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Obama goes from Spock to Kirk in one speech.

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But is it too late?

Last night, Barack Obama finally put the hurt on the Republicans. Listening to Senator John Kyl’s floundering and blustering at the State of the Union address shows that it clearly hit home. Obama did what he had to do. He diverted blame for the economic shit sandwich firmly to the Bush Administration and told America that he hated the bank bailout in no uncertain terms. His frank, confident tone was a breath of fresh air, a pleasant surprise that left us wondering, where his this guy been for the last year?

It took the shock of the Massachusetts upset to get the President thinking he needed to be speaking the people’s language. And he did just that. It’s a long shot to suggest that a single speech will change the course of events in a significant way, but it could – if it’s the beginning of a full-on, sustained populist campaign. The speech was peppered with great sound bites, but one of the themes I was impressed by (partly because I’ve been touting the idea for 18months) was the idea that the government should be run like the American family. Bringing the business of government down to a human level is always a great idea with voters.

In my last post, I suggested that the President get on the road, work out of Air Force One, and talk to the people in this country that are really hurting. Getting into campaign mode, at the same time as attacking Wall Street,  pushing the “good for business” aspects of Healthcare reform and other stimulus efforts, as well as enacting serious efforts to stem the foreclosure crisis will really help. As for the deficit, the message is a smart one. Let’s cut it! Except that we can’t in any meaningful way – and because economic recovery will do the job far better. People (who’ve wholeheartedly drunk Reaganomic kool-aid) like the idea.  But deep down they know that actually cutting the deficit during the dark times would hurt them so they aren’t really interested in actually doing it.

Keep it up, Mr. President. Don’t make this a one shot lighter.

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Written by coolrebel

January 28, 2010 at 2:30 am

AIG. Was the Bailout From Hell a Mistake?

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The word du jour right now is “rathole”, a rather ugly expletive that equates to plughole, drain, succubus, and other such unpleasantries. It may however be too polite a phrase for what is going on right now with the bailout of AIG, the government’s new pet project that looks like it’s going to hand the downpayment on fixing the nation’s health care shambles to Goldman Sachs and their ilk.

Just like everyone else in this country, I’m spitting with fury at the idea that the government is handing over money to keep these clowns out of the poorhouse. The bonuses should have been blocked way before they went public, and the fact that the President is being exposed to ye olde “What did you know and when did you know it?” game only eight weeks into his administration does not bode well.

Then there’s the irksome question of whether the meeting where it was decided to keep AIG alive in September of last year was actually a little joke played on us by Goldman Sachs. (After all the key people around that table were Paulson, ex-boss of GS, Blankenfein, current boss of GS, and Tim “someone put me out of my misery now” Geithner). We’ve known for years that Goldmans was a class above every other investment bank, but their ability to game the system seems utterly unparalleled now.

Finally, there’s this little nugget. We were told that if we’d let AIG die the global banking system would have collapsed. That the $1.6 trillion in Credit Default Swaps (CDSs) that they sold to the world’s top financial institutions who’d sunk their dough into those toxic assets would suddenly go away, leaving them totally exposed, and toppling like dominoes. Makes sense, right? I mean, if the insurance company backing those toxic assets goes belly up then the world’s banks are left holding the bag. Stands to reason.

Or does it?  With the caveat that I really don’t know what I’m talking about, I’m not so sure. And here’s why.

Let’s start with what everyone knows. We know that the slice and dice mortgage derivatives that the best and the brightest of the world’s financial institutions got suckered into buying because of their AAA ratings (purchased AAA ratings it should be noted) went really, really bad. We know that this stuff has been written down all over the world, but there’s an awfully long way to go.

We know that financial institutions and hedge funds bought AIG’s Credit Default Swaps to the tune of $1.6 trillion (AIG’s own numbers) as a way to insure themselves just in case these investments went bad. We know that AIG didn’t have to back the CDSs with assets like they have to with regular insurance. And if we know that, I’m guessing the guys who are holding these CDSs knew it way before we did. They also knew that there was no way AIG would be able to find more than a fraction of the $1.6 trillion in the “very unlikely” event the assets went bad. In short, as soon as the rats started leaving the sinking ship when Bear Stearns went down everyone knew most of the Credit Default Swaps were worthless.

Wait. Rewind that. “Everyone already knew most of the Credit Default Swaps were worthless.” Far from being the keystone holding the system together, AIG might in fact have been utterly irrelevant to the future of the world’s financial system, except to elite banks like Goldman Sachs. Goldmans, it turns out, were one of the first counterparties out and got paid back in full for their bad bets – by the US taxpayer. Which goes a long way to explaining the scare story that Paulson and Blankenfein (let’s call them the Goldman boys) worked on poor, put-upon Tim Geithner. Paulson signed the check over to AIG, the rathole was dug, and the payouts were readied. Goldman Sachs didn’t want to take the PR hit of taking TARP funds direct, but by instigating “Operation Chump”, ie filtering the TARP funds through AIG first, was a fine and dandy idea. Ka-ching for Blankenfein and Paulson. Ka-ching for the top banks on the planet who didn’t want to face the music. Ka-pow right in the keester for the rest of us.

One could be pardoned for suggesting all this doesn’t pass the smell test. That perhaps AIG could have been left to wither on the vine, and bypassed entirely in favor of the bad bank plan that’s on the cards now, which would have saved us that health care down payment. Or that perhaps the AIG bailout (or “Operation Chump”) might well have been a ruse to salvage the reputation of the top banks.

There are three very painful ironies at the heart of all this. Here’s number one. What made AIG critical to the world economy was the act of saving it.  If AIG had failed, its mainly worthless CDS contracts would have continued to be, well, worthless. But once we made the decision to prop up the company, the world’s banking system knew it had found a sucker to back those contracts again and again. That sucker would be….us.

The second irony is this, If we’d let AIG fail, we would have been forced to price the toxic assets at the heart of the credit crisis, which is the only true way that recovery from the crisis can be quantified. But backing AIG’s CDS’s undermines that vital requirement. Now all we have to do is bilk the US taxpayer for billions upon billions more to honor Credit Default Swaps of banks all over the world at the asking price.

Finally, irony number three. The public is readying a lynch mob. Congress wants blood. Even President Obama is mildly indignant, but it’s all for naught. Because bailing out AIG is the biggest example of moral hazard imaginable. When it comes to punishment, actions speak louder than words. All the feiry rhetoric about AIG execs falling on their swords means nothing if Uncle Sam’s still signing the checks to bail these clowns out. Big banks made really bad bets, then bought snake-oil insurance to back them. Two awful decisions for which they should pay the price. Except that we’re paying it for them.

Someone, please tell me I’m wrong about all this.

The AIG Gravy Train – It Just Keeps Getting Worse

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Joe Nocera of the New York Times wrote a great post today which adds more grist to the mill on the price discovery issue relating to AIG’s credit default swaps (CDSs). Not only does the government end up propping up the most destructive derivative behavior around, but it does so while allowing AIG to maintain the confidentiality of their shady transactions.

And guess who that protects? You’re spot on. It shields AIG’s counterparties, banks, investors, and lenders who were looking for a way to ‘insure’ themselves on the quiet while they pigged out at the trough just before the fall. Nocera makes the point that this doesn’t sit well with the President’s call for transparency and he’s right. But it’s yet another example of the contradictions that Obama seems to be displaying. High principle on the one hand and almost Bush-like duplicity with the status-quo on the other. It’s becoming increasingly clear that Tim Geithner is lurching from crisis to crisis just like his predecessor. But the situation is far worse now. Paulson was a stooge and everyone knew it, a placeholder and agent for the Street. Geithner is supposed to know better. But he doesn’t seem to be able to escape the shackles of hide-bound “group-think”. Wasn’t the President supposed to put a stop to this kind of thinking?

Written by coolrebel

March 2, 2009 at 8:14 am

Robert Reich and Howard Dean. Where are They?

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Many left-leaning Democrats are asking the same question. Reich would have been a superb choice at Treasury and Dean an obvious choice at HHS. Both are tough, forward-thinking progressive politicians with total command of the briefs in question.  Many people inside and outside the Beltway are surprised that neither man was even in the running. Joe Trippi, a top Democratic consultant who ran Howard Dean’s 2004 Presidential bid, “I think Robert Reich would have been a better appointment than Geithner”.

And there are many others who agree.

So why aren’t they the nominees?

There are many, many reasons.

First, both Robert Reich and Howard Dean are liberals, and that means they don’t mesh with Obama’s all inclusive ‘new politics’ (or centrism as it’s otherwise known). They are mistakenly seen by the White House as skilled ideologues in a post-partisan world.

Secondly, both Reich and Dean would actually work to enact real change in the two most important domestic arenas in government. Simply put, they would define Obama’s presidency at home. Reich would lead the charge to right the economy by taking control of the banking system, tougher regulation and corporate realignment, while pushing hard for targeted infrastructure spending and less tax cuts, while Dean would crusade for the  universal healthcare system America needs. Is Obama prepared to put his first term in the hands of two guys who will actually do what’s necessary rather than what’s prudent? Naaah. Sadly, change is fast turning out to be a slogan, rather than a strategy.

Thirdly, the opposition to both Reich and Dean would have been deafening inside and outside the beltway. Installing Reich in Treasury would have been a huge red flag to Wall Street. And if one thing is becoming increasingly clear Obama is still clearly enthralled by the Street, despite the fact that it’s a huge part of why we’re on the edge of a worldwide depression. Put Dean in HHS and the sound you’d hear would be the health insurance lobby locking and loading their checkbooks for a long fight. Both these guys would signal that the Prez means business. As for the GOP, to suggest they’d be frothing at the mouth would be an understatement. Some of them might even cry.

Fourthly, there’s politics. Keeping two powerhouses like Reich and Dean out of the club might have seemed like a good idea to another powerhouse. According to some DC bloggers, Rahm Emmanuel has long been feuding with Dean and perhaps a word in Obama’s ear would have been enough to have the former Governor of Vermont and DNC chair frozen out of the health post. As for Reich, he remains an economic advisor to the President, but confirmed that he hadn’t been approached to be part of the Obama cabinet.

After the Judd Gregg and Daschle Debacles, HHS and Commerce remain open. There’s still time for Obama to do the right thing.

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Written by coolrebel

February 17, 2009 at 3:18 pm

The Definition of Normal by George W. Bush

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It’s more than a tad ironic that one of the last and most important acts of the outgoing Bush administration will be to attempt an end-run around Republicans in Congress and allow a bridge loan to the US automakers from the the $700 billion set aside all those months ago for the purchase of “toxic securities”.

The White House supported this turnaround with a fabulous piece of Bush logic. To wit; In normal times, the Bushies would have much preferred that the market decide the fate of the automakers, but these, it suggests, are not normal times, and therefore extraordinary measures are needed.

Not a bad version of the West Wing Shuffle, one might think. Except the logic has one drawback. It is as a result of years of allowing the market to take its ‘normal’ course that we are in the mess we are in now. One doesn’t test the beliefs of true free market ideologues during normal times. The only time they can be truly tested is in extremis.

You’d think that free market ideologues would be true to this logic, they are supposed to be, after all, Darwinian in their rigor. In their estimation, a company struggling in the marketplace must be allowed to die, just like a lame wildebeest must be allowed to be consumed by the cheetah on its tail. Upsetting the relationship between victor and vanquished is to deny the core of savage, brutal, evolutionary – or in other words free market principles. But the ideological unity of the free marketeers has been shattered forever. Some are still holding the line – and look silly and self serving doing it. Most have abandoned the fort, and now believe that the law of the market jungle must be tempered for the common good.

So much for the intellectual purity of the Conservative movement. It was always just a shaky front, and at the first sign of a tornado, it’s buckled like the set on a Keystone Cops movie lot. It was David Brooks who recently said the Reagan Revolution was over. Now he tells us. For years, we were subjected to a steady flow of rhetoric about the virtues of the marketplace. It was all we ever heard. It was such a simple pitch, so full of the natural justice of things we were told. Our entire legislative strategy became based on it. But the new normality those policies created was never tested until now. And even according to one of the chief footsoldiers of the Revolution, they were found to be profoundly wanting. What a total waste of time it turned out to be for one and all.

Unfortunately, it is not Thatcher, Reagan, Bush and their acolytes and puppeteers that will face the consequences.

It is our children.

Written by coolrebel

December 13, 2008 at 7:19 am

Some Bailouts Are Big Gifts. Some Bailouts Are Bad Loans.

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Maybe it’s the rise of the Internet that did it, but there are an awful lot of lemmings in the fourth estate these days. Once the zeitgeist gets hold of a word it’s everywhere fast. That’s especially true of catch-all terms that lose their meaning the moment anyone begins to dig even a tiny bit deeper into a story.

Take the term “Bailout”.

In economic terms it means ‘assistance to a financial or other institution in distress’. But assistance can mean anything from a loan that nobody else will give with very stringent terms to a total and utter gift.

There have been a ton of bailouts in the last few months. We don’t have to list them all, we’re just going to focus on two ‘institutions’, Citigroup and the Big Three Auto manufacturers.

Let’s look at what these two have in common. Both of them are vast with global reach and influence.  Both of them made awful business decisions in the short, medium and long term that led them to the brink of collapse.

Now let’s look at what people perceive they have in common, namely that both are “too big to fail”, another term of limited meaning. Citigroup is too big to fail because of the depth of its interconnected interests throughout the financial world. The Auto Industry is too big to fail because whole regions of the country depend on it for their economic welfare.

Finally let’s examine where they are different. Citigroup is a financial institution that buys and sells assets with client and depositor funds. It employs in the region 300,000 people worldwide. The Auto industry makes cars and trucks, is the backbone of US manufacturing and directly and indirectly employs around three million Americans.

It’s a tribute to how well the Finance, Insurance, Real Estate or FIRE sector has sold itself over the last twenty years of the Reagan Revolution that a bloated, shapeless and rudderless behemoth of a bank should be regarded so highly, while the jewel of America’s industrial crown should be treated as if it’s already on the scrapheap.

That contrast is perfectly reflected in the way that the United States Congress and the Administration has handled the ‘bailouts’ to Citigroup and the Auto Industry.

Citigroup received the largest bailout in history without getting grilled by Congress, or having to show any contrition whatsoever because the $700 billion TARP program had already been signed into law. It has received a total of $45 billion in TARP funds, and the Government will cover 90% of the losses from its gigantic, unknowable mound of toxic mortgage debt in its $335 billion dollar loan portfolio, after the company absorbs the first $29 billion. This is the key to the bailout. Without the Government guarantee, confidence in Citi would have disintegrated in a matter of days after the rot set in about a month ago. In short it would have been finished, and we’d have been in a second credit freeze that would have made us wish that more than anything we could have the first one back. And in return for totally saving Citigroup from total collapse, the Government get a $27 billion sliver in preferred stock or warrants, the bosses lose their bonuses or parachutes, and the Feds get an office in Citigroup’s HQ to watch over operations. Not a bad deal.

Total potential bailout: Around $300 billion.

The Auto Industry got an incredibly rough ride in Congress, where they essentially grovelled for some change, not once but twice. They were castigated and humiliated in a series of hearings that took their cue squarely from the Spanish Inquisition. In return for Government funds, the Industry has to completely change its business model, completely overhaul its working practices and product ranges, and take orders from a “Car Czar” who would have tremendous power over Auto Industry decision making, including sign-off rights on any expenditure over $25 million, or in other words, anything remotely important. Auto Industry executives also take a huge hit (including a no-fly zone for their private planes), and the Government also get massive equity stakes in GM and Chrysler, because their market cap is so pitiful. (Ford decided to go it alone and not take Government money).

Total potential Bailout: $15 billion.

Now, I’ve never been much of a whiz at math, but by my reckoning the entire Auto Industry potentially gets 5% of what Citigroup is potentially getting. If Citigroup had received $15 billion instead of $300 billion it would now be owned by some unknown businessman from Dubai, who’d have bought it at the financial equivalent of a garage sale as a present for one of his wives. But the Auto Industry has to make do, its unions have to basically stick a fingers in every member’s eye, and the people of Michigan, Ohio, Kentucky and Wisconsin have to be extremely grateful for not very much.

Now it’s important to mention that if Citi and the Auto Industry had to live without bailouts the world would not cave in on itself. Bailouts aren’t about protecting ‘the little people’ who actually work for these companies, they’re about protecting management and shareholders. Bankruptcy wipes out both.

But putting aside whether or not a ‘bailout’ in either case was justifiable or advisable, the difference in the way Citi and the Auto Industry have been treated is staggering both in magnitude and detail . Their experiences are so utterly different, and yet are both referred to as having been “bailed out”. The press hardly blinked when Citigroup got its massive infusion of cash and confidence. The biggest and most egregious of Paulson’s handouts to his golfing buddies was all over so fast. At the same time, every detail of the Auto Industry bailout has been dissected to the point of absurdity, down to the make of hybrids that the bedraggled CEO’s sat in for the drive from Detroit to DC for their Congressional do-overs the other day.

This seems like a massive and illogical case of double standards at play, and ‘bailout fatigue’ doesn’t really describe it. TARP was set up at a time when everyone was truly panicking, and panic is not exactly a reliable driver of good policy. It was also limited to the financial sector because the panic was in the financial sector. In one fell swoop, America dumped nearly a trillion dollars into bailing stuff out. So now they’re getting snippy about a mere $15 billion for the car companies. The ROI on the financial bailout is hard to measure but if the Auto Industry were to disappear, the states of the upper Mid West would go from being the ‘rust-belt’ states to the ‘no-belt’ states. They’d be lucky to find a piece of string to hold up their pants. Millions of people would lose their jobs, livelihoods, and futures. If Citi were to go down, the Financial succubus would survive as it always does by hungrily digging into the entrails of one of its erstwhile gods; shareholders, executives, bank tellers, and office cleaners be damned.

Both Citi and the Auto Industry are going to have been “bailed out”. One of the bailouts is a huge gift, the other is a loan-shark’s dream.  When the same word is used to describe polar opposites, it’s a word without meaning.

Written by coolrebel

December 8, 2008 at 2:38 pm

Ford + GM Have Been Making Small Cars For Years. In Europe.

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Recognize these?

getimage1

2au_largeThe one on the left is a Ford Ka, the one on the right is GM Vauxhall Corsa.

Small, good-looking, low cost, not at all thirsty, and sold in Europe for years.

Ford and GM during their latest congressional grovel sessions, said they’d tool up to produce small cars in the US. Great idea, except they’ve been making small cars for decades. Good ones too.

Here’s the rest of the Ford Europe Range, and here’s the GM Europe Range (brand name Vauxhall). Take a look. Would they be able to take on Toyota and Honda in the US? Definitely.

They both have great well designed ranges that could be really competitive in the US, with low emissions, great gas mileage (almost as good as a hybrid for way less money) and far better European styling than we’re used to here in the US even from the Japanese.

So why weren’t they for sale here?

Why weren’t their European versions (with left hand drive) shipped to the US? Why wasn’t the tooling imported to US factories years ago, to diversify their domestic ranges? Ford and GM could have saved themselves, and their dealers, and their workers, and all the people who depend on the car industry.

The answer is short-term profit hunger. Selling these cars makes less money than selling an SUV. Ford and GM tried to squeeze out the last drop of profit from the SUV and didn’t plan ahead, like any good business should. As usual, blinkered incompetence at the top is the primary reason. But there is another. Legacy costs. Ford and GM labor under onerous union agreements and health/pension benefit arrangements that eat up massive amounts of profit potential per car. If these costs were lower, profits from smaller cars would have been higher, and management would have been more willing to maintain them in their US ranges. But instead of dealing with the issue then – management waited until it was essentially too late. GM + Ford have taken massive hits to their brands that will take decades to eradicate.

Then there’s the issue of globalization.

We’ve been talking about it for years. But Ford and GM have been making cars in Europe for more than seventy-five years, way before globalization was even a word. They were among the first businesses in the world to go global. And yet, their US markets were profoundly devoid of the globalization they pioneered. The US market was provincial and protected. It was only a matter of time before Ford and GM paid the price.

That moment arrived in the last year. In spades.

Written by coolrebel

December 3, 2008 at 12:37 am