Trying to Pick the Winner

People should definitely vote for whomever they believe to be the better candidate. I don't get people who try to get on the bandwagon and vote for the "winner."

I'm not so convinced that Obama is as far ahead as the polls indicate. For whatever reason, polls seem to undercount Republicans. I've heard some theories about this from statisticians:

1. Republicans are less likely to talk to pollsters.


2. Evangelicals vote more faithfully than other groups.


3. People say that they are going to vote for Obama in order to seem "enlightened" even if they really plan on voting for McCain.

--SCC

The Role of Deregulation

The International Herald Tribune published an article on the role of lax regulation in the explosion of CDOs on Wall Street.

The article outlines how, in 2004, the big investment companies petitioned the SEC for the right to place the capital from their safety nets into play on the marketplace.

One commissioner, Harvey Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

"We've said these are the big guys," Goldschmid said, provoking nervous laughter, "but that means if anything goes wrong, it's going to be an awfully big mess."

Part of the quid pro quo was that the SEC would have increased visibility into the activities of these firms to make sure that they were not abusing their new freedom.

The 2004 decision for the first time gave the SEC a window on the banks' increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Cox more than a year and a half ago.
...
"It's a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs," said Roderick Hills, a Republican who was chairman of the SEC under President Gerald Ford. "The problem with such voluntary programs is that, as we've seen throughout history, they often don't work."

If you can't trust the big boys to regulate themselves, whom can you trust?

"We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing," said Professor James Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

Finally, there has been a recognition that this plan is not working:

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

"The last six months have made it abundantly clear that voluntary regulation does not work," Cox said.

The decision to shutter the program came after Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. McCain has demanded Cox's resignation.

You would think that we would have learned this lesson from the past. Unfortunately, politicians are blinded by the large political contributions they receive from the "Masters of the Universe" on Wall Street.

--SCC

CDOs, CDSs, and the Panic

Republicans have been making an effort to lay this entire mess at the feet of the Democrats. This is entirely consistent with their ongoing efforts to avoid responsibility for anything bad that might have happened while they were in charge of the government.

Republicans controlled all three branches of government for most of the decade, including the critical years that saw a peak in the issuance of sub-prime mortgages. (If the Evil Democrats (TM) were so effective that they were able to run the government during those years, maybe they really should be elected, if only to replace the staggering ineffectiveness of the Republican majorities.)

CDOs peaked in 2006.

According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$ 552 billion in 2006 and US$ 503 billion in 2007.

Not that it's relevant, since this is something that would be regulated by the administration in power, not the Congress.

The Republican argument hinges on the idea that Pelosi and Reid were able to affect the rates of mortgage writing immediately upon taking power (even before passing any major relevant legislation), but that the Republican administration was helpless to stop them.

If the Republicans are such a bunch of feebs, why would I vote for them?

The truth is that both parties bear a portion of the blame for the crisis.

While the focus of the mainstream media has been on CDOs, the role of CDSs has been underreported.

Credit default swaps sit at the center of this whole mess. There are several times the level of outstanding debt contained in what amount to little more than casino-style bets. While these have existed in the past, they really came into vogue during the last decade.

Here's a reading assignment for the masochistically inclined:

Ok, I'll take mercy on you. The bottom line is that these are a way for investors to get insurance via an investment vehicle. Why don't they call it insurance? Because then it would fall under a number of state-level regulations, since insurance is regulated by the states. Among other things, insurers are required to prove that they have enough cash reserves to pay any reasonably expected number of claims.

So all the investment banks "share" risk by selling each other insurance. Now what happens if you have a systematic failure, where everyone needs to file a claim on their insurance?

Lousy shame that nobody managed to ask that question when they were designing their risk models...

So why didn't the regulators realize that insurance was being sold in a relatively unregulated environment? I'll leave that one as an exercise for the reader...


Here's a much better explainer:

Some key sections that should really tick you off:

As with reclamation of strip mines, the insurance companies will file for bankruptcy. Government, via a $700 billion emergency rescue plan, will step up to the plate. The costs will be paid by taxpayers who have seen only losses and no gains. Pursuant to a rescue plan that prohibits any and all forms of congressional or judicial oversight or opportunity to object.

Except for reports, to be filed twice yearly. Something akin to the fox being required to periodically report how many chickens he stole from the hen house, without being required to return any of the stolen chickens. And who will keep this count? The fox.

The inevitable bankruptcy of A.I.G? What other option exists for a company with a market value of $12 billion and liabilities of about $450 billion on credit default swaps written to hedge funds, many of which are headquartered offshore and thus pay no taxes in the United States. For this, the government is paying $85 billion in taxpayer's money. In return, the government, meaning the taxpayers, will be entitled to receive 80 percent of the company's stock. Stock that is all but assured to be totally worthless.

For insurance company executives, financial risks of corporate bankruptcy are all but non-existent. Lehman Brothers is a prime example. On September 15, Lehman filed bankruptcy - the biggest in America's history. Hours before, the New York headquarters was scrambling for cash. Other banks were refusing to provide loans to Lehman. Banks with loans outstanding were demanding immediate repayment. Counter parties to Lehman's credit default swaps were selling out at ten cents on the dollar.

Lehman's response: Hours before the bankruptcy filing, Lehman transferred $2.5 billion from the London office to the American holding company. This money had "accrued as part of group profits from the first nine months of the year" and will be used to pay employee bonuses. As a result, the London office had no funds with which to make the payroll.
...
Paulson, who steadfastly refuses to consider taking a hard look at A.I.G. and other financial firms. How could these companies, managed by the so-called "best and brightest" guys in the room, have committed such a long and horrendous series of "poor judgments"?

By accident, or sheer incompetence?

Hard to believe, given that everyone in the room knew millions of explosive mortgages were being written to families without sufficient income, or in some cases no documentation of any income at all, based on fraudulent appraisals and supported by fraudulent AAA ratings.

Given the size and blatant nature of the disaster, accident and incompetence excuses simply don't fly. Something more was involved. That something is the number and size of vultures who bet on and stand to gain from the disaster, and how much they stand to gain. Too many people owning fire insurance on my neighbor's valuable house.

Even though I agree with almost all of the above, I don't see that we had any choice but to do the bailout. In my opinion, Barney Franks had it right: Once Paulson had announced that a depression would ensue without the bailout, his pronouncement became a self-fulfilling prophecy.

Basically, I agree with his analysis that our economy has been kidnapped and is being held for ransom. Unlike him, I think we have to pay off the kidnapper.

Flame away...

--SCC

Alternative Minimum Tax

Here's a good article describing the extent of the problem with the Alternative Minimum Tax. Without a real fix for this problem, the AMT will take a bigger and bigger bite out of middle class incomes.

--SCC

Wall Street and the Financial Collapse

You've got to love Wall Street types. When the money is coming in, it's all about how they are so smart that government needs to get out of the way because they can protect themselves against fraud.

Then, when things are bad, it is the government's fault for getting out of the way while they were all trying to cheat each other.

By the way, I highly recommend the book "Liar's Poker" for a look at how Wall Street really operates. You should be able to pick it up second-hand for a song.

These guys aren't dumb. They're just convinced that they're so smart that they'll be able to find a chair before the music stops. The after-the-fact whining about how somebody should have saved them from themselves just rings false.

Congress (both parties) does not provide adequate oversight because they are bought and paid for by the same people who are trying to keep the cake-walk music going for just one more big score.

--SCC

Update on the Bailout

AP provided an interesting update:

John McCain and Barack Obama offered long-distance help from the campaign trail. They announced separately that they support a plan that some House Republicans had pushed earlier: raising the federal deposit insurance limit from $100,000 to $250,000.

I wonder what the cost is. I'll bet it's not too high. How many people keep more than $100k in a bank account anyway?

For his part, President Bush sought to avoid being marginalized. He spoke with both nominees, and made another statement in the White House. "Congress must act," he demanded in front of the cameras.

Avoid being marginalized? I think that boat already sailed. Has there ever been another sitting president kept out of his party's convention?

Another possible change to the bill would modify "mark to market" accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years.

And, after all, we can certainly trust the banks to price their holdings properly.

Some lawmakers reported a shift in constituent calls pouring into their offices. Calls and e-mails were overwhelmingly opposed to the rescue plan before Monday's vote, many offices said. But Monday's stock market dive prompted calls Tuesday from Americans furious about Congress's inaction, some said.

Decisive, as ever.

--SCC

The Real Motives for the Bailout

CNBC was kind enough to report the real reason the bailout is needed:

“All our concern about bailing out Wall Street," Cashin said. "It’s really to try to free up Main Street. So the guy with the plumbing-supply business who gets a contract can go to the bank and get some of the money he needs overnight.”

You see, they're really in it for the little guy. It just gives you a warm feeling inside, doesn't it?

--SCC