being nice to the biggest banks will not save the midterm elections for the Democrats.  The banks’ campaign contributions will flow increasingly to the Republicans and against any Democrats (and there are precious few) who have fought for real reform.

The president’s only political chance is to take on the too big to fail banks directly and clearly.  He needs to explain where they came from (answer: the Reagan Revolution, gone wrong), how the problem became much worse during the last administration, and how – in credible detail – he will end their reign.

James Kwak at Baseline Scenario:

More generally, Obama is trying to strike a balance: put pressure on Wall Street while not appearing to be wielding a pitchfork himself. This is why he felt compelled to say, “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.” At the same time he feels compelled to advocate for relatively mild reforms, such as paying bonuses in stock instead of cash, which is at best a partial solution. (Top Wall Street executives were already paid overwhelmingly in stock rather than cash before the financial crisis.)

I’m not sure why he needs to strike that balance. CEOs are overpaid, bankers are overpaid, and bank CEOs are overpaid.  Why not just say it plainly?

Paul Krugman:

Oh. My. God.

We’re doomed.

First of all, to my knowledge, irresponsible behavior by baseball players hasn’t brought the world economy to the brink of collapse and cost millions of innocent Americans their jobs and/or houses.

And more specifically, not only has the financial industry has been bailed out with taxpayer commitments; it continues to rely on a taxpayer backstop for its stability. Don’t take it from me, take it from the rating agencies:

The planned overhaul of US financial rules prompted Standard & Poor’s to warn on Tuesday it might downgrade the credit ratings of Citigroup and Bank of America on concerns that the shake-up would make it less likely that the banks would be bailed out by US taxpayers if they ran into trouble again.

The point is that these bank executives are not free agents who are earning big bucks in fair competition; they run companies that are essentially wards of the state. There’s good reason to feel outraged at the growing appearance that we’re running a system of lemon socialism, in which losses are public but gains are private. And at the very least, you would think that Obama would understand the importance of acknowledging public anger over what’s happening.

But no. If the Bloomberg story is to be believed, Obama thinks his key to electoral success is to trumpet “the influence corporate leaders have had on his economic policies.”

Michael Scherer at Swampland at Time


He’s not a stupid man. The only thing you can conclude is that this is a matter of principle for him and that he truly believes that these people are worth that kind of money despite the fact that they nearly destroyed the world financial system and are benefiting from its chaos and failure.

And it clarifies once and for all that he doesn’t understand the very real angst out in the country and the desperate need to hold someone, somewhere, accountable for what’s gone wrong. Evidently, he’s perfectly content to allow the government to take the blame for the whole sorry mess.

Daniel Foster at The Corner:

On the subject of the latest round of Wall Street bonuses, President Obama recently told Business Week that he, “like most of the American people, [doesn’t] begrudge people success or wealth.”

“That is part of the free-market system,” the president said.

Perhaps the president’s softening toward capitalism has something to do with the fact that fewer Wall Street CEOs are flocking to his $30,000-a-head steak and lobster dinners ever since the phrase “fat cat” gained currency in Washington. But in any event, the president’s praise of the free market is about as bland and uncontroversial as it gets, and even so, the White House is already starting to walk them back.

But the ever-understated Paul Krugman, responding to the Obama interview on his blog, is not pleased. Borrowing the mantle of our own John Derbyshire, he says: “Oh. My. God. . . . We’re doomed.”

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Meep, Meep, Mr. Geithner

Hugh Son at Bloomberg:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

Dealbook at NYT

Henry Blodget at Clusterstock:

Bloomberg unearths more details on the nauseating bailout of AIG and the 100-cents-on-the-dollar payouts to Goldman, et al.

Once again, Tim Geithner was in charge.

Geithner will probably say he ordered AIG to conceal the details of the bailout to save the world. (This seems to be the generic excuse for everything that happened in the fall of 2008).

We suspect there was another reason: The details were outrageous.

Felix Salmon:

Was the Fed demanding secrecy because, as Henry Blodget says, it wanted to keep the “outrageous” details of the government bailout a secret? Yes, that’s probably part of it. And maybe there was an element of worry that public disclosure would make it more obvious what the Fed’s Maiden Lane funds comprised, making it easier for the market to try to trade against them.

But mostly I suspect that this was just a knee-jerk thing, with Fed officials (yes, Tim Geithner, that means you) and their lawyers always wanting to tell the public only what they wanted the public to know, and to keep everything else secret. If you read Sorkin’s Too Big To Fail, one of the themes running through it is that public-sector officials were in serious panic mode for months, and were convinced that things were much worse than the markets and the press were indicating. It seems they thought that if they just kept things secret, maybe the markets wouldn’t find out, and could keep on running in thin air indefinitely. A bit like in the Road Runner cartoons: it’s only when you look down and see how bad things are that you actually plunge.

Jim Geraghty at NRO:

In a sane world, Treasury Secretary Tim Geithner would be cleaning out his desk right now, right?

Ed Morrissey:

Almost a year ago, Democrats hyperventilated over the machinations of AIG execs and screeched about their bonuses.  Now it appears that the problem wasn’t AIG at all, but the sneaky way the New York Fed and Geithner rode to Goldman Sachs’ rescue, and that of other banks.  Geithner and his cohorts wanted to make sure they covered their tracks while using AIG as both a whipping post and a money-laundering device in order to effect the rescue of politically-connected private institutions.

Should we have rescued GS and the banks?  Opinions differ, but even if we needed to do so, that should have been done with enough transparency for everyone to understand where the money went and why.  Playing shell games with the money while demonizing the people who were forced to run the laundry should have been a prescription for excluding Geithner from positions of authority — and so should have the tax evasion revelations.  Instead, the administration of Hope and Change chose obfuscation and deceit.

Naked Capitalism:

He was on the job when these firms levered up and took reckless risks that endangered our financial system. For him to absolve himself of responsibility is a disgrace. And to add insult to injury, we now learn that he urged a systemically important company to withhold evidence of his looting of taxpayers.

Tim Geithner must go.

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They’re Getting Armed Against The Pitchforks

Alice Schroeder at Bloomberg:

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter” it believes some of the bankers I inquired about do have pistol permits. The NYPD also said it will be a while before it can name names.


Common sense tells you a handgun is probably not even all that useful. Suppose an intruder sneaks past the doorman or jumps the security fence at night. By the time you pull the pistol out of your wife’s jewelry safe, find the ammunition, and load your weapon, Fifi the Pomeranian has already been taken hostage and the gun won’t do you any good. As for carrying a loaded pistol when you venture outside, dream on. Concealed gun permits are almost impossible for ordinary citizens to obtain in New York or nearby states.

In other words, a little humility and contrition are probably the better route.

Until a couple of weeks ago, that was obvious to everyone but Goldman, a firm famous for both prescience and arrogance. In a display of both, Blankfein began to raise his personal- security threat level early in the financial crisis. He keeps a summer home near the Hamptons, where unrestricted public access would put him at risk if the angry mobs rose up and marched to the East End of Long Island.

Naked Capitalism:

This isn’t hard to understand at all. Goldman ran afoul of one of Machiavell’s big rules: “Men sooner forget the death of their father than the loss of their patrimony.” Or its 21st century variant: “You can take from all of the people some of the time, and some of the people all of the time, but you cannot take from all the people all of the time. ” But the banksters, and Goldman in particular, have been determined to push the limits of those formulas, and are learning, much to their surprise, that they neglected to consider the intensity of the backlash that might result from their considerable success in extracting rents from the populace. Or did they?


These guys really are something aren’t they? First they seem to actually believe that “populists” are coming to take over their bank and second that they could “defend” it with pistols. Good God, these people really do think they are John Galt, don’t they?

Matt Taibbi:

I’m reading this article on Goldman executives applying en masse for gun permits and I’m trying to decide exactly how funny it is on a scale of 1 to 10. Reader assistance here is definitely appreciated.

On the unfunny side: it’s never good when anyone buys guns, particularly not rich weenies with persecution complexes. Also, it might possibly be true that people have threatened Goldman bankers physically, which would really not be all that funny and would make me personally feel somewhat uncomfortable, although it would probably never be very high on the list of things I have to lose sleep over.

On the funny side, there are several things to consider. There’s the image of Goldman guys walking into Dean and DeLuca’s nervously grabbing at their holstered nines as they buy espresso and soy waffles. There’s the idea that some of these dorks might actually think that they’re going to forestall proletarian rebellion by keeping guns in their Hamptons beach houses. There’s even the impossible-to-resist image of a future accidental shooting of some innocent hot dog vendor on Park Avenue, followed by the inevitable p.r. response from Goldman in which the bank claims that the only thing its employees are guilty of is “being really good at shooting people.”

Certainly, there are things to ponder on both sides. Right now I’m leaning toward making this a seven on the funny scale, trending toward eight. Advice more than welcome.

John Cook at Gawker

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The 100% And The Strippergram

Richard Teitelbaum and Hugh Son at Bloomberg:

In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.

Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.

Subprime Mortgages

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Fed’s decision to pay the banks in full cost AIG — and thus American taxpayers — at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.

Habayeb, who left AIG in May, did not return phone calls and an e-mail.

Tim Cavanaugh at Reason:

I’m not sure this stuff counts as an outrage anymore. After all, $13 billion is range-finding to these guys. Maybe 2009 1040 forms should have a special checkbox to send a strippergram to Geithner to thank him for saving us so much money.

Naked Capitalism:

Wow, I should not be surprised, but this is a stunner nevertheless.

It had generally been assumed that the AIG payouts of 100% on credit swaps (when the insurer was under water and bankrupt companies do not satisfy their obligations in full) was the result of some gap in oversight plus traders at AIG exercising discretion (they were unhappy about bonus rows and had reason to curry favor with dealers, who were potential employers).

The article makes clear that AIG had been negotiating to settle on the swaps prior to getting aid from the government, and was seeking a 40% discount. The Fed might not have gotten that much of a discount, but there was clearly no need to pay out at par.

This massive backdoor subsidy to the likes of Goldman, DeutscheBank was authorized by Geithner while he was at the New York Fed.

Tom Maguire responding to Naked Capitalism:

Generally assumed by whom?  Did anybody think these multi-billion dollar liquidations and financing vehicles were created without the Fed’s knowledge?

I assumed that when the government took a 79.9% stake in AIG in order to assure the world that its obligations would be honored, there was a pretty explicit intention to honor their obligations and avoid a worldwide meltdown as creditors, policy holders and local regulators attempted to seize AIG assets.

That commitment to avoiding a nasty reorganization more or less eliminates the bargaining position of “Take 60 cents on the dollar now or try your luck in a reorganization.”

As to whether the payments represented a giveaway to Goldman Sachs – who knows?  I belabored this months ago, but the gist is this – Goldman claims they had previously bought credit default swaps against AIG, so they would be protected in the event of an AIG default.  If AIG had actually defaulted, these unnamed third parties would have been on the hook for Goldman’s losses (although whether they could have paid, who knows?).  It was these third parties that benefited from the settlement between AIG and Goldman at par.

As a bonus puzzle, it also means that the Fed was negotiating with the wrong people.  Goldman has no financial incentive to agree to accept a discount on its swaps with AIG unless that triggers an offsetting  payment on its credit protection swaps (which it probably does not since Goldman would be a volunteer and the entire Fed exercise was meant to avoid formal defaults).

Maybe, maybe maybe the Fed could have extracted something from the counterparties providing default protection to Goldman.  But since the default threat was not credible there, either, probably not.

The lesson is, if a government that values it credibility and hopes to avoid a panic promises to protect creditors, it pretty much has to do just that.  Quel surprise.  The same logic – a deal is a deal and contracts count – led to the government paying out on the bonuses.  It is easy enough not to like that outcome, but having a government that could tear up contracts at random would probably be worse.

Daniel Indiviglio at The Atlantic

John Carney at Clusterstock:

So why did the Fed pay out so handsomely even though a better deal for taxpayers was already in the works? We’d guess it was financial panic. In the wake of the collapse of Lehman Brothers, the government was worried that the financial system was on the verge of collapse. It fearred making banks take a haircut on the AIG swaps would leave them with insufficient capital. In short, it was a covert bailout of the banks.

The biggest winners here include Goldman Sachs, which got $14 billion, as well as Societe Generale and Deutsche Bank.

No doubt regulators would say that paying full price was necessary. But it was not.

A far better move would have been to transparently bailout firms that needed the additional capital instead of doing it in an under-handed way. Even better would have been to have forced those firms with too much exposure to AIG to seek out new capital in the markets, possibly converting debt to equity and wiping out existing shareholders. Goldman Sachs claims that it didn’t need the AIG bailout bucks to survive–a claim whose truth we’ll never actually know because of the bungled operation of the bailout.

John Cook at Gawker

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Geithner’s Crew In The House!

Robert Schmidt at Bloomberg:

Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms.

The advisers include Gene Sperling, who last year took in $887,727 from Goldman Sachs and $158,000 for speeches mostly to financial companies, including the firm run by accused Ponzi scheme mastermind R. Allen Stanford. Another top aide, Lee Sachs, reported more than $3 million in salary and partnership income from Mariner Investment Group, a New York hedge fund.

As part of Geithner’s kitchen cabinet, Sperling and Sachs wield influence behind the scenes at the Treasury Department, where they help oversee the $700 billion banking rescue and craft executive pay rules and the revamp of financial regulations. Yet they haven’t faced the public scrutiny given to Senate-confirmed appointees, nor are they compelled to testify in Congress to defend or explain the Treasury’s policies.

“These people are incredibly smart, they’re incredibly talented and they bring knowledge,” said Bill Brown, a visiting professor at Duke University School of Law and former managing director at Morgan Stanley. “The risk is they will further exacerbate the problem of our regulators identifying with Wall Street.”

Michelle Malkin

Daniel Indiviglio at The Atlantic:

I have a few comments about this. First, what exactly is it that Bloomberg is proposing? Should every employee of the Treasury be confirmed by the Senate and testify in Congress? Clearly, that’s madness. You have to draw the line somewhere, and the number of appointees already required to fulfill those obligations seems adequate.

It sounds to me like Bloomberg is joining the growing chorus of people who object to Wall Street’s influence in Washington. If lawmakers are really that worried about the Wall Street connection, then they could always require that no one working for the government was ever compensated directly or indirectly by Wall Street. That would solve the problem.

It would also decimate much of the Federal government, particularly the Treasury. There’s a sort of natural progression that’s always existed where business and finance professionals find themselves interested in trying out a different role, after tiring of the private sector. That’s what’s led so many to travel to Washington to be a part of the government. I don’t think that’s a bad thing. They have very useful experience in the private sector that can be utilized in their new government jobs.

Joe Weisenthal at Clusterstock:

Tim Geithner has always been a public-sector, bureacracy man, but the rest of is office isn’t filled with choirboys. Bloomberg is trumpeting the fact that many of his aides at one point made beacoup bucks working in the private sector. We’ll give you a second to let that sink in.


Peter Cohan at Daily Finance:

So what is going on here? I haven’t spoken to these folks, so I can only speculate that Wall Street pays them for their access to power. When they leave Washington, they go back to those lucrative jobs on Wall Street. And they get paid to keep Washington from crimping Wall Street’s money-making style. Or maybe they’re getting paid just for advice on charitable giving and educating the people of developing countries.

If that happens to hurt the other 99.99 percent of Americans who can’t afford the billions needed to buy the government, who really cares? That’s why I stand by my previous promise to dance the hula on Wall Street if meaningful financial reform becomes law.

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Buy American Tires Or The Baby Gets Run Over By A Hummer!


Douglas McIntyre at Daily Finance:

The Office of the United States Trade Representative announced that it is imposing huge tariffs on Chinese tire imports. This move is certain to cause friction between the two countries. Already, Chinese officials have called the move protectionist and threatened similar penalties on US exports.

The International Trade Commission had determined that China had produced products similar to tires made in the US and sold them at prices low enough to force some US plants to close.

Trade representative Ron Kirk stated that “The three-year remedies, consisting of an additional tariff of 35 percent ad valorem in the first year, 30 percent ad valorem in the second, and 25 percent ad valorem in the third year, are being imposed after a finding by the United States International Trade Commission that a harmful surge of imports of Chinese tires disrupted the U.S. market for those products.”

Brad DeLong:

Why oh why can’t we have better Democratic presidents?

Barack Obama does something stupid.


Let’s see… 250 million cars in America… need 4 tires per car… need new tires every 2.5 years. 400 million tires a year… $1.4 billion dollars a year… 10,000 worker jobs saved… $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That’s the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid.

Leo Gerard, President of the Steelworkers, at HuffPo:

These are special trade safeguard rules called “Section 421” that the Chinese had agreed to obey to gain entrance to the World Trade Organization (WTO). They are, however, laws that had gone unenforced by the U.S. in the past.

President Obama used these safeguard rules to impose tariffs on tires manufactured in China and imported into the U.S., following a recommendation by the International Trade Commission, an independent, bi-partisan group. The action made Obama the first president to execute sanctions under “Section 421.”

The International Trade Commission recommended sanctions under “Section 421” four times before Obama took office. Nothing was done. The result was closed American factories, lost American manufacturing jobs, diminished American dreams.

Not this time though. Not this president. Obama showed he’s made of tougher stuff. By placing tariffs on imported Chinese tires, President Obama put himself in the line of fire for the jobs of U.S. workers, for the preservation of U.S. manufacturing and, ultimately, for the stabilization of the U.S. economy.

Daniel Indiviglio at The Atlantic:

Stupid is likely the best adjective to describe the action. It’s likely intended to save or create U.S. jobs. In reality, it will just drive up costs for consumers and anger the Chinese. They have reportedly already filed a complaint with the World Trade Organization.

The most obvious fear I see here is that China will retaliate. According to a separate article in the Wall Street Journal, they have already begun investigations into the U.S. “dumping” poultry and auto products in the Chinese market. The last thing you want during a global recession is a trade war. That would slow recovery across-the-board.

Naked Capitalism:

It would be better if we were not proven correct on this one, but when the US imposed stiff tariffs on imported tires from China late on Friday, we noted, “This could get interesting in a bad way.” The Chinese responded quickly over the weekend to announce they were investigating US auto parts and chicken, which together account for roughly as much as the disputed tires ($1.2 billion versus $1.3 billion for tires).

It is if nothing else getting interesting fast, and it certainly does not look good. The Financial Times branded the harsh reaction from China as elevating the US action to “a full-blown trade row.”

When trade volumes plunged late last year, most commentators expected a rise in protectionism. There hasn’t been much in the way of overt action, yet, perhaps in the hope that government intervention would work and the crisis would pass quickly.

But protectionism is driven by the desire to protect jobs. Unemployment has not peaked in the US, and some analysts suggest that China’s job losses are far worse than the 20 million often bandied about, more on the order of 30 to 50 million. So political pressure is set to intensify.

The New York Times treats the Chinese reaction as a surprise. But the tire tariffs relied upon a special provision in the WTO agreement for China’s entry that set a lower bar for trade violations than the normal anti-dumping sort. This is the first time that rule has been used as the basis for an action against China, and China may feel it important to fight that precedent.

Daniel Drezner:

When the Bush administration did what it did, it was fulfilling a campaign promise to the state of West Virginia steelwokers.  Fortunately, the rest of Bush’s winning political coalition was not seeking trade relief.  So the protectionist instinct pretty much ended with the steel tariffs — and everyone in the Bush administration knew that they’d be overturned by the WTO eventually.

With the Obama administration, however, this feels like the tip of the iceberg.  Most of Obama’s core constituencies want greater levels of trade protection for one reason (improving labor standards) or another (protecting union jobs).  This isn’t going to stop.  “Trade enforcement” has been part and parcel of Obama’s trade rhetoric since the campaign.  The idea that better trade enforcement will correct the trade deficit, however, is pure fantasy.  It belongs in the Department of Hoary Political Promises, like, “We’ll balance the budget by cracking down on tax cheats!” or “By cutting taxes I can raise government revenues!”  It.  Can’t.  Happen.

If I knew this was where the Obama administration would stop with this sort of nonsense, I’d feel a bit queasy but chalk it up to routine trade politics.  When I look at Obama’s base, however, quasiness starts turning into true nausea.

Developing…. in a very, very scary way.

Dave Schuler:

We face a conundrum. We have plenty of trade grievances with China and we’ve already filed a half dozen different complaints against China with the WTO that are awaiting resolution. Among our greatest concerns in trade negotiations are routine Chinese ignoring of U. S. intellectual property rights. Additionally, China’s de facto pegging of their currency to ours is arguably one of the forces behind the asset inflation that is one of the root causes of the economic problems we’ve been suffering for the last year or so.

However, as I watch these events unfold I can’t help but worry that we’re seeing the economic equivalent of the assassination of Archduke Ferdinand in which all of the great powers hurtle willy-nilly towards a truly stupid trade war.


China is demanding talks with the U.S. and has filed a complaint to the World Trade Organization on Barack Obama’s decision to impose tariffs on tires from the Asian nation.

“China’s requirement for talks with the U.S. is a proper practice to exercise its rights as a WTO member and is a practical move to defend its own interests,” Yao Jian, the spokesman for China’s Ministry of Commerce, said in a statement posted on its Web site today.

Obama announced duties Sept. 11 of 35 percent on $1.8 billion of automobile tires from China, acting on a complaint by United Steelworkers union against the second-largest U.S. trading partner. China said yesterday it will begin dumping and subsidy probes of chicken and auto products from the U.S.

UPDATE: Stephen Spruiell at NRO

Conn Carroll at Heritage

UPDATE #2: Noam Scheiber at TNR

Drezner responds

Scheiber responds to Drezner

Drezner and Reihan Salam at Bloggingheads

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Goodbye Lehman Brothers, Though I Never Knew You At All


A year ago, Lehman went down, the spark that caused the collapse.

Joe Nocera in NYT:

As we approach this anniversary, though, I’ve begun to question that conventional wisdom [that Lehman should have been saved]. Yes, the fall of Lehman Brothers set off a contagion of panic. And I’m still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But I’ve become convinced that, if Lehman had been saved, the collapse would have occurred anyway.

John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.

A week ago, a Reuters reporter traveled to Richard Fuld’s vacation home in Ketchum, Idaho, to see if the former Lehman chief executive would say anything about the anniversary. (When Mr. Fuld walked outside to meet her, he said, “You don’t have a gun; that’s good,” according to the reporter.)

Standing in his driveway, leading, as ever, with his chin, Mr. Fuld talked about the “pummeling” he had taken for presiding over the bankruptcy. “They’re looking for someone to dump on right now and that’s me,” he said. “The facts are out there. Nobody wants to hear it, especially not from me,” he added.

Mr. Fuld’s bitter remarks reflect the way many former Lehman executives feel, even now, about the fact that their firm was the only one to go under during the crisis. After all, they say, Lehman’s mistakes — too much leverage, an overreliance on shaky real estate assets, playing down the risks on its balance sheet — were the same mistakes just about every firm made. Bear Stearns made those mistakes — and was rescued. Citigroup made those mistakes — and was rescued.

John Carney at Clusterstock:

The argument Nocera makes is that it took the collapse of Lehman to make the markets and the government sit up and take notice about how sick the financial sector had become. In the months between the collapse of Bear Stearns and Lehman, the markets and government had been in denial, thanks in part because JP Morgan’s goverenment backed acquisition of Bear had made it look like their was an easy way out. Lehman’s collapse was the signal that finally made the world realize that the finacial system was in deep distress, packed with too much risk and teetering on the edge of oblivion.

Ellen Brown in HuffPo:

Although Lehman Brothers filed for bankruptcy on Monday, September 15, 2008, it was actually “bombed” on September 11, when the biggest one-day drop in its stock and highest trading volume occurred before bankruptcy. Lehman CEO Richard Fuld maintained that the 158 year old bank was brought down by unsubstantiated rumors and illegal naked short selling. Although short selling (selling shares you don’t own) is legal, the short seller is required to have shares lined up to borrow and replace to cover the sale. Failure to buy the shares back in the next three trading days is called a “fail to deliver.” Christopher Cox, who was chairman of the Securities and Exchange Commission in 2008, said in a July 2009 article that naked short selling “can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.” By September 11, 2008, according to the SEC, as many as 32.8 million Lehman shares had been sold and not delivered — a 57-fold increase over the peak of the prior year. For a very large company like Lehman, with plenty of “float” (available shares for trading), this unprecedented number was highly suspicious and warranted serious investigation. But the SEC, which was criticized for failing to follow up even on tips that Bernie Madoff’s business was a Ponzi scheme, has yet to announce the results of any investigation.

More Questions

Other questions about the Lehman collapse are raised in David Wessel’s July 2009 book In Fed We Trust. Why was Bear Stearns saved from bankruptcy but Lehman Brothers was not? How could the decision makers not realize the dire consequences of letting Lehman go down?


All of this suggests that Lehman Brothers did not just fall over the brink but was pushed. Judge James Peck, who presided in the bankruptcy proceedings, said “Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets.”

If Lehman was indeed sacrificed, who pushed it and to what end? Some critics point to Henry Paulson and his cronies at Goldman Sachs, Lehman’s arch rival. Goldman certainly came out on top after Lehman’s demise, but there were other possibilities as well, involving more global players. The month after Lehman collapsed, Gordon Brown and the EU leaders called for using the financial crisis as an opportunity to radically enhance the regulatory power of global institutions. Brown spoke of “a new global financial order,” echoing the “new world order” referred to by globalist banker David Rockefeller when he said in 1994:

We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the new world order.

Richard Haas, President of the U.S. Council on Foreign Relations, wrote in 2006:

Globalisation . . . implies that sovereignty is not only becoming weaker in reality, but that it needs to become weaker.

Sovereignty is one of these cherished rights that nations will give up only with “the right major crisis.” Gordon Brown put it like this:

Sometimes it takes a crisis for people to agree that what is obvious and should have been done years ago, can no longer be postponed. . . . We must create a new international financial architecture for the global age.

In April 2009, Gordon Brown and Alistair Darling hosted the G20 summit in London, which focused on the financial crisis. A global currency issue was approved, and an international Financial Stability Board was agreed to as global regulator, to be based in the controversial Bank for International Settlements in Basel, Switzerland. The international bankers who caused the financial crisis are indeed capitalizing on it, consolidating their power in “a new global financial order” that gives them top-down global control. Just some food for thought as September 11 rolls around again.

Matt Phillips in WSJ:

Today’s anniversary of the Lehman Brothers implosion has given market watchers the chance to look back and exactly how far we’ve come since the height of the crisis. Here are a few selections from some of the notes we’ve been seeing.


S&P 500: “With the S&P 500 down 17% since Lehman, and although the economy has deteriorated more than consensus expectations, the extreme negative outcomes that were widely predicted have not materialized. Therefore, one can understand how despite a 55% rally, the investing public will likely be attracted to share prices that have gone nowhere in 11 years in an economy that will be rebounding in the intermediate term.” –BTIG

Mark Deen and David Tweed at Bloomberg:

Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

Naked Capitalism:

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some very smart people say that the big banks – even after many billions in bailouts and other government help – have still not repaired their balance sheets. Reggie Middleton, Mish, Zero Hedge and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.

Simon Johnson and Peter Boone at Baseline:

The pre-crisis activities and portfolios of Barclays, Goldman Sachs, and other “survivors” of this crisis were only slightly different from Lehman Brothers or Bear Stearns, which failed.  The “good” banks also securitized subprime assets, helped build the intricate web of IOUs between banks and insurance companies, and leveraged their balance sheets to enormous levels.  The winners were not better, they were just smart enough to make sure someone else held the bad assets when the music stopped, and they were powerful enough to win generous bailout packages from their governments.

The danger we face is that, by bailing out these institutions and rewarding failed managers with new powerful positions, we have now created a much more dangerous financial system.  The politically well-connected, knowing they will most likely do fine in the next crisis, is now highly incentivized to take even greater risk.

Once we admit this profound problem in our system, we can begin to think of the radical measures needed to solve it.  There is no doubt these solutions will include much greater capital requirements, so that bank shareholders know that they face substantial losses if their ventures fail.

But, we also need to ensure that our regulators are not captured by the banks that they are meant to oversee.  This means we need to put checks on financial donations to political parties, and we need to buttress our regulators with more intellectual firepower and financial resources, along with rules that ensure independence, in order to be sure they can act in the interests of the broader population.

UPDATE: James Surowiecki in The New Yorker on Nocera’s argument

Matthew Yglesias on Surowiecki

Felix Salmon on Surowiecki and Nocera

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Filed under Economics, History, The Crisis