Fillet of Financial Crisis

This article by Matt Taibbi in Rolling Stone does a nice job explaining the current financial crisis and its origins. It should be required reading for all citizens. He touches on my favorite theme (the GAMBLING):

He [Liddy, AIG CEO] conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

He covers the legislative pieces of the puzzles and ties it together with campaign contributions:

In 1997 and 1998, the years leading up to the passage of Phil Gramm's fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures.

There's lots more, so please do read. (I might recommend double-dosing on any anti-depression meds first, though.)

Dang...

I tried to give Sen. Dodd the benefit of the doubt in this discussion with Stephanie. I'd heard some of his denials and read a pretty convincing argument that this was all a right-wing character assassination of the senator. Also, the complicated ins and outs of sausage making made me want to err on the side of the Senator.

I should have known better. From the Hartford Courrant:

In an apparent change of his position, U.S. Sen. Christopher Dodd said Wednesday that he was aware of changes in legislation for a loophole that allowed highly controversial bonuses for AIG, the embattled insurance company that has received federal bailout money.

In a live interview on CNN, Dodd said, "I agreed to a modification in the legislation, reluctantly.

''Previously, Dodd had said he was not a member of the conference committee that crafted the final version of the highly complicated bill. But he had come under strong fire from Republicans and others as the person who was involved in what CNN anchor Wolf Blitzer had called a "mysterious loophole'' in the legislation.

When Blitzer asked Dodd what had changed in his understanding between Tuesday and Wednesday, Dodd replied, "Going back and reviewing it. ... I apologize if we had some confusion.''

Mark-to-market

I struggle with what all this means but here’s brief blurb by Larry Kudlow at NRO that helps a bit:

Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.

Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital [emph. mine]. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.

Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

"... destroying bank profits and capital." When the capital of a bank is reduced, then it’s ability to lend is correspondingly (something more than 1:1) reduced because of the (reasonable) restrictions we’ve placed on them. We don’t want to require a bank to have one dollar of gold in the bank for every dollar of loans it makes (just like we don’t require the Treasury to have a dollar of gold in Ft. Knox for every dollar it prints–though I’m starting to hear those grumblings on the really rabid fringe). OTOH, we don’t want the banks to lend everything it has without some sort of capital reserve–think bank runs in the 30s and the S&L crisis in the 80s.

I have no idea which (mark-to-market or positive cash flows) is the proper method by which to value these assets. In today’s market, however, if they really are being serviced 70 cents on the dollar, how can they be worth nothing?

Btw, if only being serviced 70 cents on the dollar, then how can they possibly be considered to be "serviced in a timely cash-flow manner"?

Focusing on the Tool Shed, not the Power Plant

From Mankiw:

The AIG bonuses now being debated in Congress and everywhere else represent about .001 percent of annual GDP. If a typical Congressman spent that fraction of a 2000 hour work year on the topic, it would consume only about 1 minute of his or her time.

Yes, I know, that calculation is silly in many ways, but here is my point: Regardless of how outraged you are about the AIG bonuses, it is probably not an optimal allocation of resources for our elected leaders to spend large amounts of time and energy on the topic. The economy has bigger problems right now, and it would be better to focus attention on those.

The tool shed analogy is from one of his readers later in the post but one gets the drift. One thought, though: How many Congresspersons really work 2000 hours per year?

RE: AIG political contributions

FWIW: I almost never get too riled up about that sort of thing. To me, there is a certain level of sleaze that just goes with the political territory.

A model of efficiency

New bill would tax AIG bonuses at 100%; from Newsday.

Somewhat misplaced anger: AIG Bonuses

We're all outraged, rightly, that AIG is dispensing $450 million in bonuses (the latest installment of which is $165,000,000) when we taxpayers have handed them $170+ billion in bailout money so far. Here's how those amounts compare (Bonuses on the left; Bailout on the right):

Of course, it's the principle that offends.