(c) 2010 F. Bruce Abel
A conversation with Neil Bortz at a youth baseball game Thursday night causes me to start a new topic: "extend and pretend."
The Fifth Thirds of the world are told by FHA and the like "extend and pretend." When your good customers' loans come due, close them out and do not relend. Use your government money as follows: with your questionable loans, pretend they are good for it and extend the loan. That way nobody has to recognize the loss!
Guest Post: Extend And Pretend - A Guide To The Road Ahead zero hedge: "There is no mistaking the fact that the US has a sovereign crisis as measured by many indicators such as: Debt to GDP, deficit percentage, balance of trade, state, city and local government financial imbalances, underfunded pension plans and excess unfunded entitlement programs. However, relative to Europe, the US is still lagging and therefore is not currently getting the media attention that it will soon receive."
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Friday, June 11, 2010
Wednesday, April 28, 2010
Goldman Sachs -- "Sociopaths"
(c) 2010 F. Bruce Abel
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
Wednesday, April 14, 2010
Morgenson -- One I Missed
(c) 2010 F. Bruce Abel
Looking for something else I read yesterday I came across this excellent piece. I was fascinated (although I knew the story line) and then was surprised to realize that this piece came out in December. Maybe when we were in Italy.
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1
Looking for something else I read yesterday I came across this excellent piece. I was fascinated (although I knew the story line) and then was surprised to realize that this piece came out in December. Maybe when we were in Italy.
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1
Friday, April 9, 2010
Rubin -- How to Read My Blog on Him
I will continue to build on my first recent blog, "Rubin -- Are You Nothing But a Sandwich?" So when you enter my blog today and the following week or so go back to that blog item.
Thursday, April 8, 2010
Rubin -- Are You Just a Sandwich?
(c) 2010 F. Bruce Abel
If you were to ask me ten years ago to name my heroes in a quick moment Robert Rubin would be one of them -- out of a very few. Today before Congress Rubin is just a sandwich.
Of course this is troubling. Our world is so complicated that Robert Rubin can be paid by his company $100 million (as he was during the relevant time) and have no idea that his company is on the verge of bringing not just itself down, but the entire financial system down, with all that this implies.
We at this high level could not have been expected to get involved with the "granularity" of the bank's dealings, he says today to Congress.
This man saved the government from Newt Gingrich's plan to shut down government one weekend.
Was this done without "granularity?"
My Gawd.
This man saved Mexico through slogging through our debt package.
Was this done without "granularity?"
Maybe after all it was simply Young Goldman Sachs Men Looking Cool on the Beach. Robert Rubin is now not so young and he can't carry out on the granularity things?
Speaking of carry-out, Robert Rubin, here's a "granularity" assignment that would at least take care of lunch. Would you go down to Izzys and tell them to spread slices of bread with 1000 Island dressing; top each with 1 tablespoon sauerkraut and corned beef, lay cheese on top. Put in broiler and grill until hot ...
Meanwhile, mixing metaphors if not mega-phors, and, as Woody Allen would say,
"You are Citigroup; What are we, chopped liver?"
OK, put aside the above and read a stunningly good piece from the Washington Post by Ezra Klein:
Ezra Klein
The complexity problem
Earlier in the crisis, the line was that "too big to fail" was too big to exist. I'm coming around to an altogether more radical view: What if "too complex to understand" is too complex to exist?
Listen to Robert Rubin -- the former co-chairman of Goldman Sachs, celebrated secretary of the treasury and director of Citibank -- tell the Financial Crisis Inquiry Commission that
"All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”
Listen to Alan Greenspan -- former Federal Reserve chairman, holder of the nickname "The Oracle" -- say that we need regulations that kick in "without relying on the ability of a fallible human regulator to predict a coming crisis."
If you're an investment bank, the stock market has become a bit of a bummer. It's so transparent and user-friendly that there's really no place for a middleman to make major profits. That's normal: Efficient markets reduce margins. To put it another way: It's hard to make money doing simple things in a competitive market unless you have a monopoly. But Wall Street has leveraged incredible levels of complexity into something that's more like a monopoly than a market.
The really neat trick was that this worked even after the market crashed. Because no one could understand it, the people who crashed the place were also given a major role in the rescue effort. And that wasn't just true at the top level. Think back to the AIG employees threatening to quit and make it (theoretically) impossible to unwind the company's financial products division if they didn't get their retention bonuses. Their retention bonuses!
It would be one thing if this complexity had done great things for the country. But not so much, as we all know. Some innovations (pdf) have been good. But the opaque complexity that gave rise to credit default swaps and collateralized debt obligations and risk profiles that no one understood turned out to be almost unimaginably bad. Complexity helped bankers bully ratings agencies and regulators into signing off on products they didn't understand, it helped mortgage lenders entice consumers into contracts that they couldn't fulfill, and it's now helping Wall Street beat back necessary regulations because Congress is nervous about mucking with an industry they don't really grasp. And beyond all that, the complexity that allowed Wall Street to become a more profitable and significant segment of the economy also sucked talent away from other sectors.
How does this translate into regulation? I'm not really sure. It's not like there's a standard measure of unnecessary complexity or useless opacity. But watching these Wall Street titans tell the FCIC that they didn't understand what the banks were doing is making me a lot less sympathetic when their lobbyists tell Congress that Washington simply doesn't understand what the banks are doing.
By Ezra Klein April 8, 2010; 5:07 PM ET
Categories: Financial Crisis , Financial Regulation
Comments (not by me):
Restricting complexity ultimately translates into restricting interconnectedness.
Fundamental properties of structures in computer science and mathematics called graphs* show that at a certain level of interconnectedness, the corporate graph will show cyclical dependencies that are fairly intractable in terms of answering the questions we want to ask.
Compound this with the fact that you'll only be aware of a subset of the data structure at any time, and any densely interconnected financial system will be "too complex to understand".
*Note, this is very different from a plot or your common bar graph,
Posted by: zosima April 8, 2010 5:35 PM Report abuse
Ezra: I hope you do follow the TED conference and their videos. Two key speakers talks about the need to reduce complexity whether it's legal or societal.
http://www.ted.com/talks/alan_siegel_let_s_simplify_legal_jargon.html
http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html
Posted by: AD1971 April 8, 2010 5:48 PM Report abuse
From reading Michael Lewis it is clear that the subprime/CDO/CDS stuff was really complex--so much so that one had to have Asperger's and spend 6 months at it to understand it. It was way, way too complex, and deliberately so. Moreover, the Rubins and Princes didn't ask someone to explain the products to them. There were people in their firms who understood the level of risk, or at least how the products worked. In addition, there were people gaming the ratings agencies who knew that the towers of mortgages and derivatives were largely sh*tpiles. But no one wanted to upset the applecart, and the people with responsibility never wanted to inquire very far.
So what did Rubin do to warrant his $20 million? Provide access? Cachet? He ought to give most of it back.
Greenspan also won ;t acknowledge the role that low interest rates played in (1) fueling the housing boom and (2) encouraging savers/investors to look for higher yields in products like CDOs.
If we want to encourage genuine savings, higher yields were needed, and it would have provided a margin for easing when things went bad. Now, of course, we need low rates. But still. It is a hell of an environment for savers.
Posted by: Mimikatz April 8, 2010 6:05 PM Report abuse
This combined size and complexity is not manageable or controllable in a democracy.
We face very hard choices that we are not socially/politically prepared to make.
There are many aspects that need radical redos:
- numbers and types of biz's that financial firms are allowed to participate in
- max. size of a organization allowed before a anti-trust/anti-complexity trigger is hit that results in breakup into smaller pieces.
- regulators that are tailored to various segments of biz that are created after monoliths are outlawed.
- no financial innovation that isn't fully studied and pre-prescribed remedies are enacted to automatically kick in when inevitably things go awry in one of the newly arranged segments/sectors.
It is almost a fool's errand to think about this, since the beast controls the keeper in multiple ways. We haven't and won't learn from our mistakes. Denial is the order of the day. A return to democratic control of our society is probably now impossible.
Learn to love your financial masters, because they are now your destiny.
Posted by: JimPortlandOR April 8, 2010 7:01 PM Report abuse
The key to regulation is to make CONSUMER PROTECTION paramount. If rules are made with consumer protection in mind AT ALL LEVELS then it will eliminate most of the cheats frauds and loan sharks.
Especially if we take a broad definition of consumer protection to include pension funds and 401Ks. Protecting consumers by cracking down on loan sharks would have prevented the housing bubble.
Trying to regulate the banksters directly is unlikely to work. What can work is to protect small investors and the types of products that can be marketed. The cost of regulation will be small compared to the huge inefficiencies created by the cheats frauds and loan sharks.
Posted by: bakho April 8, 2010 8:01 PM Report abuse
I always though we should just make it a criminal offense to lose $X billion when you can't cover it with assets. Financial meltdowns causes much more societal damage than any particular single criminal act from drug use to trespassing to murder.
You designate a CEO and/or CFO or whoever to be responsible. If the losses include contracts made under a previous CEO, you include him or her.
This is effectively a leverage ratio of 1, but only coming into place when you leverage near the limit. Say, X = $50 billion dollars. I can leverage $4 billion in assets at 13:1 and still make it under the "cap" if it goes bad (4 x 13 - 4 = 48).
But I can only leverage $10 billion at just under 5:1, or else risk 20 years in prison.
But the best part is that no one has to calculate it until after the fact if it goes bad and it motivates people to get it right in the first place. The creditors will act as the police and bring it to everyone's attention because they are making the claims.
Not that I've worked out every aspect of this. You can mitigate sentences for bad luck or duped CEOs.
We used to throw people in jail for debts but got rid of it because it was inhumane for the poor. They can't leverage assets however, so they would just go bankrupt before they reached the limit.
I don't think debtors prison is inhumane for rich CEOs, though.
Posted by: JasonFromSeattle April 8, 2010 8:20 PM Report abuse
RobRub?
Posted by: pj_camp April 8, 2010 8:56 PM Report abuse
Post a Comment
© 2010 The Washington Post Company
If you were to ask me ten years ago to name my heroes in a quick moment Robert Rubin would be one of them -- out of a very few. Today before Congress Rubin is just a sandwich.
Of course this is troubling. Our world is so complicated that Robert Rubin can be paid by his company $100 million (as he was during the relevant time) and have no idea that his company is on the verge of bringing not just itself down, but the entire financial system down, with all that this implies.
We at this high level could not have been expected to get involved with the "granularity" of the bank's dealings, he says today to Congress.
This man saved the government from Newt Gingrich's plan to shut down government one weekend.
Was this done without "granularity?"
My Gawd.
This man saved Mexico through slogging through our debt package.
Was this done without "granularity?"
Maybe after all it was simply Young Goldman Sachs Men Looking Cool on the Beach. Robert Rubin is now not so young and he can't carry out on the granularity things?
Speaking of carry-out, Robert Rubin, here's a "granularity" assignment that would at least take care of lunch. Would you go down to Izzys and tell them to spread slices of bread with 1000 Island dressing; top each with 1 tablespoon sauerkraut and corned beef, lay cheese on top. Put in broiler and grill until hot ...
Meanwhile, mixing metaphors if not mega-phors, and, as Woody Allen would say,
"You are Citigroup; What are we, chopped liver?"
OK, put aside the above and read a stunningly good piece from the Washington Post by Ezra Klein:
Ezra Klein
The complexity problem
Earlier in the crisis, the line was that "too big to fail" was too big to exist. I'm coming around to an altogether more radical view: What if "too complex to understand" is too complex to exist?
Listen to Robert Rubin -- the former co-chairman of Goldman Sachs, celebrated secretary of the treasury and director of Citibank -- tell the Financial Crisis Inquiry Commission that
"All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”
Listen to Alan Greenspan -- former Federal Reserve chairman, holder of the nickname "The Oracle" -- say that we need regulations that kick in "without relying on the ability of a fallible human regulator to predict a coming crisis."
If you're an investment bank, the stock market has become a bit of a bummer. It's so transparent and user-friendly that there's really no place for a middleman to make major profits. That's normal: Efficient markets reduce margins. To put it another way: It's hard to make money doing simple things in a competitive market unless you have a monopoly. But Wall Street has leveraged incredible levels of complexity into something that's more like a monopoly than a market.
The really neat trick was that this worked even after the market crashed. Because no one could understand it, the people who crashed the place were also given a major role in the rescue effort. And that wasn't just true at the top level. Think back to the AIG employees threatening to quit and make it (theoretically) impossible to unwind the company's financial products division if they didn't get their retention bonuses. Their retention bonuses!
It would be one thing if this complexity had done great things for the country. But not so much, as we all know. Some innovations (pdf) have been good. But the opaque complexity that gave rise to credit default swaps and collateralized debt obligations and risk profiles that no one understood turned out to be almost unimaginably bad. Complexity helped bankers bully ratings agencies and regulators into signing off on products they didn't understand, it helped mortgage lenders entice consumers into contracts that they couldn't fulfill, and it's now helping Wall Street beat back necessary regulations because Congress is nervous about mucking with an industry they don't really grasp. And beyond all that, the complexity that allowed Wall Street to become a more profitable and significant segment of the economy also sucked talent away from other sectors.
How does this translate into regulation? I'm not really sure. It's not like there's a standard measure of unnecessary complexity or useless opacity. But watching these Wall Street titans tell the FCIC that they didn't understand what the banks were doing is making me a lot less sympathetic when their lobbyists tell Congress that Washington simply doesn't understand what the banks are doing.
By Ezra Klein April 8, 2010; 5:07 PM ET
Categories: Financial Crisis , Financial Regulation
Comments (not by me):
Restricting complexity ultimately translates into restricting interconnectedness.
Fundamental properties of structures in computer science and mathematics called graphs* show that at a certain level of interconnectedness, the corporate graph will show cyclical dependencies that are fairly intractable in terms of answering the questions we want to ask.
Compound this with the fact that you'll only be aware of a subset of the data structure at any time, and any densely interconnected financial system will be "too complex to understand".
*Note, this is very different from a plot or your common bar graph,
Posted by: zosima April 8, 2010 5:35 PM Report abuse
Ezra: I hope you do follow the TED conference and their videos. Two key speakers talks about the need to reduce complexity whether it's legal or societal.
http://www.ted.com/talks/alan_siegel_let_s_simplify_legal_jargon.html
http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html
Posted by: AD1971 April 8, 2010 5:48 PM Report abuse
From reading Michael Lewis it is clear that the subprime/CDO/CDS stuff was really complex--so much so that one had to have Asperger's and spend 6 months at it to understand it. It was way, way too complex, and deliberately so. Moreover, the Rubins and Princes didn't ask someone to explain the products to them. There were people in their firms who understood the level of risk, or at least how the products worked. In addition, there were people gaming the ratings agencies who knew that the towers of mortgages and derivatives were largely sh*tpiles. But no one wanted to upset the applecart, and the people with responsibility never wanted to inquire very far.
So what did Rubin do to warrant his $20 million? Provide access? Cachet? He ought to give most of it back.
Greenspan also won ;t acknowledge the role that low interest rates played in (1) fueling the housing boom and (2) encouraging savers/investors to look for higher yields in products like CDOs.
If we want to encourage genuine savings, higher yields were needed, and it would have provided a margin for easing when things went bad. Now, of course, we need low rates. But still. It is a hell of an environment for savers.
Posted by: Mimikatz April 8, 2010 6:05 PM Report abuse
This combined size and complexity is not manageable or controllable in a democracy.
We face very hard choices that we are not socially/politically prepared to make.
There are many aspects that need radical redos:
- numbers and types of biz's that financial firms are allowed to participate in
- max. size of a organization allowed before a anti-trust/anti-complexity trigger is hit that results in breakup into smaller pieces.
- regulators that are tailored to various segments of biz that are created after monoliths are outlawed.
- no financial innovation that isn't fully studied and pre-prescribed remedies are enacted to automatically kick in when inevitably things go awry in one of the newly arranged segments/sectors.
It is almost a fool's errand to think about this, since the beast controls the keeper in multiple ways. We haven't and won't learn from our mistakes. Denial is the order of the day. A return to democratic control of our society is probably now impossible.
Learn to love your financial masters, because they are now your destiny.
Posted by: JimPortlandOR April 8, 2010 7:01 PM Report abuse
The key to regulation is to make CONSUMER PROTECTION paramount. If rules are made with consumer protection in mind AT ALL LEVELS then it will eliminate most of the cheats frauds and loan sharks.
Especially if we take a broad definition of consumer protection to include pension funds and 401Ks. Protecting consumers by cracking down on loan sharks would have prevented the housing bubble.
Trying to regulate the banksters directly is unlikely to work. What can work is to protect small investors and the types of products that can be marketed. The cost of regulation will be small compared to the huge inefficiencies created by the cheats frauds and loan sharks.
Posted by: bakho April 8, 2010 8:01 PM Report abuse
I always though we should just make it a criminal offense to lose $X billion when you can't cover it with assets. Financial meltdowns causes much more societal damage than any particular single criminal act from drug use to trespassing to murder.
You designate a CEO and/or CFO or whoever to be responsible. If the losses include contracts made under a previous CEO, you include him or her.
This is effectively a leverage ratio of 1, but only coming into place when you leverage near the limit. Say, X = $50 billion dollars. I can leverage $4 billion in assets at 13:1 and still make it under the "cap" if it goes bad (4 x 13 - 4 = 48).
But I can only leverage $10 billion at just under 5:1, or else risk 20 years in prison.
But the best part is that no one has to calculate it until after the fact if it goes bad and it motivates people to get it right in the first place. The creditors will act as the police and bring it to everyone's attention because they are making the claims.
Not that I've worked out every aspect of this. You can mitigate sentences for bad luck or duped CEOs.
We used to throw people in jail for debts but got rid of it because it was inhumane for the poor. They can't leverage assets however, so they would just go bankrupt before they reached the limit.
I don't think debtors prison is inhumane for rich CEOs, though.
Posted by: JasonFromSeattle April 8, 2010 8:20 PM Report abuse
RobRub?
Posted by: pj_camp April 8, 2010 8:56 PM Report abuse
Post a Comment
© 2010 The Washington Post Company
Saturday, February 6, 2010
Gretchen Comes Through
(c) 2010 F. Bruce Abel
A clearer picture than hitherto. Good going Gretchen Morgenson.
Goldman Helped Push A.I.G. to Precipice
comments (142)
By GRETCHEN MORGENSON and LOUISE STORY
Published: February 6, 2010
Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months.
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A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.
A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.
After more than an hour of debate, the two sides on the call signed off with nothing settled, according to internal A.I.G. documents and an audio recording reviewed by The New York Times.
Behind-the-scenes disputes over huge sums are common in banking, but the standoff between A.I.G. and Goldman would become one of the most momentous in Wall Street history. Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.
With taxpayer assistance to A.I.G. currently totaling $180 billion, regulatory and Congressional scrutiny of Goldman’s role in the insurer’s downfall is increasing. The Securities and Exchange Commission is examining the payment demands that a number of firms — most prominently Goldman — made during 2007 and 2008 as the mortgage market imploded.
The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.
In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.
In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.
Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.
In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated — and in many cases, less than the prices at which other dealers valued the securities.
The pricing dispute, and Goldman’s bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.
The dispute between the two companies, he said, “was the tip of the iceberg of this whole crisis.”
“It’s not just who was right and who was wrong,” Mr. Brown said. “I also want to know their motivations. There could have been an incentive for Goldman to say, ‘A.I.G., you owe me more money.’ ”
Goldman is proud of its reputation for aggressively protecting itself and its shareholders from losses as it did in the dispute with A.I.G.
In March 2009, David A. Viniar, Goldman’s chief financial officer, discussed his firm’s dispute with A.I.G. in a conference call with reporters. “We believed that the value of these positions was lower than they believed,” he said.
Asked by a reporter whether his bank’s persistent payment demands had contributed to A.I.G.’s woes, Mr. Viniar said that Goldman had done nothing wrong and that the firm was merely seeking to enforce its insurance policy with A.I.G. “I don’t think there is any guilt whatsoever,” he concluded.
Lucas van Praag, a Goldman spokesman, reiterated that position. “We requested the collateral we were entitled to under the terms of our agreements,” he said in a written statement, “and the idea that A.I.G. collapsed because of our marks is ridiculous.”
Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.’s insurance did not even cover.
A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that A.I.G. insured were “consistently lower than third-party prices.”
To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once the world’s largest insurer, had written far more insurance than it could have possibly paid if a national mortgage debacle occurred — as, in fact, it did.
Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty — and Goldman became one of the biggest beneficiaries.
Longstanding Ties
For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative new business: insuring the least risky portions of corporate loans or other assets that were bundled into securities.
A.I.G.’s financial products unit, led by Joseph J. Cassano, was behind the expansion. To reduce its own risks in the transactions, the company structured deals so that it would not have to make early payments to clients when securities began to sour. That changed around 2003, however, when A.I.G. began insuring portions of subprime mortgage deals. A lawyer for Mr. Cassano said his client would not comment for this article. A.I.G. also declined to comment.
Alan Frost, a managing director in Mr. Cassano’s unit, negotiated scores of mortgage deals around Wall Street that included a complicated sequence of events for when an insurance payment on a distressed asset came due.
The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded. If all of those things happened, A.I.G. would have to make even larger payments.
Mr. Frost referred questions to his lawyer, who declined to comment.
Traders loved Mr. Frost’s deals because they would pay out quickly if anything went wrong. Mr. Frost cut many of his deals with two Goldman traders, Jonathan Egol and Ram Sundaram, who had negative views of the housing market. They had made A.I.G. a central part of some of their trading strategies.
Mr. Egol structured a group of deals — known as Abacus — so that Goldman could benefit from a housing collapse. Many of them were actually packages of A.I.G. insurance written against mortgage bonds, indicating that Mr. Egol and Goldman believed that A.I.G. would have to make large payments if the housing market ran aground. About $5.5 billion of Mr. Egol’s deals still sat on A.I.G.’s books when the insurer was bailed out.
“Al probably did not know it, but he was working with the bears of Goldman,” a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. “He was signing A.I.G. up to insure trades made by people with really very negative views” of the housing market.
Mr. Sundaram’s trades represented another large part of Goldman’s business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. — helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.
Through Société Générale, Goldman was also able to buy more insurance on mortgage securities from A.I.G., according to a former A.I.G. executive with direct knowledge of the deals. A spokesman for Société Générale declined to comment.
It is unclear how much Goldman bought through the French bank, but A.I.G. documents show that Goldman was involved in pricing half of Société Générale’s $18.6 billion in trades with A.I.G. and that the insurer’s executives believed that Goldman pressed Société Générale to also demand payments.
Goldman’s Tough Terms
In addition to insuring Mr. Sundaram’s and Mr. Egol’s trades with A.I.G., Goldman also negotiated aggressively with A.I.G. — often requiring the insurer to make payments when the value of mortgage bonds fell by just 4 percent. Most other banks dealing with A.I.G. did not receive payments until losses exceeded 8 percent, the insurer’s records show.
Several former Goldman partners said it was not surprising that Goldman sought such tough terms, given the firm’s longstanding focus on risk management.
By July 2007, when Goldman demanded its first payment from A.I.G. — $1.8 billion — the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.
Still, Goldman’s initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments.
On Nov. 1, 2007, for example, an e-mail message from Mr. Cassano, the head of A.I.G. Financial Products, to Elias Habayeb, an A.I.G. accounting executive, said that a payment demand from Société Générale had been “spurred by GS calling them.”
Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.’s downfall, declined to be interviewed and referred questions to A.I.G. The insurer also declined to comment for this article. Mr. van Praag, the Goldman spokesman, said Goldman did not push other firms to demand payments from A.I.G.
Later that month, Mr. Cassano noted in another e-mail message that Goldman’s demands for payment were becoming problematic. “The overhang of the margin call from the perceived righteous Goldman Sachs has impacted everyone’s judgment,” he wrote to five employees in his division.
By the end of November 2007, Goldman was holding $2 billion in cash from A.I.G. when the insurer notified Goldman that it was disputing the firm’s calculations and seeking a return of $1.56 billion. Goldman refused, the documents show.
In many of these deals, Goldman was trading for other parties and taking a fee. As the mortgage market declined, Goldman paid some of these parties while waiting for A.I.G. to meet its demands, the Goldman spokesman said. But one reason those parties were owed money on the deals was that Goldman had marked down the securities.
Adding to the pressure on A.I.G., Mr. Viniar, Goldman’s chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman’s valuations, according to a person with knowledge of the discussions. Goldman declined to comment on this exchange.
Pricewaterhouse had supported A.I.G.’s approach to valuing the securities throughout 2007, documents show. But at the end of 2007, the auditor began demanding that A.I.G. provide greater disclosure on the risks in the credit insurance it had written. Pricewaterhouse was expressing concern about the dispute.
The insurer disclosed in year-end regulatory filings that its auditor had found a “material weakness” in financial reporting related to valuations of the insurance, a troubling sign for investors.
A spokesman for Pricewaterhouse said the company would not comment on client matters.
Insiders at A.I.G. bridled at Goldman’s insistence that they accept the investment bank’s valuations. “Would we call bond issuers and ask them what the valuation of their bonds was and take that?” asked Robert Lewis, A.I.G.’s chief risk officer, in a message in January 2008. “What am I missing here, so I don’t waste everybody’s time?”
When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, Mr. Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman’s vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.
Mr. Sherwood said he did not want to ask other firms to value the securities because “it would be ‘embarrassing’ if we brought the market into our disagreement,” according to an e-mail message from Mr. Cassano that described the call.
The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology.
Trouble Grows at A.I.G.
By the spring of 2008, A.I.G.’s dispute with Goldman was just one of its many woes. Mr. Cassano was pushed out in March and the company’s defenses against the growing demand for payments faltered. By the end of August 2008, A.I.G. had posted $19.7 billion in cash to its trading partners, including Goldman, according to financial filings.
Over that summer, A.I.G. had tried, unsuccessfully, to cancel its insurance contracts with the trading partners. But Goldman, according to interviews with former A.I.G. executives, would allow that only if it also got to keep the $7 billion it had already received from A.I.G. Goldman wanted to keep the initial insurance payouts and the securities in order to profit from any future rebound.
In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.
Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.
On Aug. 18, 2008, Goldman’s equity research department published an in-depth report on A.I.G. The analysts advised the firm’s clients to avoid the stock because of a “downward spiral which is likely to ensue as more actual cash losses emanate” from the insurer’s financial products unit.
On the matter of whether A.I.G. could unwind its troublesome insurance on mortgage securities at a discount, the Goldman report noted that if a trading partner “is not in a position of weakness, why would it accept anything less than the full amount of protection for which it had paid?”
A.I.G. shares fell 6 percent the day the report was published. Three weeks later, the United States government agreed to pour billions of dollars in taxpayer money into the insurer to keep it from collapsing.
The government would soon settle the yearlong dispute between Goldman and A.I.G., with Goldman receiving full value for its bets. The federal bailout locked in the paper losses of those deals for A.I.G. The prices on many of those securities have since rebounded.
Alan Feuer contributed reporting.
A clearer picture than hitherto. Good going Gretchen Morgenson.
Goldman Helped Push A.I.G. to Precipice
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By GRETCHEN MORGENSON and LOUISE STORY
Published: February 6, 2010
Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months.
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A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.
A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.
After more than an hour of debate, the two sides on the call signed off with nothing settled, according to internal A.I.G. documents and an audio recording reviewed by The New York Times.
Behind-the-scenes disputes over huge sums are common in banking, but the standoff between A.I.G. and Goldman would become one of the most momentous in Wall Street history. Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.
With taxpayer assistance to A.I.G. currently totaling $180 billion, regulatory and Congressional scrutiny of Goldman’s role in the insurer’s downfall is increasing. The Securities and Exchange Commission is examining the payment demands that a number of firms — most prominently Goldman — made during 2007 and 2008 as the mortgage market imploded.
The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.
In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.
In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.
Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.
In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated — and in many cases, less than the prices at which other dealers valued the securities.
The pricing dispute, and Goldman’s bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.
The dispute between the two companies, he said, “was the tip of the iceberg of this whole crisis.”
“It’s not just who was right and who was wrong,” Mr. Brown said. “I also want to know their motivations. There could have been an incentive for Goldman to say, ‘A.I.G., you owe me more money.’ ”
Goldman is proud of its reputation for aggressively protecting itself and its shareholders from losses as it did in the dispute with A.I.G.
In March 2009, David A. Viniar, Goldman’s chief financial officer, discussed his firm’s dispute with A.I.G. in a conference call with reporters. “We believed that the value of these positions was lower than they believed,” he said.
Asked by a reporter whether his bank’s persistent payment demands had contributed to A.I.G.’s woes, Mr. Viniar said that Goldman had done nothing wrong and that the firm was merely seeking to enforce its insurance policy with A.I.G. “I don’t think there is any guilt whatsoever,” he concluded.
Lucas van Praag, a Goldman spokesman, reiterated that position. “We requested the collateral we were entitled to under the terms of our agreements,” he said in a written statement, “and the idea that A.I.G. collapsed because of our marks is ridiculous.”
Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.’s insurance did not even cover.
A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that A.I.G. insured were “consistently lower than third-party prices.”
To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once the world’s largest insurer, had written far more insurance than it could have possibly paid if a national mortgage debacle occurred — as, in fact, it did.
Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty — and Goldman became one of the biggest beneficiaries.
Longstanding Ties
For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative new business: insuring the least risky portions of corporate loans or other assets that were bundled into securities.
A.I.G.’s financial products unit, led by Joseph J. Cassano, was behind the expansion. To reduce its own risks in the transactions, the company structured deals so that it would not have to make early payments to clients when securities began to sour. That changed around 2003, however, when A.I.G. began insuring portions of subprime mortgage deals. A lawyer for Mr. Cassano said his client would not comment for this article. A.I.G. also declined to comment.
Alan Frost, a managing director in Mr. Cassano’s unit, negotiated scores of mortgage deals around Wall Street that included a complicated sequence of events for when an insurance payment on a distressed asset came due.
The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded. If all of those things happened, A.I.G. would have to make even larger payments.
Mr. Frost referred questions to his lawyer, who declined to comment.
Traders loved Mr. Frost’s deals because they would pay out quickly if anything went wrong. Mr. Frost cut many of his deals with two Goldman traders, Jonathan Egol and Ram Sundaram, who had negative views of the housing market. They had made A.I.G. a central part of some of their trading strategies.
Mr. Egol structured a group of deals — known as Abacus — so that Goldman could benefit from a housing collapse. Many of them were actually packages of A.I.G. insurance written against mortgage bonds, indicating that Mr. Egol and Goldman believed that A.I.G. would have to make large payments if the housing market ran aground. About $5.5 billion of Mr. Egol’s deals still sat on A.I.G.’s books when the insurer was bailed out.
“Al probably did not know it, but he was working with the bears of Goldman,” a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. “He was signing A.I.G. up to insure trades made by people with really very negative views” of the housing market.
Mr. Sundaram’s trades represented another large part of Goldman’s business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. — helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.
Through Société Générale, Goldman was also able to buy more insurance on mortgage securities from A.I.G., according to a former A.I.G. executive with direct knowledge of the deals. A spokesman for Société Générale declined to comment.
It is unclear how much Goldman bought through the French bank, but A.I.G. documents show that Goldman was involved in pricing half of Société Générale’s $18.6 billion in trades with A.I.G. and that the insurer’s executives believed that Goldman pressed Société Générale to also demand payments.
Goldman’s Tough Terms
In addition to insuring Mr. Sundaram’s and Mr. Egol’s trades with A.I.G., Goldman also negotiated aggressively with A.I.G. — often requiring the insurer to make payments when the value of mortgage bonds fell by just 4 percent. Most other banks dealing with A.I.G. did not receive payments until losses exceeded 8 percent, the insurer’s records show.
Several former Goldman partners said it was not surprising that Goldman sought such tough terms, given the firm’s longstanding focus on risk management.
By July 2007, when Goldman demanded its first payment from A.I.G. — $1.8 billion — the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.
Still, Goldman’s initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments.
On Nov. 1, 2007, for example, an e-mail message from Mr. Cassano, the head of A.I.G. Financial Products, to Elias Habayeb, an A.I.G. accounting executive, said that a payment demand from Société Générale had been “spurred by GS calling them.”
Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.’s downfall, declined to be interviewed and referred questions to A.I.G. The insurer also declined to comment for this article. Mr. van Praag, the Goldman spokesman, said Goldman did not push other firms to demand payments from A.I.G.
Later that month, Mr. Cassano noted in another e-mail message that Goldman’s demands for payment were becoming problematic. “The overhang of the margin call from the perceived righteous Goldman Sachs has impacted everyone’s judgment,” he wrote to five employees in his division.
By the end of November 2007, Goldman was holding $2 billion in cash from A.I.G. when the insurer notified Goldman that it was disputing the firm’s calculations and seeking a return of $1.56 billion. Goldman refused, the documents show.
In many of these deals, Goldman was trading for other parties and taking a fee. As the mortgage market declined, Goldman paid some of these parties while waiting for A.I.G. to meet its demands, the Goldman spokesman said. But one reason those parties were owed money on the deals was that Goldman had marked down the securities.
Adding to the pressure on A.I.G., Mr. Viniar, Goldman’s chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman’s valuations, according to a person with knowledge of the discussions. Goldman declined to comment on this exchange.
Pricewaterhouse had supported A.I.G.’s approach to valuing the securities throughout 2007, documents show. But at the end of 2007, the auditor began demanding that A.I.G. provide greater disclosure on the risks in the credit insurance it had written. Pricewaterhouse was expressing concern about the dispute.
The insurer disclosed in year-end regulatory filings that its auditor had found a “material weakness” in financial reporting related to valuations of the insurance, a troubling sign for investors.
A spokesman for Pricewaterhouse said the company would not comment on client matters.
Insiders at A.I.G. bridled at Goldman’s insistence that they accept the investment bank’s valuations. “Would we call bond issuers and ask them what the valuation of their bonds was and take that?” asked Robert Lewis, A.I.G.’s chief risk officer, in a message in January 2008. “What am I missing here, so I don’t waste everybody’s time?”
When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, Mr. Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman’s vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.
Mr. Sherwood said he did not want to ask other firms to value the securities because “it would be ‘embarrassing’ if we brought the market into our disagreement,” according to an e-mail message from Mr. Cassano that described the call.
The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology.
Trouble Grows at A.I.G.
By the spring of 2008, A.I.G.’s dispute with Goldman was just one of its many woes. Mr. Cassano was pushed out in March and the company’s defenses against the growing demand for payments faltered. By the end of August 2008, A.I.G. had posted $19.7 billion in cash to its trading partners, including Goldman, according to financial filings.
Over that summer, A.I.G. had tried, unsuccessfully, to cancel its insurance contracts with the trading partners. But Goldman, according to interviews with former A.I.G. executives, would allow that only if it also got to keep the $7 billion it had already received from A.I.G. Goldman wanted to keep the initial insurance payouts and the securities in order to profit from any future rebound.
In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.
Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.
On Aug. 18, 2008, Goldman’s equity research department published an in-depth report on A.I.G. The analysts advised the firm’s clients to avoid the stock because of a “downward spiral which is likely to ensue as more actual cash losses emanate” from the insurer’s financial products unit.
On the matter of whether A.I.G. could unwind its troublesome insurance on mortgage securities at a discount, the Goldman report noted that if a trading partner “is not in a position of weakness, why would it accept anything less than the full amount of protection for which it had paid?”
A.I.G. shares fell 6 percent the day the report was published. Three weeks later, the United States government agreed to pour billions of dollars in taxpayer money into the insurer to keep it from collapsing.
The government would soon settle the yearlong dispute between Goldman and A.I.G., with Goldman receiving full value for its bets. The federal bailout locked in the paper losses of those deals for A.I.G. The prices on many of those securities have since rebounded.
Alan Feuer contributed reporting.
Saturday, January 30, 2010
"I.O.U." -- Excerpt
Excerpt
‘I.O.U.’
By JOHN LANCHESTER
Published: January 5, 2010
Introduction
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'I.O.U.,' by John Lanchester: Laughing All the Way to the Bank (January 6, 2010)
Annie Hall is a film with many great moments, and for me the best of them is the movie's single scene with Annie's younger brother, Duane Hall, played by Christopher Walken, the first of his long, brilliant career of cinema weirdos. Visiting the Hall family home, Alvy Singer — that's Woody Allen — bumps into Duane, who immediately shares a fantasy:
"Sometimes when I'm driving . . . on the road at night . . . I see two headlights coming toward me. Fast. I have this sudden impulse to turn the wheel quickly, head-on into the oncoming car. I can anticipate the explosion. The sound of shattering glass. The . . . flames rising out of the flowing gasoline."
It's Alvy's reply which makes the scene: "Right. Well, I have to — I have to go now, Duane, because I, I'm due back on the planet Earth."
I've never shared Duane Hall's wish to turn across the road into the oncoming headlights. I have to admit, though, that I have sometimes had a not-too-distant thought. It's a thought which never hits me in town, or in traffic, or when there's anyone else in the car, but when I'm on my own in the country, zooming down an empty road, with the radio on, and everything is moving free and clear, as it hardly ever is with today's traffic, but when it is, I sometimes have a fleeting thought, one I've never acted on and hope I never will. The thought is this: what would happen if I chose this moment to put the car into reverse?
When you ask car buffs that, the first thing they do is to give you a funny look. Then they give you another funny look. Then they explain that what would happen is that the car's engine would basically explode: bits of it would burst through other bits, rods would fly through the air, the carburetor would burst into fragments, there would be incredible noise and smell and smoke, and you would swerve off the road and crash with the certainty of serious injury and the high probability of death. These explanations are sufficiently convincing that I find that the thought of putting the car into reverse flits across my mind only very temporarily, for about half a second at a time, say once every two or three years. I'm sure it's something I'll never do.
For the first years of the new millennium, the whole planet was zooming along, doing the equivalent of seventy on a clear road on a sunny day. Between 2000 and 2006, public discourse in the Western world was dominated by the election of George W. Bush, the attacks of 9/11, the "global war on terror" and the wars in Afghanistan and Iraq. But while all that was happening, something momentous was taking place, not quite unnoticed but with bizarrely little notice: the world's wealth was almost doubling. In 2000, the total GDP of Earth — the sum total of all the economic activity on the planet — was $36 trillion. By the end of 2006, it was $70 trillion. In the developed world, so much attention was given to the bust in dot-com shares in 2000 — "the greatest destruction of capital in the history of the world," as it was called at the time — that no one noticed the way the Western economies bounced back. The stock market was relatively stagnant, for reasons I'll go into later, but other sectors of the economy were booming. So was the rest of the planet. An editorial in The Economist in 1999 pointed out that the price of oil was now down to $10 a barrel, and issued a solemn warning: it might not stay there: there were reasons for thinking the price of oil might go to $5 a barrel. Ha!
By July 2008 the price of oil had risen to $147.70 a barrel, and as a result the oil-producing countries were awash with cash. From the Arab world to Russia to Venezuela, the treasury departments of all oil-producing countries resembled the scene in The Simpsons in which Monty Burns and his assistant, Smithers, pick up wads of cash and throw them at each other while shouting "Money fight!" The demand for oil was so avid because large sections of the developing world, especially India and China, were undergoing unprecedented levels of economic growth. Both countries suddenly had a hugely expanding, highly consuming new middle class. China's GDP was averaging growth of 10.8 percent a year, India's 8.9 percent. In fifteen years, India's middle class, using a broad definition of the term meaning the section of the population who had escaped from poverty, grew from 147 million to 264 million; China's went from 174 million to 806 million, arguably the greatest economic achievement anywhere on Earth, ever. Chinese personal income grew by 6.6 percent a year from 1978 to 2004, four times as fast as the world average. Thirty million Chinese children are taking piano lessons. Two-fifths of all Indian secondary school boys have regular after-school tuition. When you have two and a quarter billion people living in countries whose economies are booming in that way, you are living on a planet with a whole new economic outlook. Hundreds of millions of people are measurably richer and have new expectations to match. So oil is up, manufacturing is up, the price of commodities — the stuff which goes to make stuff — is up, the economy of (almost) the entire planet is booming. Who knows, optimists think, with the global economy growing at this rate, we can perhaps begin to think seriously about meeting the United Nations' Millennium Development goals, such as halving the number of hungry people, and of people whose income is less than $1 a day, by 2015.1 That seemed utopian at the time the goals were set, but with the world $34 trillion richer, it suddenly looked as if this unprecedented target might be achieved.
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Friday, January 29, 2010
"IOU" -- Read It!
(c) 2010 F. Bruce Abel
As this review says, this is good! And I am finding it so. Thank you John Lanchester.
Books of The Times
Laughing All the Way to the Bank
By DWIGHT GARNER
Published: January 5, 2010
If you wanted to try to make sense of the global banking crisis, instead of merely weeping openly at your A.T.M. balance, 2009 was a very good year. Bookstores were filled with volumes that, with expert 20-20 hindsight, explained how capitalism went to hell. The blame was spread around: to politicians (for deregulating financial markets), to bankers (for gambling with exotic derivatives they barely understood) and to the rest of us (for living beyond our means, like insatiate zombie piglets).
Skip to next paragraph
Steven Puetzer/Masterfile
John Lanchester
I.O.U.
Why Everyone Owes Everyone and No One Can Pay
By John Lanchester
260 pages. Simon & Schuster. $25.
Related
Excerpt: ‘I.O.U.’ (January 6, 2010)
Times Topics: Credit Crisis — The Essentials
This nightmare isn’t over. We’ll be living with the fallout from the banking crisis for decades and devouring plenty more books about it too. The whole episode is a kind of intellectual and moral Superfund site, an oozing gift that will keep giving. But here’s a prediction: Few if any of these books will be as pleasurable — and by that I mean as literate or as wickedly funny — as John Lanchester’s “I.O.U.: Why Everyone Owes Everyone and No One Can Pay.”
Mr. Lanchester, who is British, isn’t an economist or a business journalist. He’s a novelist (and a talented one; try “The Debt to Pleasure”), a man with no special financial expertise whatsoever. A few years ago he began following the financial meltdown for research purposes, as background for a novel he was writing. He soon realized, he says, “that I had stumbled across the most interesting story I’ve ever found.”
It’s a story that begins, as these stories are wont to do, with the fall of the Berlin Wall. The capitalist West won its “ideological beauty contest” with the communist East, Mr. Lanchester writes, which was good news except for this: Suddenly “there was no global antagonist to point at and jeer at the rise in the number and size of the fat cats; there was no embarrassment about allowing the rich to get so much richer so very quickly.”
Once upon a time in America and Britain, he observes, “the jet engine of capitalism was harnessed to the ox cart of social justice, to much bleating from the advocates of pure capitalism, but with the effect that the Western liberal democracies became the most admired societies that the world had ever seen.”
Then the Wall crumbled, and “the jet engine was unhooked from the ox cart and allowed to roar off at its own speed. The result was an unprecedented boom, which had two big things wrong with it: It wasn’t fair, and it wasn’t sustainable.”
The snidest villains and the greediest buffoons in the narrative are the bankers and other financial wizards who began recklessly playing with new, risky, little-understood tools to get richer faster — tools that ostensibly hedge against risk but also dramatically increase it. If you don’t know how derivatives or credit default swaps work, or what securitization is, or why futures are riskier than options, this is a book for you. Mr. Lanchester explains these things methodically, with mathematical rigor, but he is also, crucially, guided as much by perception and feel.
“We are a long, long way from a single quote for next season’s wheat crop,” he notes. “The contemporary derivative is likely to involve a mix of options, futures, currencies and debt, structured and priced in ways which are the closest extant thing to rocket science. Mathematics Ph.D.’s are all over the place in this business.”
Mr. Lanchester finds loads of bleak humor here. “Warren Buffett was doubly right to compare the new financial products to ‘weapons of mass destruction’ — first, because they are lethal, and, second, because no one knows how to track them down,” he writes.
He also compares the banking crisis to the birth of postmodernism. “For anyone who studied literature in college in the past few decades, there is a weird familiarity about the current crisis,” he says. “Value, in the realm of finance capital, parallels the elusive nature of meaning in deconstructionism.”
“I.O.U.” crosses over into black satire when Mr. Lanchester describes how bankers used their new tools to make money from poor people, the worst credit risks, by prying their cash loose through predatory lending, then pooling this money and selling it off. Who cared if these people defaulted on their mortgages? The risk had already been passed along to others, and ultimately, when banks failed, to taxpayers. Mr. Lanchester calls this “a 100 percent pure form of socialism for the rich.”
With steam shooting from his ears, he summarizes: “So: a huge, unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialized. That is literally nobody’s idea of how the world is supposed to work.”
Mr. Lanchester’s history lesson is peppered with dead-on references to everything, including “Annie Hall,” “The Simpsons,” “The Wire,” Hemingway and Jacques Derrida. He is effortlessly epigrammatical. (“In a sense, credit isn’t just an aspect of the economy, it is the economy.”)
His wit pops out at unexpected angles. About the ever-riskier wagers bankers were making, he writes: “This wasn’t just looking for trouble, it was sending trouble a ‘save the date’ card, followed by a formal invitation, followed by nagging e-mails and phone calls just to make absolutely sure.”
He also lays out a wide series of necessary reforms, including requiring banks to keep more capital on hand and separating investment banking from everyday banking (“the casino” from “the piggy bank”).
These reforms include personal ones, aimed at me and at you. Do we need so much stuff in our lives? he asks. “In a world running out of resources, the most important ethical, political and ecological idea can be summed up in one simple word: ‘enough.’ ”
Mr. Lanchester is no admirer of George W. Bush, but he does enjoy citing Mr. Bush’s comment in late 2008 about the worsening economy: “This sucker could go down.” Mr. Lanchester, in 2010, isn’t quite that pessimistic. But he does note that we’re all about to get the bill from the financial bailouts, a bill that could easily top $4.6 trillion.
How much money is that, anyway? Brace yourself. That number, Mr. Lanchester writes, paraphrasing one expert, “is bigger than the Marshall Plan, the Louisiana Purchase, the Apollo moon landings, the 1980s savings and loan crisis, the Korean War and the total cost of NASA’s space flights, all added together — repeat, added together (and yes, the old figures are adjusted upward for inflation).”
Before you begin to cry, pick up a copy of “I.O.U.” Good humor and good company will be the things that’ll get us through.
As this review says, this is good! And I am finding it so. Thank you John Lanchester.
Books of The Times
Laughing All the Way to the Bank
By DWIGHT GARNER
Published: January 5, 2010
If you wanted to try to make sense of the global banking crisis, instead of merely weeping openly at your A.T.M. balance, 2009 was a very good year. Bookstores were filled with volumes that, with expert 20-20 hindsight, explained how capitalism went to hell. The blame was spread around: to politicians (for deregulating financial markets), to bankers (for gambling with exotic derivatives they barely understood) and to the rest of us (for living beyond our means, like insatiate zombie piglets).
Skip to next paragraph
Steven Puetzer/Masterfile
John Lanchester
I.O.U.
Why Everyone Owes Everyone and No One Can Pay
By John Lanchester
260 pages. Simon & Schuster. $25.
Related
Excerpt: ‘I.O.U.’ (January 6, 2010)
Times Topics: Credit Crisis — The Essentials
This nightmare isn’t over. We’ll be living with the fallout from the banking crisis for decades and devouring plenty more books about it too. The whole episode is a kind of intellectual and moral Superfund site, an oozing gift that will keep giving. But here’s a prediction: Few if any of these books will be as pleasurable — and by that I mean as literate or as wickedly funny — as John Lanchester’s “I.O.U.: Why Everyone Owes Everyone and No One Can Pay.”
Mr. Lanchester, who is British, isn’t an economist or a business journalist. He’s a novelist (and a talented one; try “The Debt to Pleasure”), a man with no special financial expertise whatsoever. A few years ago he began following the financial meltdown for research purposes, as background for a novel he was writing. He soon realized, he says, “that I had stumbled across the most interesting story I’ve ever found.”
It’s a story that begins, as these stories are wont to do, with the fall of the Berlin Wall. The capitalist West won its “ideological beauty contest” with the communist East, Mr. Lanchester writes, which was good news except for this: Suddenly “there was no global antagonist to point at and jeer at the rise in the number and size of the fat cats; there was no embarrassment about allowing the rich to get so much richer so very quickly.”
Once upon a time in America and Britain, he observes, “the jet engine of capitalism was harnessed to the ox cart of social justice, to much bleating from the advocates of pure capitalism, but with the effect that the Western liberal democracies became the most admired societies that the world had ever seen.”
Then the Wall crumbled, and “the jet engine was unhooked from the ox cart and allowed to roar off at its own speed. The result was an unprecedented boom, which had two big things wrong with it: It wasn’t fair, and it wasn’t sustainable.”
The snidest villains and the greediest buffoons in the narrative are the bankers and other financial wizards who began recklessly playing with new, risky, little-understood tools to get richer faster — tools that ostensibly hedge against risk but also dramatically increase it. If you don’t know how derivatives or credit default swaps work, or what securitization is, or why futures are riskier than options, this is a book for you. Mr. Lanchester explains these things methodically, with mathematical rigor, but he is also, crucially, guided as much by perception and feel.
“We are a long, long way from a single quote for next season’s wheat crop,” he notes. “The contemporary derivative is likely to involve a mix of options, futures, currencies and debt, structured and priced in ways which are the closest extant thing to rocket science. Mathematics Ph.D.’s are all over the place in this business.”
Mr. Lanchester finds loads of bleak humor here. “Warren Buffett was doubly right to compare the new financial products to ‘weapons of mass destruction’ — first, because they are lethal, and, second, because no one knows how to track them down,” he writes.
He also compares the banking crisis to the birth of postmodernism. “For anyone who studied literature in college in the past few decades, there is a weird familiarity about the current crisis,” he says. “Value, in the realm of finance capital, parallels the elusive nature of meaning in deconstructionism.”
“I.O.U.” crosses over into black satire when Mr. Lanchester describes how bankers used their new tools to make money from poor people, the worst credit risks, by prying their cash loose through predatory lending, then pooling this money and selling it off. Who cared if these people defaulted on their mortgages? The risk had already been passed along to others, and ultimately, when banks failed, to taxpayers. Mr. Lanchester calls this “a 100 percent pure form of socialism for the rich.”
With steam shooting from his ears, he summarizes: “So: a huge, unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialized. That is literally nobody’s idea of how the world is supposed to work.”
Mr. Lanchester’s history lesson is peppered with dead-on references to everything, including “Annie Hall,” “The Simpsons,” “The Wire,” Hemingway and Jacques Derrida. He is effortlessly epigrammatical. (“In a sense, credit isn’t just an aspect of the economy, it is the economy.”)
His wit pops out at unexpected angles. About the ever-riskier wagers bankers were making, he writes: “This wasn’t just looking for trouble, it was sending trouble a ‘save the date’ card, followed by a formal invitation, followed by nagging e-mails and phone calls just to make absolutely sure.”
He also lays out a wide series of necessary reforms, including requiring banks to keep more capital on hand and separating investment banking from everyday banking (“the casino” from “the piggy bank”).
These reforms include personal ones, aimed at me and at you. Do we need so much stuff in our lives? he asks. “In a world running out of resources, the most important ethical, political and ecological idea can be summed up in one simple word: ‘enough.’ ”
Mr. Lanchester is no admirer of George W. Bush, but he does enjoy citing Mr. Bush’s comment in late 2008 about the worsening economy: “This sucker could go down.” Mr. Lanchester, in 2010, isn’t quite that pessimistic. But he does note that we’re all about to get the bill from the financial bailouts, a bill that could easily top $4.6 trillion.
How much money is that, anyway? Brace yourself. That number, Mr. Lanchester writes, paraphrasing one expert, “is bigger than the Marshall Plan, the Louisiana Purchase, the Apollo moon landings, the 1980s savings and loan crisis, the Korean War and the total cost of NASA’s space flights, all added together — repeat, added together (and yes, the old figures are adjusted upward for inflation).”
Before you begin to cry, pick up a copy of “I.O.U.” Good humor and good company will be the things that’ll get us through.
Sunday, January 24, 2010
Morgenson Today
(c) 2010 F. Bruce Abel
Good because I always agree with her.
http://www.nytimes.com/2010/01/24/business/24gret.html?adxnnl=1&ref=todayspaper&adxnnlx=1264345293-VyBn/7G/ZOgxsS6SoJBX3g
Good because I always agree with her.
http://www.nytimes.com/2010/01/24/business/24gret.html?adxnnl=1&ref=todayspaper&adxnnlx=1264345293-VyBn/7G/ZOgxsS6SoJBX3g
Sunday, December 20, 2009
Baseline Scenario -- Missing the Meeting With the President
(c) F. Bruce Abel
A simple but powerful effort by Simon Johnson:
The Baseline Scenario
“It’s Certainly Not For A Lack Of Effort”
Posted: 19 Dec 2009 06:21 AM PST
The fundamental divide in opinion regarding our financial system is: Are the people running “large integrated financial groups“ hapless fools, buffeted by forces beyond their comprehension and control; or do they know exactly how to ensure they get the upside and the awful, sickening downside is borne by society – including through high unemployment.
Some light was shed on this issue by Monday’s meeting at the White House or, more specifically, by who didn’t turn up and why. Of the dozen bank CEOs invited, Vikram Pandit was supposedly busy trying to extricate Citi from TARP and asked Dick Parsons to attend instead – a wimpy but smart move, as Parsons is close to the President.
However, three executives – Lloyd Blankfein, John Mack, and Dick Parsons himself – did not show up in person and had to join by conference call. Their excuse was bad weather (fog) in DC meant that they were unable to fly in; Mack was quoted as saying, regarding their absence, “It’s certainly not for a lack of effort“.
But really there are three possible interpretations:
Pure bad luck. This happens to us all; even the best laid plans are for nought sometimes.
Bad management by the executives and their logistic teams – who are ordinarily the best of the best.
Wilful defiance of the government which, while not premeditated in this instance, means that the executives grabbed an opportunity to show disrespect and relative power.
We don’t know all the facts of how these executives planned to travel or exactly their routes on Monday morning – and I would be happy to be corrected on any details – but here’s what we can readily construct from the public record. (We do know they didn’t try to come down Sunday evening, because that would have worked.)
President Obama held a press briefing after his meeting with the bankers, starting at 12:36pm. The meeting itself lasted a bit over an hour. As we all like to start meetings, particularly important meetings, on round numbers, it seems fair to assume that the appointment at the White House was for 11am. Even VIPs need some time to clear security, so let’s assume that the CEOs were asked to arrive by 10:30am.
All three of the missing bankers were apparently coming from New York. There are many ways to make the flight, but US Airways is among the most reliable – flying from LaGuardia to National Airport, every hour on the hour, from 6am. The flight takes just over an hour, it’s easier to get to LaGuardia from Manhattan before 7am, and delays are common at LGA as air traffic builds up over the east coast. Any conservative banker, who really did not want to be the only person missing a meeting with the president, would aim for the 7am shuttle – putting him on the tarmac in DC at 8:10am, with a comfortable time cushion (and an opportunity to have coffee with his chief lobbyist).
There was thick fog in DC on Monday morning, but this did not descend in a matter of seconds during rush hour – it was evident already by 5am. Corporate jets could get through (Jamie Dimon came that way), but let’s limit ourselves to public transportation – remember that the Acela train service is not generally slowed by fog and on Monday ran almost on time.
So the question becomes: At what point did the CEO realize that there was a fog issue, and was there still time to come by train? The Acela leaves Penn Station every hour on the hour, with the 7am train getting to DC at 9:49am and the 8am arriving at 10:49am.
We can rule out explanation #1 (bad luck). These are experienced people who travel all the time, with first class support staff, and they are supposed to be the best in the timely information business. These executives don’t generally wander around airports trying to puzzle out flight information displays.
Is explanation #2 plausible (bad management)? It is possible that at least one bank team wasn’t paying close attention and sent their boss to the airport for the 7am shuttle (although what are the odds that this would happen for 3 of our biggest and most dangerous banks?) An experienced traveller, who has checked in on-line, might aim to arrive at the airport at 6:30am – to discover the delays already in progress.
So then the question becomes: Can you get from LaGuardia to Penn station in 90 minutes early on a Monday morning? My experience is: Yes (if any New Yorkers know differently or if anyone saw John Mack pushing desperately through the crowds at Penn Station just before 8am Monday, please post or send that information in).
The implication is inescapable. These three bank executives did not plan on missing the meeting but, once they learned of the fog delay, they did not rush to the train station – which is what any other business traveller with a pressing commitment would have done.
These three executives – who were, in some sense, the primary audience for the president’s remarks – did not really want to attend. They do not see the need to show deference or even respect. They won big from the crisis and that is now behind them. As they move on (and up), there is nothing – in their view – that the executive branch can do to hold them back.
Even so, it wasn’t polite to behave in this fashion; showing disrespect to the President of the United States is always objectionable. But there is a pattern of behavior here, reflecting a deeper culture on Wall Street. This arrogance will eventually prove their undoing - no self-respecting White House can let this kind of repeated insult pass unaddressed.
By Simon Johnson
A simple but powerful effort by Simon Johnson:
The Baseline Scenario
“It’s Certainly Not For A Lack Of Effort”
Posted: 19 Dec 2009 06:21 AM PST
The fundamental divide in opinion regarding our financial system is: Are the people running “large integrated financial groups“ hapless fools, buffeted by forces beyond their comprehension and control; or do they know exactly how to ensure they get the upside and the awful, sickening downside is borne by society – including through high unemployment.
Some light was shed on this issue by Monday’s meeting at the White House or, more specifically, by who didn’t turn up and why. Of the dozen bank CEOs invited, Vikram Pandit was supposedly busy trying to extricate Citi from TARP and asked Dick Parsons to attend instead – a wimpy but smart move, as Parsons is close to the President.
However, three executives – Lloyd Blankfein, John Mack, and Dick Parsons himself – did not show up in person and had to join by conference call. Their excuse was bad weather (fog) in DC meant that they were unable to fly in; Mack was quoted as saying, regarding their absence, “It’s certainly not for a lack of effort“.
But really there are three possible interpretations:
Pure bad luck. This happens to us all; even the best laid plans are for nought sometimes.
Bad management by the executives and their logistic teams – who are ordinarily the best of the best.
Wilful defiance of the government which, while not premeditated in this instance, means that the executives grabbed an opportunity to show disrespect and relative power.
We don’t know all the facts of how these executives planned to travel or exactly their routes on Monday morning – and I would be happy to be corrected on any details – but here’s what we can readily construct from the public record. (We do know they didn’t try to come down Sunday evening, because that would have worked.)
President Obama held a press briefing after his meeting with the bankers, starting at 12:36pm. The meeting itself lasted a bit over an hour. As we all like to start meetings, particularly important meetings, on round numbers, it seems fair to assume that the appointment at the White House was for 11am. Even VIPs need some time to clear security, so let’s assume that the CEOs were asked to arrive by 10:30am.
All three of the missing bankers were apparently coming from New York. There are many ways to make the flight, but US Airways is among the most reliable – flying from LaGuardia to National Airport, every hour on the hour, from 6am. The flight takes just over an hour, it’s easier to get to LaGuardia from Manhattan before 7am, and delays are common at LGA as air traffic builds up over the east coast. Any conservative banker, who really did not want to be the only person missing a meeting with the president, would aim for the 7am shuttle – putting him on the tarmac in DC at 8:10am, with a comfortable time cushion (and an opportunity to have coffee with his chief lobbyist).
There was thick fog in DC on Monday morning, but this did not descend in a matter of seconds during rush hour – it was evident already by 5am. Corporate jets could get through (Jamie Dimon came that way), but let’s limit ourselves to public transportation – remember that the Acela train service is not generally slowed by fog and on Monday ran almost on time.
So the question becomes: At what point did the CEO realize that there was a fog issue, and was there still time to come by train? The Acela leaves Penn Station every hour on the hour, with the 7am train getting to DC at 9:49am and the 8am arriving at 10:49am.
We can rule out explanation #1 (bad luck). These are experienced people who travel all the time, with first class support staff, and they are supposed to be the best in the timely information business. These executives don’t generally wander around airports trying to puzzle out flight information displays.
Is explanation #2 plausible (bad management)? It is possible that at least one bank team wasn’t paying close attention and sent their boss to the airport for the 7am shuttle (although what are the odds that this would happen for 3 of our biggest and most dangerous banks?) An experienced traveller, who has checked in on-line, might aim to arrive at the airport at 6:30am – to discover the delays already in progress.
So then the question becomes: Can you get from LaGuardia to Penn station in 90 minutes early on a Monday morning? My experience is: Yes (if any New Yorkers know differently or if anyone saw John Mack pushing desperately through the crowds at Penn Station just before 8am Monday, please post or send that information in).
The implication is inescapable. These three bank executives did not plan on missing the meeting but, once they learned of the fog delay, they did not rush to the train station – which is what any other business traveller with a pressing commitment would have done.
These three executives – who were, in some sense, the primary audience for the president’s remarks – did not really want to attend. They do not see the need to show deference or even respect. They won big from the crisis and that is now behind them. As they move on (and up), there is nothing – in their view – that the executive branch can do to hold them back.
Even so, it wasn’t polite to behave in this fashion; showing disrespect to the President of the United States is always objectionable. But there is a pattern of behavior here, reflecting a deeper culture on Wall Street. This arrogance will eventually prove their undoing - no self-respecting White House can let this kind of repeated insult pass unaddressed.
By Simon Johnson
Thursday, August 27, 2009
Baseline Scenario
Very, very good today, with some points we should never forget:
The Baseline Scenario
--------------------------------------------------------------------------------
Firefighter Arson And Our Macroeconomic Policymakers
Posted: 27 Aug 2009 04:49 AM PDT
Firefighter arson is a serious problem. The U.S. Fire Administration, part of Homeland Security, concluded in 2003, “A very small percentage of otherwise trustworthy firefighters cause the very flames they are dispatched to put out” (p.1). Illustrative and shocking anecdotes are on pp. 9-15 of that report, as well as here and here.
Macroeconomic policy making now has a similar issue to confront.
As the economy begins to stabilize and the financial system shows signs of recovery, accolades start to shower down on various officials, including most recently Ben Bernanke, who was rewarded this week with renomination – and almost certain confirmation – to a second term as chairman of the Federal Reserve Board of Governors.
Bernanke is widely seen as our financial firefighter in chief (BusinessWeek; USA Today) Similar terms are used to describe Treasury Secretary Tim Geithner and the entire gigantic financial rescue effort. Larry Summers, head of the White House National Economic Council and administration economic guru-at-large, is applauded as an “experienced crisis manager”, which amounts to the same thing in this context.
If any of this sounds familiar, you’re probably remembering the famous cover of Time magazine from November 1999, which depicted Alan Greenspan, Robert Rubin, and Summers as “The Committee To Save The World.” The idea then was that crises in Asia, Latin America, and Russia had spilled over to US financial markets, most notably in the near failure of Long Term Capital Management, but disaster had been averted by – essentially – the financial firefighting abilities of this troika.
But what if the financial crises in recent decades – you can add the dotcom bubble, the S&Ls fiasco, and various emerging market debt crises to our recent housing and banking disaster – is not a sequence of random unfortunate events, but rather the product of a dangerous financial system? Given that today’s firefighters also previously held responsibility for overseeing this system, both recently and as long ago as the early 1990s, this question is relevant – particularly as the very same team, in various combinations, repeatedly pronounced on the system’s fundamental soundness.
Some of today’s firefighters pushed hard for deregulation of derivatives markets in the 1990s, and this now proves to have been an important cause of the crisis (Summers and others). Others had responsibility for the solvency of Wall Street over the past half decade, yet disguised all potential warnings in layers of impenetrable opaqueness (e.g., Geithner; see p.91 in David Wessel’s bestselling In Fed We Trust, Crown Business, 2009). Still others pronounced that there was no housing bubble exactly as things spiraled out of control and the potential costs to taxpayers rose (Bernanke and his colleagues at the Fed; again, pick up Wessel’s book, p.93 is among the most damaging).
No one is suggesting that our illustrious financial firefighters deliberately triggered a crisis. But, for over two decades, they and their close mentors oversaw the operation and development of a banking and securities system with profound instability hard wired into its DNA. Don’t take my word for it; review this speech by Summers in April 2009, or – in the light of what we know now – look at his talk on crises to the American Economic Association in 2000.
Perhaps that was all a legitimate mistake on their parts and they have now learned the right lessons. But how then do you explain their amazing reluctance to reform the financial system today?
President Obama said on Tuesday that Ben Bernanke helped avert a second Great Depression. That is a considerable achievement, but why then are this administration and the Federal Reserve proposing only minor adjustments in oversight and governance for the financial system that ran amok – producing “financial innovation” that harms consumers and destabilizes everything?
It makes no sense at all. Unless, of course, they are not afraid of future financial fires – despite the enormous fiscal cost (likely 40% of GDP from this round alone), the unemployment (heading to and lingering at 10%, by the administration’s own revised estimates), and the millions of people hammered hard by lender abuse, house price collapse, and job losses.
You may not like the implications, but keep in mind this advice: “To ignore the problem or suggest that it does not exist will only increase the damage caused by the arson firefighters involved, as well as destroy the morale of the other firefighters in their departments” (Minnesota Fire Chief, March/April 1995 issue, quoted on p.1 of above cited report).
By Simon Johnson
A slightly edited version of this post originally appeared on NYT.com’s Economix, and from that version you can link directly to the referenced pages in David Wessel’s book.
This post is reproduced here with permission. If you would like to use the entire post, please contact the New York Times. The usual fair use rules apply to short quotations.
Saturday, August 15, 2009
Baseline Scenario -- A Good Read Today, If Wonkish
The Baseline Scenario
Waiting For The Federal Reserve’s Next Apology
Posted: 14 Aug 2009 05:18 AM PDT
In November 2002, Ben Bernanke apologized – for the Fed’s role in causing the Great Depression of the 1930s. “I would like to say to Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again” (conclusion of this speech).
Bernanke’s point, of course, is that the Fed tightened monetary policy inappropriately – and allowed banks to fail – in 1929-33. And much has been made of his strong focus, over the past year, on avoiding a repeat of those or closely related mistakes (including here).
But today we need a different kind of apology, or at least a statement of responsibility, from Ben Bernanke and the Fed.
From the Federal Open Market Committee meeting transcript of August 2003, we know that Bernanke said, “Despite the good news, I think it’s premature to conclude that we should not consider further rate cuts, if not at this meeting then at some time in the near future depending on how the data play out” (p.63).
He was concerned not just to keep interest rates low for a prolonged period but also to signal this to financial markets, “To the extent that we can sharpen our message that economic growth no longer implies an immediate and automatic policy tightening, we should make every effort to do so” (p.65; see also his role in the broader discussion around p.93).
This was, of course, at a time that the speculative fever and outright malpractice in the housing market was really taking off. The build-up of financial market risk was starting to head towards system-threatening dimensions. And many consumers were being set up for a trampling of epic proportions. It is striking there is barely a mention of these issues in the FOMC transcripts.
And that’s the issue. We can argue for a long time about whether the Fed should have tightened earlier. Defenders of the Fed will say the data were ambiguous – and will point to the serious discussion of these issues in the FOMC transcript.
We can also dispute whether or not the Fed should have said anything in public about the impending housing-financial-consumer-taxpayer doom, or tried to tighten regulation. “It’s not our job” or “we don’t have the powers,” or “the politicians wouldn’t have supported us” is what senior Fed people now whisper around Washington.
But this and other FOMC transcripts make it clear that the senior Fed decision makers were not even thinking about the first order financial sector issues. They weren’t aware of what the big investment banks were really doing – show me the intelligence reports before the FOMC or the analytical discussion that indicated any degree of worry. No doubt someone somewhere in the Federal Reserve system was thinking critically about finance – feel free to send me any relevant details - but from the point of view of evaluating the institution, it only counts if the top decision-making body at least has the issues on the table.
We have transcripts so far through the end of 2003. Others should be forthcoming soon; there is supposed to be only a 5 year lag in their publication. But, given their likely content, it would not be a surprise if the appearance of these transcripts slows down.
At this moment of potential regulatory reform, who within the Fed really wants us to know that their leadership in the Greenspan era completely framed the problem wrong, didn’t understand what was happening, and repeatedly, brazenly, and callously ignored the damage being done to consumers?
I fully understand that financial market considerations are not the established focus of central bank interest rate deliberations. But the scope and nature of such deliberations has changed a great deal since the founding of the Fed almost 100 years ago. As the economy changes, central banks have to adapt their conceptual frameworks and our broader regulatory frameworks need to change also. We’ve done this many times before, and we need to do it again.
Huge problems were missed by people using anachronistic conceptual frameworks. Those frameworks should change. This was the assessment of Ben Bernanke, building on Friedman and Schwartz, for 1929-33, and this should be our assessment today.
Our top monetary policy makers completely missed the true nature of the Great Bubble and its consequences, until it was far too late. They should apologize for that and we can start work on redesigning the institution, its decision-making, and how financial markets operate, to make sure it won’t happen again. And it would also be nice if the Fed could avoid adding insult to injury – and stop opposing the administration’s consumer protection proposals.
Hopefully, this time the Fed’s apology won’t take 70 years.
By Simon Johnson
Health Care’s Senior Moment
Posted: 13 Aug 2009 06:30 PM PDT
Seniors have recently emerged as an important battleground in the health reform war. Katharine Seelye of the New York Times has a post on the “new generation gap” separating the elderly from the not-so-elderly, and multiple polls have shown that seniors are more resistant to reform, at least when it is phrased broadly. In addition, the nonsense about “death panels” has worried at least some seniors, enough for the AARP to pitch in to try to shoot it down.*
This should seem ironic, given that people over 65 are the one group that has already most benefited from health care reform – only their reform happened in the 1960s, when Medicare was created. But hey, it’s a democracy, and people don’t have to wish for others the benefits they themselves enjoy.
What are the underlying reasons why seniors are more likely to oppose “reform?” The first – leaving aside the self-contradicting notion that health care reform will mean a government takeover of Medicare – is probably fear that Medicare will be negatively affected. Now, there is a grain of a partial truth to this fear. Several of the proposals on the table include paying for health care reform (meaning, paying for the subsidies that poor people will need if we’re going to mandate universal coverage) in part by reducing growth in Medicare spending. One proposal is the Independent Medicare Advisory Committee, which would look for ways to increase efficiency in Medicare, which could include lower reimbursements for procedures that were deemed to be not providing benefits commensurate with their costs.
To its credit, here’s what the AARP** has to say about health care reform and Medicare:
What do the proposals say? It’s true they all seek to save billions from Medicare costs—not by cutting benefits, but by setting up new ways to pay doctors more fairly and to reward providers for quality of care instead of (as now) paying them a fee for each separate service; reducing waste and fraud; and reducing preventable hospital readmissions.
All the proposals would cut the amount of subsidies now paid to Medicare Advantage private health plans, which cost an average of 14 percent more per person than traditional Medicare does. Without subsidies, the private plans could become more efficient, or they could raise premiums, reduce benefits or withdraw from Medicare.
The proposals also add benefits to Medicare—such as covering more preventive services and narrowing the Part D “doughnut hole.”
More fundamentally, though, the need to reduce growth in Medicare spending stems from the simple fact that otherwise Medicare will blow through the entire Federal budget within the next few decades. Not reducing the Medicare growth rate is not an option. If I were a senior, or expected to be one in the next couple decades, I would very much want health care reform now, because the alternative will be much more draconian cuts to Medicare benefits in the future as the national debt explodes.
And reducing costs is precisely the other thing that seniors care about. According to Seelye, concern about health care costs rises with age. Now this makes sense; even with Medicare, seniors’ out-of-pocket medical expenses are considerably higher than those of younger people, for the simple reason that on average they consume more medical care. But there’s no good way to reduce seniors’ out-of-pocket spending without at the same time reducing Medicare spending because, broadly speaking, those two types of spending are buying the same thing – health care. You can’t have a system where Medicare spends more and more yet seniors spend less and less out of pocket (short of simply reducing seniors’ relative contribution to their health care costs, which would only make the fiscal problem worse).
It’s simply contradictory to oppose reductions in the growth rate of Medicare spending while favoring reductions in your out-of-pocket spending. Of course, there’s nothing that prevents people from holding two logically inconsistent thoughts in their heads at the same time. Uwe Reinhardt had a brilliant column a couple of weeks ago on the stew of inconsistencies that many Americans take for granted when it comes to health care.
Luckily, they elect representatives who can think clearly about these complex issues. Oh, wait, sorry about that.*
* On the other hand, what the hell does Chuck Grassley – one of the six people who think they are writing the health care bill – think he’s doing, saying “We should not have a government plan that will pull the plug on grandma?” As Brad DeLong might say, why oh why does he have a seat at the table?
** As far as I can tell from their website, the AARP is neither for nor against health care reform in general; they say they are working to make sure that health care reform is good for their constituency.
By James Kwak
Waiting For The Federal Reserve’s Next Apology
Posted: 14 Aug 2009 05:18 AM PDT
In November 2002, Ben Bernanke apologized – for the Fed’s role in causing the Great Depression of the 1930s. “I would like to say to Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again” (conclusion of this speech).
Bernanke’s point, of course, is that the Fed tightened monetary policy inappropriately – and allowed banks to fail – in 1929-33. And much has been made of his strong focus, over the past year, on avoiding a repeat of those or closely related mistakes (including here).
But today we need a different kind of apology, or at least a statement of responsibility, from Ben Bernanke and the Fed.
From the Federal Open Market Committee meeting transcript of August 2003, we know that Bernanke said, “Despite the good news, I think it’s premature to conclude that we should not consider further rate cuts, if not at this meeting then at some time in the near future depending on how the data play out” (p.63).
He was concerned not just to keep interest rates low for a prolonged period but also to signal this to financial markets, “To the extent that we can sharpen our message that economic growth no longer implies an immediate and automatic policy tightening, we should make every effort to do so” (p.65; see also his role in the broader discussion around p.93).
This was, of course, at a time that the speculative fever and outright malpractice in the housing market was really taking off. The build-up of financial market risk was starting to head towards system-threatening dimensions. And many consumers were being set up for a trampling of epic proportions. It is striking there is barely a mention of these issues in the FOMC transcripts.
And that’s the issue. We can argue for a long time about whether the Fed should have tightened earlier. Defenders of the Fed will say the data were ambiguous – and will point to the serious discussion of these issues in the FOMC transcript.
We can also dispute whether or not the Fed should have said anything in public about the impending housing-financial-consumer-taxpayer doom, or tried to tighten regulation. “It’s not our job” or “we don’t have the powers,” or “the politicians wouldn’t have supported us” is what senior Fed people now whisper around Washington.
But this and other FOMC transcripts make it clear that the senior Fed decision makers were not even thinking about the first order financial sector issues. They weren’t aware of what the big investment banks were really doing – show me the intelligence reports before the FOMC or the analytical discussion that indicated any degree of worry. No doubt someone somewhere in the Federal Reserve system was thinking critically about finance – feel free to send me any relevant details - but from the point of view of evaluating the institution, it only counts if the top decision-making body at least has the issues on the table.
We have transcripts so far through the end of 2003. Others should be forthcoming soon; there is supposed to be only a 5 year lag in their publication. But, given their likely content, it would not be a surprise if the appearance of these transcripts slows down.
At this moment of potential regulatory reform, who within the Fed really wants us to know that their leadership in the Greenspan era completely framed the problem wrong, didn’t understand what was happening, and repeatedly, brazenly, and callously ignored the damage being done to consumers?
I fully understand that financial market considerations are not the established focus of central bank interest rate deliberations. But the scope and nature of such deliberations has changed a great deal since the founding of the Fed almost 100 years ago. As the economy changes, central banks have to adapt their conceptual frameworks and our broader regulatory frameworks need to change also. We’ve done this many times before, and we need to do it again.
Huge problems were missed by people using anachronistic conceptual frameworks. Those frameworks should change. This was the assessment of Ben Bernanke, building on Friedman and Schwartz, for 1929-33, and this should be our assessment today.
Our top monetary policy makers completely missed the true nature of the Great Bubble and its consequences, until it was far too late. They should apologize for that and we can start work on redesigning the institution, its decision-making, and how financial markets operate, to make sure it won’t happen again. And it would also be nice if the Fed could avoid adding insult to injury – and stop opposing the administration’s consumer protection proposals.
Hopefully, this time the Fed’s apology won’t take 70 years.
By Simon Johnson
Health Care’s Senior Moment
Posted: 13 Aug 2009 06:30 PM PDT
Seniors have recently emerged as an important battleground in the health reform war. Katharine Seelye of the New York Times has a post on the “new generation gap” separating the elderly from the not-so-elderly, and multiple polls have shown that seniors are more resistant to reform, at least when it is phrased broadly. In addition, the nonsense about “death panels” has worried at least some seniors, enough for the AARP to pitch in to try to shoot it down.*
This should seem ironic, given that people over 65 are the one group that has already most benefited from health care reform – only their reform happened in the 1960s, when Medicare was created. But hey, it’s a democracy, and people don’t have to wish for others the benefits they themselves enjoy.
What are the underlying reasons why seniors are more likely to oppose “reform?” The first – leaving aside the self-contradicting notion that health care reform will mean a government takeover of Medicare – is probably fear that Medicare will be negatively affected. Now, there is a grain of a partial truth to this fear. Several of the proposals on the table include paying for health care reform (meaning, paying for the subsidies that poor people will need if we’re going to mandate universal coverage) in part by reducing growth in Medicare spending. One proposal is the Independent Medicare Advisory Committee, which would look for ways to increase efficiency in Medicare, which could include lower reimbursements for procedures that were deemed to be not providing benefits commensurate with their costs.
To its credit, here’s what the AARP** has to say about health care reform and Medicare:
What do the proposals say? It’s true they all seek to save billions from Medicare costs—not by cutting benefits, but by setting up new ways to pay doctors more fairly and to reward providers for quality of care instead of (as now) paying them a fee for each separate service; reducing waste and fraud; and reducing preventable hospital readmissions.
All the proposals would cut the amount of subsidies now paid to Medicare Advantage private health plans, which cost an average of 14 percent more per person than traditional Medicare does. Without subsidies, the private plans could become more efficient, or they could raise premiums, reduce benefits or withdraw from Medicare.
The proposals also add benefits to Medicare—such as covering more preventive services and narrowing the Part D “doughnut hole.”
More fundamentally, though, the need to reduce growth in Medicare spending stems from the simple fact that otherwise Medicare will blow through the entire Federal budget within the next few decades. Not reducing the Medicare growth rate is not an option. If I were a senior, or expected to be one in the next couple decades, I would very much want health care reform now, because the alternative will be much more draconian cuts to Medicare benefits in the future as the national debt explodes.
And reducing costs is precisely the other thing that seniors care about. According to Seelye, concern about health care costs rises with age. Now this makes sense; even with Medicare, seniors’ out-of-pocket medical expenses are considerably higher than those of younger people, for the simple reason that on average they consume more medical care. But there’s no good way to reduce seniors’ out-of-pocket spending without at the same time reducing Medicare spending because, broadly speaking, those two types of spending are buying the same thing – health care. You can’t have a system where Medicare spends more and more yet seniors spend less and less out of pocket (short of simply reducing seniors’ relative contribution to their health care costs, which would only make the fiscal problem worse).
It’s simply contradictory to oppose reductions in the growth rate of Medicare spending while favoring reductions in your out-of-pocket spending. Of course, there’s nothing that prevents people from holding two logically inconsistent thoughts in their heads at the same time. Uwe Reinhardt had a brilliant column a couple of weeks ago on the stew of inconsistencies that many Americans take for granted when it comes to health care.
Luckily, they elect representatives who can think clearly about these complex issues. Oh, wait, sorry about that.*
* On the other hand, what the hell does Chuck Grassley – one of the six people who think they are writing the health care bill – think he’s doing, saying “We should not have a government plan that will pull the plug on grandma?” As Brad DeLong might say, why oh why does he have a seat at the table?
** As far as I can tell from their website, the AARP is neither for nor against health care reform in general; they say they are working to make sure that health care reform is good for their constituency.
By James Kwak
Monday, August 10, 2009
Krugman -- Boehner is Wrong
Reagan was wrong too. Sometimes Big Government saves us from a depression.
http://www.nytimes.com/2009/08/10/opinion/10krugman.html?_r=1
http://www.nytimes.com/2009/08/10/opinion/10krugman.html?_r=1
Sunday, August 9, 2009
Rich -- A Serious Question Raised This Morning
(c) F. Bruce Abel
Is Obama "punking" us? Beware the Ides of August:
http://www.nytimes.com/2009/08/09/opinion/09rich.html?_r=1
Is Obama "punking" us? Beware the Ides of August:
http://www.nytimes.com/2009/08/09/opinion/09rich.html?_r=1
Sunday, August 2, 2009
Nocera -- A Point That Gets Lost in Anger
Read this excellent piece to the very end. There's a very important lesson there that Nocera forgot. And we all are prone to forgetting it too.
http://www.nytimes.com/2009/08/01/business/01nocera.html?_r=1
And, if it takes you all of Sunday to do, read the comments that follow this Nocera article:
http://executivesuite.blogs.nytimes.com/2009/07/31/what-do-the-banks-owe-the-country/#respond
http://www.nytimes.com/2009/08/01/business/01nocera.html?_r=1
And, if it takes you all of Sunday to do, read the comments that follow this Nocera article:
http://executivesuite.blogs.nytimes.com/2009/07/31/what-do-the-banks-owe-the-country/#respond
Saturday, August 1, 2009
Why Own When You Can Lease
Not what you expect. Has implications for the banks.
http://www.nytimes.com/2009/08/01/opinion/01alpert.html?_r=1
http://www.nytimes.com/2009/08/01/opinion/01alpert.html?_r=1
Saturday, July 18, 2009
Nocera -- Looking Back in Anger at the Crisis Last Fall
One of Joe Nocera's best.
Talking Business
Looking Back in Anger at the Crisis
Recommend
By JOE NOCERA
Published: July 17, 2009
“Did they first bring up the bailout to you, or did you bring it up to them?” asked Congressman Edolphus Towns, the chairman of the House Committee on Oversight and Government Reform.
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“I prefer to use the word ‘rescue,’ ” replied Henry Paulson Jr., the former secretary of the Treasury.
•
It was Thursday morning, and Mr. Paulson was once again before Congress, as he had been so many times last fall, defending his actions during the financial crisis. This time the subject was the Bank of America’s $50 billion purchase last year of Merrill Lynch, which Mr. Towns’s committee had become almost bizarrely obsessed with. In the middle of all the important issues Congress is currently tackling, it has managed to devote three full days of hearings to this seven-month-old deal.
Each hearing has had only one witness: the first to be grilled was Bank of America’s chief executive, Ken Lewis. Then came the Federal Reserve chairman, Ben Bernanke. Thursday was Mr. Paulson’s turn on the hot seat. The questions, from both parties, were uniformly hostile.
“Mr. Lewis, isn’t it true that ...”
“Yes or no, Mr. Bernanke ...”
“Isn’t that why you issued that threat, Mr. Paulson?”
The congressmen claimed to be investigating the events of last December. You’ll recall that just weeks before the Bank of America deal with Merrill Lynch was supposed to be consummated — and after shareholders had approved it — Mr. Lewis suddenly got cold feet. With Merrill Lynch’s toxic assets rapidly deteriorating, Mr. Lewis called Mr. Paulson and Mr. Bernanke to tell them he was thinking of pulling out of the deal.
Terrified that this might set off renewed panic in the financial markets, Mr. Paulson and Mr. Bernanke persuaded Mr. Lewis to stick by the deal. Quietly, over the next few weeks, they agreed to lend Bank of America an additional $20 billion from the Troubled Asset Relief Program to help shore up the bank’s capital. (They also agreed to backstop some $118 billion in troubled assets — though that part of the deal was later abandoned.) The first time the world learned of the additional government assistance was when the bank made its quarterly financial disclosure in January 2009 — weeks after the deal had closed.
To the congressmen at the hearings, something nefarious must have taken place during those negotiations. But what exactly? Dennis Kucinich, a Democrat from Ohio, told me that Mr. Lewis’s failure to inform shareholders was a “potential violation of securities law.” He felt that Mr. Lewis had gamed the banks’ regulators to get more money.
Mr. Towns, for his part, seemed to think that Mr. Paulson and Mr. Bernanke should have fired Mr. Lewis as a condition of more bailout money — that the government had been too nice to an incompetent management. Republicans, meanwhile, felt that Mr. Paulson and Mr. Bernanke had overreached, using intimidation and threats to force through a private transaction. And they all cited e-mail from the Fed that expressed skepticism at Mr. Lewis’s motives, and emphasized the need to keep things quiet for as long as possible.
I had watched the first two hearings with a growing sense of bewilderment. It always seemed obvious to me that if the Bank of America-Merrill deal hadn’t gone through, Merrill Lynch would have been in a horrible position, akin to Lehman Brothers or the American International Group. The government very likely would have had to spend an awful lot more than $20 billion to save it. Surely, the end result was worth whatever arm-twisting and additional government aid was required.
So why the anger? Why the suggestions of “cover-up” and “lies”? On Thursday, as I watched Mr. Paulson being castigated, it dawned on me. Seven months later, with the palpable fear of a financial collapse largely subsided, it really all boils down to how you view what happened last year. Was it, as Mr. Towns believes, a bailout of a handful of unworthy but too-big-to-fail institutions? Or was it, in the eyes of Mr. Paulson, a rescue of a teetering financial system? My vote is for the latter.
•
In retrospect, the events of last December have a kind of irrefutable logic. Mr. Lewis, scared by the mounting losses at Merrill, tells the government he is thinking of invoking the “material adverse event” clause in the contract to get out of it. Even though the clause is pretty airtight — among other things, it says that deteriorating assets are not enough to create a material adverse effect — it is still a useful weapon, and a common tactic. No matter what the actual wording, invoking it usually prompts litigation or a renegotiation of the terms, or both.
Mr. Paulson and Mr. Bernanke understand this, of course. But having just finished giving Citigroup another round of TARP aid, they fear that even a rumor that the Merrill deal is in trouble will set off a rerun of the awful events of last September, when the financial system melted down. They persuade Mr. Lewis to take one for the team.
“They needed to say to Ken Lewis, ‘You haven’t had very good capital ratios, and we’ve looked the other way,’ ” said Nancy Bush, a prominent bank analyst. “‘Now it is payback time. We’ve let you do deal after deal after deal. Now it’s time to take one on the chin.’ ”
That appears to be exactly what happened. Instead of renegotiating the deal with Merrill Lynch, Mr. Lewis wound up renegotiating it with the federal government. Mr. Paulson helpfully pointed out that as Bank of America’s regulator, the Federal Reserve had the right to remove him and his management team from their jobs if it no longer trusted his judgment. I can almost picture Mr. Lewis gulping as he listened to “Hammerin’ Hank” laying down the law.
Seen in this light, virtually all the Congressional objections seem almost laughably naïve. Mr. Lewis gamed the regulators? Hardly. Bank of America is paying 8 percent interest on the $20 billion. Unlike Goldman Sachs or JPMorgan Chase, it lacks the financial wherewithal to pay it back. And accepting the extra money means it has now taken as much overall TARP money as Citigroup, the very symbol of a crippled bank. Plus, of course, it has to abide by strict executive compensation rules.
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Talking Business
Looking Back in Anger at the Crisis
Recommend
By JOE NOCERA
Published: July 17, 2009
“Did they first bring up the bailout to you, or did you bring it up to them?” asked Congressman Edolphus Towns, the chairman of the House Committee on Oversight and Government Reform.
Skip to next paragraph
Related
Times Topics: Henry M. Paulson Jr. Merrill Lynch & Company Inc. Bank of America CorporationColumnist Page »
Readers' Opinions
Post a Comment on the Executive Suite Blog »
Add to Portfolio
Bank of America Corp
Go to your Portfolio »
“I prefer to use the word ‘rescue,’ ” replied Henry Paulson Jr., the former secretary of the Treasury.
•
It was Thursday morning, and Mr. Paulson was once again before Congress, as he had been so many times last fall, defending his actions during the financial crisis. This time the subject was the Bank of America’s $50 billion purchase last year of Merrill Lynch, which Mr. Towns’s committee had become almost bizarrely obsessed with. In the middle of all the important issues Congress is currently tackling, it has managed to devote three full days of hearings to this seven-month-old deal.
Each hearing has had only one witness: the first to be grilled was Bank of America’s chief executive, Ken Lewis. Then came the Federal Reserve chairman, Ben Bernanke. Thursday was Mr. Paulson’s turn on the hot seat. The questions, from both parties, were uniformly hostile.
“Mr. Lewis, isn’t it true that ...”
“Yes or no, Mr. Bernanke ...”
“Isn’t that why you issued that threat, Mr. Paulson?”
The congressmen claimed to be investigating the events of last December. You’ll recall that just weeks before the Bank of America deal with Merrill Lynch was supposed to be consummated — and after shareholders had approved it — Mr. Lewis suddenly got cold feet. With Merrill Lynch’s toxic assets rapidly deteriorating, Mr. Lewis called Mr. Paulson and Mr. Bernanke to tell them he was thinking of pulling out of the deal.
Terrified that this might set off renewed panic in the financial markets, Mr. Paulson and Mr. Bernanke persuaded Mr. Lewis to stick by the deal. Quietly, over the next few weeks, they agreed to lend Bank of America an additional $20 billion from the Troubled Asset Relief Program to help shore up the bank’s capital. (They also agreed to backstop some $118 billion in troubled assets — though that part of the deal was later abandoned.) The first time the world learned of the additional government assistance was when the bank made its quarterly financial disclosure in January 2009 — weeks after the deal had closed.
To the congressmen at the hearings, something nefarious must have taken place during those negotiations. But what exactly? Dennis Kucinich, a Democrat from Ohio, told me that Mr. Lewis’s failure to inform shareholders was a “potential violation of securities law.” He felt that Mr. Lewis had gamed the banks’ regulators to get more money.
Mr. Towns, for his part, seemed to think that Mr. Paulson and Mr. Bernanke should have fired Mr. Lewis as a condition of more bailout money — that the government had been too nice to an incompetent management. Republicans, meanwhile, felt that Mr. Paulson and Mr. Bernanke had overreached, using intimidation and threats to force through a private transaction. And they all cited e-mail from the Fed that expressed skepticism at Mr. Lewis’s motives, and emphasized the need to keep things quiet for as long as possible.
I had watched the first two hearings with a growing sense of bewilderment. It always seemed obvious to me that if the Bank of America-Merrill deal hadn’t gone through, Merrill Lynch would have been in a horrible position, akin to Lehman Brothers or the American International Group. The government very likely would have had to spend an awful lot more than $20 billion to save it. Surely, the end result was worth whatever arm-twisting and additional government aid was required.
So why the anger? Why the suggestions of “cover-up” and “lies”? On Thursday, as I watched Mr. Paulson being castigated, it dawned on me. Seven months later, with the palpable fear of a financial collapse largely subsided, it really all boils down to how you view what happened last year. Was it, as Mr. Towns believes, a bailout of a handful of unworthy but too-big-to-fail institutions? Or was it, in the eyes of Mr. Paulson, a rescue of a teetering financial system? My vote is for the latter.
•
In retrospect, the events of last December have a kind of irrefutable logic. Mr. Lewis, scared by the mounting losses at Merrill, tells the government he is thinking of invoking the “material adverse event” clause in the contract to get out of it. Even though the clause is pretty airtight — among other things, it says that deteriorating assets are not enough to create a material adverse effect — it is still a useful weapon, and a common tactic. No matter what the actual wording, invoking it usually prompts litigation or a renegotiation of the terms, or both.
Mr. Paulson and Mr. Bernanke understand this, of course. But having just finished giving Citigroup another round of TARP aid, they fear that even a rumor that the Merrill deal is in trouble will set off a rerun of the awful events of last September, when the financial system melted down. They persuade Mr. Lewis to take one for the team.
“They needed to say to Ken Lewis, ‘You haven’t had very good capital ratios, and we’ve looked the other way,’ ” said Nancy Bush, a prominent bank analyst. “‘Now it is payback time. We’ve let you do deal after deal after deal. Now it’s time to take one on the chin.’ ”
That appears to be exactly what happened. Instead of renegotiating the deal with Merrill Lynch, Mr. Lewis wound up renegotiating it with the federal government. Mr. Paulson helpfully pointed out that as Bank of America’s regulator, the Federal Reserve had the right to remove him and his management team from their jobs if it no longer trusted his judgment. I can almost picture Mr. Lewis gulping as he listened to “Hammerin’ Hank” laying down the law.
Seen in this light, virtually all the Congressional objections seem almost laughably naïve. Mr. Lewis gamed the regulators? Hardly. Bank of America is paying 8 percent interest on the $20 billion. Unlike Goldman Sachs or JPMorgan Chase, it lacks the financial wherewithal to pay it back. And accepting the extra money means it has now taken as much overall TARP money as Citigroup, the very symbol of a crippled bank. Plus, of course, it has to abide by strict executive compensation rules.
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