Sunday, November 30, 2008

Friday, November 28, 2008

Latin America

Brooks -- The Big Picture -- Excellent

What Does it Mean?

(c) 2008 F. Bruce Abel

When CNBC says "Citi rose 60% yesterday" there are implications and errors embedded therein. For someone who bought and held "C" from 55 down to 2 1/2 the statement is meaningless and irritating. So what that it came back from 2 1/2 to 4 or 6?

The statement does have tremendous "meaning" to someone who got out of the market January 1, 2008 and invested his cash in Citi the day before the "Citi rose 60% yesterday" comment, at 2 1/2.

Another "error:" 60% of 2 1/2 is little, dollar-wise. 60% of 55 is a lot.

Krugman -- This One's Wonkish but Huge!

Op-Ed Columnist
Lest We Forget

Published: November 27, 2008
A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”
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There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”
Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved.
About those precedents: Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?
Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?
Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?
One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?
There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.
Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.
Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.
In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.
Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. Will the Fed’s ever more aggressive efforts to unfreeze the credit markets finally start getting somewhere? Will the Obama administration’s fiscal stimulus turn output and employment around? (I’m still not sure, by the way, whether the economic team is thinking big enough.)
And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.
For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.
So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now.
More Articles in Opinion » A version of this article appeared in print on November 28, 2008, on page A43 of the New York edition.
Past Coverage
Geithner, Rescue-Team Veteran, Has Head Start in Seizing Reins (November 25, 2008)
Saving Citi May Create More Fear (November 25, 2008)
Awaiting Reaction to 3rd Try at Bailout (November 24, 2008)
THE RECKONING; Citigroup Saw No Red Flags Even as It Made Bolder Bets (November 23, 2008)
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Thursday, November 27, 2008

Verizon's Storm Reviewed by Pogue

I include this article mainly because I have a month-to-month Verizon contract and can get s Storm cheaply. Not after this review though.

Wednesday, November 26, 2008

A Chapter of Erie,M1

Duke Energy Charges for Bills Received December

Here we go into the winter. Last year's Duke Energy natural gas cost per ccf for Laurel Avenue property was $1.32 per ccf. So since December's bill will come in at $1.1779 per the attached, we have a bona fide reduction in rates so far this winter, to the tune of $.15 per ccf. Project that out to say 1500 ccf for the winter and that results in a $225 "savings" for other things. (Remember that December bill reflects November usage, i.e. what we are going through now.)
An almost identical calculation can be made for the Greenville property which is vacant and for sale.

Now let's talk about the Gas Cost Recovery Charge, the "GCR," which is more or less the base cost of gas to Duke Energy. See how volatile it is! The following figures are taken straight off my bills, which are on this blog -- just click on "ebills."Most recent month at the top. Note that summer GCR's are irrelevant to the residential user.

GCR Duke Energy Cinti:Usage Month Nat Gas

November 30, 2008 $.9810 (from above Apples-to-Apples filing of yesterday)

October 27, 2008 $1.03

September 28, 2008 $1.17

August 28, 2008 $1.41

July $1.41

June $1.24

May $1.16

April $1.14

March $1.19

February $1.03

Comment on Friedman Article

November 26, 2008 9:54 am
A lot of people, like the first poster, want to put the onus on the home buyers. Others point their finger at Fannie Mae, Freddie Mac, Frank and Dodds.The home owners were not acting out of greed. They wanted a home and the stability that comes with ownership.Fannie, Freddie (F&F) and the congressmen were using a capitalist system not out of greed but for the betterment of the country.When one takes the time to dig through the data, and I am surprised no one at the Times has done a through job on this, you find a different story. The closest the NYT did on the subject was the article/interview with the CEO of Fannie, Mr. Mudd.Take sub-prime mortgages and the secondary mortgage market. When I look up F&F's sub-prime exposure I find the number $58 billion. When I check on investment bank exposure I get various numbers, no one seems to know exactly, but the most common is around $1.5 trillion. That is 25 times the F&F exposure. More research shows that F&F were not that involve to any significant extent until after 2002. By 2004 they were fighting for their very existance in the secondary mortgage market as the investment banks were taking it over (see the Mudd article). By 2005 the investment bankers had and they did it through sub-prime mortgages, directly and indirectly.I place the onus on investment bankers who sought out the junk and created the market for it and those who did the bogus rating of their bonds. If there was any justice at all those in managment of those entities from 2000 to 2006 would be stripped of every penny and posession they own and their companies forfitted to the government. That would include Henry Paulson
— tim, iowa city

George Soros Interview -- Chain From Friedman Article etc.,1518,592268,00.html

It's Day Before Thanksgiving -- Still Friedman on my Mind

Oh, what the hell, other than the one case I'm working on, I'm going to keep the CNBC off today and dwell only on the Friedman article, the excellent comments thereon, and maybe walk my dog twice.

CNBC becomes irrelevant anyway. Common stocks? Forget it. Except for the wonderful analysis early in the day, it's a bunch of (although good and handsome) people spouting on about something they cannot grasp ("exactly where is the bottom of this stock market?").

Preferred stocks? Maybe (West Side Story anybody?) "fagetaboutit."

Bonds? Maybe "Officer Krumpkie about it."

Comment on Helplessness re Friedman's Article

November 26, 2008 6:45 am
There are surely few more horrible conditions in human experience than the feeling of utter helplessness. For weeks and weeks now we have been reading of the inadequacies of highly-paid, upper crust, well-educated people who have been running into the ground just about every major financial institution in the nation - and getting away with it. And it appears that no one - NO ONE - is in a position to turn things around in any way other than passing out unimaginable sums of government money - money that came from, or will come from, taxpayers like little old me and little old you. And it appears that there is no one - NO ONE - capable of managing these "saved" institutions except the people who were managing them when they went bust. And I, along with tens of millions of other taxpayers, am utterly helpless to do a damned thing about it, except write comments like this and letters to the editor.Hopelessness is horrible, dreadful, sick-making, demoralizing in the extreme; but do I, do you, have any choice in the matter? For pity's sake, we are being told, it appears, that so many of the factors in play while these institutions were being destroyed are outside the law that there are no grounds for indicting all the scores and scores, hundreds and hundreds of men and women who took the single actions, hour after hour, day after day, which when put together did as much damage to the nation's spirit as the pilots of the two planes that flew into the towers of the World Trade Center. One has to admit that there has been none of the cold-blooded murder of that horrendous day seven Septembers ago, But who is to say how many lives will be shortened, how many destroyed, by the stress and strain of having to deal with day-by-day ghastly situations for which they are not prepared.Rather than feeling help-less I would like to feel help-ful (which is what I usually am, or try to be, when I encounter misery and pain.) But WHAT can we little people do to help the most damaged victims of the loathsome behavior of the battalions of senior members of the finance industries, beyond shelling out on April 15 every year for the rest of our lives, our as-calculated-by-the-government shares of the cost of the "rescue packages" of 2008 and 2009.What can we do?Other than to feel helpless. And to try to understand (and then abolish?) a system of governance which allows (requires, I suspect he would say) the chairman of the House committee with oversight authority for the finance, insurance, and real estate industries to accept $800,000 - EIGHT HUNDRED THOUSAND DOLLARS - from people and institutions in those industries towards the cost of ONE year's election campaign.
— Ruskin, Buffalo, NY

Blog Within Comment on Friedman etc.

Especially, read his section on "Unconstitutional" remedies and bankruptcy being the only constitutional solution for altering mortgage products.

Comment on Friedman Article

November 26, 2008 6:21 am
Too bad you can't point to any reporting over the last few years by the NYT or the WSJ on a par with the article mentioned (yes, I read it too...with disgust...but hardly "shocked disbelief"). We did have Professor Doctor Krugman, but I don't recall your vigorous support for him. You think all this is something new? I suggest you and some others re-read (or, for most of you read) Charles Francis Adams' "Chapters of Erie." When I took securities regulation in law school, it was a small book the professor recommended to those who could not see why the "free-market" needed to be regulated. It makes better reading than certain "flat earth" gibberish.
— M. Johnson, Chicago

Comment on Friedman's Op-Ed

November 26, 2008 6:21 am
Mr. Friedman,Capitalism unleashed without almost any common sense regulation (since Ronald Reagan brought up his "government is the problem, not the solution" mantra) had a whole lot to do with this. The Republicans (as ham handed as they have been the last eight years) managed to frame the dialogue brilliantly. Almost no one on either side of the aisle seemed to dare to say "do we know what we are getting ourselves into?" possibly for fear of being labeled "liberal", "Socialist" "anti-freemarket" and other such loaded terms. Why did no one point out that as with most things in life, too much of almost anything is not good whether it is regulation or deregulation?Where are the "government is the problem not the solution" poodles now that we the taxpayers(government)seem to be bailing some company or other every weekend?Has any one of these people who made multimillion dollar bonuses offered to help the nation out by giving up even a tiny portion of their bonuses from any of the last five years of this bacchanal?
— S.Cavett, NJ

Comments on Friedman's Spot-On Article

Friedman -- A Classic

Op-Ed Columnist
All Fall Down
comments (78)

Published: November 25, 2008
I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.
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Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.
So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.
Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.
These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences — many, many, many.
Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.
“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”
Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.
“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”
Lewis continued: Eisman knew that subprime lenders could be disreputable. “What he underestimated was the total unabashed complicity of the upper class of American capitalism... ‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.”
That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.
Maureen Dowd is off today.

Tuesday, November 25, 2008

Cassidy's Article in New Yorker

Buffett to Offer Details on Derivatives

See, Warren's derivatives are so long that he doesn't have to put up the money until 2019. But he gets the up-front fees on them now.

Who knows? Warren may be the worst of them all. He just doesn't have to reveal.

The article:

Prostate Cancer

Came across this well-written article. Hard to label this one.

Michael Lewis -- A New Book He Edits

Readers of this blog know that my favorite is Michael Lewis, who, with his book Liar's Poker, exposed Wall Street for what lay ahead. You will see that reference to him dominates my list of blogs, because so many of the crazy frauds we are facing from Wall Street are spin-offs of what he saw (and participated in as a bond trader with Saloman Brothers [remember them?]).

Michael was interviewed on NPR this morning.
So I searched his new book, a compendium. Here's a cite to a review in yesterday's Pittsburgh Post-Gazette:

Here's the chapter list: Introduction:

Inside Wall Street's Black Hole

Part I: A Brand-New Kind of Crash

1. Stephen Koepp, "Riding the Wild Bull"
2. Scott McMurray and Robert L. Rose, "The Crash of '87: Chicago's `Shadow Markets' Led Free Fall in a Plunge That Began Right at Opening"
3. From the Brady Commission Report
4. Tim Metz, from Black Monday: The Catastrophe of October 19, 1987 ... and Beyond
5. Michael Lewis, from Liar's Poker: Rising through the Wreckage on Wall Street
6. Stephen Labaton, "The Lonely Feeling of Small Investors"
7. Richard J. Meislin, "Yuppies' Last Rites Readied"
8. Eric J. Weiner, from What Goes Up
9. Lester C. Thurow, "Did the Computer Cause the Crash?"
10. Terri Thompson, "Crash-Proofing the Market; A Lot of Expert Opinions, but Few Results"
11. The Economist, "Short Circuits"
12. Robert J. Shiller, "Crash Course: Black Monday's Biggest Lesson -- Don't Run Scared"
13. Franklin Edwards, from After the Crash

Part II: Foreigners Gone Wild

14. Reed Abelson, "Mutual Funds Quarterly Report; The Forecast Looks Brighter for Adventure Travel"
15. The New York Times, "Thailand Warns Currency Speculators"
16. David Holley, "A Thai Business Wonders, Will It All Crumble?"
17. Paul Krugman, Reporter Associate Jeremy Kahn, "Saving Asia"
18. Interview with Rob Johnson, from Frontline's "The Crash"
19. The Economist, "Finance and Economics: A Detour or a Derailment?" 20. Michael Lewis, "Pulling Russia's Chain"
21. Interview with Jeffrey D. Sachs, from Frontline's "The Crash"
22. Michael Lewis, "How the Eggheads Cracked"
23. Joseph Stiglitz, "10 Years After the Asian Crisis, We're Not Out of the Woods Yet"
24. Keith Bradsher, "Asia's Long Road to Recovery"
25. Choe Sang-Hun, "Tracking an Online Trend, and a Route to Suicide"

Part III: The New New Panic

26. The New York Times, "Bigger Netscape Offering"
27. The New York Times, "Underwriters Raise Offer Price for Netscape Communication"
28. Laurence Zuckerman, "With Internet Cachet, Not Profit, a New Stock is Wall St.'s Darling"
29. Carrick Mollenkamp and Karen Lundegaard, "How Net Fever Sent Shares of a Firm on 3-Day Joy Ride"
30. Michael Lewis, "New New Money," from The New New Thing
31. Rebecca Buckman and Aaron Lucchetti, "Cooling It: Wall Street Firms Try to Keep Internet Mania from Ending Badly"
32. Jack Willoughby, "Burning Up"
33. John Cassidy, from [...]: The Greatest Story Ever Told
34. Erick Schonfeld, "The High Price of Research: Caveat Investor: Stock and Research Analysts Covering Dot-Coms Aren't as Independent as You Think"
35. Katherine Mieszkowski, "[...]: Internet Companies Threw Millions into the Air at he Super Bowl. They're Still Pretending They Scored a Touchdown."
36. Mark Gimein, "Meet the Dumbest Dot-Com in the World"
37. James Surowiecki, "The Financial Page: How Mountebanks Became Moguls"
38. Jerry Useem, "Dot Coms: What Have We Learned"
39. Michael Lewis, "In Defense of the Boom"

Part IV: The People's Panic

40. Dave Barry, "How to Get Rich in Real Estate," from Dave Barry's Money Secrets
41. John Hechinger, "Shaky Foundation: Rising Home Prices Cast Appraisers in a Harsh Light"
42. John Cassidy, "The Next Crash"
43. Robert Julavits, "As Bubble Speculation Rises, Industry Sees Little Fear"
44. Peter S. Goodman, "This Is the Sound of a Bubble Bursting"
45. Christopher Dodd, Opening Statement of Chairman Christopher Dodd, Hearing on "Mortgage Market Turmoil: Causes and Consequences"
46. James Surowiecki, "Subprime Homesick Blues"
47. Roger Lowenstein, "Triple-A Failure"
48. Larry Roberts, from "Rudolph the Red-Nosed Reindeer"
49. Kate Kelly, "Bear CEO's Handling of Crisis Raises Issues"
50. Michael Lewis, "What Wall Street's CEOs Don't Know Can Kill You"
51. David Henry and Matthew Goldstein, "The Bear Flu: How It Spread"
52. Michael Lewis, "A Wall Street Trader Draws Some Subprime Lessons" 53. Paul Krugman, "After the Money's Gone"
54. Matthew Lynn, "Hedge Funds Come Unstuck on Truth-Twisting, Lies" 55. Gregory Zuckerman, "Trader Made Billions on Subprime"

What Caused the Panic Over Morgan Stanley

NOVEMBER 24, 2008
Anatomy of the Morgan Stanley Panic
Trading Records Tell Tale of How Rivals' Bearish Bets Pounded Stock in September
Two days after Lehman Brothers Holdings Inc. sought bankruptcy protection, an explosive rumor spread that another big Wall Street firm, Morgan Stanley, was on the brink of failure. The chatter on trading desks that Sept. 17 was that Deutsche Bank AG had yanked a $25 billion credit line to the firm.

That wasn't true, but it helped trigger a cascade of bearish bets against Morgan Stanley. Chief Executive Officer John Mack complained bitterly that profit-hungry traders were sowing panic. Yet he lacked a critical piece of information: Who exactly was behind those damaging trades?
Trading records reviewed by The Wall Street Journal now provide a partial answer. It turns out that some of the biggest names on Wall Street -- Merrill Lynch & Co., Citigroup Inc., Deutsche Bank and UBS AG -- were placing large bets against Morgan Stanley, the records indicate. They did so using complicated financial instruments called credit-default swaps, a form of insurance against losses on loans and bonds.
A close examination by the Journal of that trading also reveals that the swaps played a critical role in magnifying bearish sentiment about Morgan Stanley, in turn prompting traders to bet against the firm's stock by selling it short. The interplay between swaps trading and short selling accelerated the firm's downward spiral.
This account was pieced together from the trading documents and more than six dozen interviews with Wall Street executives, traders, brokers, hedge-fund managers, regulators and investigators.

For years, sales of credit-default swaps were a profit gold mine for Wall Street. But ironically, during those tumultuous few days in mid-September, the swaps market turned on Morgan Stanley like a financial Frankenstein. The market became a highly visible barometer of the Panic of 2008, fueling the crisis that ultimately prompted the government to intervene.
Other firms also were trading Morgan Stanley swaps on Sept. 17: Royal Bank of Canada, Swiss Re, and hedge funds including King Street Capital Management LLC and Owl Creek Asset Management LP.
Pressure also mounted on another front. There was a surge in "short sales" -- bets against the price of Morgan Stanley's stock -- by large hedge funds including Third Point LLC. By day's end, Morgan Stanley's shares were down 24%, fanning fears among regulators that predatory investors were targeting investment banks.
That pattern of trading, which previously had battered securities firms Bear Stearns Cos. and Lehman, now is dogging Citigroup, whose stock fell 60% last week to a 16-year low.

Investigators are attempting to unravel what produced the market mayhem in mid-September, and whether Morgan Stanley swaps or shares were traded improperly. New York Attorney General Andrew Cuomo, the U.S. Attorney's office in Manhattan and the Securities and Exchange Commission are looking into whether traders manipulated markets by intentionally disseminating false rumors in order to profit on their bets. The investigations also are examining whether traders bought swaps at high prices to spark fear about Morgan Stanley's stability in order to profit on other trading positions, and whether trading involved bogus price quotes and sham trades, people familiar with the probes say.
No evidence has emerged publicly that any firm trading in Morgan Stanley stock or credit-default swaps did anything wrong. Most of the firms say they purchased the credit-default swaps simply to protect themselves against potential losses on various types of business they were doing with Morgan Stanley. Some say their swap wagers were small, relative to all such trading that was done that day.
Proving that prices of any security have been manipulated is extraordinarily difficult. The swaps market is opaque: Trading is done by phone and email between dealers, without public price quotes.

Erik Sirri, the SEC's director of trading and markets, contends that the swaps market is vulnerable to manipulation. "Very small trades in a relatively thin market can be used to … suggest that a credit is viewed by the market as weak," he said in congressional testimony last month. He said the SEC was concerned that swaps trading was triggering bearish bets against stocks.
Morgan Stanley had entered September in pretty good shape. It made money during its first two fiscal quarters, which ended May 31. It didn't have as much exposure to bad residential-mortgage assets as Lehman did, although it was exposed to commercial-real-estate and leveraged-loan markets. Mr. Mack knew that third-quarter earnings were going to be stronger than expected.
On Sept. 14, as Lehman was preparing to file for bankruptcy protection, Mr. Mack told employees in an internal memo that Morgan Stanley was "uniquely positioned to succeed in this challenging environment." The following day, the firm picked up some new hedge-fund clients who had fled Lehman.
But rumors were flying as traders worried which Wall Street firm could fall next. The chatter among hedge funds was that Morgan Stanley had $200 billion at risk as a trading partner with American International Group Inc., the big insurer on the brink of a bankruptcy filing, according to traders. That wasn't true. Morgan reported in an SEC filing that its exposure to AIG was "immaterial."
Some brokers at rival J.P. Morgan Chase & Co. were suggesting to Morgan Stanley clients it was risky to keep accounts at that firm, people familiar with the matter say. Mr. Mack complained to J.P. Morgan Chief Executive James Dimon, who put an end to the talk, these people say. Deutsche Bank, UBS and Credit Suisse also marketed to Morgan Stanley's hedge-fund clients, people familiar with the pitches say.
On Sept. 16, Morgan Stanley's stock fell sharply during the day, although it rebounded late. Some hedge funds yanked assets from the firm, worried that Morgan might follow Lehman into bankruptcy court, potentially tying up client assets. In an effort to quell concerns, Morgan Stanley released its earnings that afternoon at 4:10 p.m., one day early.

"It's very important to get some sanity back into the market," said Colm Kelleher, Morgan's chief financial officer, in a conference call with investors. "Things are frankly getting out of hand, and ridiculous rumors are being repeated."
UBS analyst Glenn Schorr asked Mr. Kelleher about the soaring cost of buying insurance in the swaps market against a Morgan Stanley debt default. Protection for $10 million of Morgan Stanley debt had risen to $727,900 a year, from $221,000 on September 10, according to CMA DataVision, a pricing service.
"Certain people are focusing on CDS as an excuse to look at the equity," Mr. Kelleher responded, implying that traders betting on swaps were also shorting Morgan Stanley shares, betting that the stock price would fall.
It's impossible to know for sure what was motivating buyers of Morgan Stanley credit-default swaps. The swap buyers stood to receive payments if Morgan Stanley defaulted on bonds and loans. Some buyers, no doubt, owned the firm's debt and were simply trying to protect themselves against defaults.
But swaps were also a good way to speculate for traders who didn't own the debt. Swap values rise on the fear of default. So traders who believed that fears about Morgan Stanley were likely to intensify could use swaps to try to turn a fast profit.

Amid the uncertainty that Sept. 16, Millennium Partners LP, a hedge fund with $13.5 billion in assets, asked to pull out $800 million of the more than $1 billion of assets it kept at Morgan Stanley, according to people familiar with the withdrawals. Separately, Millennium had also shorted Morgan Stanley's stock, part of a series of bearish bets on financial firms, said one of these people. In addition, the hedge fund bought "puts," which gave it the right to sell Morgan shares at a set price in the future.
"Listen, we have to protect our assets," Israel Englander, Millennium's head, told a Morgan Stanley executive, according to one person familiar with the conversation. "This is not a personal thing."
Those bearish bets, small compared to Millennium's overall size, rose in value as Morgan Stanley shares fell.
That same day, Sept. 16, Third Point LLC, a $5 billion hedge-fund firm run by Daniel Loeb, began to move $500 million in assets out of Morgan Stanley. The following day, Sept. 17, Third Point, after seeing the surge in swaps prices, made a substantial bearish bet, selling short about 100,000 Morgan Stanley shares, trading records indicate. Third Point quickly closed out that position for a profit of less than $10 million, says one person familiar with the trading.
Around the same time, hedge fund Owl Creek began asking to withdraw its assets, and ultimately took out more than $1 billion.
On the morning of Sept. 17, David "Tiger" Williams, head of Williams Trading LLC, which offers trading services to hedge funds, heard from one of his traders that a fund had moved an $800 million trading account from Morgan Stanley to a rival. His trader, who was on the phone with the fund manager who moved the money, asked why. Morgan Stanley was going bankrupt, his client responded.
Pressed for details, the fund manager repeated the rumor about Deutsche Bank yanking a $25 billion credit line. Mr. Williams hit the phones. His market sources told him they thought the rumor false.
But damage already was being done. By 7:10 that morning, a Deutsche Bank trader was quoting a price of $750,000 to buy protection on $10 million of Morgan Stanley debt. At 10 a.m., Citigroup and other dealers were quoting prices of $890,000.
As the rumor about Deutsche spread, Morgan shares fell sharply, from about $26 at 10 a.m. to near $16 at 11:30 a.m.
Before noon, swaps dealers began quoting the cost of insurance on Morgan in "points upfront" -- Wall Street lingo for transactions where buyers must pay at least $1 million upfront, plus an annual premium, to insure $10 million of debt. In Morgan Stanley's case, some dealers were demanding more than $2 million upfront.
Bearish Signal
Firms making trades protecting against a Morgan Stanley default during Sept. 17 and 18, 2008
Net Purchase+(in millions)
Merrill Lynch
Doesn't comment on trades
King Street
Royal Bank of Canada
Replacing Lehman swaps
Hedging, customers
Deutsche Bank*
Hedging, customers
Swiss Re*
No comment
Societe Generale**
No comment
Owl Creek*
Insuring collateral held at Morgan Stanley
No comment
Liberty Harbor Master Fund**
ACM Global Credit Fund
Bank of America**
No comment
No comment
No comment
Cyrus Opportunity Fund**
No comment
+ Morgan Stanley debt covered by credit default swaps. * Trading on Sept. 17 ** Trading on Sept. 18
Source: Trading records, Wall Street Journal research

During the day, Merrill bought swaps covering $106.2 million in Morgan Stanley debt, according to the trading documents. King Street bought swaps covering $79.3 million; Deutsche Bank, $50.6 million; Swiss Re, $40 million; Owl Creek, $35.5 million; UBS and Citigroup, $35 million each; Royal Bank of Canada, $33 million; and ACM Global Credit, an investment fund operated by AllianceBernstein Holding, $28 million, according to the documents.
The following day, Sept. 18, some of those same names were back in the market. Merrill bought protection on another $43 million of Morgan Stanley debt; Royal Bank of Canada, $36 million; King Street, $30.7 million; and Citigroup, $20.7 million, the trading records indicate.
None of the firms will comment on how much they paid for the swaps, or whether they profited on the trades.
"The protection we bought was a simple hedge, not based on any negative view of Morgan Stanley," says John Meyers, a spokesman for AllianceBernstein. A Royal Bank of Canada spokesman says the bank bought the swaps to manage its Morgan Stanley "credit risk," and was not "betting against Morgan Stanley and conducted no bearish trades on its stock."
King Street, a $16.5 billion hedge fund, bought the swaps to hedge its exposure to Morgan Stanley, which included bond holdings, according to a person familiar with the fund. The fund didn't hold a short position in the stock, this person says.
Spokespeople for Deutsche Bank and Citigroup say their trading was relatively small and meant to protect against losses on other investments with Morgan, and to handle client orders. An Owl Creek spokesman says it bought the swaps "to insure collateral we had at Morgan Stanley at the time," and that it continues to do business with the firm.
Merrill, UBS and Swiss Re declined to comment on the trading.
As Morgan Stanley's stock tumbled, the number of shares sold short by bearish investors soared to 39 million on Sept. 17, nine times the daily average this year, adding to the 31 million shares shorted in the prior two days, according to trading records.
Mr. Mack sent a memo to employees on Sept. 17. "I know all of you are watching our stock price today, and so am I.… We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."
The stock and swaps trading were feeding on each other. That afternoon, Mr. Schorr, the UBS analyst, wrote: "Stop the insanity -- we need a time out." In an interview that day, he said "the negative feedback loop of stocks and CDS making each other crazy shouldn't be able to destroy the value of companies."
Scrambling to stop the crisis of confidence, Mr. Mack phoned Paul Calello, investment-banking chief at Credit Suisse, and asked whether he knew what was driving the cost of the swaps up so quickly, say people familiar with the call. Mr. Calello said he didn't.
Morgan Stanley's chief legal officer, Gary Lynch, once the SEC's enforcement chief, called New York Stock Exchange regulatory head Richard Ketchum. He said he was suspicious about manipulation of Morgan Stanley securities, and asked whether the NYSE would support a temporary ban on short selling, according to people familiar with the call.
Mr. Mack called SEC Chairman Christopher Cox, Treasury Secretary Henry Paulson and others. Trading in Morgan Stanley securities, he groused, was irrational and "outrageous," and "there's nothing to warrant this kind of reaction," says a person familiar with the calls. The steps already taken by the SEC to prevent certain types of abusive short selling, he argued, didn't go far enough.
In his memo to employees that day, Mr. Mack had made it clear that he intended to press regulators to rein in short sellers. When word about that got out, hedge-fund managers were up in arms. Some yanked business from Morgan Stanley, moving it to rivals including Credit Suisse, Deutsche Bank and J.P. Morgan. They said the trading represented legitimate protection and speculation.

Hedge-fund veteran Julian Robertson Jr. and James Chanos, a well-known short seller, both longtime Morgan Stanley clients, were both angry. Mr. Chanos says he "hit the roof" when he heard about Mr. Mack's memo.
After the stock market closed that day, Mr. Chanos decided that his hedge fund, Kynikos Associates, would pull more than $1 billion of its money from a Morgan Stanley account.
"It's one thing to complain, but another to put out a memo blaming your clients," says Mr. Chanos, who adds that the development all but ended a more-than-20-year relationship with Morgan Stanley. He says his fund hadn't bought any Morgan Stanley swaps or sold short its stock.
Other Wall Street executives, concerned about their stocks, were also calling regulators. At about 8:15 that night, the SEC said it would require more disclosure of short selling. Late the following day, Sept. 18, the SEC moved to temporarily ban short selling in financial stocks.
Mr. Mack contacted hedge-fund clients to tell them he hadn't single-handedly brought on the ban, and that he was primarily interested in giving the market a temporary "time out" from the volatile mix of rumors and trading.
But within days, more than three-quarters of Morgan Stanley's roughly 1,100 hedge-fund clients had put in requests to pull some or all of their assets from the firm, according to a person familiar with the operation. Even though most kept some money at the firm, Morgan Stanley couldn't process all the withdrawal requests at once, adding to market fear.
Morgan Stanley was in a precarious position. During the Sept. 17 trading frenzy, Mr. Mack had begun merger talks with Wachovia Corp. Four days later, Morgan Stanley shifted course, becoming a bank-holding company and gaining wider access to government funds. Last month, after raising $9 billion from a Japanese bank, it received a $10 billion capital injection from the federal government.
Morgan Stanley must now revise its business strategy to contend with a more risk-averse environment and the more stringent government oversight that comes with being a bank-holding company. Earlier this month, it announced it would fire about 2,300, or 5%, of its employees.
The cost of insuring its debt has come back down from its peak, but its stock remains in the doldrums. On Friday, it was trading at $10.05 a share in 4 p.m. composite trading on the New York Stock Exchange -- less than half of the $21.75 close on Sept. 17.
A month after the mayhem, Mr. Mack said in an interview that he had all but given up trying to get to the bottom of what was driving the trading in his firm's securities during those chaotic days in mid-September. "It's difficult to say what's rumor and what's fact," he said.
Write to Susan Pulliam at, Liz Rappaport at, Aaron Lucchetti at and Jenny Strasburg at
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

Monday, November 24, 2008

Floyd Norris

On the Citi thing.


Op-Ed Columnist
Admit We Don’t Know
if (;

Published: November 24, 2008
“In my view it has to be between five and seven hundred billion dollars,” proclaimed Senator Charles Schumer Sunday on ABC’s “This Week.” The “it” is the economic stimulus package the new Congress intends to send to the new president, Barack Obama, in January.
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The truth is, Schumer hasn’t a well-grounded view, or even a well-informed clue, as to how large the stimulus package “has to be.” I’d be amazed if he could give a coherent explanation of why it should be $500 billion to $700 billion instead of, say, $300 billion or $900 billion. On TV, he simply invoked the authority of “most economists,” who, according to Schumer, “say, to make this work, you need about 5 percent of G.D.P., which would be $700 billion.” Nor do I think Schumer could begin to explain why a demand-side stimulus package oriented toward employment, infrastructure and consumer spending will “work” in dealing with an economic crisis whose origins seem to be in the collapse of a housing bubble and the deleveraging of overstretched financial institutions.
Now I hasten to add — wait a second, Senator Schumer, put down the phone, no need to call me at home this early in the morning! — that I don’t mean to pick in any way on Chuck Schumer, who is surely among the more economically literate members of Congress. It’s not as if his colleagues have a better understanding of what has happened, or of what should be done. And it’s not as if the rest of us do.
In his interview, Schumer appealed to the authority of economists. Economists still do have considerable sway in our public life — even though it doesn’t seem that a large number of them have been particularly prescient in warning about, or strikingly persuasive in explaining, the current economic situation.
In any case, the Obama economic adviser Austan Goolsbee also weighed in Sunday on television and said: “I don’t know what the number is going to be, but it’s going to be a big number. It has to be. The point is to, kind of, get people back on track and startle the thing into submission.”
So a key member of Obama’s economic team hopes a big federal spending number will “startle the thing into submission.” That’s reassuring. On the other hand, it’s not as if the analysis of many conservative economists is much more persuasive. At least the liberals, being more or less Keynesians, tend to agree on what should be done. The more idiosyncratic conservatives tend to be all over the lot. But, basically, it seems to me, we’re all flying blind. The markets are spiraling down, and our leading experts don’t have much of a clue as to what to do.
Given that, one has to welcome the expected appointment to senior positions in the Obama administration of economists like Lawrence Summers, Timothy Geithner, Jason Furman, Peter Orszag, and Goolsbee himself. They’re sober and competent people who know we face a real crisis — and who, importantly, may be more willing than many of their colleagues to adjust their thinking early and often.
Indeed, one hopes they’re not too invested in the findings of the economics profession of which they’re such distinguished products — because one suspects many of the conventional answers of that profession aren’t much applicable to the current situation. After all, wasn’t it excessive confidence in complex economic models and sophisticated financial instruments on the part of people well educated in modern economics that helped get us into the current mess?
So I hope the best and the brightest who will be joining the new president will at least entertain the possibility that a lot of what they think they know is wrong. I trust they’ll remember that successful economic policies in the past have pulled together elements from unlikely sources, and that they’re as likely to find wisdom from reading political economists like Friedrich Hayek or Joseph Schumpeter, or Keynes himself, as from poring over the latest academic paper in a peer-refereed economics journal.
During his two years on the campaign trail, Barack Obama has often cited Abraham Lincoln. Well, it turns out Obama could be taking over the presidency at something more closely resembling (though still far short of) a Lincolnian moment than one would have expected. And it was Lincoln who wrote, in his second annual message to Congress, in December 1862: “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country.”
I’ve worked in government. It’s hard to do much thinking there at all, let alone thinking anew. But Obama and his team will have to think anew, and those on the outside who wish to help will have to think anew too, if we’re to have a chance of rising to this daunting occasion.
Paul Krugman is off today.

Best Line of the Day

It took me a minute before "getting" this (from an article on how rivalries will spoil the BCS bowl hopes the next week):

Notre Dame, like Texas A&M, is playing both for an upset and to salvage a season gone awry. Though the Irish (6-5) have improved since going 3-9 in 2007, the fourth-quarter collapse and loss at home to Syracuse on Saturday sucked away all the goodwill Notre Dame had created this season. Playing a USC team fighting for a foothold in the BCS is no way to regain that goodwill.

Whither Notre Dame? Take out the first "h" and the answer is "Yes."

Flynn's Oil -- Exeter



OK here's the deal: Bobby you go straight down the field. Perry, you block. On three I say "hike."

They're Baaack

Predator loans and new FHA subprime loans:

Sunday, November 23, 2008

Friedman -- Now! Dammit!

What Friedman says is what I have felt for a year. We have wasted time, and not a little substance, by the Bush administration keeping deregulation still on the front burner. We must not waste another week or day.

Op-Ed Columnist
We Found the W.M.D.

Published: November 22, 2008
So, I have a confession and a suggestion. The confession: I go into restaurants these days, look around at the tables often still crowded with young people, and I have this urge to go from table to table and say: “You don’t know me, but I have to tell you that you shouldn’t be here. You should be saving your money. You should be home eating tuna fish. This financial crisis is so far from over. We are just at the end of the beginning. Please, wrap up that steak in a doggy bag and go home.”
Times Topics: Credit Crisis - Bailout Plan
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Now you know why I don’t get invited out for dinner much these days. If I had my druthers right now we would convene a special session of Congress, amend the Constitution and move up the inauguration from Jan. 20 to Thanksgiving Day. Forget the inaugural balls; we can’t afford them. Forget the grandstands; we don’t need them. Just get me a Supreme Court justice and a Bible, and let’s swear in Barack Obama right now — by choice — with the same haste we did — by necessity — with L.B.J. in the back of Air Force One.
Unfortunately, it would take too long for a majority of states to ratify such an amendment. What we can do now, though, said the Congressional scholar Norman Ornstein, co-author of “The Broken Branch,” is “ask President Bush to appoint Tim Geithner, Barack Obama’s proposed Treasury secretary, immediately.” Make him a Bush appointment and let him take over next week. This is not a knock on Hank Paulson. It’s simply that we can’t afford two months of transition where the markets don’t know who is in charge or where we’re going. At the same time, Congress should remain in permanent session to pass any needed legislation.
This is the real “Code Red.” As one banker remarked to me: “We finally found the W.M.D.” They were buried in our own backyard — subprime mortgages and all the derivatives attached to them.
Yet, it is obvious that President Bush can’t mobilize the tools to defuse them — a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets and, most importantly, a huge injection of optimism and confidence that we can and will pull out of this with a new economic team at the helm.
The last point is something only a new President Obama can inject. What ails us right now is as much a loss of confidence — in our financial system and our leadership — as anything else. I have no illusions that Obama’s arrival on the scene will be a magic wand, but it would help.
Right now there is something deeply dysfunctional, bordering on scandalously irresponsible, in the fractious way our political elite are behaving — with business as usual in the most unusual economic moment of our lifetimes. They don’t seem to understand: Our financial system is imperiled.
“The unity seems to be gone. The emergency looks to be a little less pressing,” Bill Frenzel, the former 10-term Republican congressman who is now with the Brookings Institution, was quoted by on Friday.
I don’t want to see Detroit’s auto industry wiped out, but what are we supposed to do with auto executives who fly to Washington in three separate private jets, ask for a taxpayer bailout and offer no detailed plan for their own transformation?
The stock and credit markets haven’t been fooled. They have started to price financial stocks at Great Depression levels, not just recession levels. With $5, you can now buy one share of Citigroup and have enough left over for a bite at McDonalds.
As a result, Barack Obama is possibly going to have to make the biggest call of his presidency — before it even starts.
“A great judgment has to be made now as to just how big and bad the situation is,” says Jeffrey Garten, the Yale School of Management professor of international finance. “This is a crucial judgment. Do we think that a couple of hundred billion more and couple of bad quarters will take care of this problem, or do we think that despite everything that we have done so far — despite the $700 billion fund to rescue banks, the lowering of interest rates and the way the Fed has stepped in directly to shore up certain markets — the bottom is nowhere in sight and we are staring at a deep hole that the entire world could fall into?”
If it’s the latter, then we need a huge catalyst of confidence and capital to turn this thing around. Only the new president and his team, synchronizing with the world’s other big economies, can provide it.
“The biggest mistake Obama could make,” added Garten, “is thinking this problem is smaller than it is. On the other hand, there is far less danger in overestimating what will be necessary to solve it.”

Conventional wisdom says it’s good for a new president to start at the bottom. The only way to go is up. That’s true — unless the bottom falls out before he starts.

Saturday, November 22, 2008



Published: November 21, 2008
With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.
Vikram S. Pandit, center, the chief executive of Citigroup, set up a companywide phone call to reassure anxious employees.
In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company.
Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.
The course of action, however, remained uncertain on Friday night, these people said, and other options may yet emerge. But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.
After a board meeting early Friday morning, Citigroup’s management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of New York, Timothy F. Geithner, who later emerged as President-elect Barack Obama’s choice to be Treasury secretary.
As Citigroup’s stock sank during the day, falling 68 cents to close at $3.87, the Federal Reserve was carefully monitoring how much money corporations and other customers were withdrawing from the bank, people involved in the discussions said.
The Fed was trying to ascertain whether the tumult in the stock market could escalate into something worse.
So far, these people said, most customers and clients remained committed to Citigroup.
But with Citigroup’s troubles opening a new chapter in the long-running financial crisis, government officials said that the Treasury Department was considering whether to ask for the second half of the $700 billion rescue fund approved by Congress in September.
It was unclear whether any of that money would be used to make a cash infusion into Citigroup, which received $25 billion from the government in October. A second financial rescue for banks might be difficult politically at a time that the struggling auto industry is being turned away in Washington.
As Citigroup’s fortunes diminished on Friday, Mr. Pandit, the company’s embattled chief executive, went on the offensive. He worked the phones and held a companywide call to shore up the confidence of anxious employees.
Later in the day, the company held a similar call with large corporate customers. On Sunday, Citigroup plans to run full-page advertisements in major newspapers that acknowledge “our financial markets have been tested in unprecedented ways,” but argue that the company has a broad range of businesses and enough management expertise to pull through. In a nod to the company’s slogan, the text concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”
Still, Citigroup’s executives are not expected to sleep much this weekend as they continue to pursue contingency plans, including what they might need to calm anxious investors before the stock market opens on Monday morning.
One maneuver that Mr. Pandit has championed is for the Securities and Exchange Commission to reinstate the “uptick rule,” which prevents short-sellers from betting against companies whose stock price is falling. Mr. Pandit has been lobbying the S.E.C. for the past week, as have other Wall Street chiefs.
Mr. Pandit and others have suggested that Citigroup is a victim of short-sellers, which some have blamed for speeding the demise of other financial companies this year.
In September, Richard X. Bove, an analyst at Ladenburg Thalmann, predicted that short-sellers would turn their attention to larger and larger financial companies, including Citigroup, which he said at the time was strong enough to withstand the pressure.
“They’re going to hit a company that is too well grounded, too well capitalized, and I think that will be Citigroup,” he said. Still, while Citigroup is widely regarded as too big and too interconnected to be allowed to fail, its immediate future is uncertain. Executives at other financial firms said that there are not many options left, and that Citigroup’s stock has reached a level that may force government action.
“The reason you have to ‘save’ Citibank is you cannot allow this hysteria,” said Peter J. Solomon, chairman of the Peter J. Solomon Company, a small investment bank.
Investors and executives at other banks said that one way the bank might be able to give itself some breathing room would be for Mr. Pandit, who became chief executive less than a year ago, to step down.
Executives in New York have also begun pointing out that Citigroup has a huge global presence. They suggested that perhaps a government bailout should involve money from other countries in addition to the United States.
“If there’s a flight from Citi’s stock, that’s unfortunate, but I don’t think that’s the government’s business,” said David M. Walker, the president of the Peter G. Peterson Foundation and a former United States comptroller general.
Mr. Walker said that the government should be concerned about Citigroup only if there were a run on the bank that threatened the financial system. The government should not, he said, be concerned about shareholders.
Some executives, however, argued that it was important to protect Citigroup’s shareholders because if they lose their investment, that will send other bank stocks diving.
Among the other ideas being bandied about Washington and the halls of Citigroup would be an assisted merger between Citigroup and another major bank. The merger might be structured with government assistance based on the blueprint that was developed for the Wachovia and Citigroup merger.
That deal ultimately did not go through because Wells Fargo stepped in with a higher offer, but it would have involved the Federal Deposit Insurance Corporation sharing the losses on $312 billion of Wachovia’s loans with Citigroup. Citigroup would have absorbed the first $42 billion in losses, and the government would have absorbed the rest. The F.D.I.C. would have been given $12 billion in warrants and preferred shares of Citigroup in exchange.
That structure could be used in a merger, but this time around, the government would be absorbing losses on Citigroup’s loans. But it remains unclear what other bank is in a strong enough position to merge with Citigroup.
Inside Citigroup on Friday, some angry senior executives said that the government had “allowed” Wells Fargo to take Wachovia from them, people at the firm said. They argued that had Citigroup and Wachovia been allowed to merge “we wouldn’t be in this position,” one executive said.
Another option might be for the government to purchase a large chunk of Citigroup’s assets in one swoop. Such an action could be structured similarly to the proposed deal in Switzerland for UBS. A spokesman for UBS, Mark Arena, said on Friday that the arrangement would allow UBS to have “one of the cleanest balance sheets of our peers.”
At the time of the deal’s announcement in October, Jean-Pierre Roth, president of the Swiss National Bank, said the government had the time to wait for the values of the assets to improve. “UBS does not have time,” Mr. Roth said.


Cruel but absolutely true. We cannot wait.

Op-Ed Columnist
Time for Him to Go

if (;

Published: November 22, 2008
Thanksgiving is next week, and President Bush could make it a really special holiday by resigning.
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Seriously. We have an economy that’s crashing and a vacuum at the top. Bush — who is currently on a trip to Peru to meet with Asian leaders who no longer care what he thinks — hasn’t got the clout, or possibly even the energy, to do anything useful. His most recent contribution to resolving the fiscal crisis was lecturing representatives of the world’s most important economies on the glories of free-market capitalism.
Putting Barack Obama in charge immediately isn’t impossible. Dick Cheney, obviously, would have to quit as well as Bush. In fact, just to be on the safe side, the vice president ought to turn in his resignation first. (We’re desperate, but not crazy.) Then House Speaker Nancy Pelosi would become president until Jan. 20. Obviously, she’d defer to her party’s incoming chief executive, and Barack Obama could begin governing.
As a bonus, the Pelosi presidency would put a woman in the White House this year after all. On the downside, a few right-wing talk-show hosts might succumb to apoplexy. That would, of course, be terrible, but I’m afraid we might have to take the risk in the name of a greater good.
Can I see a show of hands? How many people want George W. out and Barack in?
A great many Americans have been counting the days all year on their 2008 George W. Bush Out of Office Countdown calendars. I know a lot of this has been going on because so many people congratulated me when the Feb. 1 Bush quote turned out to be from one of my old columns. (“I think we need not only to eliminate the tollbooth from the middle class, I think we should knock down the tollbooth.”)
This was not nearly as good as Feb. 5 (“We ought to make the pie higher”) or Feb. 21 (“I understand small business growth. I was one.”) But we do what we can.
In the past, presidents have not taken well to suggestions that they hand over the reins before the last possible minute. Senator J. William Fulbright suggested a plan along those lines when Harry Truman was coming to the end of a term in a state of deep unpopularity, and Truman called him “Halfbright” for the rest of his life. Bush might not love the idea of quitting before he has a chance to light the Christmas tree or commute the execution of one last presidential turkey. After all, he still has a couple more trips planned. And last-minute regulations to issue. (So many national parks to despoil, so many endangered species to exterminate ... .) And then there’s all the packing.
On the other hand, he might want to consider his legacy, such as it is.
In happier days, Bush may have nurtured hopes of making it into the list of America’s mediocre presidents, but somewhere between Iraq and Katrina, that goal became a mountain too high. However, he might still have a chance to avoid the absolute bottom of the barrel, a spot currently occupied by James Buchanan, at least in my opinion. Buchanan nailed down The Worst President title in the days between Abraham Lincoln’s election and inauguration, when the Southern states began seceding and Buchanan, after a little flailing about, did absolutely nothing. “Doing nothing is almost the worst thing a president can do,” said the historian Michael Beschloss.
If Bush gives up doing nothing by giving up his job, it’s possible that someday history might elevate him to the ranks of the below average. Better than Franklin Pierce! Smarter than Warren Harding! And healthier than William Henry Harrison!
The person who would like this plan least probably would be Barack Obama. Who would want to be saddled with the auto industry’s problems ahead of schedule? The heads of America’s great carmaking corporations are so dim that they couldn’t even survive hearings run by members of Congress who actually wanted to help them. Really, when somebody asks you exactly how much money you need, the answer should not be something along the line of “a whole bunch.”
An instantaneous takeover would also ruin the Obama team’s plan to have the tidiest, best-organized presidential transition in history. Cutting it short and leaping into governing would turn their measured march toward power into a mad scramble. A lot of their Cabinet picks are still working on those 62-page questionnaires.
But while there’s been no drama with Obama, we’ve been living a Technicolor version of “The Perils of Pauline.” Detroit is tied to the railroad tracks and the train is coming! California’s state government is falling into the sea! The way we’re going now, by the time the inauguration rolls around, unemployment will be at 10 percent and the Dow will be at 10.
Time for a change.
More Articles in Opinion » A version of this article appeared in print on November 22, 2008, on page A21 of the New York edition.
Past Coverage
QUESTIONS FOR KARL ROVE; Party Loyalist (November 16, 2008)
Change (November 16, 2008)
WHITE HOUSE MEMO; As the Handoff Begins, A Visit Both Historic And Perhaps Awkward (November 10, 2008)
Bush's Prepared Text (October 7, 2008)

Friday, November 21, 2008


Op-Ed Columnist
The Insider’s Crusade

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Published: November 21, 2008
Jan. 20, 2009, will be a historic day. Barack Obama (Columbia, Harvard Law) will take the oath of office as his wife, Michelle (Princeton, Harvard Law), looks on proudly. Nearby, his foreign policy advisers will stand beaming, including perhaps Hillary Clinton (Wellesley, Yale Law), Jim Steinberg (Harvard, Yale Law) and Susan Rice (Stanford, Oxford D. Phil.).
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The domestic policy team will be there, too, including Jason Furman (Harvard, Harvard Ph.D.), Austan Goolsbee (Yale, M.I.T. Ph.D.), Blair Levin (Yale, Yale Law), Peter Orszag (Princeton, London School of Economics Ph.D.) and, of course, the White House Counsel Greg Craig (Harvard, Yale Law).
This truly will be an administration that looks like America, or at least that slice of America that got double 800s on their SATs. Even more than past administrations, this will be a valedictocracy — rule by those who graduate first in their high school classes. If a foreign enemy attacks the United States during the Harvard-Yale game any time over the next four years, we’re screwed.
Already the culture of the Obama administration is coming into focus. Its members are twice as smart as the poor reporters who have to cover them, three times if you include the columnists. They typically served in the Clinton administration and then, like Cincinnatus, retreated to the comforts of private life — that is, if Cincinnatus had worked at Goldman Sachs, Williams & Connolly or the Brookings Institution. So many of them send their kids to Georgetown Day School, the posh leftish private school in D.C. that they’ll be able to hold White House staff meetings in the carpool line.
And yet as much as I want to resent these overeducated Achievatrons (not to mention the incursion of a French-style government dominated by highly trained Enarchs), I find myself tremendously impressed by the Obama transition.
The fact that they can already leak one big appointee per day is testimony to an awful lot of expert staff work. Unlike past Democratic administrations, they are not just handing out jobs to the hacks approved by the favored interest groups. They’re thinking holistically — there’s a nice balance of policy wonks, governors and legislators. They’re also thinking strategically. As Norman Ornstein of the American Enterprise Institute notes, it was smart to name Tom Daschle both the head of Health and Human Services and the health czar. Splitting those duties up, as Bill Clinton did, leads to all sorts of conflicts.
Most of all, they are picking Washington insiders. Or to be more precise, they are picking the best of the Washington insiders.
Obama seems to have dispensed with the romantic and failed notion that you need inexperienced “fresh faces” to change things. After all, it was L.B.J. who passed the Civil Rights Act. Moreover, because he is so young, Obama is not bringing along an insular coterie of lifelong aides who depend upon him for their well-being.
As a result, the team he has announced so far is more impressive than any other in recent memory. One may not agree with them on everything or even most things, but a few things are indisputably true.
First, these are open-minded individuals who are persuadable by evidence. Orszag, who will probably be budget director, is trusted by Republicans and Democrats for his honest presentation of the facts.
Second, they are admired professionals. Conservative legal experts have a high regard for the probable attorney general, Eric Holder, despite the business over the Marc Rich pardon.
Third, they are not excessively partisan. Obama signaled that he means to live up to his postpartisan rhetoric by letting Joe Lieberman keep his committee chairmanship.
Fourth, they are not ideological. The economic advisers, Furman and Goolsbee, are moderate and thoughtful Democrats. Hillary Clinton at State is problematic, mostly because nobody has a role for her husband. But, as she has demonstrated in the Senate, her foreign-policy views are hardheaded and pragmatic. (It would be great to see her set of interests complemented by Samantha Power’s set of interests at the U.N.)
Finally, there are many people on this team with practical creativity. Any think tanker can come up with broad doctrines, but it is rare to find people who can give the president a list of concrete steps he can do day by day to advance American interests. Dennis Ross, who advised Obama during the campaign, is the best I’ve ever seen at this, but Rahm Emanuel also has this capacity, as does Craig and legislative liaison Phil Schiliro.
Believe me, I’m trying not to join in the vast, heaving O-phoria now sweeping the coastal haut-bourgeoisie. But the personnel decisions have been superb. The events of the past two weeks should be reassuring to anybody who feared that Obama would veer to the left or would suffer self-inflicted wounds because of his inexperience. He’s off to a start that nearly justifies the hype.


(c) 2008 F. Bruce Abel

As readers of this blog know, I have been saying for some time that the damage done by the Bush administration is, to my mind, irreversable. And I have said repeatedly that the interregnum between leaders is intolerable.

Also, the dangers of pure conservatism and talk radio still take their toll, now in "little" ways that are devastating. Eating away at my faith in Paulson, which still exists in some part.

And I was the first to blow the whistle on the dangers of deregulation of electricity, which have yet to be faced, and passing this thought on to Paul Krugman via email in 2001, also predicting the Enron debacle.

Op-Ed Columnist
The Lame-Duck Economy
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Published: November 21, 2008
Everyone’s talking about a new New Deal, for obvious reasons. In 2008, as in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters’ minds, both discredited the G.O.P.’s free-market ideology and undermined its claims of competence. And for those on the progressive side of the political spectrum, these are hopeful times.
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There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.
It’s true that the interregnum will be shorter this time: F.D.R. wasn’t inaugurated until March; Barack Obama will move into the White House on Jan. 20. But crises move faster these days.
How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.
Most obviously, we’re in the midst of the worst stock market crash since the Great Depression: the Standard & Poor’s 500-stock index has now fallen more than 50 percent from its peak. Other indicators are arguably even more disturbing: unemployment claims are surging, manufacturing production is plunging, interest rates on corporate bonds — which reflect investor fears of default — are soaring, which will almost surely lead to a sharp fall in business spending. The prospects for the economy look much grimmer now than they did as little as a week or two ago.
Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet no new rescue plan is in sight. On the contrary, Henry Paulson, the Treasury secretary, has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff.
How much should we worry about what looks like two months of policy drift? At minimum, the next two months will inflict serious pain on hundreds of thousands of Americans, who will lose their jobs, their homes, or both. What’s really troubling, however, is the possibility that some of the damage being done right now will be irreversible. I’m concerned, in particular, about the two D’s: deflation and Detroit.
About deflation: Japan’s “lost decade” in the 1990s taught economists that it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall). Yet there’s clear deflationary pressure on the U.S. economy right now, and every month that passes without signs of recovery increases the odds that we’ll find ourselves stuck in a Japan-type trap for years.
About Detroit: There’s now a real risk that, in the absence of quick federal aid, the Big Three automakers and their network of suppliers will be forced into liquidation — that is, forced to shut down, lay off all their workers and sell off their assets. And if that happens, it will be very hard to bring them back.
Now, maybe letting the auto companies die is the right decision, even though an auto industry collapse would be a huge blow to an already slumping economy. But it’s a decision that should be taken carefully, with full consideration of the costs and benefits — not a decision taken by default, because of a political standoff between Democrats who want Mr. Paulson to use some of that $700 billion and a lame-duck administration that’s trying to force Congress to divert funds from a fuel-efficiency program instead.
Is economic policy completely paralyzed between now and Jan. 20? No, not completely. Some useful actions are being taken. For example, Fannie Mae and Freddie Mac, the lending agencies, have taken the helpful step of declaring a temporary halt to foreclosures, while Congress has passed a badly needed extension of unemployment benefits now that the White House has dropped its opposition.
But nothing is happening on the policy front that is remotely commensurate with the scale of the economic crisis. And it’s scary to think how much more can go wrong before Inauguration Day.