Tuesday, April 20, 2010

Barker's Newsbites: Tuesday, April 20, 2010


Today's Newsbites theme song...
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6 comments:

William R. Barker said...

http://www.nytimes.com/2010/04/20/business/20sorkin.html?ref=todayspaper

The government’s civil fraud case against Goldman Sachs raises so many provocative questions.

Did the firm deliberately mislead its clients who bought a mortgage-related investment without the knowledge that it was devised to fail?

Was it fair that a bearish hedge fund manager helped to pick the parts of an investment marketed as bullish, so that he could bask in the winnings?

Who besides the vice president named in the lawsuit knew details of the deal in question? Were there other deals like this one?

But if there is a larger question, it is this: Why was Goldman, or any regulated bank, allowed to create and sell a product like the synthetic collateralized debt obligation at the center of this case?

What purpose does a synthetic C.D.O., which contains no actual mortgage bonds, serve for the capital markets, and for society?

* YA GOT ME! AS FAR AS I CAN TELL THE ANSWER IS "NONE." ON THE FLIP SIDE, THE ANSWER IT, IT ALLOWS "INSIDERS" TO GET RICH WHILE "OUTSIDERS" ARE ULTIMATELY LIABLE FOR THE ILLS THAT EMERGE FROM THE "DEAL."

C.D.O.’s are a simple wager. In this case they were a bet on the value of a bundle of mortgages that the investors didn’t even own. (That’s why it is called a derivative.) One side bets the value will rise, and the other side bets it will fall. It is no different than betting on the New York Yankees vs. the Oakland Athletics, except that if a sports bet goes bad, American taxpayers don’t pay the bookie.

Because structuring derivatives like synthetic C.D.O.’s is so lucrative - $20 billion a year, by some estimates - it’s no surprise that Goldman Sachs [, whose corporate PAC was presidential candidate Obama's second largest contributor in 2008 via donation of $994,795) is among the banks that oppose regulating them.

David Paul, president of the Fiscal Strategies Group, an advisory firm specializing in municipal and project finance [, says of the derivatives market,] “It’s all just become a casino..."

April 20, 2010 at 11:32 AM
William R. Barker said...

http://online.wsj.com/article/SB10001424052748704671904575193910683111250.html

The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.

Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred.

The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now - in the name of the taxpayers - they want more power, but they have never been called to account for their earlier failings.

One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote - all Republicans in favor, all Democrats opposed.

The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs - which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements - accelerated the purchases that led to their 2008 insolvency.

If legislation along the lines of the [Republican's] bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate?

As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

As a senator, [Barak Obama] was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.

Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."

With hypocrisy like this at the top, is it any wonder that nearly 80% of Americans, according to new Pew polling, don't trust the federal government or its ability to solve the country's problems?

April 20, 2010 at 11:43 AM
William R. Barker said...

http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html

When government and business collude, it's called crony capitalism. Expect more of this from the [Obama financial] "reforms" contemplated in Washington.

The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately - not withstanding what any rule might otherwise allow.

And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing.

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve's Jackson Hole Conference in 2008, economist Willem Buiter described "cognitive capture," by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in "Staffer One Day, Opponent the Next."

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.

Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

April 20, 2010 at 11:57 AM
William R. Barker said...

http://www.washingtontimes.com/news/2010/apr/20/america-on-the-verge-of-bailing-out-greece/

[W]ithin the next month, billions of U.S. tax dollars will be spent plugging budget holes within the European Union's core eurozone.

[Specifically...] the International Monetary Fund's (IMF) recent commitment to participate in the...bailout of Greek national debt.

The initial tab is $50 billion, and consensus is that this is just for triage and the patient ultimately will require much more. With the United States having the largest IMF quota, it is the largest donor country.

What is most galling is that the EU openly declares it has the money to handle this bailout internally within the eurozone. It's just that it prefers to use other people's money, and the IMF is ready to deliver under its director, Dominique Strauss-Kahn, a career French government bureaucrat.

Plugging budget holes in the eurozone (an economic superpower) hardly is in line with the IMF's intended role of backstopping Third World countries during times of crisis in return for structural free-market reforms. But [President] Obama and [Speaker of the House] Pelosi seem happy to let even U.S. taxpayer dollars flow for this purpose.

* HMM... I WONDER WHY NO MENTION OF SENATE MAJORITY LEADER REID...???

As recently as January, France's position, pumped up by its legendary pride, was that the eurozone has more than enough resources to manage this internal problem and that the EU would no more consider asking IMF participation to bail out Greece than the U.S. would consider asking IMF support to bail out California. The eurozone plan was to have member countries proportionately pool necessary funds, which meant Germany and France would carry the heaviest burden.

But then the German [people] revolted against using German taxpayer money to bail out the Greeks, whose problems obviously are self-inflicted through a decade-plus orgy of spending and flagrant violation of EU and eurozone budgetary obligations. Angela Merkel, the German prime minister, and her coalition listened to the loud protests of fiscally conservative German taxpayers and made a U-turn in March, declaring Germany will not participate in the Greek bailout unless the IMF ponies up about half the cash and takes the lead in dictating and enforcing the terms Greece to which must commit.

The other EU members, France, et al., were shocked at first, but after hearing no push-back or shaming from the IMF, the U.S. Congress or [President] Obama, quickly warmed up to the idea. And why not? Why reject what will be tens of billions of dollars from others, starting with U.S. taxpayer cash?

America can easily put a stop to this misuse of the IMF. While the U.S. Congress and president don't have direct control over the IMF, they certainly have a very effective bully pulpit, given that America is the largest donor country.

Without delay, all Americans - red state, blue state, from Tea Party folks to Charlie Rangel fans - should be writing letters to their congressmen, senators and president, demanding that they push back and use America's bully pulpit. The blogosphere and radio/TV pundits should be mobilized. American taxpayers must toss this rotten egg back across the Atlantic to their German counterparts. We'll deal with our California, and they can deal with their Greece, thank you very much.

[Let] the eurozone...take of its internal financial issues. After all, the dollar has fallen more than 40% against the euro in the past decade because the markets believe our financial situation is even worse that the eurozone's. The Europeans think we are suckers for going along with this. Not one U.S. taxpayer penny should go, directly or indirectly, toward filling budget gaps in the eurozone.

April 20, 2010 at 12:35 PM
William R. Barker said...

http://www.ft.com/cms/s/0/0821cc00-4bb5-11df-9db6-00144feab49a.html

Flawed computer models may have exaggerated the effects of an Icelandic volcano eruption that has grounded tens of thousands of flights, stranded hundreds of thousands of passengers and cost businesses hundreds of millions of euros.

* OOPS! (*SNORT*) (*DARK CHUCKLE*)

The computer models that guided decisions to impose a no-fly zone across most of Europe in recent days are based on incomplete science and limited data, according to European officials. As a result, they may have over-stated the risks to the public, needlessly grounding flights and damaging businesses.

* AL GORE... PAGING MR. AL GORE...

April 20, 2010 at 5:55 PM
William R. Barker said...

http://www.foxnews.com/world/2010/04/20/uns-massive-haiti-budget-goes-staff/

The United Nations has quietly upped this year's peacekeeping budget for earthquake-shattered Haiti to $732.4 million, with two-thirds of that amount going for the salary, perks and upkeep of its own personnel, not residents of the devastated island.

(*SARCASTIC THUMBS UP*)

Presumably, the budget also includes at least part of some $10 million that the U.N. has spent on renting two passenger vessels, the Sea Voyager (known to some U.N. staffers as the "Love Boat") and the Ola Esmeralda, for a minimum of 90 days each, as highly subsidized housing for some of its peacekeepers and humanitarian staff. The tab for the two vessels, which offer catered food, linen service and comfortable staterooms and lounges, is about $112,500 per day.

Under a cost-sharing formula, the U.S. pays a 27% share of the entire $732.4 million peacekeeping tab for Haiti during this 12 month period...

(*SLOW, SARCASTIC CLAP-CLAP-CLAP*)

The revised peacekeeping tab is over and above the roughly $15 billion in short and long-term aid that the international community - led by the U.S. and European Union - pledged to Haiti at an international donor's conference last month.

It is also over and above the $773 million in humanitarian aid raised from donor nations and private citizens in a "flash" appeal in the days after the Jan. 12 earthquake...

Moreover, the revised Haiti peacekeeping budget only covers a period that ends in about 10 more weeks - on June 30, 2010 - at which time, [U.N. Secretary General] Ban's office will have to formulate another peacekeeping estimate for the stricken island, not to mention the remainder of its global peacekeeping effort.

Since the U.N. installed peacekeepers on the island in 2004...the budgeted cost of peacekeeping has roughly doubled, from an original $372.8 million.

April 20, 2010 at 5:55 PM

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