McCain, Busted!

I think it's fairly obvious that the current Wall Street crisis is pretty much the best argument one could imagine in favor of government regulation of the financial industry. Given that banks doing stupid things might result in the government being forced to spend $700 billion to save them from themselves, it seems reasonable that the government might take steps to save the banks from getting into such trouble before it starts.

Since the possible bailout of Wall Street is, for now at least, it would look bad if one of the presidential candidates had several recent statements on the record supporting deregulation. Unfortunately for Senator McCain, he has such a record.

Despite recent statements in support of regulation, McCain was clearly in support of deregulation, at least before such a position became completely untenable.



As he told the Wall Street Journal in March, McCain is "fundamentally a deregulator".

In an article written for the September/October 2008, so presumably written recently, of Contingencies, a magazine for actuaries (like my father), McCain wrote:

Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.

So he's using deregulation of the financial industry as a model for his plan for healthcare, and he did this persumably within the past few weeks. Wow

McCain was clearly wrong on the most important issue out there. How is it possible that this race is still close?

What's the Goal of the Bailout?

Today, in response to the Republican bailout plan discussed yesterday, Senator Chris Dodd (D-CT) proposed his own addendum to the plan. It would require the banks which sell troubled (i.e., possibly worthless) assets to also give the Treasury Department contingent shares in the bank which would protect the value of the troubled asset the government (i.e., taxpayers) bought. As I understand it, if the government pays $2 million for an asset and then is only able to sell it for $1 million, the government gets $1 million in stock in the company it originally bought the asset from.

This seems like a good idea because a) the banks are allowed to liquidate their bad assets, and b) taxpayers don't lose any money, which is great, because they didn't do anything wrong. But of course, Wall Street and some (though not all, to the credit of the party) Republicans are balking at Dodd's idea, stating that it will hurt banks' profitability or "stigmatize" them by forcing them to accept such conditions.

That would be an argument that mattered if the goal of the bailout were to help banks. Let's be clear here. The goal is (or, well, at least should be) to stave off a new Great Depression. By all rights, these banks should go out of business. Shareholders, far from being worried about the government taking a piece of their company, should be more worried about the "free market" running their company out of business.

Look, the market's got a gun to the banks' heads, and we're stepping in to bail them out. Since we're doing so at taxpayers' expense, the goal should be to do the absolute minimum to keep the banks in business and back to writing mortgages. Protecting shareholders' investments is utterly irrelevant, because without us, their investments have no value at all.

Bailout Selling Taxpayers Out

As details emerge about the proposed government bailout of the financial industry is nothing more than a blank check, with no concern for the taxpayers funding the whole thing. Like the PATRIOT ACT rammed through Congress, the Treasury Department and moneyed interests more generally are attempting to force this bailout into law before anyone has a real chance to work through the implications of the bill. If the bill isn't passed by the end of next week, they say, the economy will go over a cliff, so just vote for the darn thing before noticing its shortfalls.

For example, the bill, as proposed, involves absolutely no oversight on the part of Congress on the actions of the Treasury Secretary, Hank Paulson. To remind you, Hank Paulson's job before being Treasury Secretary was being Chairman and CEO of Goldman Sachs, one of the five (now 2, after Bear Stearns and Merrill Lynch were bought and Lehman Bros. went out of business) big Wall Street investment banks. So we're definitely talking about the fox guarding the henhouse here.

Let's have a look at some troubling portions of the bill, shall we?

Sec. 2. Purchases of Mortgage-Related Assets.
(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

Section 3109 of Title 5 deals with contracting consultants and doesn't, so far as I can tell, restrict those contracts in any real way. So Paulson can, on behalf of the US government, sign any contract he wants.

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

Great, so the former head of a Wall Street investment bank can designate Wall Street banks, or anyone else he wants, to oversee the transfer of taxpayer dollars to other Wall Street banks. Awesome plan.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Paulson gets three months and $700 billion to do whatever he wants, and then only has to testify before the same body that kept failing to change anything about the Iraq war despite years of evidence that the Bush Administration was screwing up royally. In order to pass another bill, after this one, to rein in Paulson's authority, you'd have to convince 60 senators that things weren't going well. Good luck with that...

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Just so we know how much money we're dealing with. Look at all those zeroes!

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Wow, really? So we're just abandoning any glimmer of such quaint oddities as judicial review, checks and balances, etc.?

But even more disturbing than what is in the proposed bill is what is not. As anyone in Washington can tell you, bank lobbyists have had far more than their share of influence over the regulations and other laws governing the financial industry. It is this influence which prevented (or reversed, in the case of the Gramm-Leach-Bailey Act (as in Phil Gramm, McCain's chief economic advisor)) the sorts of regulations which would have kept banks from getting into such trouble that they needed bailed out.

Now, the banks are negotiating not from a position of strength from lobbying and campaign contributions, but out of $700 billion worth of weakness. Now is the time (to borrow a line from Obama) for the government to put into place those regulations necessary to keep the greed which has caused this mess from happening again. Democrats, according to the Wall Street Journal, are trying to force those companies which want to sell their bad assets to the Treasury to agree to salary and bonus limits for CEOs. They also want to give bankruptcy judges the power to alter the terms of mortgages, giving people a chance to stay in their homes. And yet, per the Journal:

House Republican staffers met with roughly 15 lobbyists Friday afternoon, whose message to lawmakers was clear: Don't load the legislation up with provisions not directly related to the crisis, or regulatory measures the industry has long opposed.

If ever Republicans were going to ignore lobbyists and do what was right for taxpayers, it would be now, but the Administration and Republican allies are pushing for a "clean" bill without any regualtions. But by coughing up the cash now and then talking about new regulations later, we give away the best chance we have to actually get meaningful regulations passed. Taxpayers (that's you and me) and the media must put pressure on lawmakers now to keep them from surrendering, from a position of strength, to the banks.

You can bet your bottom $700 billion that if we screw this up, you can forget there ever being enough money for health care reform or anything else a new administration might want to do. Let's get it right.

Today's Bank Bailout, Explained

As previously discussed, financial institutions have been losing tons of money. To briefly, briefly review, here was the problem:

1. People took out loans they couldn't afford to keep inflating the housing bubble.
2. When housing prices started to fall, people with bad loans couldn't refinance to continue paying them, so they went into foreclosure.
3. Banks who owned bundles of these bad loans called CDOs lost money, because the value of the foreclosed houses was less the amount the bank had paid for the CDO.
4. Banks lost money and had less money to give out, so they stopped putting up money for mortgages, decreasing demand for houses and decreasing prices even further.
5. Go back to #2.

This set up a cycle where the value of these mortgage-backed investments kept losing value, and accountants were struggling to assign a value to these CDOs because their value kept changing a the market changed.

(simplification alert!) Say a bank owns a CDO worth $250 million, covering 1,000 mortgages each for $250,000 houses. Today, those houses are worth $200,000 each, and some portion of the 1,000 homeowners defaulted, sending their houses into foreclosure. So the $250 million investment is now worth substantially less, though no one knows how much less. Fearful of continuing losses, banks became less likely to give out new loans, since they might wind up needing to use that cash to cover their continuing losses due to bad CDOs.

What the government proposed today to step in and spend taxpayer dollars to buy a bunch of CDOs from banks at discounts. The most likely plan is that the government takes bids from several banks, to continue the example, who each have a bundle of mortgages originally worth $250 million. The lowest (cheapest) bid would then sell the CDO to the government for that cheapest price.

It's possible that the government and, by extension, taxpayers will actually make money on this bailout, because no one really knows how much the investments are worth. But the real goal is to give banks a cash infusion and cost certainty. Because they'll wind up with a bunch of cash and will no longer have to keep around excess cash to cover CDO losses, they'll be able to get back into the business of giving out loans and reinforcing the housing market.

That's the theory, anyway. Let's hope it works out.

Vicious Anti-Palin Ad

Here's the ad (and my first attempt to embed a video):



Wow. Here's more info on the subject.

To briefly sum up, Palin claims, based on shaky scientific evidence, that Alaska's wolves kill too many moose and caribou, so those Alaskan natives who are subsistence hunters go hungry (and also deprives red-blooded Americans of delicious, nutritious mooseburgers). Non-government scientists who have examined Alaskan wolves and their prey disagree, saying that wolves are mostly scavengers, eating moose who died of other causes.

In addition to borderline animal cruelty, this story demonstrates Palin's troubling tendency to pick out which "science" she chooses to believe while ignoring others. Remind you of anyone we know?

McCain Stubborn Re: Foreign Policy

McCain gave an interview, transcript here, this week with a Spanish-language radio station (though the interview was in English) where he seemed to slam a NATO ally. The interviewer, who does have a pretty substantial though still understandable accent, asked him questions about Latin America. McCain responded appropriately if somewhat boringly with the typical responses: "Castro's a jerk!", "Chavez is a commie", et al.

The interviewer then switched (at 2:58 in the linked audio clip) to a question about whether McCain would meet with Spain's Prime Minister, one Mr. Zapatero. McCain seemed to not know who the interviewer was talking about. He gave an apparently unrelated response about working with the Mexican government. There is, apparently, a Mexican rebel group called the zapatistas, so maybe McCain misunderstood what the interviewer was referring to. He gave a response about meeting with friends and standing up to enemies, which would seem to indicate that he might've associated something sounding like Zapatero/Zapatista with Mexico, and wasn't sure exactly how, and decided to just give a vague answer. Which is fine. No criticism there, though it sure would've been great if he'd asked the interviewer to clarify.

So the interviewer, understandably confused by McCain talking about Latin America, and actually using the phrase "Latin America" in his response to a question about Spain, so she clarified, saying "But what about Europe? I'm talking about the President (sic) of Spain." And rather than saying "Oh golly, I'm on a cellphone and misunderstood you before. Oh silly me!", McCain decided to repeat the previous answer, "I am wiling to meet with any leader who is dedicated to the same principles and philosophy that we are for humans rights, democracy and freedom. And I will stand up to those who do not."

He seems to be unwilling to state if Zapatero, the leader of a NATO ally, is dedicated to human rights, democracy and freedom. The only reason I can think of for this is that he couldn't bring himself to admit he had misheard the question, cuz that would look, ya know, weak and stuff.

Even hours after the fact, when asked just what McCain was trying to say about one of our allies, McCain's top foreign policy advisor, Randy Scheunemann, said in an e-mail that McCain was just "keeping his options open." Really? You'd rather piss off an ally by saying you might not meet with them than admit you made a mistake in mishearing a substantially-accented question? Who could be so concerned with image over alliances? Hmmm....


In case you're wondering, yes, I am looking for any excuse to use this picture. I just love it. It's the wallpaper on my desktop.

Roulette, AIG and the Subprime Crisis, pt. 2

Note: Here's my previous post on this topic.

So, how is it that so many bad bets (giving big loans to people very unlikely to be able to pay them back) were made by so many smart people? Obviously no one was making a single loan of this type and expecting to make money on it, just like no one would make a single bet at a roulette table and expect it to be a money maker. But mortgage lenders combined lots of these loans together into bundles called Collateralized Debt Obligations (CDOs) and then sold these CDOs to financial companies like Lehman Brothers and AIG. CDOs complicated the picture and gave a slick-sounding rationale for why the combination of bad bets might wind up being actually a good bet, just like my buddy's betting system for roulette obscures the bad odds and makes him think he's thought of a way to beat the house.

There are rating agencies like Standard and Poor's (of S&P 500 fame) or Moody's whose main function is to rate investments like CDOs. Lehman, AIG and other banks relied on S&P and Moody's to tell them how likely it was that they would get their money back on these CDO investments. But the rating agencies were fooled by the complexity of the CDOs (i.e., collections of bad bets) and told Wall Street that these were good investments.

So you've got a three-part system: mortgage brokers give big loans to people who can't pay them off, but the brokers don't care because they turn around and sell bundles of mortgages to Wall Street, who were told by rating agencies that the bundles were safe, sound investments. The mortgage brokers and Wall Street did nothing wrong, save from believing the rating agencies' wrong guesses at the value of CDOs.

Banks still don't know how much these investments are worth because, as housing prices continue to fall, more and more people wind up defaulting on these loans. Eventually, banks like Lehman investments lost so much value that the banks no longer had enough money to cover their obligations, like withdrawals and such. And because pretty much every bank is in the same boat, banks can't find anyone (save for the federal government) to loan them money, so they wind up having to declare bankruptcy.

So that, in a nutshell, is one man's attempt to explain the current economic struggles. Any questions?

Words Have Meanings

Much has been made in the last few days about McCain's statement that "the fundamentals of our economy are strong" on the same day that the Dow lost 500 points. After realizing that this might be, ya know, dumb and tone-deaf, he attempted to "clarify" his statement by saying that by "fundamentals", he meant the "the American worker and their innovation, their entrepreneurship, the small business, those are the fundamentals of America, and I think they're strong."

This attempted fix led to some ridiculous answers yesterday during his appearance with noted vicious lefty attack dog Matt Lauer on the Today Show.

Unfortunately for Senator McCain, words have meanings. In economics, as in other sciences or topics of the day, intelligent discourse requires common vocabulary. To anyone who has studied economics, "the fundamentals of our economy" brings to mind specific economic factors, including monetary policy, employment figures, productivity, and so on. You can't just go around assigning whatever meaning you want to such common phrases. It would be like, I don't know, promising to balance the budget and then saying after you fail that by "the budget" you mean "myself on a balance beam".

Of course, I have no doubt that the truth of the matter is that McCain, like his main economic advisor former Sen. Phil Gramm, thinks that the economy is fine and that we're all whiners, and then someone told him saying that this week was, frankly, dumb.

McCain/Palin soft on child molestation?

1. Palin's city, of which she was mayor for years and a councilwoman for years more, made women pay for their own rape kits, the bundles of swabs, test tubes and such used to gather evidence from a women's, uh, private parts (no links here. Find your own, perverts!) in order to investigate sexual assaults. The state of Alaska had to pass a law to stop Wasilla from doing this.

2. As previously discussed, the campaign attacked Barack Obama for supporting a law which would teach kindergarteners how to avoid "bad touching" (AKA, "child molestation"), labelling such teaching "comprehensive sex education".

3. John McCain, during his wild youth (AKA, his 50's), told a terrible joke about rape.

4. The McCain/Palin campaign's current explanation (there have been several) for "Troopergate" is that Walter Monegan, the former Alaska Public Safety Commissioner, was fired because he went over Palin's head by going to Washington to ask for federal money for Alaska (which has the highest per capita rape rate in the US) for a law enforcement initiative to combat child molestation. Yes, seriously.

Now, I know the internets and the Google are susceptible to hyperbole, but, given that Palin (and, by extension, the McCain/Palin campaign) is willing to ask for millions of dollars to study seal DNA but not for little things like rape kits or law enforcement, isn't it possible that the Republican standard-bearers just aren't nearly as concerned as they maybe should be about rape?

Roulette, AIG and the Subprime Crisis, pt. 1

I have a buddy, one of my best friends in the whole wide world, who is absolutely convinced that he has a system to beat roulette. This is, of course, pure BS. To those of you who might not know the game, roulette involves making bets on a randomly generated number between 1 and 36. You can bet on, for example, the exact number generated, whether it's odd or even, whether it's 1-18 or 19-36, etc. The house gains its advantage via two spots on the roulette wheel which are 0 and 00, which cause all the bets (except bets on 0 or 00) to lose. Long story short, the house has an expected profit of 2/38, and a player can expect that out of every $38 placed on the board in any arrangement or under any "system" you want, the player can expect to get back. I wrote an Excel spreadsheet to prove it, if anyone wants it. It's obvious to even the most casual observer that a single bet has an expected payout of 36/38, but my friend has come up with a system that, at the very least, is complex enough to obscure the fact that his expected payout is still 36/38. By putting some chips here, some chips there and then changing the bets on the next spin of the wheel, my friend's disadvantage became less obvious, but was always still there, unchanged.

The subprime crisis which once again reared its ugly head this week shares much with my friend's roulette delusion. Here's my attempt to briefly summarize the problem:

It used to be that, in order to get a mortgage, you'd have to demonstrate that you had some amount of income and credit history to allow the bank to be reasonably confident that you'd be able to repay it. As people who were actually qualified for a mortgage became more and more rare, banks began giving loans to people who weren't as likely to be able to repay their loans. Eventually, as this process continued, banks began loaning money to people who were so unlikely to be able to repay their loans that, even while charging those who do pay some calculated interest rate, that banks' expected payoff for a given loan was less than the value of the loan. For example, banks stopped requiring proof of your income to get a loan. So a guy who makes $25,000 could get a $600,000 mortgage, which of course he would be incredibly unlikely to be able to repay.

So why were banks making these loans? A market developed whereby they were able to bundle up a bunch of these loans into one package and sell them to banks/hedge funds/etc. They could sell shares in these bundles of mortgages. Some high-paying shareholders would be more likely to be paid each month, while cheaper stocks would be the first to not be paid as more mortgages go into default.

But few mortgages went into default, because, with more and more new mortgages being given out, homeowners could always refinance, getting more money to make their payments. So everyone made money.

Eventually, even people willing to take ask banks for such absurdly large loans became scarce, and fewer people were looking to buy homes. With this decrease in demand, home prices fell significantly. Existing homeowners became unable to refinance at sufficient house values to be able to pay off their original loans, so they defaulted. Banks were left with, instead of say a loan worth $250,000, they had a house now worth only $200,000. It is these losses of value that ruined Bear Stearns and Lehman Bros., and is ruining AIG, the world's largest insurer and a vital piece of Western finance.

I've had about enough typing for now, so I'll stop here. More tomorrow!