Friday, April 03, 2009

President Obama And His Chat With Wall-Streeters…

  had to have been a pretty good one, unless you were one of the Wall Street idiots sitting at the table.


Smackdown: Big-Wig Bankers Reminded Who's In Charge

by IDrankWhat   Fri Apr 03, 2009

As POTUS and FLOTUS charm the Continent, new details emerge about the not so secret meeting between President Obama and the financial mavens whose incredible avarice plunged this nation's and the world's economy into the deepest pits of despair since the Great Depression.

Quick brown foxes, jump over lazy dogs for juicy details of big-wigs taken to the woodshed.

They may not have come hat-in-hand this time, but they tried to make their case none-the-less.  They soon realized that this was to be all business and no pomp and circumstance.

At each place around the table sat a single glass of water. No ice. For those who finished their glass, no refills were offered. There was no group photograph taken of the CEOs with the president...

Said one attendee: "The only way they could have sent a more Spartan message is if they had served bread along with the water.  The signal from Obama’s body language and demeanor was, I’m the president, and you’re not.

Thus, having only crow to eat and enlightened with the understanding of who actually runs the country, the gathered power-brokers, though cowed,  tried to explain the outrageous salaries, bonuses, perks and what not as a necessary costs of doing business.

These are complicated companies, one CEO said. Offered another: We’re competing for talent on an international market.

The big-dog wasn't buying that.  Seems the Prez. is a bit more in touch with the mood of us proles than them private-jet-ridin, I use summer as a verb, hot-shots who succeeded in driving our financial system to ruin.

The president spoke of public outrage over the high-flying executive lifestyle. “The anger gentlemen, is real,” Obama said. He urged pay reform and said rewards must be proportional, balanced, and tied to the health and success of the company.

President Barack Obama... offered a blunt reminder of the public’s reaction to such explanations.  Be careful how you make those statements, gentlemen. The public isn’t buying that.

Talk a guy with his finger on the pulse.  I guess those who live in glass houses shouldn't heave bricks about.  Especially when they are buying those bricks on our dime. 

I fully share the populist anger over the excess of the honchoes who thought they owned the world and President Obama's measured suggestion that those who get look to the opinions and options of those who lose strikes me as yet another instance of the brilliance our President possesses. 

What he is saying is what we all know:  You are welcome in our system to profit from you endeavors.  We have always rewarded hard work, sacrifice, education...  That is the world we live in.  However, the rules are changing and you have lost the faith and the trust of the public and thus you have to show through affirmative action that your interest are broader than yourselves - you have to give back.  The treasure you horde, comes with an obligation to respect the public upon whose back you made it.

As POTUS told the Wall-Street-Wizards:

My administration is the only thing between you and the pitchforks.

Now that is Righteously Kick-Ass

  Now if only President Obama would do to those Wall Street bankers just as he did with the CEO of GM. Force them out of their positions. Then maybe we all would be just a little bit happier. Maybe not. These sorry fuckers need to be tried and convicted, and then sent to the prison of our choice. That would be at least a little bit of justice for you and I.

Thursday, April 02, 2009

Endless Right-Wing Self-Pity

Common Dreams                  Original Article

Published on Thursday, April 2, 2009 by

Endless Right-Wing Self-Pity

by Glenn Greenwald

The predominant attribute of the right-wing movement is self-victimizing petulance over the unfair treatment to which they are endlessly and mercilessly subjected.  Last week, C-SPAN broadcast a Commentary Magazine event that almost certainly set a record for most tough-guy/warrior nepotism ever stuffed onto a single panel, as it featured William Kristol (son of Irv and Gertrude), John Podhoretz (son of Norm and Midge), and Jonah Goldberg (son of Lucianne).  Jihadis around the world are undoubtedly still trembling at the sight of this brigade of Churchillian toughness.

Exemplifying the deeply self-pitying theme of the entire discussion, Jonah continuously insisted that conservative magazines are so very, very important to the political landscape -- indispensably so -- because conservative voices are frozen out of mainstream media venues by The Liberal Media, so that poor, lonely, stigmatized conservatives can only get right-wing opinion in places like Weekly Standard and National Review.  In between Jonah's petulant laments about how conservative opinion cannot be heard in The Mainstream Media, Bill Kristol talked about his New York Times column and his Washington Post column, John Podhoretz told stories about his tenure editing The New York Post Editorial Page and Charles Krauthammer's years of writing a column for Time and The New Republic, and Jonah referenced his Los Angeles Times column.  None of them ever recognized the gaping disparity between those facts and their woe-is-us whining about conservative voices like theirs being shut out of The Liberal Media.   So important in conservative mythology is self-victimization that they maintain it even as they themselves unwittingly provide the facts which disprove it.

Today, National Review's Andy McCarthy advises readers that -- shock of all shocks -- The New York Times today, for some indiscernible reason, for once actually allowed his opinion to seep into its rigidly leftist pages:

Here's Something You Don't See In the New York Times Everyday [Andy McCarthy]

Namely, my opinion - on the controversy over the Uighur detainees at Gitmo.

He can't just say that he has a contribution in the Times today.  Everything has to be accompanied by a self-pitying grievance lest the victimization be undermined.  Thus:  it's such a shock when one encounters a strong conservative voice like McCarthy's in The Liberal Media.  The leftist censoring editors at the NYT must have been out sick yesterday, as only that could explain how they let such a brave right-wing voice slip through.  Something like that basically never happens because conservatives are treated so unfairly in the media and are excluded from those venues, and it's specifically shocking and rare that opinions from someone like McCarthy would ever, ever be found in a place like The New York Times:

New York Times, January 29, 2009:  "A Steppingstone for Law's Best and Brightest," by Benjamin Weiser:

"Of all the clubs I've ever been in, it's the best one to be in," said Andrew C. McCarthy, a 1990s terrorism prosecutor who is now a commentator for National Review, but who leapt to the defense of his Southern District colleague Patrick J. Fitzgerald when he was attacked by conservatives for prosecuting I. Lewis Libby Jr.

New York Times,  January 23, 2009,  Room for Debate:  "The Risks of Releasing Detainees":

The Times reports today on the case of a former Guantánamo Bay detainee who has emerged as the deputy leader of Al Qaeda in Yemen. . . . We asked these experts - several of whom were in earlier discussions on the legal challenges of closing Guantánamo and on the effects that torture charges have on its closing - for their response to this case. . . . Andrew McCarthy, legal affairs editor at National Review.

New York Times, January 13, 2009, Room for Debate:  "The Challenges of Closing Guantánamo":

We asked these experts what the hardest challenge the new administration will face, and how that might be resolved. . . . Andrew McCarthy, legal affairs editor at National Review.

New York Times, January 3, 2009:  "Early Test of Obama View on Power Over Detainees," by Adam Liptak:

Still, Andrew C. McCarthy, a former federal prosecutor who has generally supported the Bush administration's approach to fighting terrorism, said Mr. Obama's hands are tied.  He cannot, Mr. McCarthy said, continue to maintain that Mr. Marri's detention is lawful.  "I don't think politically for him that's a viable option," Mr. McCarthy said. "Legally, it's perfectly viable."

New York Times, December 5, 2008:  "5 Charged in 9/11 Attacks Seek to Plead Guilty," by William Glaberson:

"These guys are smart enough to know that they're not ever going to see the light of day again," said Andrew C. McCarthy, a former federal terrorism prosecutor who is chairman of the Center for Law and Counterterrorism in Washington. "I think they're trying to make as big a publicity splash as they can."

New York Times, November 24, 2008:  "Judge Rules That Suspects Cannot Be Detained Because of Ethnicity," by Liz Robbins:

Andrew C. McCarthy, a senior fellow at the Foundation for the Defense of Democracies and a former federal prosecutor, said the ruling "sharpens a question that needs to be addressed: What is the proper consideration of factors like ethnicity in questions of surveillance?

"The police officers want to know what the rules are. It may turn out to be bad to the American people if it tells them to do something that is counter to common sense." Common sense, Mr. McCarthy said, dictated that the police should be able to take race and ethnicity into account in surveillance.

New York Times, November 21, 2008, "Judge Declares Five Detainees Held Illegally," by William Glaberson:

But Andrew C. McCarthy, a former federal terrorism prosecutor, said the decision highlighted the difficulties of courts' reviewing wartime decisions about who qualifies as an enemy combatant. Mr. McCarthy said those were decisions "our system of divided powers consigns to military professionals in the executive branch, not judges."

New York Times, November 14, 2008, "Post-Guantánamo: A New Detention Law?," by William Glaberson:

Some lawyers warn that given the nature of evidence against some Guantánamo detainees, prosecutors may not be able to convict them.  "We have lots of information that is reliable, that tells us someone is a threat and that cannot be proved in court," said Andrew C. McCarthy, a former federal terrorism prosecutor who is now director of the Center for Law and Counterterrorism.

New York Times, August 8, 2008:  "With Fewer Terror Trials, Manhattan Court Quiets Down," by Benjamin Weiser:

Andrew C. McCarthy, a former assistant United States attorney who helped to prosecute the landmarks bomb plot, said the Siddiqui case demonstrated that "we're actually starting to get to a place where we're developing some coherent principles about which cases ought to go into which system."

New York Times, June 6, 2008, "Adviser Says McCain Backs Bush Wiretaps," by Charlie Savage:

Andrew C. McCarthy, a National Review columnist who has defended the administration's legal theories, wrote that Mr. Holtz-Eakin's statement "implicitly shows Senator McCain's thinking has changed as time has gone on and he has educated himself on this issue."

New York Times, September 20, 2007:  "Big Terror Trial Shaped Views of Justice Pick," by Adam Liptak:

"The tools we had to charge terrorism were appallingly bad," said Andrew C. McCarthy, the lead prosecutor. . . .That view, Mr. McCarthy said, has turned out to be naïve, and he has proposed the creation of a new national security court to address the problem. In his Wall Street Journal article last month, Judge Mukasey said Mr. McCarthy's proposal and similar ones "deserve careful scrutiny."

In fairness to McCarthy, his whine that his opinion doesn't appear in The New York Times "every day" is, I suppose, technically true.  There do appear to be some days -- not many -- that the Times publishes its newspaper without including views from Andy McCarthy (though in January alone, one encountered his opinion in its pages on 4 separate days). 

If you subject yourself to the establishment media, there are few things more difficult than avoiding right-wing polemicists (even the supposedly "liberal" cable network, MSNBC, has a 3-hour show hosted by a movement conservative (Joe Scarborough) and only 2 one-hour shows hosted by ostensible "liberals").  The Washington Post Op-Ed page is and has long been a veritable museum showcasing neoconservative tripe.  And that's to say nothing of overtly right-wing outlets like Fox News and The Wall St. Journal Editorial Page. 

But no matter.  Their orgy of self-pitying grievances has no end.  As they tell it, unless you read The Weekly Standard or National Review, it's basically assured that you never encounter right-wing opinion, because the media hates them, silences them, and shuts them out.  Nothing is rarer than Andy McCarthy's opinion being heard in The New York Times.  And the American media -- which even Scott McClellan mocked for being "too deferential" to the Bush administration and which is owned by America's largest corporations and richest elites -- is devoted to proselytizing a leftist agenda.   Like everything else, it's all so, so unfair to our stalwart right-wing warriors.

                             © 2009

Wednesday, April 01, 2009

"We the People" to "King of the World": "YOU'RE FIRED!"

by Michael Moore   Apr 01, 2009      Original


Nothing like it has ever happened. The President of the United States, the elected representative of the people, has just told the head of General Motors -- a company that's spent more years at #1 on the Fortune 500 list than anyone else -- "You're fired!"

I simply can't believe it. This stunning, unprecedented action has left me speechless for the past two days. I keep saying, "Did Obama really fire the chairman of General Motors? The wealthiest and most powerful corporation of the 20th century? Can he do that? Really? Well, damn! What else can he do?!"

This bold move has sent the heads of corporate America spinning and spewing pea soup. Obama has issued this edict: The government of, by, and for the people is in charge here, not big business. John McCain got it. On the floor of the Senate he asked, "What does this signal send to other corporations and financial institutions about whether the federal government will fire them as well?" Senator Bob Corker said it "should send a chill through all Americans who believe in free enterprise." The stock market plunged as the masters of the universe asked themselves, "Am I next?" And they whispered to each other, "What are we going to do about this Obama?"

Not much, fellows. He has the massive will of the American people behind him -- and he has been granted permission by us to do what he sees fit. If you liked this week's all-net 3-pointer, stay tuned.

I write this letter to you in memory of the hundreds of thousands of workers over the past 25+ years who have been tossed into the trash heap by General Motors. Many saw their lives ruined for good. They turned to alcohol or drugs, their marriages fell apart, some took their own lives. Most moved on, moved out, moved over, moved away. They ended up working two jobs for half the pay they were getting at GM. And they cursed the CEO of GM for bringing ruin to their lives.

Not one of them ever thought that one day they would witness the CEO receive the same treatment. Of course Chairman Wagoner will not have to sign up for food stamps or be evicted from his home or tell his kids they'll be going to the community college, not the university. Instead, he will get a $23 million golden parachute. But the slip in his hands is still pink, just like the hundreds of thousands that others received -- except his was issued by us, via the Obama-man. Here's the door, buster. See ya. Don't wanna be ya.

I began my day today in Washington, D.C. I went to the U.S. Senate and got into their Finance Committee's hearing on the Wall Street bailout. The overseers wanted to know how the banks spent the money. And many of these banks won't tell them. They've taken trillions and nobody knows where the money went. It certainly didn't go to create jobs, relieve mortgage holders, or free up loans that people need. It was so shocking to listen to this, I had to leave before it was over. But it gave me an idea for the movie I was shooting.

Later, I stopped by the National Archives to stand in line to see the original copy of our Constitution. I thought about how twenty years ago this month I was just down the street finishing my first film, a personal plea to warn the nation about GM and the deadly economy it ruled. On that March day in 1989 I was broke, having collected the last of my unemployment checks, relying on help from my friends (Bob and Siri would take me out to dinner and always pick up the check, the assistant manager at the movie theater would sneak me in so I could watch an occasional movie, Laurie and Jack bought an old Steenbeck (editing) machine for me, John Richard would slip me an unused plane ticket so I could go home for Christmas, Rod would do anything for me and drive to Flint whenever I needed something for the film). My late mother (she would've turned 88 tomorrow if she were still with us) and my GM autoworker dad told me in the kitchen they wanted to help and handed me a check for an astounding thousand dollars. I didn't know they even had a thousand dollars. I refused it, they insisted I take it -- "No!" -- and then, in that parental voice, told me I was to cash it so I could finish my movie. I did. And I did.

So on that March day in 1989, as I was driving down Pennsylvania Avenue, my 9-year-old car just died. I coasted over to the curb, put my head down on the steering wheel and started to cry. I had no money to take it in to be repaired, and I certainly had nothing to pay the tow truck driver. So I got out, screwed the license plates off so I wouldn't be fined, turned my back and just left it there for good. I looked over at the building next to me. It said "National Archives." What better place to donate my dead car, I thought, as I walked the rest of the way home.

Though it wasn't easy for me, I still never had to suffer what so many of my friends and neighbors went through, thanks to General Motors and an economic system rigged against them. I wonder what they must have all thought when they woke up this Monday morning to read in the Detroit News or the Detroit Free Press the headlines that Obama had fired the CEO of GM. Oh -- wait a minute. They couldn't read that. There was no Free Press or News. Monday was the day that both papers ended home delivery. It was canceled (as it will be for four days every week) because the daily newspapers, like General Motors, like Detroit, are broke.

I await the President's next superhero move.

Michael Moore
(Go State!)

P.S. Please know that it has not been lost on any of us from the Rust Belt how our corporate bigwigs were treated (remember, the auto companies wanted a loan, not a handout) compared to how the titans of Wall Street got trillions of free cash, lunch at the White House and a photo op with the Prez. Trust me, we get it. And, if there is a God in heaven, the thieves of Wall Street will soon pay. Also... the sight of our president having to promise that he would back every GM warranty and give consumers a bonus if they trade in their old Grand Am for a hybrid, was alternately sad, hilarious, and just plain weird. This is what it's come to: the Commander in Chief of the Free World is now Mr. Goodwrench. Jeesh.

Tuesday, March 31, 2009

The Most Important Financial Crisis Article You Haven't Read

  From DKos by thereisnospoon
Tue Mar 31, 2009

Warning: This post is complicated, and will make little sense without a little prior reading.  If you are unfamiliar with the detailed causes and effects of the financial crisis, especially regarding instruments called CDOs and CDSs, please read (or reread) the following, then come back:
The Big Takeover (Matt Taibbi)
The Quiet Coup (Simon Johnson)
Sigh...The Biggest Problem Is Not (Toxic) Bank Assets (Jerome Guillet)

Are you back?  Good.  Because what you're about to read will be worth your while, so please bear with me.

The articles above do a great deal to explain what has happened to America's (and the world's) economies and financial systems.  But one key element is missing or taken for granted in their explanations: an element that makes it all make sense in a way that defied my prior understanding, and probably yours as well.  That element was published weeks ago with little fanfare in this month's Wired Magazine, in the article The Secret Formula That Destroyed Wall Street, by Felix Salmon.  Part of the reason that it received little attention was the inherent complexity of the subject (and it's tough enough that I still don't fully understand it); but its incredibly important upshot is one that has been missed or left out by most of the writers on the subject of the economic meltdown: that the value of the CDOs was being determined almost entirely by the value of the CDS bets against them.  If you really understand the relationship between CDOs and CDSs, and the efforts being made to combat the current crisis by the Administration, this revelation is nearly earth-shattering in its implications.

Allow me to explain in the simplest terms I can, smoothing out a lot of details.  A bunch of assholes on Wall St. decided they wanted to make a bunch of money they couldn't make before with responsible lending.  So they took a bunch of risky mortgages and other bad loans, and stuffed them into big black boxes of debt together with good loans.  They essentially sold all of these black boxes, to make a long tranche-filled story short, as good, safe loans with AAA ratings.  These black boxes were called Collateralized Debt Obligations (CDOs).

Problem was, it was really tough to figure out what these things were really worth because they were made up of so many different loans.  A bunch of these wall street assholes were worried about having so many potentially problematic CDOs; a bunch of other assholes saw a way to make lots more money, provided the housing market didn't go bust.  That's where the Credit Default Swaps (CDSs) came in.  CDSs are insurance on CDOs: if you own a bunch of CDOs, you can pay me a premium to insure you; if your CDO (or a particular part or "tranche" of it) defaults, I have to pay the entire value of the CDO (or tranche thereof).

The really fucked up part of the CDS deals was that the insurance provider didn't have to have the capital to pay out even a fraction of the premiums; worse still, you could take out "insurance" on loans neither of you had on "naked" CDS deals--basically, casino betting of a purer variety than standard Wall St. fare.  There were potentially an infinite number of insurance CDSs that could be written just on one single CDO, by just about anybody willing to do so.  Do the permutations, and that's how you get, by some estimates, almost $70 trillion in CDS deals alone on "just" $4.7 trillion of CDOs.  That's more than the entire world's GDP.

Then the housing market went south, a bunch of the CDOs (or the worst "tranches") went kablooie, and all the shitheads holding CDS premiums (AIG, first and foremost) were fucked because they couldn't pay out.  And, of course, the firms like Goldman Sachs who paid CDS firms like AIG want their damn insurance payouts, even if it's at taxpayer expense.  And the banks who hold a bunch of CDOs can't move them, so they can't raise capital, so they don't lend.  And when banks don't lend, a bunch of regular people lose their shirts.  Compared the amount of money and carnage involved here, a couple hundred million dollars in bonuses to the same assholes who got us here may be infuriating, but it's chump change.

So what's the big mystery, you say?  What's the big problem?  Just cancel the CDS contracts, let CDS firms like AIG fail, let the taxpayer cover the downside of the worst subprimes in the "BBB" tranches of the CDOs, and let the CDO trading go on as before!  Sounds simple, and that's exactly what our own Jerome a Paris is calling for.  Well, you can't.  And the Wired article explains why you can't, and why we're more fucked than you can possibly imagine.  You see, the CDOs have No Determinable Value Without CDSs Attached.  The CDSs determined the value of the CDOs.  And no one is touching CDSs with a thousand foot pole right now, and with very good reason.

The key link that tied CDOs to CDSs forever was made by a mathematician named David X. Li, who pioneered a formula called the Gaussian Copula Function to solve the intractable problem of the correlative relationship between the loans in the CDO black box.  This particular formula and its problems are also discussed The Black Swan, a book written prior to the collapse by a hedge fund manager.  The Wired article explains:

The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation (emphasis added)—-the degree to which one variable moves in line with another-—and measuring it is an important part of determining how risky mortgage bonds are.

In other words, you can't consider each loan individually within the box, as all the loans affect one another in some way.  Plus, there's not enough past data to work from.  How can you possibly judge one individual's risk of default on a Bank of America no-doc loan on a first home, when nobody at BofA knew the trustworthiness or even the income of the buyer?  And how the hell were you supposed to figure out the value of an entire box full of these things when they impact each other?   It's a statistician's nightmare.  Without solving it, you can't know what a CDO, or even a tranche of a CDO, is really worth.  That's where Li's Gaussian Copula Function came in:

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

If your eyes didn't just bulge out of your head and plop on the keyboard, they should have.  This genius decided that the underlying value of the loans really was irrelevant: what was really relevant was what the market decided they were worth, on the basis of the value of the CDS insurance hedges against them.  The infinitely traded, completely unregulated, massively speculative pool of CDS bets against the CDOs that now contained the entire economy's lifeblood.  You can't make this shit up:

When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

Rather than laugh at the simple-minded insanity of this "valuation" scheme, the brilliant Masters of the Universe on Wall St. could barely contain themselves with glee at the "solution" to their CDO valuation problem:

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

Having created a system in which profits self-replicated like infinite reflections in funhouse mirrors in such a way that Dutch tulip merchants would laugh with schadenfreude, the rest makes you wonder if straitjackets might not be more appropriate than prison uniforms for this sorry bunch of Jokers:

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

The entirety of the article is an absolute must read, but I would be remiss if I left out the following critical detail: nobody even factored in the possibility that the CDOs would go bust, because the the Gaussian copula formula based itself on the CDS, a derivative so brand spanking new that it had never seen a bear market.  All these geniuses' models didn't even calculate for the possibility of negative growth: the formula for calculating it simply didn't exist.

Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.

Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.

"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."

So now what?

I'll tell you what.  As I have explained before, the big Geither vs. Krugman grudge match is overwrought, imbued with more long-term ideological than immediately practical significance.  Both have one concern: get people, somehow, to start buying the CDOs banks have on their books.  Geithner wants to give sweetheart deals to hedge funds to buy the black boxes for cheap, under the premise that the CDOs have real, decent value.  Krugman and other progressive economists are less optimistic, feeling that only the federal government will take the plunge to purchase enough CDOs to make a dent in the banks' balance sheets and provide a real market for CDOs.

But there's a big problem with both plans: nobody has any idea what these things are worth.  No one EVER DID.  And without Li's hopelessly naive Gaussian copula formula, an entirely new method of calculating the value of these "toxic assets" will have to be found.  But like trying to predict the long-term weather of any given local area, correlative influences  and a lack of relevant predictive data make that task essentially impossible--almost as impossible as, say, attempting to predict the stock market or the probability that the Knicks will cover the spread against the Lakers on any given night.

And that's why the credit markets are frozen, and aren't coming unfrozen any time soon.  That's why they're trying to rescue AIG and the CDS market.  Because nobody has any other idea how to calculate the value of what amounts to the entire American economy: the vast majority of every mortagage loan, auto loan, business loan, credit card loan, and all manner of other financial debt transaction made by American consumers.

It's a mess I can't even begin to propose a solution for how to unwind--but we better, as a nation, figure it out fast.  Then perhaps we can figure out how to employ our best mathematicians and statisticians in fields that actually producesomething of value, rather than destroy the world economy in one fell swoop.

That, truly, would be Change We Can Believe In.

Obama’s Stimulus Package: Is Any Good Coming Out Of It?

  I would say that yes, there is some good coming from the plan.


kktlaw  Tue Mar 31, 2009

Our President has brought to implementation more life-changing programs for millions of Americans than could be listed in this diary. OK, he did not do this alone. But under his leadership, I don't believe there has ever been a President who has changed the scope of America (for the better) in such a short time. Yes, he really can walk and chew gum at the same time, much to the Repugs' chagrin.

I want to share with y'all how these programs are working already. And they are working for people I know, including myself, in life-changing ways.

My friend Paula is a high school Spanish teacher in a large Southern California school district. She has been in this position for seven years and is highly regarded by her students and her administrators. At the end of February, she (and many of her colleagues) were called into a meeting where they learned that, due to state budget cuts, they would no longer have a job next September. The old "pink slip" day.

Paula was devastated. She is a single mom of two little girls. She saved for years and two years ago finally bought a condo overlooking a park for her girls. There are simply no teaching jobs to be had in So.Cal. because of these state-wide cuts. She didn't know where to turn.

Then, last Friday, Paula was called into another meeting, and learned that, because of President Obama's American Recovery and Reinvestment Act, better known as the "stimulus package", Paula and all her colleagues will keep their teaching jobs. The billions of dollars of funds being pumped into California have  already been allotted, and her district learned it would be able to keep all its teachers, and will even be able to hire some desperately needed ESL teachers and special education teachers.

One of my favorite neighbors, Bob, has been unemployed for over a year. He has over thirty years experience in health care administration, human resources, and hospital management. The last hospital group he was with merged with another chain and his job was eliminated. After months of networking, resume sending, and interviewing, he got a part-time "consultant" position at an L.A. health care group. He loved the job, but knew it was temporary, and since it was for only a few hours a week, it wasn't enough to sustain his large family. The owner of this Hispanic-owned non profit organization had applied to receive direct funds from the stimulus package. (The company provides free health care clinics in under-privileged areas as well as home care resources and pharmacy services to low-income populations.)

The owner had told Bob that if these funds were received, Bob would become a valuable full-time employee. Just this past week, the company received confirmation of the ARRA funds. Bob was hired into a position he already knew and already enjoyed!

Many of you know my own situation. I'm a lawyer who had a large income until I became ill with an autoimmune disease. The disease causes dizziness and falls, and lo and behold, I had a doozey of a fall last year, causing eleven major surgeries within one year, eight months in a physical rehab center (nursing home), two near-fatal staph infections, and permanent disability. Through all this, I became unable to make payments on my house that I have owned for fourteen years, never missing a payment until eight months after the accident. Prior to last week, my mortgage holder, Wachovia, had no interest in refinancing, restructuring, nor even negotiating, even though I persisted for months.

But last week, Obama's "Mortgage Relief Plan" hit the fan. I had been watching carefully when Wachovia would begin implementing it, and I called the very next day. Their attitude for the past few months has been, kind of, "Stop calling us, you scumbag. We're not going to help you. We just want your house, and you have __ days until we evict you and then we get your house."

BUT, when I went there in person last week, with all my paperwork, the website information, and a copy of the mandate by which Wachovia is abiding, the tone was quite different. It was "How can we be of service to you?" Heh, I love a good Federal mandate, don't you?

I'm still not clear on the details of my new loan. I know it will meet the requirements of the Mortgage Relief Plan, discussed here and here. From my limited research, it appears all big mortgage companies are obeying the mandate by offering the same programs. I plan to write a diary detailing my experience when I get through the escrow period, with a list of other banks offering the same program. For now, by going on the website's FAQ's  you can learn the "meat" of this program.

President Obama's mortgage plan has enabled me to keep my home, where my kids grew up, and which I have owned for more than fourteen years. The ARRA program has saved important teaching jobs and provided talented leadership like Bob's new position in the non-profit health sector. I will be forever grateful to our President for saving my house and giving my dear friends their much-deserved jobs. I just keep thinking how I would already be out in the street if McCain had won. I don't like to go there, but sometimes I can't help it.

I know this is just the beginning. I believe we will be hearing plenty other stories like this in the coming days and weeks. (Yes, DAYS and WEEKS, not months and years.)

Monday, March 30, 2009

The Solution to "Too Big" is Not Bigger

From DailyKos

by Devilstower  Sun Mar 29, 2009

The administration is seeking additional power to seize firms involved in the financial problems. Which is fine -- so long as their plan for dealing with these firms doesn't encourage more mergers and buyouts like JP Morgan / Bear Stearns or Whoever / Wachovia. Because, despite the Bush administration defending these mergers as "necessary to preserve the free market," they're neither necessary nor "free."

In fact, the last round of buyouts came with with speacial breaks instituted by then Treasury Secretary Hank Paulson, who rescinded a 1986 rule and provided an estimated $140 billion in tax breaks to grease the skids for mergers. In some cases, the government did more than make it easier for financial institutions to merge. In some cases it played Shadchan for reluctant partners, in others (as with Wachovia) it drove institutions to marry at the point of a fiscal shotgun. So banks that were too big to fail became bigger financial institutions that (like Citigroup) required billions more to keep afloat.

Let's wind back the clock a bit. Remember Smith-Barney, the brokerage that used the slogan "we make money the old fashioned way -- we earn it?" (you can bet no one on Wall Street is using that motto today) In the 1980s, Smith-Barney was already part of an insurance/brokerage mash-up called Primerica. Then Primerica was bought by Commercial Credit, which merged with Travelers Insurance, which bought the brokerage firm Solomon Brothers, which merged with Citicorp to form Citigroup. Fun fact: this was all pre-1999, when the Glass-Stegall Act was still in full effect, meaning that several of these mergers were probably illegal. But instead of enforcing the existing law, Congress chose to pass Gramm-Leach-Bliley, pasting a retroactive smiley face over these mergers and clearing the way for more in the future.

So instead of several smaller companies, we ended up with one behemoth which has collected $45 billion in bailout bucks, in addition to billions more in tax breaks -- $10 million of which is going to spruce up executive's offices.  But why should we be surprised by that, or by the bonuses handed out in AIG? When we gripe about these companies that have become "too big to fail," what we really mean is that they have become too big to be dictated to. They have been provided with such fiscal leverage, such control of the system, that they are too big for the United States government to control.

This is a problem whose coming was welcomed by many conservatives, who have long lived in a Rand-ian dream world where business size is equated to moral worth -- and feared by everyone else at least as far back as Teddy Roosevelt.

Theodore Roosevelt actually liked big business. He thought that the growth of big business was very healthy, that most of the businesses got there because they were efficient and the businessmen were doing their jobs right. But two things bothered him. ... One was just that idea that they were overshadowing the government, that some of these tycoons, such as J. P. Morgan, could presume that they were sovereign equals of the U.S. government.

For example, when the first big anti-trust suit under Roosevelt was brought, which was against Morgan's railroad combine, Morgan said, "Send your man to see my man and tell him to fix it up." Roosevelt's answer to that was, "That can not be done. Nobody treats as a sovereign equal to -- of the President. No company can presume to be -- no private interest can presume to be equal to the government. The government must be superior to all of these."

Market fundamentalists may cheer at the idea of government being bossed about by business forces, since they've long held disdain for government and awe of the most ruthless business mogols. They'll defend elevating business above government as "freedom" while ignoring the fact that it's enormously undemocratic. If we get anything out of living through the Great Bushwhack, let's hope it's a new understanding that the market fundamentalists are simply anti-American nuts.

From its beginning, the "American compromise" has represented an understanding that business be regulated by government for the betterment of both the market and the people. Teddy didn't mince words when it came to restating this as a central, and often neglected, role of the government.

Of course there are many sincere men who now believe in unrestricted individualism in business, just as there were formerly many sincere men who believed in slavery -- that is, in the unrestricted right of an individual to own another individual. ... The proposal to make the National Government supreme over, and therefore to give it complete control over, the railroads and other instruments of interstate commerce is merely a proposal to carry out to the letter one of the prime purposes, if not the prime purpose, for which the Constitution was founded.

When it comes to "too big to fail," the solution now as the same as it was a century ago: chop them up. That means not waiting until a company has an effective monopoly on the market before applying anti-trust laws. It means applying those laws when a company reaches the size where it deforms the market, bullies its competitors, and when the prospect of its failure is so frightening that we cushion its fall with billions in taxpayer assistance. It means applying those rules to AIG and Citigroup and others like them long before now.

So give the administration the authority to seize the companies at the heart of the financial meltdown. Not to let them "fail gracefully." Not to force them into more corporate marriages. Not to prop them up with more billions in government investment.

Seize them, then slice them, dice them... heck, use them to make julienne fries (whatever those are). The truth is that many of these corporate monsters are much less efficient as giants stitched together by the egos of their officers, than they were as separate entities. Chop 'em up. Then put back reasonable restrictions on the merger of financial institutions so that this doesn't happen again.

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Salmonella Outbreak: Final Web Update

  I guess that the outbreak has subsided so the CDC will no longer be updating the illness count and so on.

  Everything that you may wish to know can be found at the following CDC links:

  • Timeline of Infections: Multistate Outbreak of Salmonella Infections Associated with Peanut Butter and Peanut Butter-Containing Products --- United States, 2008—2009 (PDF 149KB)
  • CDC Podcast - Salmonella Typhimurium Outbreak in Peanuts - Update
  • Information for Pet Owners: Questions and Answers Related to the Salmonella Typhimurium Outbreak and Pets
  • Information for Veterinarians: Information Regarding Peanut Butter and Peanut-Product Recall and Pets
  • Additional Advice for Consumers
  • Salmonella Signs and Symptoms
  • Multistate Outbreak of Salmonella Infections Associated with Peanut Butter and Peanut Butter-Containing Products --- United States, 2008--2009. Morbidity and Mortality Weekly Report, January 29, 2009 / 58;85-90.
  • Salmonella Strains Tables for Outbreak Related to Peanut Butter and Peanut-Containing Products
  • CDC Podcast - What Kids Need to Know About Peanut Butter and Salmonella
  • CDC Podcast - Salmonella Serotype Typhimurium Outbreak in Peanut Butter and Peanut Butter-Containing Products
  • CDC's Role During a Multi-State Foodborne Outbreak Investigation
  • CDC’s Role in Food Safety
  • CDC E-cards Related to Salmonella Outbreak

    Latest Rasmussen Polls…

       …and they are somewhat interesting ones.

      81%  of voters nationwide say it’s important to keep the promised middle-class tax cuts in President Obama's $3.6 trillion budget. That figure includes 55% who say it’s Very Important.

      About those automobile companies who have received government bailout funding?

      51%  of Republicans, 66% of Democrats and 60% of unaffiliated voters believed senior managers should be replaced in the event of a government bailout.

    At the same time, just 14% of all voters said the Big Three automakers would run better under government control.

       President Obama’s numbers as of Sunday.

      The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 38% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. That’s his highest total in just over two weeks. Thirty percent (30%) now Strongly Disapprove giving Obama a Presidential Approval Index rating of +8

    Overall, 58% of voters say they at least somewhat approve of the President's performance so far. Forty percent (40%) disapprove.

    Sunday, March 29, 2009

    The Financial Meltdown: Government And Big Business

        Yes, we all know by now that big business has pretty much bought our system of government and that the United States government will take care of big business well before taking care of its own average citizens.

    The Atlantic

    One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

      The author of the article compares other countries who have had similar problems like those that the United States is going through, and shows us what exactly brought the financial crisis’s on in said countries. Bad banking practices was one reason for the economic collapses in Russia and a few others.

    In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

    But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

      A very interesting read and I suggest that you check out the remainder of the piece here. We are in  for a world of hurt!