Nobody Could Have Known! Ratings Agency Edition

A blog post by a banking industry insider is generating a good deal of buzz in the blagosphere.

It's a pretty interesting read, but I want to pull out one little quote from the bit that Matt Y excerpted and take issue with it. Namely this:

There were a lot of contributors to the catastrophe, but one indispensable one is that the ratings agencies monetized their sterling reputations in an extraordinary fashion, and nobody in regulatory apparatus of government saw that this was happening, and what it might portend.

That's just not true. For example, you can hear audio from a Spring 2006 Banking Committee where Sens. Shelby (R-AL) and Jack Reid (D-RI) offering to give SEC Chair Chris Cox basically whatever he wants in terms of enforcement power to oversee credit rating agencies. Cox's response? More or less "no thanks." It's in this podcast at 49:43 (trying to track down the transcript...).

This quote from House Report 109-546 - CREDIT RATING AGENCY DUOPOLY RELIEF ACT OF 2006:

We have, finally, very strong apprehensions that this bill could allow history to repeat itself. In the wake of the savings and loan crisis, Congress put in place requirements that the capital held in portfolio by financial institutions must be of investment grade as determined by an NRSRO. We put this requirement in place because we found that a number of those institutions that failed did not maintain high-quality investments in their portfolios. This bill's failure to ensure that the ratings issued by NRSROs continue to be credible and reliable could one day create another regrettable situation whereby taxpayers would again need to finance a bailout.

The problem wasn't that the regulators were UNAWARE of the conflict of interest that drove an artificial inflation of the ratings of CDOs, the political appointees up to and including SEC Chairman Chris Cox simply didn't want to regulate them.

A Feel Good Story For Christmas Day

With tales of factories shutting down, banks getting bailed out, and giant ponzi schemes that made billions for corporate criminals, it's easy to forget that not all corporations are run by douchebags. Happy Holidays.

Merry Christmas

Here's "Santa Claus" from 1898

Brit Hume: White And Balanced

Brit Hume is leaving "Special Report." I guess this is good news. Still I couldn't help but find this "tribute" to him pretty damning.

First of all, if you have the current President, the current Vice President and former president Bush Sr. record nice things for you in your "goodbye" tribute, that MAY be an indication that you have done something horribly horribly wrong. Pretty much that alone should bar you from being called a "journalist." PR flack or Republican mouth-piece would probably be more accurate. I mean, you have quite possibly the most reviled politician of all time saying what a great guy you are. That's not an endorsement you should really seek as a journalist.

Also, couldn't help but notice something very similar among all the people they interview that work on Special Report. See if you can spot it (hint: it rhymes with wright whale):

Bat Girl Demands Equal Pay

Fantastic:



Now if only there was a way to tie the Chamber of Commerce to a ticking time bomb and get them to agree to stop lobbying Congress to block it.

Twas The Night Before Christmas

Santa tracking has begun. Best part of the article comes about halfway down the page:

NORAD's holiday tradition can by traced to 1955, when a Colorado Springs newspaper printed a Sears, Roebuck & Co. ad telling children of a phone number to talk to Santa. The number was one digit off, and the first child to get through reached the Continental Air Defense Command, NORAD's predecessor.

Col. Harry W. Shoup answered.

Shoup's daughter, Terri Van Keuren, said her dad, now 91, was surprised to hear that the little voice on the other end thought he was Santa.

"Dad thought, `What the heck? This must be some kind of code,'" said Van Keuren, 59.

Shoup, described by his daughter as "just a nut about Christmas," didn't want to break the boy's heart, so he sounded a booming "Ho, ho, ho!" and pretended to be Santa Claus.

That's pretty cool.
Via Kos.

Pope: Being Gay Is Like Clear Cutting Rainforests

The Pope has announced in his end-of-year address that "If tropical forests deserve our protection, humankind... deserves it no less." And by "protecting humankind" he means FROM THE GAY.

I'm not entirely clear how treating people in same sex relationships with respect and giving them benefit of protection of law leads to the destruction of the human race. Certainly consensual same sex relationships seems less destructive to humanity than concealment and complicity of systematic child abuse. Then again, I don't have a papal level of knowledge of the word of God, so I guess he must be right.

Santa Is Coming

Even if he has to slide down a bat-pole instead of a chimney.

Christmas Is Coming

Only one more week!

Franken Watch: The Recount!

It looks more and more like Franken may win the Minnesota Senate seat after all. The Star-Tribune is reporting that Coleman's lead has shrunk to FIVE votes and their "projected results" are showing Franken ahead by 89 votes.

Final tallies are still to be made, and keep in mind that any result will almost certainly be challenged in court, but it's looking good for Franken at this point.

Two Conversations At Different Times

A dramatization inspired by a true story.

Time Zero
Real Estate Developer: I would like a loan to build a large luxury apartment building please.
Banker: Fine idea, but what collateral can you offer me?
Real Estate Developer: I have this multi million dollar investment portfolio run by former NASDAQ chair Barry Madoff.
Banker: Excellent my good man, here is your loan.

Time One
Real Estate Developer: Hello my good man, what brings you to my office today?
Banker: The interest rates are going much higher on that loan I gave you.
Real Estate Developer: Whatever for? The target for the Fed Funds rate is at a historic low.
Banker: Well, it's your collateral.
Real Estate Developer: But I put down ... oh, yes I see.

Throw The Shoe

From Boing Boing: the best animated shoe throwing gifs on the internets today!

Zero

That's the target Fed funds rate (the rate at which banks loan their fed fund balances to each other for short periods) that Bernanke set this morning. The fed wants to keep this rate between 0 and .25 percent to ensure liquidity (making it cheaper to borrow money makes it more profitable to borrow that money and use it for enterprise or purchase of goods).

Blogger, New York Times op-ed columnist, and new Nobel Laurette in economics Paul Krugman observes "we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too." So that's comforting.

By the way, you may be wondering: what is the difference between the fed funds rate (the rate at which banks loan to each other) and the LIBOR (the rate at which banks lend to each other!)? Explanation here.

She's A Kennedy Damnit!

There's been increasing speculation that Caroline Kennedy is interested in being appointed to Hillary Clinton's recently vacated senate seat. The New York Times is reporting today that her interest is now "official."

I for one am not really excited about this at all. According to the story she has been wrestling "with whether to give up what has been a lifetime of avoiding the spotlight." Let me help you out, if you want to give that up and serve government, more power too you, but how about you run for your local school board? How about running for the House? What, other than the fact that her last name is "Kennedy" qualifies her for being in the senate? On NPR the reporter cited the following facts regarding her qualifications: She's a lawyer, she's smart, she has written books, she is pretty. Really?

Color me unimpressed.

Obama Wins!

What's that you say? Old news? No sir. In fact, Barack Obama was officially selected by the Electoral College today.

This archaic institution is the only method by which we select our president. On a related note, why electoral college? Well, the truth is that our founding fathers didn't trust the population as much as third grade civics would have you believe. They wanted a level of elite control to avoid the hoi polli from getting too much influence. Keep in mind that Senators were originally selected by state legislators, not voters.

It'd be nice to see this outdated mechanism relegated to the dustbin of history. The best way to do so is probably the National Popular Vote movement. More here.

Anyway, congrats to President Elect Obama.

No Such Thing As A Free Lunch

I have been offered a free chance to win money. Oh did I say free? well, at a modest cost of providing advertising. Ferryman paid below:

I have registered to play in the PokerStars World Blogger Championship of Online Poker!

The WBCOOP is an online Poker tournament open to all Bloggers.

Registration code: 535496

We Knew He Was Crooked, We Just Thought He Was Stealing From Someone Else.

Bernie Madoff, former NASDAQ chair and investment fund manager, was arrested on Thursday for admitting to being in charge of the largest Ponzi scheme ever created. According to Bloomberg, Madoff told his employees it was "all just one big lie" and that the firm was "basically, a giant Ponzi scheme."

Some on Wall St. were suspicious of his methods, since he reported only 5 down months from 1993-2007. But from Henry Blodget comes the following observation:

Another potential explanation for the performance, which also involved cheating. This is important. As we noted yesterday, many sophisticated Wall Streeters have long suspected that Bernie was crooked. But they invested with him anyway because they assumed that what he was doing was "front running"--an illegal but simple and effective practice in which traders take advantage of the knowledge of impending order flows. The possibility that Bernie was front-running explained performance that no one could replicate and that some experts thought was impossible. This stopped a handful of folks who knew enough to know that Bernie was full of it from crying "foul."

We invested in him BECAUSE we thought he was crooked! Nice.

Brinksmanship Game Won, We All Lose

Well, it looks like the Republican Senate Minority, after ushering through $700 Billion to help banks, has killed a $14 Billion dollar "just get us to the Obama administration" loan. Guess we all get to find out if all that terrible stuff that will happen if we don't bail them out really will happen after all.

I hope that the Democrats in congress finally realize the futility of trying to compromise with these jackasses. In order to compromise, you need a good faith negotiator on the other side. THERE IS NO SUCH PERSON. In the next congress, Democrats will have enough of a majority in the House that the can (not will, but CAN) largely ignore the minority party. In the Senate, the Democrats should pass their bills and let McConnell try to keep together 40 votes. Senators like Spectre in PA, Bond in MO, Burr in NC, Voinovich in OH and Grassley in IA are all vulnerable (and all in states won by Obama except for Bond). Do they really want to go into 2010 with "I stopped Obama's health plan" as their slogan? I doubt it.

Of course, I doubt that the Democrats will learn this lesson. As Will Rogers quipped: "I am not a member of any organized political party, I'm a Democrat."

UPDATE: Before I go to bed, I'd be remiss if I didn't point out that this news has the markets panicking (to be fair, shadows, funny shaped rocks, and small children saying "boo" panic the market at this point but anyway...). US Stock Futures are sinking (the markets are down 2.5-3% as of right now) and the Nikkei is dropping especially automotive stocks interestingly. Wonder how it will look in the morning...

UPDATE II: Turns out the markets are doing ok today. Dow started off low but is now back up to where it closed yesterday. Other markets about the same. On a related note, the dailykos has a list of the senators that voted to approve $700 Billion for Wall St. and against the auto bailout.

Betti Page, We Hardly Saw Ye. Ok We Did But You Were Great

Bettie Page has died in a Los Angeles hospital at the age of 85.

I think it can be safely said that you gave millions if not billions of moments of happiness to others. RIP Bettie.

Spokesperson Cage Match: Vaccine Edition

As previously discussed here, there is a large, or at least very vocal group of people who believe that vaccines cause autism, including celebrity spokes-couple (and parents of an autistic child) Jenny McCarthy and Jim Carey. Now there's nothing wrong with trying to improve vaccines, and there may be benefits to altering vaccination schedules, but any responsible advocacy for changes really must include urging parents to have their children vaccinated, change or no change. The health benefits to the population of vaccination are large and well known, and so far there is scant evidence for a vaccine causation theory.

So it's nice to see that the "get your damn child vaccinated" camp has it's own celebrity spokes person: Amanda Peet. After hearing from "friends" that she shouldn't have her child vaccinated, she did the right thing: looked at the science (thanks to her MD Sister!). Now she's trying to raise awareness, but more importantly, she "says parents shouldn't look to her as a scientific expert. She defers scientific questions to [Paul] Offit [chief of infectious diseases at Children's Hospital of Philadelphia]."

Good for you Peet.

Let's Not Build Stuff, Let's Have A Depression Instead!

Via Matt Yglesias here comes a link to an op-ed in the Politico by Minnesota Gov. Tim Pawlenty who wants to "Cut up the credit card" of the federal government at exactly the wrong time. In his blueprint outlining "steps the Republican Party must do to again become the national majority party" his prescription is "fiscal responsibility — living within our means like most Americans do."

Now this sounds like it makes sense, but this an area where common sense lessons that everyone derives from experience with microeconomics leads to extremely wrong notions about macroeconomics. Credit is fine when your personal economy is operating well and the ability to pay off the debt in a timely manner is both likely and foreseeable. If you lose your job you SHOULD reduce expenses. Debt is especially bad because the chances you will compound your problem by not being able to pay it off is high AND the rates you will be charged will be higher due to your lack of resources.

BUT, as discussed previously, the US Government is VERY different from you! The US Government lives forever, it has the ability to confiscate property of its citizens and corporations to pay off debts, it has a very good credit rating, etc... In an economic downturn it's both cheap and necessary for the government to borrow and spend. As Matt says:

At a time of economic slowdown, tax revenues will fall. Pawlenty would have the federal government offer no aid to state and local governments, forcing them to slash services and raise taxes, further deepening the slowdown. And then we’d need to cut the federal budget sharply, even further deepening the slowdown. And then next year tax revenues would come in even lower, and we’d need another round of counterproductive cuts.

Now "cutting up the credit cards" is not always bad. In times of economic expansion, the government should increase taxes and seek to "live within it's means." Had Gov. Pawlenty courageously urged his party to increase taxes and reduce spending 5 years ago when they controlled all three branches of government, truly he would be a fiscal conservative. But this? This is fiscal foolishness.

Let's Build Lots Of New Trains And Bridges!

An interesting corollary to my comment yesterday on the flight to treasury bills is that the US Government really should start spending more money now.

I know it seems strange that the government should start spending more money in a recession with tax revenues falling, but it's true. First, the reason that T-bills are absurdly expensive (or, to put it the other way, the rate of return on T-bills is absurdly low) is that private money is extremely risk averse right now. Private money doesn't want to invest in factories or equipment or new ideas that create new jobs and expand the economy. It wants to put the money under the mattress until it feels safe. That means if we want to get out of this mess, someone needs to increase spending on things that make jobs, and that someone pretty much needs to be the government.

But the really good news about this is that it's REALLY CHEAP for the US Government to borrow money right now. Normally the bad thing about debt is that you have to pay interest so it winds up costing more in the long run. But right now, because everyone's so shit scared about the economy, the government can borrow money at or below the expected rate of inflation. If the government wanted to borrow money to build a new rail line, it could borrow money right now and basically make money on the loan by taking it out.*

Now the government could spend the money on almost anything and it would stimulate the economy. John Maynard Keynes once proposed that the government take a large amount of money and bury it deep in a mine shaft, then dig it back up again, thus employing large numbers of people and requiring the purchase of lots of equipment, etc... In a more modern vein, we could build lots of new nuclear weapons and stick them in silos in North Dakota.

Even better though, the government has a great opportunity to spend money on things that will create a positive benefit for society, things like community centers that reduce crime, rail and road links that increase commerce, expanded broadband that increases commerce and knowledge, increased building efficiency that reduces energy use, etc... If it did that, the government would not only make money on the loan and stimulate the economy by employing people, the tangible improvements would increase commerce and government revenue going forward.

It seems odd, but right now the government can borrow money really cheaply and should. Deficits be damned we need to spend money.

Matt Yglesias has more on this topic and the dangers of people who say the government needs to cut back and "live within it's means" (aka "Neo-Hooverites") here, here, and here.

*To explain: the government would, of course, pay out interest on the loan, so it would cost more in nominal dollars, but it would make money in real dollars (adjusted for inflation). If person A takes out a $100 loan at 2% annual interest over 5 years the total cost of the loan in nominal dollars (not adjusted for inflation) is $105.17. But if the interest rate over those 5 years is 3% annually, one hundred dollars of value 5 years in the future is actually $116. Thus the government would "make" and the lender would "lose" $10.83.

Zero Point Zero One

While most major networks were focused on Illinois, on Wall St. the Treasury Department was busy selling three month treasury bills at 0.01% interest. This isn't investing, this is hiding in a bomb shelter. Investors are so scared of losing principal that they are just handing the US Government money and saying "hey hold on to this for a while and just give it back to me later." And they weren't just saying that, they were COMPETING to have the treasury hold their money for free. $126 Billion was bid in an auction of $32 Billion in treasuries.

The credit crunch isn't over, it isn't close. On the other hand, it seems that risk must be really underpriced right now.

Car Or No Car?

Well it looks like the auto industry will be getting some of that sweet bailout money.

It seems that the White House forced Nancy Pelosi into a key concession: that the $25 Billion would come from money to subsidize fuel efficient cars. Yes, that's right. Bush wouldn't agree to the bail out unless it also reduced the incentives to make fuel efficient cars.

Franken Says He's Ahead By 4 Votes (Yes, FOUR)

Well, the hand recount is over, and Al Franken's campaign is claiming that they are ahead by four (4) votes. The latest Star-Tribune article says the margin is 192 in favor of Coleman. I think this discrepancy is because Franken's campaign is counting the preliminary decisions on challenged ballots, while the Star-Tribune only reports official numbers. Or maybe Franken's just talking out of his ass.

Apparently they have to find 133 missing ballots (?) then the official hand recount would be over. THEN they go to the board of elections which will rule on each of the 6,657 challenged ballots (Coleman campaign challenged 3,376 ballots and the Franken camp challenged 3,281). After that expect legal challenges and/or Senate action. If it's really this close the most sensible thing might just be to have the Senate call a re-vote right away, which is what they wound up doing last time after wasting a year dithering over it.

Suddenly, I Don't Feel So All Alone

Payroll numbers came out today, one of the numbers they used to calculate unemployment. It turns out that 533,000 jobs were lost in November (that's net lost, so new unemployment claims - hires). They say that misery loves company, but frankly I don't think it welcomes competition...

Headline Stolen From Fark.com

Had to steal this:

Minnesota recount still in progress, officially surpassing Stuart Saves His Family as the longest, most tedious thing Al Franken is responsible for

Here are the details.

From Terrible To Unimaginable Nightmare

As previously noted on this blog here and here, Zimbabwe has been deteriorating for the past two years. The yearly inflation rate has gone from 100,000% to 2,000,000% to now, an unimaginable 231,000,000% (yes, that's two hundred thirty one million percent). The value of the Zimbabwe dollar is now basically zero, and unemployment is a staggering 80%.

Now, in addition to having a non-functioning economy, the collapse of Zimbabwe's infrastructure is causing a cholera epidemic.

The tragedy of Zimbabwe is just awful. It was a stable, functioning state not ten years ago. It had problems with inequality, a history of exploitation and colonial racism, etc... but it was a functional country and a net food exporter. Now that country has been set back so far by it's government that it may not recover in living memory.

Too Good To Miss

I've been meaning to post this for a while and never got around to it. Here is Michael Lewis's piece in Portfolio magazine on the Wall St. melt down. It's good, really good, as one would expect from the guy who wrote "Liar's Poker" and "Money Ball." I would summarize but if you are at all interested in how the financial crisis happened you really need to read the whole thing, and if you're not interested, well then I'd just be wasting your time.

RIP Tanta

Doris Dungey, aka "Tanta" has died of ovarian cancer at the age of 47. She was a writer on one of my favorite economics blogs "Calculated Risk." I didn't know her personally, but she instructed literally thousands looking for answers about the financial crisis and housing bubble in recent years.