When Princeton Professors collide! In one corner we have Nobel Laureate, Princeton economics professor and Bush-basher supreme Paul Krugman:
The decision [by the Pension Benefit Guaranty Corporation] to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier but possibly higher-paying assets like stocks has been controversial.
Well, either they bought at the peak or they didn't, gentlemen - surely the reality-based community can get together on reality, or do we hope for too much? [Here is some belated reality from Justin Fox of TIME - "The Pension Benefit Guaranty scandal that isn't (at least not yet)"].
Go with Krueger on this one. Here is the Sept 30 2008 PBGC annual report (p. 17) noting that as of Sept 30 the investment shift had not occurred; here is a WaPo story from Oct 23, 2008 making the same point. The CBO and the GAO chimed in last spring and summer with very legitimate concerns. As of July the PBGC was still finalizing its implementation plan. I offer more mockery of more lefty dupes here; blame Josh Marshall as Agent Zero on this one.
Google can be your friend. That can be our little secret.
PENANCE: Maybe Paul Krugman can be coaxed into explaining how "the Bush administration may have left us all a gratuitous loss of hundreds of billions" when the PBGC has net assets of roughly $68 billion (per the WaPo). Even Ezra Klein, who is otherwise utterly suckered on this story, chokes on that. It's back to the groupthink-free Journolist!
Now, to be fair to Krugman, a related and plausible claim was made in the Globe article which inspired this wave of Bush-bashing nostalgia and Krugman is probably just mindlessly echoing it. From the Globe:
Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.
"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency.
I am sure Krugman's explanation will be memorable. And if he weaves in his basis for asserting that the PGBC had previously been investing in "bonds only", it will be a marvel. (I peeked - the PGBC has been investing in equities through the Clinton Boom and the Bush Dark Era.)
So let's recap - Krugman was wrong about the previous strategy having been "always bonds", wrong about the switch to equities being executed at the market peak, and wrong about possible losses amounting to "hundreds of billions" of dollars, we presume. He also misspelled "Guaranty". But he did find an opportunity to explain how stupid conservatives are. Mission Accomplished!
Well. My free advice to my friends on the left - sometimes reporters exaggerate and hype their story a bit (really!), so critical reading skills should be applied even if the reporter is bashing Bush. In the Globe story, to pick an example almost at random, the reporter explained breathlessly that the PBGC had decided to invest in equities but waffled on whether the decision had actually been implemented. Looks like April Fool's came early for some people.
WE WILL: Yes, put this in the "If Krugman is writing on economics you can take it to the bank" file.
DIG DEEP: Commenter Appalled delivers the Oct 24 2008 Congresssional hearing transcript. PGBC head Millard comes in on p. 102 with prepared remarks. Starting on p. 112 he explains why they haven't actually moved any assets.
The question of whether they should be in equities (since the PGBC is likely to take over companies with underfunded plans during recessions when equities are down) gets some back and forth. Mr. Millard notes that the PGBC's big takeovers have been in airlines and steel and not during recessions. Sure, in the past!
And here we go on the increased commitment to equities:
Chairman MILLER. I guess if you want to extrapolate out the new policy in today’s markets, the $4.8 billion would look something like more than $8 billion in losses?
Mr. MILLARD. If the new policy had been implemented in February, our experience from February to now—well, let me go back a step. It would have been impossible to implement the new policy in February anyway. As I discussed before, it takes years to layer in some of those asset classes and would have taken many months to layer in some of the others. So it is not the kind of thing that would have all happened at once anyway.
And a bit later:
Mr. MILLARD. No. The investment performance for fiscal year 2008, which concluded September 30th, and these are, again, I want to emphasize unaudited numbers, is based principally on the
prior policy. We have made very small changes so far in transitioning into the new policy because as we went into manager selection and as we talked to transition managers and we saw what was happening in the fixed-income markets, we saw things like the liquidity crisis, et cetera; it made sense to not only have a long-term strategy, we are not market timers, we are not trying to be a market timer, have a long-term strategy that is designed to pay our bills over time without having to turn to Congress for a multibillion dollar bailout, and at the same time as we transition, to do so in a deliberate and measured way.
Mr. COURTNEY. Then your testimony is then that this loss was not the result of any new policy?
Mr. MILLARD. Correct. The decline in our portfolio, the portfolio was approximately 70 percent [corrected to 30 percent] equities in September a year ago, and other than the fact that equities have dropped, we have not changed our allocation yet.
It hasn't happened, it wouldn't have happened, but Krugman believes it happened.
PROBABLY TOO MUCH DETAIL, BUT HERE GOES:
Mr. Millard expounded on the mix of asset classes:
Chairman MILLER. The new policy you mention is more diversified, and that would be how?
Mr. MILLARD. You mean specifically what are the projected asset classes? Currently, we are in U.S. equities approximately 25 percent; the non-U.S. equities approximately 2 percent; emerging market equities about one-half of one percent; long corporate bonds, approximately 40 percent; long Treasuries, approximately 25 percent; other Treasuries, approximately 4 percent; total fixed income, approximately 69.4 percent; cash, 1.6 percent; and private equity or real estate, approximately 1.8 percent. That is the current. The new would be 20 percent, U.S. equities; 19 percent, non-U.S. equities; 6 percent, emerging market equities; long corporate bonds, 13 percent; long Treasury bonds, 19 percent; high-yield bonds, 2 percent; emerging market debt, 3 percent; total fixed income, 42 percent; cash, 3 percent; total fixed income and cash, 45 percent; private equity and real estate, 5 percent each. Now if I can just add one point there, we could pick any one of those and say, you are going to put your money in what? And the point of that is we want a diversified investment policy. We don’t want to be subject to just what is the S&P doing on any given day. We don’t want to be relying on how are Treasuries doing on any given day.
Noam Scheiber of TNR tries to deliver a new take on the collapse of AIG and gets off to a promising start:
Here we go! Finally, a big time reporter is going to tackle a question that has been vexing me - who broke AIG? The government has reportedly lent them roughly $180 billion dollars, yet only about $80 billion (Only!) has gone to AIG Financial Products, supposedly the cause of the AIG disaster. Government loans of $44 billion (as of December) were propping up the staid securities lending activity undertaken by the boring, regulated insurance side. Per this report, $20 billion of government aid went to capital contributions to the insurance subs which, per the earnings report, realized $44 billion in capital losses last year outside of AIG FP. Finally, someone is going to explore why the rest of AIG went awry!
Psych! Instead of carving a new trail and explaining how a boring insurance company lost so much in its boring, regulated businesses Mr. Scheiber puts AIG FP on the couch and wonders where the controls broke down in that unit. Whatever. He mentions this three-part WaPo series (1, 2, 3) from last December but does not go substantially beyond it.
Mr. Scheiber's version is comofort food for those who believe that more regulation is always the answer. Pondering the failures in the highly regulated insurance subs is not nearly as comforting.
David Brooks in the "Car Dealer in Chief" looks at the GM announcement but overlooks Bill Gross of PIMCO, the patron saint of free-riding bondholders everywhere.
As to the current tough talk from Washington, Brooks says this:
Today, G.M. and Chrysler have once again come up with restructuring plans. By an amazing coincidence, the plans are again insufficient. In an extremely precedented move, the Obama administration has decided that the best time for possible bankruptcy is — a few months from now. The restructuring will continue.
But this, President Obama declares, is G.M.’s last chance. Honestly. Really.
Could this really be true? Could the Harvard Business Review’s longest-running soap opera possibly be coming to an end? Could President Obama really scare the restructural recidivists in Detroit into coming up with changes big enough to do the job?
Well, the president certainly acted tough on Monday. In a show of force, he released plans from his Office of People Who Are Much Smarter Than You Are. These plans insert the government into the car business in all sorts of ways. They pick winners (new C.E.O. Fritz Henderson) and losers (Rick Wagoner). They basically send Chrysler off into the sunset. Joe Biden will be doing car commercials within weeks.
The Obama team also raised the bankruptcy specter more explicitly than ever before. Even more tellingly, the administration moved to “stand behind” the companies’ service warranties. That lays the groundwork for a bankruptcy procedure and should be a sharp shock to Detroit.
I score this as true but incomplete. The Missing Person in the GM restructuring saga is Bill Gross, money manager of the enormous and enormously influential PIMCO. Why? Bond investors, but no one else, know the story of the GMAC restructuring:
One issue of the GMAC bonds roughly doubled in price after the holding company status was approved, so every bond holder (including PIMCO investors) who played the free rider and let some one else take the haircut and exchange their bonds picked up a windfall. To paraphrase General Patton, no one ever got rich exchanging bonds for their country; you get rich making some other poor fool exchange bonds for his country.
And the point? Obama is trying to extract concessions from General Motors bondholders, all of whom know that the free riders will pick up a windfall after Obama shocks everyone by deciding not to take GM into bankruptcy. The free riders could be controlled in bankruptcy, of course, but that won't be happening. However, a lot of huffing and puffing has to take place over the next few months to scare some bond holders into submission somehow. Clearly, the ordinary Washington Kabuki won't be enough - look for Super Kabuki!
And why is this not as problem for the UAW? Finally, collective bargaining reveals its virtue - there won't be any free riders on the labor side, since the union (unions?) can enforce wage concession on their entire membership.
We wouldn't be having this problem if investors would form a union, too. Maybe that can be a new Hope and Change agenda item.
MORE: David Sanger of the Times:
And with no edge to his voice, [Obama] left hanging the threat that he might yet force G.M. into a quick, managed bankruptcy, if it was the fastest way to remake the company. That message was directed at G.M.’s reluctant bondholders, an unsubtle warning that they must negotiate to get 16 or 20 cents on the dollar — or risk getting far less.
A STEP DOWN:
I welcome current poll data, but as of 2006, Obama as Car Dealer in Chief is taking a step down in public esteem:
Let's parse the polls!
Sure, back then!
Inspired by a Boston Globe story and aroused by the indignant yet underinformed Josh Marshall, lefties are aghast that the Pension Benefit Guaranty Corporation switched "much of" (per the Globe) or "most" (per the unflappable Josh Marshall) of its portfolio from safe bonds to risky stocks last February, prior to the stock market wipe-out (see "FEEL THE RAGE", below). However, our friends on the left are so intent on bashing Bush and his appointees that they have overlooked some good news, which I will bury for a while. In fact, assistant treasury secretary nominee Alan Krueger will make an appearance on my side of the debate. But if you can't bear the suspense - yes, the left has gone fact-free on this.
Here is the Globe:
Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.
The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.
Careful readers will note that the Globe makes a distinction between "decision" and "action". Then there is Dr. M:
The more I look at these investment decisions of Pension Benefit Guaranty Corporation and former Lehman exec Charles Millard the more my suspicion grows that some very bad happened here. There's no question that something happened very bad for the pensioners who were relying on this fund. But is there any conceivable good reason why you'd take most (the quote from the Boston Globe is "much" of the funds) of the assets of the fund designed to insure pension benefits out of safe investments like bonds and put them into highly speculative investments -- hedge fund, equities, etc. -- just before the stock market collapsed.
Incompetence doesn't cut it as an explanation.
So many questions, so many answers. First, anyone with the patience to make it to the end of the original Boston Globe article will learn that "much of" and "most" are actually targets of roughly 45% stocks and 10% real estate and esoteric stuff. That is up from a current target of 15-25% equities. Or one can find coverage of the announcement last year and get the same answer. The Globe:
As to why some fool would do this, well, I'll agree that there is a huge covariance problem since the PBGC's equity portfolio will be tend to be down during times of economic weakness when distressed firms are more likely to fail and drop their pension plan into PBGC's lap. However, the evident intention was to spare Congress some embarrassment:
[Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20] said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said.
He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed.
Well - heads the government wins, tails they are already losing so what is a few billion more among Congressman?
But I promised some good news! With a burst of creativity and insight I actually went to the PBGC website and checked their most recent annual report, for their fiscal year ending Sept 30. The gist? Talk is cheap and the expensive actions have not been taken - all the PBGC seems to have done so far is to lay the groundwork for the investment shift; as of Sept 30, 2008 their actual allocation had not changed notably. Here we go, in their discussion of the new investment strategy (p. 17 of 88):
Wow, it's almost as if they are taking their time. And they are:
Now, by the time this report was prepared in November the PBGC knew that soft-pedaling its switch to equities was prudent. However, the advertised switch had not taken place as of Sept 30 - alternative investments was stuck at 2% and equities were down from 32% to 27% of the portfolio (partly due to market declines, no doubt).
This report is as of Sept 30, 2008, which follows the Lehman/AIG debacle but precedes the full October meltdown. As of Sept 30 the S&P 500 was at 1164, compared to its current level of about 800 and an Oct 31 2008 level of 968.
The PBGC director testified to Congress on Oct 24, 2008 and said this about the new investment plan:
PBGC has developed a plan for gradual implementation of the new policy to prevent any disruptions in financial markets. The Board Representatives have been deeply involved in crafting the new investment policy and will continue to oversee its implementation.
Well, if they hadn't made any notable moves as of Sept 30 and expected future moves to be "gradual", maybe the current panic among the punditocracy is premature.
Now, it is possible that the newly-hired money managers ignored that "gradual" admonition and chose early October as the time to plunge with both feet into the most turbulent market in recent history of this millennium, thereby dropping a bundle. Or maybe they were lucky enough to buy the lows - the October low was 850 on the S&P, and the November low was 750. Or maybe they are watching and hoping, like the rest of us.
Speaking only for myself, I intend to refrain from tearing out what is left of my hair over this miserable misallocation of assets until I see a few more facts, starting with determining whether the PGBC has actually implemented this dubious strategy. Of course, folks who are desperate for a Bush-bash will want to take a different course.
FEEL THE RAGE: Let's hear from some aghast lefties:
dday at the Washington Monthly and Hullabaloo does not think that Team Obama will stick with the strategy because "there's probably almost no money left in that portfolio". Oh, he (she?) will be so happy if /when this post catches his eye.
Dave Johnson of Seeing The Forest has yet to see the annual report but is preparing indictments:
Was it Bush and not Cheney?
Somebody at Wonkette:
If the stabbing has begun, I volunteer my eyes, just so I won't have to read on.
Here is the emptywheel:
Third, the market was already beginning to tank when they made this decision. And Karl Rove knows you don't win elections if the economy isn't "strong."
Call me crazy. But it sure looks like some Bush flunkie put the potential retirement of a bunch of Americans up in smoke so a guy who married a $100 million sugar momma would have a shot at being President.
Call you crazy? How about "lazy", as in too lazy to do a lick of research before joining the chorus.
The Anonymous Liberal (my emphasis):
As the Boston Globe reports this morning in an important story, this past year--at the height of the bubble market--the Bush administration implemented a "new diversified investment policy" at the Pension Benefit Guarantee Corporation, the entity established by Congress to guarantee pension payments to workers when their companies go bankrupt.
"Implemented"? At the height of the bubble? Well, they implemented it without actually shifting assets, then.
Mary of The Left Coaster calls this "A Case of Outright Theft":
The financial detectives need to look at what tranches Mr. Charles E.F. Millard bought for the PBGC. Because this looks like he and Mr. Bush's Cabinet Secretaries can be charged with fiduciary liability.
Birds on a wire.
The decision to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier but possibly higher-paying assets like stocks has been controversial.
I re-endorse Prof. Krueger's concerns about the revised strategy:
MORE REASSURANCE: From the WaPo last October:
[Rep. George Miller (D-Calif.)] blamed the $3.1 billion loss on the agency's investment in mortgage-backed securities. Speicher confirmed that 6 percent of the agency's portfolio is in mortgage-backed securities. But he said they were fixed-income products and, therefore, not the cause of the drop.
Miller also questioned the agency's decision in February to adopt a new policy that would allow it to invest 45 percent of its portfolio in equities, 45 percent in fixed-income and 10 percent in alternative investments. Previously, it could invest only 15 to 25 percent in equities and 75 to 85 percent in fixed-income.
"The people served by the PBGC have already lost their original pensions. . . . I don't think we should be investing in high-risk instruments when this is the last chance for people to hold on to what little retirement benefits they have left," Miller said.
The shift has not yet happened, however, with 70 percent of the portfolio still in fixed-income. The new asset allocation, agency officials said, would produce a more diversified portfolio and work better for long-term investing.
If the Nutroots want to make themselves useful, I assume our Congressfolks can get unaudited results for Dec 31 2008 and maybe even a five-month result through February 2009. Then we might have actual facts to deal with.
Al Gore's people respond to the accusation that the Gore's left their lights on when the truly environmentally conscious were darkening their homes in recognition of Earth Hour (aka, the Earth Hour of non-Power).
The response, which I presume to have been staff-generated, includes this gem:
"Powered"? Troubling. Actually, the Gore manse is heated and cooled by geothermal heat pumps, which can be very energy efficient. But although he is a reliable source of hot air, Big Al's residence is not sited on a hot spring.
Meanwhile, Al Gore's accuser stands by his story - at Al Gore's the lights were on, even if no one was home.
Well, he saw a few dim bulbs, so maybe Al was home...
I can quit anytime.
Jon Chait of TNR explains that Congressional Dems are doing to Obama what they did, with grim results, to Jimmy Carter and Bill Clinton:
He offers three reasons but I am most intrigued by this:
A second factor encouraging Democrats to buck their presidents is the role of the rich and business interests. Unless you are a high school student reading this article in your civics course, in which case I'm sorry to dispel your illusions, you will not be stunned to learn that the affluent carry disproportionate political weight with elites in both parties. So, while people who earn more than $250,000 per year make up just a tiny slice of the electorate, they make up a huge chunk of any congressman's friends, acquaintances, and fund-raisers.
What's more, whatever their disposition toward business in general, Democrats feel it is not just a right but a duty to slavishly attend to the interests of their home-state businesses. That is why Kent Conrad upholds even the most absurd demands of agribusiness, or why even a good-government progressive like Michigan's Carl Levin parrots the auto industry's line on regulating carbon dioxide.
That might hold true in the Senatem but are the safe-seat Democrats in the House who have accumulated the most seniority really struggling to raise money, or worried that they may fall short in doing so?
I would point a finger at gerrymandering - the safe-seat Dems have no fear whatsoever that Obama can punish them by helping to chase them from office. Now, could Obama help a primary challenger? Maybe.
MORE: Patterico questions Chait's grasp of recent history:
But Chait’s ignorance of history does not stop there, as his review of the Bush era demonstrates. The Bush tax cuts were passed on partisan votes, but the rest of his examples fall apart on examination. The first war resolution passed with broad bipartisan support. The Iraq war resolution passed the Senate by a vote of 77-23. The Medicare prescription drug program passed the Senate by a vote of 55-44, but 11 Democrats voted in favor and nine Republicans voted against it. The 2005 energy bill passed the Senate 74-26, with help from then-Sen. Barack Obama. The No Child Left Behind Act, on which Pres. Bush collaborated with the likes of Sen. Ted Kennedy, passed the Senate 87-10. To the extent that partisan leverage was involved in the passage of these items, it was largely in terms of pressuring conservatives to expand the size and power of the national government.
Obviously some of those votes, such as the Iraq war resolution or No Child, don't count because Dems were tricked, or pressured, or confused. I.e., Democrats.
If I am following this correctly, Obama is going to pretend to take a tough line with GM before opening the taxpayers checkbook.
WASHINGTON — President Barack Obama on Monday will reject requests for almost $22 billion in new taxpayer bailout money for General Motors Corp. and Chrysler, saying the car makers have failed to take steps to ensure their viability.
The government sought the departure of GM chief Rick Wagoner and said the company needed to be widely restructured if it had any hope of survival. It said it would provide the company with 60 days operating capital to give it time to undertake reforms.
Bloomberg pegs the Rick Wagoner, newly departed head of GM, as a sacrificial offering:
Presumably Obama thinks that in 60 days the anger he helped incite over the AIG bailout and bonuses will have cooled.
We are scuffling with a major infrastructure breakdown here (and what kind of a country have we become when the normally reliable bootleg hotspots are all down?)
Times business columnist Joe Nocera provides a plug for the Geithner plan. However, Mr. Nocera and his editors fluff an important detail by overstating the allowable leverage in one part of the plan, claiming that the Legacy Securities program will allow 85% leverage when the real goal is 33% with 50% allowed on an exceptional basis. Let's start with the plug:
Will it work?
Having spent the better part of this week mucking around in the details of the new plan, I concluded, somewhat to my surprise, that it might well work. By this, I certainly don’t mean that it will, all by itself, revive the economy. But I think it could put a real floor on the price of the bad assets — critically important to stabilizing the banks — and change the market psychology so that securitized assets can begin to trade again, which is important to get credit flowing. And it will give regulators a far sounder basis to ask Congress for more money to recapitalize banks — or take them over, if it comes to that.
If he has spent a week mucking around in the details, why does he get the detail about allowable leverage wrong in describing the Legacy Securities program (my emphasis)?
The P.P.I.P. (inside the beltway, they have already started calling it P-pip) is, in fact, two separate programs. One deals with the kind of mortgage-backed securities that we’ve all come to think of as toxic assets. The other deals with loans that have not been securitized — for things like commercial real estate, or residential mortgages or small businesses — that banks hold on their books. The former program will be run by Treasury and the Federal Reserve; the latter will be managed primarily by the F.D.I.C.
As it turns out — and this was also something of a surprise — there is a consensus, both in Washington and on Wall Street, that mortgage-backed securities have been marked down to levels that have started to approach reality. These securities come under mark-to-market rules, so they have to be marked down as they decline in value. They are the primary reason the banks have had to take write-down after write-down, decimating their capital.
Still, to get investors to buy those assets — and get a market flowing again — they still need some leverage to bolster potential returns. Critics complain that the government-provided debt amounts to a bribe to get investors to purchase the assets at inflated prices. But I don’t think that’s what’s really going on. Instead, it appears that the government is trying to return some normalcy to the workings of the market.
“There is something called the leverage cycle,” said John Geanakoplis, an economics professor at Yale. During the bubble, he continued, when the country was awash in debt, toxic assets rated AAA were leveraged at an outlandish 16-to-1 ratio. That leverage was the primary reason those assets made such big returns. Now we’re in the opposite end of the cycle. There is no leverage at all available — yet without it, the return on these assets would simply be too small to make them interesting enough for investors to purchase. The only entity capable of injecting leverage in the system is the government.It makes perfect sense that the government would want to supply that leverage, though certainly not at the extreme 16-to-1 ratio that characterized the bubble. Though the government will go as high as six to one, what I hear is that most of the assets will have less leverage than that. If the program works — that is, if the assets begin to make money for investors — it could draw more private lenders into the marketplace. Suddenly the market for these assets would become liquid again, and banks could mark the assets remaining on their books with some real confidence. Isn’t that what we want?
Oh, he hears most securities will have less leverage than that? My goodness, I haven't heard a thing but I have read, in both the Treasury description and the helpful Times graphic that for the Legacy Securities program being described here the target leverage will be 33% (i.e., 1-2) with a maximum of 50%.
Oh, well. Early leaks of the plan to the Times a weekend ago talked of leverage "up to" 85%. Paul Krugman seized on that 85% leverage and spent the weekend denouncing the Geithner bailout plan on that basis. The Times has been tied up on that point ever since - other than the helpful graphic, I have not noticed any acknowledgment by them of the 33% / 50% max leverage for the Legacy Securities program. Although he praises the program, Nocera continues that misinformation campaign here.
Hey, it might not be a disaster - let's find out! That is a heck of a basis for forming policy. By way of comparison the plodders at Reason actually cite world practice and experience. Like anyone cares!
However, Matt does buttress his case with some pop-sociology:
They'll thank us. Right, because money is the only form of status-competition Matt has ever encountered in his time at Harvard, Washington, and in blogging.
I wonder whether, in addition to blogging this insight, Matt Twittered it, emailed it, Journolisted it, and put it on some FaceBook groups. My suggestion - let's get off this electronic treadmill and end the competition among the media-elite. Mutual disarmament, everybody - blogs, published articles, and the odd letter to the editor are the way forward. I foresee more free time for everybody. Matt, lead the way.
BONUS THOUGHT: I refuse to look it up but I recall that both Bill and Hill took book advances of about $10 million. I think Obama can do better, but if $10 mil is his target he just might sign such a bill. Remember the key rule - "rich" is a bit more than our pols pull down.
A LONG, LONG TIME AGO IN A COUNTRY FAR FAR AWAY: Back when the top US tax bracket was 70% the tax code also offered many opportunities for tax sheltering and companies routinely offered tax-free perks such as company cars, country club memberships, coprporate jets, and expense accounts that were subject to, uhh, light and sympathetic review. The Reagan rate cuts also included tax base broadening through the elimination of many shelters, although libs are not taught that (or are they taught never to acknowledge it?).
NONE DARE CALL IT INSULAR: From Matt:
I’m prepared to be talked out of this view if Brad DeLong or someone can really lay it out for me, but I don’t see it for myself.
Confront some conservative texts or thinkers directly? Ooooh....
WHO'S THE COWARD NOW? I have run away from attempting to guess how Matt hopes to sort out taxes on salary, bonus, and capital gains on stock options and grants and make sure that "executives" don't get paid a lot but entrepeneurs do.
Mickey Kaus gets behind the Journolist curtain and reveals the left's Best and Brightest at what we can only hope is neither their best nor brightest. I applaud Journolist founder Ezra Klein, who can't be getting paid enough to read this bilge. Especially amusing are the call-outs to Ezra from other posters imploring him to stop their mutual descent into juvenile snark. Too late!
Let's cut right to the lowlights:
But I agree with Jon that the tendency to lapse into name-calling, or making broad assumptions about people who aren't on this list, seems at minimum like it's not the best use of our time, and at worst, unworthy of this very smart, very funny community. It bothered me when folks where making totally unsubstantiated comments about [REDACTED!--mk]'s sex life, and it bothers me when folks make [REDACTED] jokes. To be clear, I'm totally open to legitimate commentary on the substance of anyone's argument, and people should get smacked down if they lie, if they get things wrong, etc. I think analyzing Peretz's writing about Mexicans, or Palestinians, or whoever, is totally fair game. But saying that [REDACTED] clearly must not have a girlfriend, or speculating about who [REDACTED] gets turned down by sexually are not arguments. We wouldn't take similar statements remotely seriously if they were made by conservatives about anyone on this list.
Somebody clearly does not have a girlfriend? Geez, does that mean he needs to, uhh, find some other way to relax, or do are we getting a whiff of homophobia on the Journolist? We already have been alerted to the presence of anti-semites there.
Well, the list clearly provides the kind of rollicking, no-holds-barred (and off the record!) debate that will get this country back on track.
Projected pushback - we don't always sound like whining a**-h**** with too much free time. That'll work!
WHY THEY SECRETLY THANK MICKEY KAUS: The only thing a paranoid lefty loves better than being in a secret, exclusive group is being in an oppressed exclusive group. Catnip! Ahh, for the Bush days when they could whisper about being wiretapped.
SINCE YOU ASKED, WE CAN SERIOUS UP:
The Journolist pablum-toss centered around this passage from Marty Peretz, which is denounced as "crazy-ass racist":
The obvious rebuttal - he is describing cultural, not racial, chracteristics - gets a dismissive mention.
Amanda Marcotte, who clearly is fully qualified to be a Journolister, develops the point. What's fun is that she is so committed to her "He's a racist!" argument that she gets stuck writing stuff like this:
Its inexplicable if Peretz is describing race, obvious if he is describing culture. Since, like many lefties, Ms. Marcote apparently needs to think that those with whom she disagrees are racist (or sexist, or some other -ist, like homophobic-ist), Mr. Peretz's views will remain unfathomable to her. And even better, since he is a deplorable something or other -ist, she does not need to engage any of his arguments ever. It's the same game Barney Frank played with Scalia. So much easier to shut down debate than have it out, yes?
Now that the momentum behind it has dissipated, Republican Congressman Paul Ryan explains his flip-flop on the House Rage Tax:
Now it's unconstitutional? Hmm. Laurence Tribe said it was constitutional; then Tribe said it wasn't. Jack Balkin says it was. Richard Epstein says it was. For those scoring at home, that is either 3-1 in favor or 2-1 in favor - a clear majority! FWIW, unnoticed Constitutional scholar Tom Maguire's preliminary assessment was that the Rage Tax was probably OK, based on this 1998 Heritage paper.
Some speculated that Tribe was throwing a lifeline to his buddy Barack, providing political cover for an Obama cut-and-run. I guess gutless Republican weasels can grab the same rope.
DID I SAY "GUTLESS"? Let me try for something stronger while we contemplate this:
Vote now, study later. But this takes the cake pie-in-face:
How dare those Dastardly Democrats create a situation where Ryan's vote actually counts!
Surveying this and that while we wait for the caffeine to kick in:
ANDREW SULLIVAN ON POT:
Obama has not forgotten who elected him but the stoners will soon forget who they voted for. Or whether they voted.
IRKSOME MATH METAPHORS:
"Exponentially bigger"? Hey, paI, I got something exponentially bigger for you right here. Geez, this is a real quantum leap in their coverage. Grr. Well, we all know what they mean, which is "orders of magnitude", and since we all know, I will move on...
As to the story itself, the fickle finger of populist outrage is pointing in a new direction now that our "leaders" have mastered the spelling of "AIG". There is a pretty strong Goldman connection here:
Critics have also pointed out that then-Treasury Secretary Henry Paulson, who left Goldman in 2006 as CEO, played a lead role in the government's rescue efforts. Meanwhile, the chairman of the New York Fed is former Goldman head Steve Friedman.
BEGGING FOR AGE AND PERSPECTIVE:
A Times story about caffeine as a sports enhancing drugs for athletes tells us this but not that:
Every athlete of a certain age knows that Frank Shorter won the 1972 Olympic Marathon quaffing de-fizzed Coke. C'mon, if they are going to plug Coke anyway, go all in.
THEY'RE EVERYWHERE! The Times discovers that retention bonuses are pretty common, since it is not always good business to let all the rates desert the sinking ship.
THE REVOLVING DOOR SPINS SO FAST IT BECOMES A BLUR: Donna Brazile, a vice-chair of the DNC, will be speaking at a Justice Department event. However, this does not represent politicization of the DoJ, as Ms. Brazile explains:
“During my remarks, I will pay tribute to women who dare, women of courage and the many milestones we have achieved and the path ahead,” Brazile said in an e-mail. “I am going in my capacity as an Adjunct Professor in the Women and Gender Studies at Georgetown University — not as a CNN contributor, ABC news consultant or Vice Chair of the DNC [Democratic National Committee].
So when she outlines "the path ahead", she will be describing the agenda favored by the Georgetown faculty, not the Democratic National Committee. So it's all good.
DON'T LET THE DOOR HIT YOU IN THE A** ON THE WAY... OOPS!
KABUL, March 26 (Reuters) - A would-be suicide bomber accidentally blew himself up on Thursday, killing six other militants as he was bidding them farewell to leave for his intended target, the Interior Ministry said.
Is that 72 virgins divided by seven?
MY NEWFOUND RESPECT FOR EZRA KLEIN:
The can't be paying him enough to read this bilge.
More headlines that really ought not be newsworthy at all:
Let's cut to Daniel Henninger as he covers the long good-bye between Dems and business.
Nick Kristof is so down on experts he stops making sense:
The expert on experts is Philip Tetlock, a professor at the University of California, Berkeley. His 2005 book, “Expert Political Judgment,” is based on two decades of tracking some 82,000 predictions by 284 experts. The experts’ forecasts were tracked both on the subjects of their specialties and on subjects that they knew little about.
The result? The predictions of experts were, on average, only a tiny bit better than random guesses — the equivalent of a chimpanzee throwing darts at a board.“It made virtually no difference whether participants had doctorates, whether they were economists, political scientists, journalists or historians, whether they had policy experience or access to classified information, or whether they had logged many or few years of experience,” Mr. Tetlock wrote.
Efficient market students are not exactly agog at this. Nor is anyone who studies the sports pages - many newspapers have their panel of expert reporters make weekly football picks against the spread. The general result supports the hypothesis that these guys, who follow football professionally and spend time in the locker rooms of the local teams, need to keep their day jobs.
That said, I question this conclusion. Back in 2006 political "experts" could have delivered a short list of viable Presidential contenders in the two parties. I daresay almost all such lists would have included John McCain and many (most?) would have given a nod to Barack Obama. But would a panel of chimps throwing darts at, e.g., a list of 100 Senators, 435 Congressman, and 50 governors really have consistently hit those two?
I am sure Tetlock has an interesting point. I just wonder what it is.
Kristof closes on a personal note:
The marketplace of ideas for now doesn’t clear out bad pundits and bad ideas partly because there’s no accountability. We trumpet our successes and ignore failures — or else attempt to explain that the failure doesn’t count because the situation changed or that we were basically right but the timing was off.
Well, well. I have seen Kristof's fellow savant Paul Krugman put himself in that lonely camp of heroes who foresaw the housing collapse. With that as an excuse, let me repeat Krugman's table-pounding jeremiad from May 2006:
Maybe he's right! Thanks for that. And on the famous economist's famous other hand if he's wrong, it could be "serious". Geez, can we get a belated bid for "apocalyptic"?
Yeah, Krugman sure called the heck out of it.
PILING ON: In January 2008 Krugman has a helpful blog post explaining why the Fed may have limited ability to prop up the housing market and fretting about a possible bust. His table-pounding finish:
I’m actually not sure how bad things will get — remember, we still have help from booming exports. But it’s not too hard to tell stories in which monetary policy doesn’t have enough mojo to deal with our current problems.
He wasn't sure! But he's sure now that he was sure then.
CHEAP SHOTS: Here is another lesser-known (and deservedy so) ex post genius.
Shorter Barney Frank - Scalia is a homophobe because he is unwilling to back the GLBT agenda.
Barney Frank takes time out from harassing financial services executives to explain why he called Supreme Court Justice Scalia a homophobe:
To his credit (and our amusement) Frank produces what he considers to be two damning excerpts. Let's see. Here, per Frank, is one example where Scalia "made it clear" that sex discrimination "is very much in society's interest because homosexuality deserves to be treated with not only disapproval, but legal disability":
I don't find support for Frank's assertion that Scalia believes homosexuality "deserves" to be treated with disapproval; I find a stern reminder that the public deserves courts that wait until legislatures legislate before creating new rights.
Oh, well - Frank is not interested in a frank exchange of views. His goal is to shut down debate by branding everyone on the other side as a homophobe. Intimidating Scalia seems an improbable task, but if Frank can persuade some judges somewhere to opine carefuly or else, then he wins.
MORE: Ann Althouse had a pre-rebuttal yesterday in respomse to Frank's radio show.
The Anonymous Liberal explains why conservatives are sympathetic to Jake DeSantis of AIG but did not rally round the UAW workers when they were urged to make contract concessions or try their luck with a bankruptcy judge - it's because Jake is a more engaging conversationalist and the UAW guys smell funny. Or something:
For heaven's sake - is there any chance this is a pubic policy debate rather than an episode of Oprah? . We are not offered links to these right wing thinkers so we can't evaluate his evidence. However, Memeorandum offers plenty of reaction. Without excerpting them, I will characterize Ed Morrissey, Mark Steyn as focusing the public policy implications; Michele Malkin deplores the incitement of mob rule.
If the theorizing of the Anon Lib is correct he ought to be able to produce plenty of cites documenting conservative support for the management of General Motors and Chrysler, since surely they are the sort of plutocrats with whom conservatives can identify. Does anyone remember it that way? I do not (George Will describes the GM management as "mendicant", but maybe that is meant as a term of endearment.)
As to the UAW, here is a headline - conservatives are opposed to unions and have considered the UAW to be part of the Detroit's problem rather than Detroit's solution for at least three decades. And contrary to progressive fantasy that opposition to unions is not because conservatives revel in the oppression of the working class. The function of unions is to restrict employment and drive up wages; a predictable consequence of their workplace rules is a reduction in productivity. Fewer jobs at sub-optimal productivity is not a recipe for economic growth. In other words, unions are not about growing the proverbial economic pie; they are about re-slicing a smaller pie in their favor.
And sadly, this is not just theory. Old Europe is heavily unionized. It has a difficult time attracting investment, does not create jobs, and cannot absorb immigrants. An America that looked like Europe would no longer be the Land of Opportunity and we would have to close our borders (Krugman got roasted by progressives when, in a rare deviation from lib orthodoxy, he made a related point three years ago.)
Pressing on, I wouldn't say conservatives supported Mr. DeSantis of AIG because he is a swell guy they would like to have over for dinner. The public policy question is whether the US financial system can be salvaged after Congress caps the pay in every TARP recipient at $250,000, which is well below historical Wall Street norms.
Let me recycle this example - imagine Citigroup has a very profitable foreign exchange group with traders making several hundred million dollars for Citigroup and taking home several million dollars for themselves. Is the US taxpayer better off if those traders leave and Citigroup and work elsewhere? Even if you think the answer is "yes" (I could be convinced, as regards a new class of highly-regulated "public utility" banks anyway) the subject merits a lot more than the twenty minutes of debate the House gave it. And since Obama himself is currently drifting away from the House bill, it is hard to explain the opposition entirely in terms of class consciousness. Maybe opponents of the bill who thought it would be disastrous public policy were just, dare we say it, right?
Which leaves us where? The Anon Lib will want to buttress his "class solidarity" theory by demonstrating conservative support for GM management, and good luck with that. He willl want to familiarize himself with the economic reasons conservatives oppose unions in order to opine sensibly on the motivations of union opponents. And he willl want to explore Obama's emerging class consciousness as a member of the oppressive elite opposed to the House Rage Tax.
Or he will want to chuck this weak theory overboard.
I missed this in the Geithner plan:
One more government hold-up. Later we can bail them out.
Now let's play "Juxtaposition". Matt Yglesias can go first:
And filed under "The Devil Made Him Do It":
Oooh, the power of that Right-Wing Echo Chamber can not be overestimated.
The Swamp provides a play-by-play. I wish the Admin could bring back the days when Joe Biden had sole possession of the gaffe-o-matic.
A new Yogi Berra book is coming out, "Yogi Berra - Eternal Yankee" by Allen Barra.
But, as Barra points out, Yogi's been a success at almost everything he ever tried. Pitchers who were brilliant when he was behind the plate never did anything much when he wasn't. Whitey Ford, one of the greatest left-handers ever, often says he never shook off one of Berra's signs, and Don Larsen has said the same thing about his World Series perfect game.
Berra won more World Series than any other player. He won three Most Valuable Player awards and appeared in 17 straight All-Star games. He was the leader and the on-field constant of the only team ever to win five straight World Series, the 1949-53 New York Yankees.
He was only the second manager ever to win a pennant in each league. He was a great coach and he's a good businessman. And just about everyone who's ever dealt with Yogi Berra has come away not just liking him, but respecting his decency, his integrity and his intelligence. There's more to Yogi Berra than meets the eye.
Sure, everybody loves Yogi - here. But this is a story from the Yankees 2004 trip to Japan:
Berra, 78, accompanied the Yankees on this trip. He has done his part to help the game grow here, but Torre found out Saturday that Berra's celebrity has its limits.
''I'm sitting having breakfast with Yogi and Brian Cashman, and somebody came in and asked me for my autograph,'' Torre said. ''I signed for him, and about 30 minutes later he comes back with a camera. He said, 'Would you mind taking a picture with me?' I said, 'Not at all.'
''He hands Yogi the camera and says, 'Will you please take it?' I thought that was priceless. It was absolutely priceless. I wasn't going to say who he is. Yogi held it steady and took the picture.''
At least the fan got a picture of a smiling Joe Torre.
During his press conference Obama explained, apparently with a straight face, that making it more expensive for people to donate to charity by reducing the value of the charitable tax deduction will not affect the level of charitable donations. He further insisted that he was basing this counter-intuitive claim on "the evidence". Really? It will be interesting to watch Obama's apologists within the reality-based community defend this. While we wait, allow me to report back on evidence gathered from the planet with the yellow sun.
First, here is a meta-analysis from 2005:
The authors compile and contrast the results of a vast number of studies looking at the interplay of tax rates and charitable giving. Although people have many motivations for their philanthropy the conclusion of almost all of these studies points in the same direction - on net people give less when it costs them more. (Table 1 on p. 5 and Figure 1 on p. 6 show negative price elasticities in almost every study.)
The interplay of tax rates and charitable giving was also an issue during debates on reforming or repealing the estate tax. Parenthetically, I should note that we are about to shift gears - when it comes to the estate tax, lefties are adamant that a high estate tax coupled with a commensurate charitable deduction promotes charitable giving and that an estate tax repeal "would substantially reduce charitable giving". In that arena they recognize that Obama is talking nonsense. Yes, it can get confusing; I am long resigned to the fact that I am not smart enough to be a lefty.
That said, this is from 2003 in support of the unsurprising notion that people pay attention to their money:
Here are two relevant snippets:
As people have more, they will give more, and as giving costs more, they will give less - thank heaven for economists!
Of course, in the current context, Obama is raising taxes on high earners, thereby reducing their net worth, and reducing the value of the charitable deduction, thereby raising the after-tax cost of donating. The net effect of these changes on giving by "the rich" will be unambiguous and bad for charities, although to be fair, the effect will be swamped by the wealth effect of the current market wipe-out.
Oh, well - Obama is certainly not describing the motivations of charitable donors based on his own experience - he and Michelle were virtually unaware of the concept until he became a Presidential candidate. But that said, he did have good success getting people to write non-deductible checks to his campaign. (Here's a stray thought - totally eliminating the charitable deduction would put politicians on an equal footing with charities. That would be a boon for activists, but eliminate the middleman in the case of Planned Parenthood, the NRA, and so on. What side is Obama on here?)
Here is the relevant exchange from the presser:
QUESTION: It's not the well-to-do people. It's the charities. Given what you've just said, are you confident the charities are wrong when they contend that this would discourage giving?
OBAMA: Yes, I am. I mean, if you look at the evidence, there's very little evidence that this has a significant impact on charitable giving.
I'll tell you what has a significant impact on charitable giving, is a financial crisis and an economy that's contracting. And so the most important thing that I can do for charitable giving is to fix the economy, to get banks lending again, to get businesses opening their doors again, to get people back to work again. Then I think charities will do just fine.
If his point is that the wealth effect will is more important in the current environment, well, nobody disagrees. But that is not what the charities are worried about; their point is that this is one more problem for them in an already brutal environment.
AIG Financial Products exec Jake DeSantis know how to make an exit - his open letter of resignation to AIG head Edward Liddy is powerful. Briefly, he is out, he is innocent, and he is giving the money to charity.
He explains that his unit was profitable and had nothing to do with credit derivative swaps:
I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.
Mr. DeSantis also waves the American flag:
Raised by schoolteachers in a mill town, yet he dared to aspire to more - it will be interesting watching the lefties excoriate him. Class traitor, maybe? Too bad - if Jake gave an anti-war speech (however belatedly!) he could be John Edwards. FWIW, so far at Memeorandum our friends on the left are silent, but the day is young and I bet the Journolist is humming! [Eventually they will find a "Jason DeSantis" of AIG Financial was a max donor to Chris Dodd and defeated moderate Republican Nancy Johnson. Damning!)
He will be giving the bonus to charity, subject to some sensible provisos:
In the current climate he might want to hold on to it for legal fees and personal security.
Mr. DeSantis takes a shot at our two posturing Attorneys General:
Good stuff. Liddy and others had made the point that most of these AIGers were not culpable.
FYI: Given his work in commodities I infer that Mr DeSantis joined AIG Trading in 1998 and was moved over to AIG FP in 2003. Do I have a point? No, other than he was less likely to be in with the in crowd, or anyway, the Joe Cassano crowd.
NOW I QUIT: Given his work in commodities modified by the fact that per his letter he started at AIG in equities, I infer that my previous "insight" is deeply flawed. And wrong.
AIG Trading Group Inc., through its subsidiaries, engages in trading and market making in foreign exchange, emerging markets, precious and base metals, energy products commodity indices.
e price and performance of physical commodities, often by
the price of futures contracts for the commodities that are listed on
..... Click the link for more information..
Adam Liptak of the Times reports on School Officials Gone Wild:
SAFFORD, Ariz. — Savana Redding still remembers the clothes she had on — black stretch pants with butterfly patches and a pink T-shirt — the day school officials here forced her to strip six years ago. She was 13 and in eighth grade.
An assistant principal, enforcing the school’s antidrug policies, suspected her of having brought prescription-strength ibuprofen pills to school. One of the pills is as strong as two Advils.
The search by two female school employees was methodical and humiliating, Ms. Redding said. After she had stripped to her underwear, “they asked me to pull out my bra and move it from side to side,” she said. “They made me open my legs and pull out my underwear.”
Ms. Redding, an honors student, had no pills. But she had a furious mother and a lawyer, and now her case has reached the Supreme Court, which will hear arguments on April 21.
I infer the school is worried about the budgetary impact of a loss in this suit. Let's hear from an expert:
Richard Arum, who teaches sociology and education at New York University, said he would have handled the incident differently. But Professor Arum said the Supreme Court should proceed cautiously.
Reasonable people disagree about whether this was appropriate? How many parents strip-search their own thirteen year olds, let alone other kids? For Advil? I would guess roughly none. In fact, I daresay that if a thirteen year old came to school officials and complained that her parents were strip-searching her, the school might arrange for a home visit from Child Services.
That Supreme Court hearing will provide some You-Tube moment, I bet. I pity the fool trying to explain this to Scalia.
Ezra Klein, who would rather rail against the Geithner plan than do his homework, recycles a scenario in which an unscrupulous bank sells its own assets at an inflated price to a new private-public investment partnership in which the bank is the levered equity investor.
Self-dealing - why didn't Geithner's team think of that? Oh, wait - they did:
If a regulated bank can slide a controlling equity investment into a PPIF and then sell its own assets to that PPIF without the regulators noticing, we deserve the fate that befalls us.
His second example is more interesting:
I assume his notion is that the hedge fund buys the CDS on behalf of a separate account with the same owners (with the same level of participation) which is not part of the PPIF. And who is selling the CDS, anyway? The seller wants to bear the price risk of toxic waste by means of a CDS rather than through these "subsidized" PPIFs - why? If they are financially credible, they ought to be able to participate in these PPIFs; if they are not credible, why buy a CDS from them? Puzzling.
In any case this strategy only pays off when the non-recourse feature of the FDIC loan support is activated, so *if* the FDIC does a good job (or is lucky) on the initial leverage this problem is moot.
And in the application to become approved as an asset manager, I see that:
I don't imagine the Treasury can forbid investors in a fund from being aware of what they own and hedging it as they choose outside of the fund but I also think the asset manager could be contractually obliged not to promote and encourage those strategies.
FWIW, taking the trouble to read the tedious details can be helpful. Lots of links helpfully provided by the Treasury at the bottom of this summary sheet.
Klein's broader point, that Wall Street will be better at gaming this than the Treasury will be at defending themselves, is a truism which applies to nationalizing banks as well.
MORE: This example is just as unworkable but gets more points for cooler graphics. The short version - bank bribes asset manager with a "transaction fee" paid to the asset manager rather than the PPIF but no one notices. In a variation, the bank qualifies as an asset manager and sells its own assets to the PPIF, again without anyone noticing. Uh huh.
Sometimes you read something that crystallizes the realization that the two political camps are so far apart they don't even know how far apart they are. Josh Marshall provides such a moment:
Dr. M. then excerpts this from the WSJ:
And his conclusion:
I'm not here to criticize the article because I'm not clear that what it's reporting isn't true. At the same time, it reads almost like it's about some alternate universe.
Rather than comment, I'd rather hear your take. It's not behind their subscriber wall. So you don't need a subscription.
Give it a read. Am I reading it right? What do you make of it?
What do I make of it? Uh, are troglodyte righties allowed a question - what do I make of what?
Is Doc M shocked and awed that Team Obama is listening to the concerns of the financial community? Or is he surprised that the financial community has the gall to express their concerns after receiving taxpayer support?
I am absolutely at a loss to find something surprising, let alone eye-popping, in that paragraph. Yet the good doctor seems to take for granted that his readers will be able to at least comment on, if not share, his surprise. Surely it is not news to our friends on the left that financiers were concerned by last week's example of a grandstanding Congress retroactively changing the tax rules for TARP recipients. Even Josh Marshall himself had reservations about the 90% solution last week.
Let's see - today's LA Times:
The NY Times:
The administration also paid close attention to the political climate. With the private sector increasingly wary of Congressional intervention in the business of those who participate in government bailout programs, Mr. Obama substantially dialed back the near endorsement he had given late last week to the House vote for a confiscatory 90 percent tax on bonuses like those A.I.G. doled out.
On that theme, there are plenty of talented, hard working people at Citigroup who help the firm make money and did not contribute to its current problems. Is the hard working American taxpayer really better off if they quit and make their money elsewhere? If some foreign exchange trader who made $10 million for Citi and $1 million for himself moves on to a hedge fund where he does not need to worry about Barney Frank's future attitude towards bonuses, how does that help the Citi rescue or the taxpayer?
Well. I don't even know if that is responsive since I can't identify share the outrage over the "news" in this paragraph.
HERE WE GO: Hilzoy emotes helpfully:
If the banks are "slow-walking" the stress tests and threatening not to help get credit flowing, that just is threatening not to help get the country out of the economic crisis.
That would be an absolutely appalling thing to do under any circumstances. It would be doubly appalling since these very people bear a lot of responsibility for that crisis. But the fact that they are making these threats not over some large issue of principle, but over their bonuses -- that's just breathtaking.
I guess it's breathtaking if you believe banks are monoliths in which each employee is involved in mortgages and their securitization and contributed to breaking the bank. And if you believe that the senior banks execs (who have already given up their bonuses) are making a threat about their own conduct rather than identifying a likely response by people not involved with the mortgage mess other than by employment at,for example, Citi. And if you believe that money managers being asked to help sweep up this mess under Geithner's plan have no reason to fear the wrath of a grandstanding Congress a year or two from now.
I am not a member of that faith-based community, but I appreciate the clarification.
And with props to Dan Riehl, we see that Ezra Klein questions the patriotism of recalcitrant bank employees. Hmm, I question the patriotism of under-employed pundits who ought to volunteer to go down to a Citi office and make a few collection calls. Gratis. Doesn't he have an obliagation to be part of the solution, just as my hypothetical FX trader does?
Patterico steps up to the question of competence.
All terrific press for Orion, except that Obama kept pronouncing the company's name wrong, calling it OAR-ee-on.
Coulda been worse; coulda been "Oar-ee-o".
Say it with me: Thank the stars this wasn't George Bush.
I find this disturbing:
The New York State attorney general, Andrew M. Cuomo, said on Monday that he had persuaded nine of the top 10 bonus recipients at the American International Group to give the money back, as the Senate retreated on plans to tax such bonuses.
Mr. Cuomo said he was working his way down a list of A.I.G. employees, ranked by the size of their bonuses, and had already won commitments to pay back $50 million out of the total $165 million awarded this month. But in a reversal of the stand he took last week, he said he did not intend to release any names.
I would want to know lot more about the nature of his conversations with these people. Is he threatening to out them? Tie them up in endless investigations? Does he have a serious criminal case to be made against each employee there, and if so, why does returning the bonus make the case go away?
Oh, well - if this were happening under the Bush Justice Department the howls from the civil liberties types would be deafening.
REAX: The Gawker is not thrilled with what is being done in our name:
The AIG executives in Britain are basically ignoring Cuomo's populist hardball, given the relative lack of outrage in their country.
But Cuomo announced that nine of the top 10 bonus recipients will return the money! And 15 of the top 20 in the financial products division! Victory!
Noam Scheiber of TNR is not sure what is going on:
The Times says 15 of the 20 largest bonus recipients at AIG Financial Products will be returning the money, for a total of about $30 million. The story implies that Andrew Cuomo deserves the credit (or, at least, it allows him to claim it). But is that really true? What if the bonus recipients were responding to pleas by AIG CEO Ed Liddy? Or to the House bonus-tax measure? Or to various forms of shaming by their friends and neighbors? Or to general public outrage?
This development strikes me as way, way overdetermined.
If this were the Bush DoJ or an aggressive state AG threatening to out and investigate the nurses, technicians and doctors at an abortion clinic I bet Mr. Scheiber would surely know whom to credit. Sorry, blame, in that case.
Alex Koppelman of Salon identifies only one problem - not enough money is coming back:
New York State Attorney General Andrew Cuomo -- who, given the possibility that he'll run for governor in 2010, has to be loving all this -- announced Monday that AIG executives have agreed to return, in total, about $30 million of the bonus money the company recently paid out.
Considering this means that, for now, less than one-fifth of the $165 million in bonus money is coming back, it's unlikely this number will do much to stem the anger directed at AIG. One other announcement Cuomo made might help, though -- nine of the top 10 recipients agreed to return their bonuses, as did 15 of the top 20 recipients from the company's financial products division, which is at the heart of the firm's woes.
"Australia" was a wanna-be epic film starring the beautiful Nicole Kidman, the rugged Hugh Jackman, and the rugged and beautiful Australian scenery. I sat through the DVD with family and friends and am hoping for a cathartic moment as I share my suffering.
The story opens in 1939. Britain is at war and hopes to buy cattle in Australia. As best I could tell from a bunch of actors with faux-Aussie accents, an Australian cattle baron with aspirations of being a war profiteer has killed his rival, Lord Some-such, who we can only remember as Mr. Lady Ashley. Lady Ashley herself, played by Nicole Kidman, makes the long trip from London to save the family ranch,which is sort of a weathered, beaten down fixer-upper. To save the ranch she needs to drive her cattle across perilous yet strangely beautiful deserts to the waiting ship. And to drive cattle she needs a drover. Enter Hugh Jackman, "The Drover", who drinks Scotch, brawls, drives cattle, and looks good doing it. Lady Ashley and The Drover team up, deliver the cattle, humiliate the bad guy, and save England. It's a Happy Ending!
But not so fast. Evidently Lady Ashley has to go back to her ranch and spruce it up; the next sequence is a bit of "This Old House Down Under". Eventually the house is painted, the furniture is grand, the garden is green, and she and The Drover are together and smiling. It's a Happy Ending!
But not so fast. One of the Young Viewers started mumbling about the multiple Big Finishes to Lord of the Rings, but we quelled the rebellion and pressed on. Did I mention there is an engaging young lad hanging abut who is the illegitimate son of an Aborigine woman and yet another Aussie baddy? Lady Ashley is quite taken with the lad, who is in turn taken by the baddy and hauled off to some Mission camp on some island where he can be raised with his own kind (evidently Australian society was quite intolerant in this era, as we learn at length.)
After much to-ing and fro-ing we reach a critical juncture where the Japanese are about to bomb northern Australia starting with the Mission camp, the British are about to evacuate the port city and abandon the half-breed children, and a British officer informs Lady Ashley that "no one can save those kids". Emote, Ms. Ashley!
Not to spoil the suspense but The Drover rallies up a boat (he is as handy on the water as on a horse, obviously), saves the kids, and reunites with Lady Ashley. Let's quote that British officer again - "When I said no one could save those kids I forgot about The Drover".
Forget The Drover? I say forget the whole film.
LET OTHER VOICES BE HEARD:
In their defense, it's hard to gauge the passage of time when you are dozing off every few minutes. If you like Hugh Jackman, check him out in The Prestige, with Christian Bale and Scarlett Johansson. If you like Nicole Kidman - why?
The Geithner plan to form public-private investment funds tosses this gem towards the Wall Street bond trading desks:
Multiple PPIFs. Many, many PPIFs, each with its own story, maturity and payment dates and each with a FDIC guarantee. That is a lot of paper to move and since it is not uniform the price to the issuer (that would be "We the People") will be higher, as will the opportunity for bond traders to, well, add value.
The cheaper way would be for the Treasury to fund this in its normal debt issuance and dole out the cash. I don't think I want to know why they chose this route. It does get the FDIC involved in the creation of what might be called "bad banks" and presumably they are the government experts in that sort of credit assessment. I would hate to think that a FDIC guarantee allows Geithner to sidestep any debt limit ceilings. The FDIC seems not to be part of the limit but I await guidance on this.
MORE: FDIC guaranteed debt is backed by the full and credit of the US, is rated "backed-Aaa", snd is exempt from certain SEC ad OCC registration requirements.
And the Dow is up 497 points:
Fun's fun, and yes, maybe its time Paul spent quality time with a pool guy, or a lawn service technician, or a boiler serviceman, or the dentist, or all of the above. But meanwhile the Fios guy is delaying Krugman's inevitable climbdown on the Geithner plan, which should make for the blogging equivalent of Must-See TV.
Paul Krugman spent the weekend denouncing the Geithner bailout plan, details of which were leaked to the NY Times. His central objection - the leaked plan offered generous subsidized, highly leveraged non-recourse loans to investors, who would therefore have an economic incentive to overpay for the assets. For example:
Well, as they nearly said in Animal House, he messed up - he trusted 'em. The details of the plan have been released and the Times was, hmm, ahead of the curve with their 85% solution.
The plan has two parts of immediate concern. The Legacy Securities program will attempt to revive the market for securities backed by residential and commercial mortgages, which is now famous as toxic waste. The allowed leverage? No, not 85%; actually, its 33% but the Treasury will make exceptions and sometimes go all the way up to 50%.
The related Legacy Loans plan tackles bank loans that have not been securitized. Here, the maximum allowable leverage will be 85%, subject to asset type and quality:
It is not clear just what a "legacy loan" is, other than it is "troubled and illiquid". They provide an example based on residential mortgages and do say this when explaining the genesis of the banking problem in the introduction:
OK - some non-securitized real estate related loans may be levered up to 6-1 at the discretion of the FDIC. Here's hoping they know what they are doing.
LEARN FROM EXAMPLE: Krugman provided a helpful example illustrating the value of the non-recourse subsidy but we will want to rework it armed with new information about the plan:
Let me offer a numerical example. Suppose that there’s an asset with an uncertain value: there’s an equal chance that it will be worth either 150 or 50. So the expected value is 100.
But suppose that I can buy this asset with a nonrecourse loan equal to 85 percent of the purchase price. How much would I be willing to pay for the asset?
The answer is, slightly over 130. Why? All I have to put up is 15 percent of the price — 19.5, if the asset costs 130. That’s the most I can lose. On the other hand, if the asset turns out to be worth 150, I gain 20. So it’s a good deal for me.
Fine, but suppose that the initial leverage is 33%, as with Legacy Securities, and the investor has to put up 67% of the purchase price. The "correct" initial price is now $100. The investor borrows $33 and puts up $67 of equity. If the security plunges to $50, the investor loses $50, retains $17, and pays off the loan. Conversely, if the assets soars to $150 the investor pays of the $33 loan and retains $127, for a profit of $50 above the initial $67 investment.
In fact, if the initial leverage is 50% the "correct" bid is still $100.
That is a helpful example from Krugman illustrating that if the lender makes a sensible allowance for asset volatility the non-recourse feature is relatively valueless. Krugman also lauds a similar example in which a "pool" of residential mortgages can be worth either zero or par. Uh, zero? No recovery on the real estate whatsoever? What happened - was every house in the pool located over a literal toxic waste dump? Or did the land burn down with the house? And yet (by assumption) the FDIC cannot make these assessments in advance? Not a helpful example in the context of real estate and limited leverage.
IF HE'S LOST THE JOURNOLIST: Paul Krugman has been pounding the table in favor of nationalizing problem banks as per the Swedish model. Since Sweden, population 9 million, successfully nationalized two banks on the periphery of global finance of whom no one has ever heard, Krugman is confident that the same US Congress which has shown such subtlety and restraint in overseeing AIG is ready to run Citigroup, Bank of America, and a few troubled regional banks as well.
Ezra Klein has some pushback. My fave bit could be subtitled "Live Free or Die Hard" - Admin officials wonder what might happen if a zombie bank refused to go gentle into that good night:
Virtually no one thinks that Congress is willing to quickly offer either the legislation authorizing such an action nor the massive upfront money that receivership would require. Will Ben nelson and George Voinovich vote to take control of the banks? And what happens to the market while Congress is debating? And to Congress if the market dives?
No one knows if the Treasury Department has the technical capacity or simple competence to swiftly assume control of much of the United States banking sector. If Treasury seems unable to simply build out a banking plan and claw back bonuses, what makes anyone think they can run the banking sector?
Maybe we can apply a "Heal Thyself" rule - Treasury can hold off nationalizing and re-staffing anyone until they demonstrate an ability to staff their own senior positions. Two weeks ago Obama and Geithner had not filled any of seventeen top spots. However, three names were announced today, still pending Senate confirmation.
Laurence Tribe makes news by telling a reporter he as had second thoughts and now worries that the Rage Tax might be unconstitutional.
A few days back, Laurence Tribe made news by telling a reporter he was sure that a Rage Tax bill could be written that would pass Constitutional muster.
Tribe says the main problem is that it’s hard to make the case that the law isn’t “punitive.”
“Its punitive intent is increasingly transparent,” Tribe says. “when you have Chuck Grassley calling on [executives] to commit suicide, and people responding to pitch fork sentiment, it’s hard to argue that this isn’t an attempt to punish an identifiable set of individuals who are the subject of understandable outrage.”
Hmm, maybe Congress should not have titled this the "We Want To Drive Them Before Us And Hear The Lamentations Of Their Women But This Is The Best We Can Do Act of 2009". Bygones.
Keen observers will prefer the notion that Tribe is being kind enough to lay down covering fire (or at least a smokescreen) for the White House. Legal eagles will note that Yale prof Jack Balkin, hardly a Constitutional slouch himself, snorts at the Tribe argument. Sorry, the current Tribe argument.
What next? Obama won't have the guts to veto this, so he does need to see it talked to death somehow. Is there a hero in the Senate who will tell the American people to get over it on this bonus thing? Doubtful.
My suggested solution - in response to the Rage Act the Senate passes a slightly different bill; call it the Fury Act. Then in the House-Senate Conference the parties discover irreconcilable differences (Rage! No, Fury!) and the bill dies. There is nothing wrong with Kabuki that can't be fixed by what's right with Kabuki.
I hope I am misunderstanding this from the Treasury term sheet on the Legacy Securities investment program:
Since you ask, the "Treasury Capital Term" is the wrap-up date of the fund, not to exceed ten years.
And my fright? I don't want interest to accrue - I want it to be paid! Annually, quarterly, monthly, whatever but unless investors are not allowed to dividend out any cash at all it is absurd that cash interest payments are not required.
My guess is that I am just overthinking this. Presumably, they mean that the loan principal is payable at the termination of the fund and interest would be paid annually, as is normal practice. Still, these are not normal times...
Over the weekend we learned that based on available press leaks Paul Krugman does not think that Tim Geithner's bank rescue plan could work. However, new details have been released that eviscerate his central objection while introducing a new one (The $1 trillion program is shrinking! See "SIZE MATTERS, below). Meanwhile, Krugman's preferred solution is to rely on the wisdom and forbearance of the Congress we saw in action last week and nationalize some troubled banks. Why does he think this will work? Well, in the early 90's Sweden nationalized two banks on the periphery of global finance that no one has ever heard of; therefore, the US ought to be able to run Citigroup, Bank of America, and a few regional stragglers without a hiccup. No, I'm serious:
Groan - how do you say "No Mas" in Swedish? As Justin Fox of TIME explained to the reality-based community, Citigroup has roughly $2 trillion in both assets and liabilities, of which about $400 billion come under the authority of the proposed nationalizing authority, the FDIC. His conclusion:
But this would leave an entity (or entities) with about $1.5 trillion in assets and $1.4 trillion in liabilities to be taken over by foreign governments or fail in pretty much the same unruly manner that Lehman Brothers did.
Have fun storming the bank, boys.
Now, one of Krugman's central objections to the Geithner plan is that the Treasury and FDIC are providing attractive, subsidized financing to the private investor meant to buy toxic assets from banks. Subsidized loans implies subsidized asset pricing, since the investors can rely on the easy credit to overpay for the assets. Let's hear from Krugman:
Brad DeLong’s defense of Geithner
My bold view amounted to "Yes,but...". I was taken aback by the high leverage on offer: per the leaks, Treasury would provide 85% financing via the FDIC, allowing investors to buy volatile assets with only 15% down.
However, there were easy modifications to the basic scheme that would mitigate this problem - for example, investors might be allowed to borrow up to 85% of the initial asset purchase price, but then might also be obliged to direct a significant portion of the asset income towards paying down the FDIC loan over time before distributing money to themselves. The effect would be to reduce their leverage over the years, thereby reducing reduce the implicit subsidy.
In short, until we know the details of the plan we don't know enough to say.
Fortunately, we have moved on and more details have been released; from the WSJ:
The program has two parts. It will address both the legacy loans and the legacy securities clogging the balance sheets of financial firms.
Under the legacy loan program, banks will identify the assets they wish to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Eligible assets will be determined by banks, regulators, the FDIC and the Treasury Department.
Leverage won't exceed 6-1 (i.e., 85%) but may be less, depending on the nature (and volatility, presumably) of the asset. [And for a Legacy Securities wing of the program leverage is targeted at 33% and capped at 50%]. Geez, that was easy! Riskier assets get less leverage, and less of a subsidy - why didn't I, or Krugman think of that? Oh,enough - I had supported the plan with lower leverage a few weeks back. Obviously, until we know how much lower the allowable leverage will be, prudent observers will have to defer judgment.
Eventually DeLong is going to be vindicated in this dust-up. Right now, Krugman's central objection has evaporated and his alternative, nationalization, is a political non-starter. Meanwhile, banks continue lending.
AS AN ASIDE: IIRC, wasn't one of the nationalized Swedish banks the Fältskog-Ulvaeus Group? I am sure I've heard of them...
HEDGE FUNDS OUT, BUT..: The embarrassment of watching the House whoop through the Rage Tax on financial services made it clear that no sane hedge fund manager would dare to partner up with Treasury, rely on Federal financing, and then make an obscene profit on the back of the hard-working American taxpayer which would then be subject to a retroactive tax rate. However, there are large pools of what I will call "sympathetic money", such as pension funds and college endowments (if the NY State Teachers or the UAW pensioners make obscene profits, can we be OK with that?). There are also highly regulated pots of money, such as insurance companies, that are modestly sympathetic.
This is from Treasury:
Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged.
The only individuals participating will be those who can't conjure any other way to meet Barney Frank.
SIZE MATTERS: The $1 trillion dollar program leaked over the weekend has shrunk:
Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets — with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles...
Well. If the program is otherwise sensible but too small, then We the People can expand it. Krugman et al will need to come back with something stronger than "Too Small to Succeed" as they raise new objections...
KAUS AND DELONG IN AGREEMENT: Mickey Kaus and Brad DeLong are in broad agreement on the politics of nationalization. Mickey, from a post titled "Obama Too Big To Fail":
This doesn't seem like a situation where the "political capital" metaphor applies. The metaphor does apply on an issue like health care--Obama could easily fail to pass his health care plan, lose influence ("capital") and not get another chance. But Congress can't afford to not give Obama another chance to fix the economy. It would be like deciding, in the middle of World War II, that FDR's strategy wasn't working and he'd lost a lot of credibility--so we'll just have to lose the war. ...
Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it's chances become.
Its a grim day for DeLong when he is on the same side of the ball as Mickey and yours truly.
In a display of good luck and even better judgment, Meade proposes to Ann Althouse, and is fortunate enough to be accepted. Best wishes to all.
I have nearly total confidence when people like Ben Bernanke (but not Tim Geither!) explain that we need to do this, that and the other thing in order to unclog the credit markets and get banks lending again.
However, I also have nearly total confidence that the St. Louis Fed is not just generating random numbers to produce their charts.
Let's see - commercial and industrial loans at all commercial banks spiked upwards last fall; it has since tailed down, but remains higher than the levels in the summer of 2008.
And the struggling consumer? Lending flattened out last fall but has since resumed a brisk upward march.
I can suggest an explanation for the divergence between the message and the numbers - the loan growth we are seeing is in response to the many policy steps taken so far but is not sustainable without further dramatic Fed and Treasury action. OK, maybe. The good news, assuming the St. Louis Fed numbers are meaningful, is that the current actions seem to be taking hold.
A parting thought - last fall the commercial paper and asset-backed securities markets died. That is not bank lending, but reviving them would be helpful. One might wonder why, since these markets effectively disintermediated banks, that they can only be revived by reviving banks. Beats me.
We now resume our regular panicked blogging.
The Politico reports on what we hope is the on-going education of Barack Obama:
leading liberal voices of the New York Times editorial pages all
criticized—and, in some cases, clobbered—President Obama on Sunday for
his handling of the economy and national security.
It's not unusual for Barack Obama to take a little friendly fire from the Times. But it's perhaps unprecedented for him to get hit on the same day by columnists Frank Rich, Thomas Friedman and Maureen Dowd—and in the paper's lead editorial. Their critique punctuated a weekend that started with a widely circulated blog post by Paul Krugman that said the president’s yet to be announced bank rescue plan would almost certainly fail.
The sentiment, coming just two months after the president was sworn in, reflects elite opinion in the Washington-New York corridor that Obama is increasingly overwhelmed, and not fully appreciative of the building tsunami of populist outrage.
Oh, please - the sentiment reflects the realization by the Times commentariat that their colleague David Brooks got an audience with The One himself after penning a 'Bama-basher. As Gail Collins said, "I am so jealous".
Any chance that Obama learned something about the unintended consequences of opening a dialogue with an adversary?
Under the proposed plan, private investors will partner up with Treasury and the FDIC to form an investment vehicle dedicated to purchasing toxic assets.
The equity investors (which includes the Treasury, which may be as much as 80% of the equity participation) will put 15% down, or $15 per $100 of total investment.
The FDIC will lend 85% on a non-recourse basis, which means that they can only look to the underlying assets of the investment vehicle for repayment and can not attempt to collect any shortfall from the private investors. (This creates the "heads I win, tails they lose" problem to which people refer).
So let's dive into the numbers! Here is a simple example to illustrate how the cash flows might work. I will present pre-tax cash flows, which will be fine if the investor is, for example, a pension fund or private endowment. After-tax cash flows will depend on the ex-post tax rate set by Pelosi and Reid as investors earn obscene profits at the expense of the taxpayer (or don't.)
The underlying toxic assets pay (I assume) a mere 4% coupon but are priced at 50% of face value for an 8% current yield (I bet investors can do better, but work with me).
The equity investors put $15 dollars in the pool (OK, $15 million, billion, whatever - we will work with percentages here.)
The FDIC will lend $85 at a generous rate meant to cover their cost of funds. The three year Treasury is yielding 1.22%, so on an opportunity cost basis the FDIC will be thrilled to collect 2% interest on a loan to the investment vehicle. Does this really cover their risk? Of course not, but what is a bailout if not a bailout? Let's press on.
Our investment vehicle has a simple balance sheet: $100 market value of toxic assets with a face value of $200 and interest payments of $8 dollars per year (4% on $200); $85 of debt costing 2%, or $1.7 per year; and $15 of equity.
Now watch the power of leverage - after collecting the $8 of interest and paying the FDIC $1.7 in loan interest, investors have $6.3 left over. That is a 42% return on their initial investment.
And it gets better. Imagine that the investment vehicle is allowed to pay out that $6.3 as a dividend, so that the loan balance with the FDIC remains at $85. Further assume that after three years the vehicle is liquidated by selling off the remaining toxic assets and repaying the FDIC.
*IF* the toxic assets are sold in three years at a price of 50 (i.e., the same as the purchase price), the vehicle collects $100 on the sale. $85 goes to pay off the FDIC loan (sighs of relief from that quarter) and the equity investors have earned, or at least collected, 42% per annum. Nice if you can get it.
Now, suppose the toxic waste fades a bit in price and is sold at a final price of 40. That means the vehicle takes in $80 of asset principal on the final sale; all of that is given to the FDIC, along with a rueful smile, in satisfaction of the $85 FDIC loan. Sorry about that!
But how have our investors fared? Well, in this scenario they won't be getting back their original $15 dollar investment, so there is a bit of shared pain. However, they have collected that $6.3 of net interest for each of three years, for total net interest income of $18.9. On an IRR basis, this is an annual yield of about 12.5%. That is not as good as 42%, but it is pretty appealing as a worst case scenario. Presumably, if Pelosi and Reid have not lost their majorities they will want to investigate this and determine the ex-post tax rate.
Obviously, reality is more complicated - for example, it may be that the underlying toxic assets fell in price because of rising delinquencies and decreasing interest receipts. However, the simplified example here depicts a Treasury and FDIC that are being pretty generous. Yes, the Treasury in their role of equity participant enjoys that nice return, too, but the FDIC has a loss, so We the People don't do so well. In fact, assuming that Treasury had 80% of the equity, the "taxpayer" return, summing the Treasury and FDIC cash flows, is about 1.2%. Of course, that will turn negative if the toxic asset sale price is lower than 40.
Now, here is a suggested modification - the Treasury might restrict dividend payouts and oblige the investors to direct a portion of their net interest income towards paying down the FDIC loan and increasing their equity stake.
For example, suppose the investors are allowed to collect as dividends half the net income but must use the rest to pay down the FDIC loan (thereby reducing the interest owed to the FDIC in subsequent periods and increasing their own net income.) That means that over three years, these redirected dividends will reduce the DIC, by roughly one half of three years worth of dividends, or about $9.4. (I am making the keep-it-easy assumption that all cashflows occur at year end.)
By my Sunday morning calculation (Do not attempt this without caffeine!), the FDIC loan will be reduced from $85 to $75.46 as the third anniversary cashflows occur and interest is passed to the equity participants. At this point, the sale proceeds of $80 are enough to pay off the FDIC, which is great news for the taxpayer; equity investors pocket $4.54 dollars as principal return on their $15 equity as well as half of the last interest payment; because half the cash flow was directed to the FDIC loan rather than their pockets, the revised IRR is -2.6%. That is hardly a disaster, especially by recent standards, but at least they are now losing money with the rest of us. In the worst case the equity investors might face, with a sale price below about 37.5, their IRR can be about -20% (they collect half of three net interest dividends and nothing else).
BETTER WITH A SPREADSHEET, BUT...
Very roughly, with half the net income directed to repaying the FDIC loan, the equity investors cash flow is a $15 dollar investment outflow at period 0; net interest income dividends of approximately $3.15 in periods 1, 2, and 3; and a final return of principal of $4.54, also in period 3.
As a simple approximation that ignores the reduced interest on the reduced FDIC loan, suppose the FDIC loan is reduced by *3 x $3.15, or $9.45, to a balance of $75.55. Then the final principal payment would be the difference between $80 and $75.55, or $4.45. That makes the last period cash flow the sum of $4.45 and $3.15, or $7.60. With that approximation the IRR is -3.3%.
WHAT ABOUT THE FDIC LOAN RATE?
If the FDIC raises its lending rate from 2% to 5% in the initial example, the simple return on capital falls from 42% to 25%. That said, if the toxic asset falls in price such that the investor's return comes only in the form of net interest income, the IRR falls from +12.5% to -13.1%.
The Times said this about the likely lending rate:
Administration officials refused to comment on the details of the plan, and refused to say what kind of interest rates the government would be charging investors. But government officials have long maintained that they could charge slightly more than the Treasury’s own cost of money and still offer rates far less than the private markets would demand.
SO HOW ARE WE DOING?
Here is an interesting (or perhaps, utterly opaque) chart. The final sale price of the toxic asset is assumed to range from 20 to 80. Cash flows are calculated as in the first example where all net interest income is used to pay interest on the FDIC loan and then is paid to the equity investors; the FDIC loan is paid off by the toxic sale proceeds.
The FDIC IRR is at best 2%, when the loan is repaid in full. The Equity IRR is never less than 12.5% (as explained earlier) but can rise if the toxic asset holds its value or appreciates. Finally, We the People experience the "Taxpayer IRR" which is calculated after summing the FDIC cash flows and 80% of the equity flows.
Sale Price FDIC IRR Equity IRR Taxpayer IRR
20 -19.6% 12.5% -16.2%
30 -8.7% 12.5% -6.7%
40 0.0% 12.5% 1.2%
50 2.0% 42.0% 6.9%
60 2.0% 66.5% 11.8%
70 2.0% 84.6% 16.3%
80 2.0% 99.4% 20.5%
DEFYING KRUGMAN ET AL: Kevin Drum stands up to Krugman's complaints about Geithner's plan:
This is all true, but it's a little too glib. After all, if markets can overvalue assets on the way up — and obviously they can — then they can also undervalue them on the way down. There's a pretty good chance that the toxic waste in question really is worth more than the market is currently willing to pay for it.
NOT TO BE WHINGING, BUT... The "5" key on this keyboard is recalcitrant, or cacified, or something, so there may be a stray "5" or "%" missing or duplicated.
Paul Krugman does not like Geithner's latest scheme to set up leveraged investment vehicles to buy up the toxic assets on bank's balance sheets. Fair enough, he covered this (as did I) back when the latest iteration was floated a few weeks back.
But as I said at the time - let's end these calls for nationalization, Swedish style. Sweden played catch-and-release with two banks on the periphery of international finance whose names are unknown to virtually everyone (Was one of them Fältskog-Ulvaeus Bank? Maybe! I am sure I've heard of them...).
That hardly demonstrates that the same Congress that embarrassed itself this week on the AIG bonuses has the discipline and patience to oversee Citbank, Bank of America, and a few major regional banks all nationalized at the same time.
And Justin Fox of TIME introduced an alternative view of the same reality - after studying Citigroup's $2 trillion of US and overseas assets, he concluded that FDIC has authority over roughly 25% of the group:
But this would leave an entity (or entities) with about $1.5 trillion in assets and $1.4 trillion in liabilities to be taken over by foreign governments or fail in pretty much the same unruly manner that Lehman Brothers did.
Have fun storming the bank, boys.
I will admit - I am experiencing shock and awe at the level of leverage in the latest proposal (and I am not alone) - I was defending the notion with a hypothetical leverage of 2-1; the leaked plans contemplate leverage of 6-1 (i.e., 85% debt). If time permits I will present a dramatic example illustrating the problem with the Geithner plan on offer. But nothing I saw last week could have left people thinking that Congress is poised to oversee some of the largest, most complicated banks in the world.
SUPPLEMENTAL FRETTING: For practical and especially political purposes money is fungible. Doesn't it follow that if a borrower from a TARP bank or nationalized bank defaults, they are ripping off the hard-working American taxpayer? Shouldn't Barney Frank et al haul such a miscreant under the Congressional bright lights?
And if the realization of that possibility takes hold amongst prospective borrowers, does it not follow that TARP banks will have to offer more generous loan terms than their non-TARP rivals? Default on a non-TARP loan, and at worst it's "See ya in court"; default with a TARP bank and it may be "See ya in Congress".
I am deeply concerned that we don't have the leadership to see us through this.
Tim Geithner is so far behind the curve he thinks the road ahead is straight:
Treasury Secretary Tim Geithner will try to cut down on risky behavior byby asking them to tie bonuses to the long-term health of the company rather than short-term gains, according to people briefed on his plans.
As part of a broad financial-regulatory plan to be unveiled this week, the administration wants to put in place reforms to get financial incentives for employees closer in line with the actual results of the company. Basically, it's what bonuses used to be beforewent wild in recent years.
Long before the recent focus on AIG bonuses, the administration was looking at how risky behavior in the financial system was driven in part by incentives for executives to take risky bets for a quick return.
Buthas no plan to try to cap bonuses, according to the people who were briefed. The administration said it simply plans to update regulations, not control what people are paid.
I will attempt to flush out more details (although Geithner has access to all this, so an enterprising reporter could ask him), but I will assure you - AIG Financial Products had a notable deferred compensation plan the specific purpose of which was to align the interest of the employees with the long term interst of the AIG Corporation. Let me offer some gratis psychic "reporting"; enterprising reporters know whom to call for details.
For example - bonuses below a certain level, e.g., $50,000, were paid in cash immediately; this would apply to administrative personnel.
"Mid range" bonuses, e.g., between $50,000 and $2,000,000, were paid out in equal installments over three years.
Finally, "Big" bonuses to designated senior personnel above $2,000,000 were paid out over eight years and a portion (1/3) was indexed to the performance of AIG stock.
Some specific, verifiable details: Per the letter from AIG Chairman Liddy to Treasury Secretary Geithner,
in March 2008 AIG FP had $675 million in deferred compensation held over from previous years, including $92 million payable in 2008 and "$582 million in 'at-risk' pay earned from prior years"; all of this was wiped out by the losses recorded by AIG FP on their credit derivative swaps.
So yeah - wouldn't deferred bonus plans help avoid the next melt-down? If only someone had thought of that sooner.
BONUS LAUGHTER: Per both the contract governing the recent bitterly controversial AIG bonuses and AIG's Sept 2008 10-Q (p. 103/164), some of the $165 million on bonuses was subject to mandatory deferral and was indexed to AIG stock. Dare we ask Geithner how much actual cash was disbursed to AIG FP employees as bonus payment in mid-March? As a supplemental question, how much of the bonus payment that some AIG execs have "given back" was in fact deferred and has not yet been paid?
WHO KNEW: If only Geithner read the Washington Post. This is from Feb 21, 2009, with my redundant emphasis:
Since the collapse, many Financial Products employees have lost nearly two-thirds of their compensation under the firm's deferred payment plan, in which bonuses are doled out over several years based on the firm's profitability.
"It's like the stock going to zero," Pasciucco said. "It's been wiped out."
Still, employees who stick around are eligible for hundreds of millions of dollars in retention payments -- half next month and the rest in March 2010 -- a practice that has roiled some members of Congress and further stoked public anger. [You call that stoked? We'll show you stoked!] Executives say the payments are justified because few people possess the expertise to handle the mind-bending transactions at Financial Products.
Ok, sometimes it is easy.
I realized that I have two hours of material which I will attempt to blurt out in two minutes.
1. Yes, Obama's "joke" was offensive. As Joe Torre said a million times, players can't control the outcome, but they can control their effort. We respect Special Olympians because they make the effort, working as hard as they can to achieve their best. Does anybody think that the obviously athletic (and proud of it) Barack has really committed himself to mastering bowling and is maxed out with a score of 129? If not, then watching him bowl would be nothing like watching the Special Olympics - it would be like watching a dilletante embarrass himself and annoy us. Or like watching me try to spell "dilettante".
[Just warming up, but gotta go...
Still to come - Jake Tapper and the Republican view of PC humor; Jeff Goldstein and the Captain on same.]
READY TO RUMBLE!
Preparing for day of hypocrisy: conservs who would normally defend the SpecOlymp joke acting offended, liberals saying lighten up. Sigh
Exit question: One of Jeff Goldstein’s points in his debate with Patterico over Rush Limbaugh is that it’s a grave mistake for conservatives to play by the left’s rhetorical rules. Isn’t that what we’re doing by beating up on The One for a very mildly politically incorrect joke, though?
Inshallah. I will not spoil the suspense by seeing whether Jeff G has responded. Instead, I will tell you how I interpet his past arguments. IMHO his basic theme is that the left has established themselves as the arbiter of language by declaring that racism, for example, is determined by the feelings and reaction of the listener rather than the actual words of the speaker. Thus, when Barack makes a joke about the disabled it is not (in Left-world) a big deal because they all know his heart is in the right place. However, if a hate-filled Republican says the same thing, then Open the Gates of Hell!
Jeff G's view (as I grasp it, and that is the only thing Jeff has that I am willing to grasp just now. Or ever.) is that words have meaning - if Obama's words were offensive, they were offensive regardless of how inclined people may be to project noble intent on to him.
That is much different from saying that conservatives routinely defend non-PC speech. Republicans ought to defend themselves from phony, politically opportunistic outrage, but that does not mean that we have no sense of manners and recognize no lines that should not be crossed.
That is hardly a subtle distinction, yet look at how that difference gets glossed in this coverage of recent comments by Clint Eastwood on PC humor (my emphasis):
Clint Eastwood goes gunning for PC killjoys by saying we should laugh at race-based jokes
"Inoffensive"! There are plenty of jokes about blacks, or Poles, or the Irish, that I don't think a reasonable person would consider to be offensive, and plenty more that are way over any reasonable line. Eastwood's utterly defensible point is that our ability to make distinctions has been lost by the right of any person anywhere to announce that their having taken offense defines the crime.
Or for another example, recall Rush Limbaugh's crucifixion for pointing out that Donovan McNabb was carried by the press because he was black. Was that a serious attempt to discuss the issues or political opportunism? Tough call.
So. Obama's comment was ignorant and projected an unfortunate and inaccurate image of Special Olympians as lacking skill, determination and the ability to master a task. There is nothing to defend and no reason to defend it, and he is not attempting to do so.
If Obama lacks for offensive comic material, here is a suggestion - "Watching me try to bowl is like watching Michelle try to balance the checkbook." Har de har - don't attempt that at home, Big Fella.
If Obama had wanted to try for self-deprecation, he could have gone with "Watching me try to bowl is like watching me try to balance the budget... making progress!" Or maybe, "Watching me try to bowl is like watching me, umm, try to talk without, uhh, my teleprompter." Obama's fans would have been mystified but I know plenty of folks who would have laughed.
Over to Jeff.
LAST CALL: Let me add that words have their meaning but speakers have their history. If a chap with a deplorable history of racist remarks makes a comment that falls in a gray area, he will be judged differently from a fellow with an otherwise stellar past. Obama's past is irrelevant here since his words don't come anywhere near a gray zone. And clearly, history is subject to manipulation - many people "know" Rush is a racist because of his McNabb comments, and judge his other words accordingly.
YOU KNEW I WASN'T DONE: If you have a joke that absolutely requires a dummy but you aren't comfortable with Micks or Polacks, go with some self-selected and racially/religiously/sexually indeterminate group. I lean towards "How many Red Sox fans does it take to change a lightbulb...".
BEATS ME. Ok, how many Red Sox fans does it take to change a light bulb? I have no idea - my free agent comedian hasn't delivered the punchline yet.
DEVELOPING: How many Red Sox fans to change a lightbulb? None, they have yet to see the light.
Or, That depends on many lightbulbs are down in the cellar.
We're having fun now.
LATE BREAKING: Imus - Fire Barack.
I NEED SOME WATER: Right after the Special Olympics joke Jay Leno and Barack Obama yucked it up about Obama's new dog, with Leno wondering if it was a "portugese waterhead" and Obama joining in. Turns out that "waterhead" is urban slang for a person with Down's syndrome. Roll the tape.
Obama got big props for his cool during the campaign. How is he going to brush this dirt off his shoulder?
HOW SOON WE FORGET: No real need to imagine the reaction if Bush had said this - in the summer of 2004, disgusting anti-war flyers were made up with a Special Olympian and a caption of "Starting a war in Iraq is like running in the Special Olympics - Even if you win, you're still retarded."
In October 2004 that poster was photo-shopped with a picture of Bush's head superimposed over the Special Olympian and given a new caption - "Voting for Bush is like running in the Special Olympics - Even if you win, you're still retarded".
The posters were found at the campaign headquarters of a local Dem candidate. Their "defense" - it was a dirty trick by Evil Republicans.
So I guess it was considered offensive enough to blame Bush back in 2004. Well, then, they should blame Bush now! If he hadn't left Obama so many problems the poor guy could get some rest and concentrate when he spoke.
Got to make this quandary last...
Senate Republican Jon Kyl finds his nerve and a clue:
WASHINGTON – Senate Republicans are drawing out a flap that has made the Obama administration squirm, applying the brakes to Democratic attempts to quickly tax away most of the bonuses at troubled insurance giant AIG and other bailed-out companies.
Sen. Jon Kyl, the Republicans' vote counter, blocked Democratic efforts Thursday evening to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009. The House had swiftly approved its version of the bill earlier in the day.
By rushing, Kyl said, Democrats were letting populist outrage trump informed decision-making in the Senate, which is supposed to be insulated from the pressures of public passion.
"I don't believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences," Kyl said on the Senate floor. "Frankly, I think that's how we got into the current mess."
You mean Congress isn't thrilled with TARP and the stimulus bill, and now wants to read the legislation before passing it? I don't suppose another week of trying to figure out why Treasury pushed to grandfather bonus contracts in place as of Feb 11, 2009 and now has reversed course will embarrass Republicans. An added benefit for the nation is that this gives Barack and his teleprompter some time to coordinate their position on this tax.
Meanwhile, Geithner is braced for another bad week when he announces his toxic disposal plan:
The officials, who spoke on condition of anonymity because they were not authorized to speak publicly about Geithner's plan, said it will have three major parts.
One program will use the bailout fund to create a public-private partnership to back purchases of bad assets by private investors.
A second portion of the plan will expand a recently launched program being run by the Federal Reserve called the Term Asset-Backed Securities Loan Facility, or TALF. That program is providing loans for investors to buy assets backed by consumer debt in an effort to make it easier for consumers to get auto, student and credit card loans. Under Geithner's proposal, this program would be expanded to support investors' purchases of banks' toxic assets.
The third part of the Geithner plan would utilize the resources of the FDIC, the agency that guarantees bank deposits, to purchase toxic assets.
They state the obvious:
Hedge funds and other big investors may be even more leery of accepting the government's enticements to purchase these assets for fear of the imposition of tighter government restraints in such areas as executive compensation in the wake of the uproar over AIG.
Leery? Really? Partner up with Pelosi and Reid now, and later find out whether you are a hero or villain and what your tax rate is - who would say no to that?
The Times coverage is delightfully imprecise:
The uproar over the American International Group’s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.
Clearly that should read "The plan is not expected to impose restrictions... at this time." Who can foretell what might pique Pelosi or enrage Reid as we move on down the road?
The Times has more details on the "Heads they win, tails we lose" leveraged financing structure:
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
Wow. Aparently the investor's primary role is to be the impartial outsider setting the price. Of course, that price is adjusted for the put implicit in the the non-recourse financing - price declines of more than 15% impact the FDIC, not the investor. On the other hand, if you think that the Treasury, Fed and FDIC are big enough (or are willing to tolerate inflation), their buying power can force this to be a real estate market bottom and the put is much less meaningful.
I grasp this logic:
Left undiscussed - weak banks may not be able to sell assets at a loss, so we may see participation only from already-strong banks. That might be OK, as long as the Fed is satisfied that there are strong banks operating in every region of the country; eventually the locals will figure out who is lending.
The Times closes plaintively:
Still, the Treasury Department’s biggest obstacle may be the current political environment in Washington, where Democratic lawmakers are furious about the pay packages and bonuses received by executives at companies being rescued by taxpayers.
Many investment executives said they were worried that participating in any bailout program would expose them to political wrath and potentially steep new restrictions on their own pay.
Interesting that the Times blames (credits?) the Democrats - half the House Republicans backed the crazy 90% solution, too.
Will Krugman peg Obama as the Narcissist-in-Chief?
In a follow-up to his "Special Olympics" gaffe President Obama has been challenged to a White House bowl-off by a Special Olympics champion with a 266 average. I say the Pres ought to folllow the immortal advice of Charles Barkley and take his butt-whipping like a man.
In a follow-up to his "Special Olympics" gaffe President Obama has been challenged to a White House bowl-off by a Special Olympics champion with a 266 average. I say the Pres ought to follow the immortal advice of Charles Barkley and take his butt-whipping like a man.
Henry Blodgett explains one consequence of the new confiscatory tax on TARP recipient bonuses:
But that's not the really distressing part. The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.
(Remember? That's the reason we bailed Citigroup, AIG, GM, and the rest of them out--to save them. Because we convinced ourselves that civilization would end if we didn't.)
Thanks to our stupidity bailouts, we now own major stakes in these firms--at mind-boggling expense. So it's not clear why we want to destroy them. But that's what we seem determined to do.
Believe it or not, hidden inside these companies are thousands of decent, competent people whose households bring in more than $250,000 a year. Many of these folks had NOTHING to do with the gambling addiction that bankrupted their firms. Many of them still have a choice where to work. And now that they've learned that their family's pay will be capped at $250,000 indefinitely, many of them will quickly decide that now is a good time to pursue their careers elsewhere. (That is, unless their firm takes the easy and obvious step of just paying them a fatter salary, which just renders the whole thing a farce.)
Will everyone leave these firms? No. The folks whose households don't have the education, desire, ambition, skill, or time to make more than $250,000 a year won't. But a lot of the rest will. And however little our massive investments in these companies are worth now, they will soon be worth a lot less.
That is not the end of it. The Treasury and Fed keep mooting their plans for public-private partnerships to reopen credit markets, with TALF and other ventures yet to come. But what venture capital firm or hedge fund is going to parnter with the government now that COngres has demonstrated a willingness to retroactively change the terms of a deal? Remember, the initial TARP bailout had few restrictions on compensation; Congress just unilaterally re-negotiates the terms as fits of pique pass over them.
So we will blow up the firms in which we are invested and scare off any potential new government "partners". Would this be happening of the teleprompter were in charge?
Noam Scheiber of TNR is against:
This makes me pretty uncomfortable, partly because of the perverse consequences we can foresee, and partly because of those we can't....There are third-world juntas that would think twice before doing this.
Josh Marshall of H&R Block is against:
Paul Krugman firmly straddles:
Preliminary thoughts on the tax bill:
1. It’s not the way you should make policy — it’s clumsy, and it will punish some innocent parties while letting the most guilty off scot-free
That wins Krugman our Profile in Gutlessness award - as an economist he knows this is awful, but as a populist author he has his base to whom he must play. Smart - book royalties will be safe from Congress for a while.
My question - which Senate hero will allow that august body to play its historical role of deliberating while passions cool? Dodd? Kidding. McCain? Maybe.
Or does the Senate kick this "feels good 'til it's enacted" mess to Obama in the hope that whomever is in charge that day will do the right thing and veto it? Geez, what are the odds of this bill being Obama's first veto?
OK, here is the answer - the Senate passes a slightly different Feel the Rage bill and then the whole effort collapses over irreconcilable differences in the House-Senate conference. That way every Congressfool can vote for an Angry Bill without actually doing anything stupid, and blame Someone Else for its failure. There is no problem with Kabuki that can't be solved by more Kabuki.
You’d think if some tiger were lunging at your neck, your attention would be riveted on the tiger. But that’s apparently not how it works in the age of global A.D.D. As a tiger sinks its teeth into the world’s neck, we focus on the dust bunnies under the bed and the floorboards that need replacing on the deck. We live in the world of Perverse Cosmic Myopia, an inability to focus attention on the most perilous matter at hand.
In times like these, you’d expect prudent leaders to prepare for the worst. After all, the pessimists have recently been vindicated by events. But that’s apparently too painful to think about. In normal times, leaders like to focus on the short term at the expense of the long term. But now the short term is really confusing, so leaders take refuge in projects that are years or decades away.
Josh Marshall decries the selective financial services act but closes with this tax-related puzzle:
I have seen that notion at other lefty blogs, generally in the comments somewhere, but have always dismissed it as another invention of the reality-based community (based on 10% real reality!). For bonuses paid in stock options and stock grants, it may be true. But since the AIG bonuses which sparked this conversation were paid in cash, and since the comparison on offer is the benefit of paying "bonuses as opposed to ordinary salary income", I am presuming that we are being informed that companies get a tax break on cash bonuses vis a vis cash salary.
Are our friends on the left onto some Bush tax break heretofore concealed from me? Help! And I don't want to hear about deferrals of the deduction from one tax year into another - I want a *BIG* break, not a penny-ante time value of money when rates are at 2% break.
NO SALE, BUT A CREATIVE REINTERPRETATION:
From Lord Whorfin: