Details suggest taxpayers paid a price beyond dollars…

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger. —Bloomberg

Do tell.

An Oirish Lament

Happy New Year, it says here. . .

via Quick Study

I See A Financial Transaction In Your Future

Just a sideshow mage, maybe a little too proud of his gifts considering his present station. Lodged in the little booth behind the round cloth-covered table in an obscure part of the arcade.

Here's one, you see, here's a good one now. All I ask is a quarter, the fourth part of a dollar, and for your trouble you can have a thousand dollars for it. You see? You see the attraction? A thousand dollars for a quarter: Yours! Oh, and but all you have to do is tell me what's under the hat…

You see? You see the potential of it now, the negligible loss balanced against the considerable gain? Eh? Eh?

Your wondering what might fit under the hat, whether there might be a hole in the table making room for a much larger object than you might at first suspect, whether between the tassles there you might get glimpse of whatever it might be. And it's only a quarter to guess.

And it's a secret, you see. And the mage, you understand, this is what I do, this is the thing handed down to me, for an additional quarter the mage will reply with utter truth to any question put to him by the seeker, and for a dollar answers a fifth question for free.

Time was it was a dime, and before that a penny. It was a dime when I was coming up, always a dime, but I was told about the penny I'm old but not that old, heh heh.

Yes, yes, it was always ten dollars to buy the answer from the mage, decline the chance to gain a thousand dollars with an independent guess but instead pay up and have the thing straightforwardly revealed by the simple offices of an ageless business proposition cloaked in the mysterium of initiation into the ancient ways of the mage.

Yes, yes, it's always been ten dollars to be a mage. The secret revealed, yes. It kept the number of new mages down back when guesses were a penny each, yes. Ten dollars was a lot then. Nowadays it's not so much, but nowadays who wants to be a mage? Who wants sit in a booth all day long giving true but necessarily unhelpful answers to the straggle of seekers happening by? They want their thousand dollars but they can't find it in themselves, you see? Still, a quarter here, a quarter there. It's a living.

Oh, but yes. Your ten. You've paid to join now, you'll have your secret revealed now, you're fit to use it or pass it on yourself, oh yes. All rights and privileges, just as promised.

It's my head, you see. It's my head that's under the hat.

Go on now.

Dismal? I'll Show You Dismal. . .

 
Paul Krugman sits down to talk with Bloomberg News about the current financial crisis. [Part 1 of 5 parts]


 

The Student Is Always The Last To Learn

 
Finance Students Keep Their Job Hopes Alive in today's NYT.

Obama could do worse than making this his rallying cry for the next few weeks

 
Someone stuck the "stock injection plan" as an option in the bailout bill signed into law on Friday. Call your congesscritter and demand that the Treasury Secretary exercise his option to take an equity share in any and every institution applying for a bailout. Don't let the government spend a nickel of tax money to buy worthless paper when it can use its authorized billions to buy ownership shares in the companies that brought this whole mess on in the first place.

You'll notice that Wells Fargo and Citgroup are signalling it's a fine time to be buying poorly performing banks right now if you've got the scratch, so the government will be in decent company if it decides to start gobbling up financial institutions right and left. It might even want to swoop in and take over Wachovia first, just to show who's boss.

Stock Injection! No cash for trash!
 

Fiduciary Figura

At Michael Bérubé's recently reinhabited blog, the Professor assigns his minions the task of suggesting figural representations for the current financial situation. He refers to the famous fellow Auerbach's rule of thumb:

Figural interpretation establishes a connection between two events or persons in such a way that the first signifies not only itself but also the second, while the second involves or fulfills the first. The two poles of a figure are separated in time, but both, being real events or persons, are within temporality.

So, Ben Bernanke (Stan) and Henry Paulson (Ollie) try to deliver the bailout package to the Hill. Figura?

Robert Vesco, fugitive pirate, reportedly dead in Cuba

If Mr. Vesco indeed eluded the American authorities until his final day, it was the fitting end to his nearly four decades on the run. He was wanted for, among other things, bilking some $200 million from credulous investors in the 1970s, making an illegal contribution to Richard M. Nixon’s 1972 presidential campaign and trying to arrange a deal during the Carter administration to let Libya buy American planes in exchange for bribes to United States officials.
[…]
Having lived comfortably in Havana for more than a dozen years, Mr. Vesco was convicted and jailed there for fraud in 1996 after reportedly double-crossing Fidel Castro’s relatives in a bogus wonder-drug deal.
[…]
After serving most of his time in a private cell in a large prison in eastern Cuba, Mr. Vesco was quietly released in 2005 and lived so simply in recent years in Havana that a friend said he did not know what had happened to his fortune.

—A last Vanishing Act for Robert Vesco, Fugitive, by Marc Lacey and Jonathan Kandell of The New York Times

It's hard not to compare the $200 million gained by the wiley Mr. Vesco with the salaries granted to the principals of financial services companies imploding right and left around the globe these days. Mr. Vesco purposely engineered the financial fiasco that lead to his wealth; the officers of financial services companies are somewhat more thoughtlessly complicit in creating the conditions for the fiasco we're currently experiencing. But such officers are granted salaries of the same order of magnitude as the sum said to have been lifted by Mr. Vesco, some nine-digit number sanctioned with a straight face by the Board of Directors at places like Bear Stearns and Citbank and Countywide for the services of the fellow who was all the while not only heading the company right off the cliff, but reaching out and joining hands with others all across the financial serivices sector to jump at the same time.

The principals, the officers of all the financial services companies currently going to rack and ruin around the world, have it better that Robert Vesco did, for, although it's true that Mr. Vesco's $200 million was made of a much more robust dollar than the 8 or 9 digits of dollars of their own salaries, and therefore represents a comparatively larger sum than what they'll ever get away with, still, they bear none of the burdensome bother of illegality borne away down the years with all his loot by Mr. Vesco.

Mr. Vesco was a pirate who made an enormously successful raid and got away with it for decades. The last sentence of the Times obit hints that in his last years Mr. Vesco's fortune was gone, but who knows? It would be irresponsible not to speculate on The Lost Hoard of Vesco. Perhaps it was stolen or squeezed from him while he was in prison, perhaps there's a Howard Hughesian will. Only time and the airport paperback racks will tell.

What Created This Monster?

Here's Krugman a couple of days ago, and a long NYT article that tries to describe the true shape of the mess the financial markets have created for us all.

Some of the cutting edge instruments devised to play in today's financial markets are so abstruse that only a small number of people in the world pretend to understand how they work, although that hasn't kept fund managers from vigorously rolling them out on the strength of a phone call here and an email there, completely off the books as far as the regulated part of their business is concerned, and, in the area of credit default swaps alone,

the outstanding value of the swaps stands at more than $45.5 trillion, up from $900 billion in 2001.

[…]

Bear Stearns held credit default swap contracts carrying an outstanding value of $2.5 trillion, analysts say.

—Nelson D. Schwartz and Julie Creswell, NYT, March 23, 2008

Credit default swaps are like insurance for investors against the sort of bad financial moves so often made by debtors, the kind that make it impossible for them to pay back the money they've been advanced by creditors. Except that actual insurance is a relatively regulated market with a long-standing legal obligation to come through for its policyholders, to have the scratch on hand to make good the claims on its policies that can be expected to be handled over time, and the market for credit default swaps, the one Bear Stearns had a 5% share of, has never been put through its paces, and it seems likely that the Federal Reserve, when it partnered with JP Morgan Chase to take down Bear Stearns, did it with an eye toward avoiding the unpredictable but potentially disastrous effects that firm's failure would have on just that market.

James Surowiecki goes on from there in The New Yorker.

A lump of coal in your stocking courtesy of the dismal science

Paul Krugman is a smart guy but he's no performer. He writes so lucidly on economic matters that I'm always brought up short when witnessing one of his talks. I imagine being in one of his classes at Princeton must be daunting for the student trying to follow the quicksilver coursings of his expressed ideas, which are congenitally cogent but when he speaks ex tempore rush from his mind to his his mouth unmediated by the the customary attention a public speaker pays to the formal requirements of being readily followed by a given audience.

Shifting from one stated thought to another is a tricky business in public speech, and is best attempted by any speaker only after being preceded by sufficient warning to the audience in some brief but comprehensible suggestion that now we're on to something else, accompanied by a fond farewell to the idea that's just now being left.

As he speaks, Krugman's mind seems constantly torn between saying the words coming from his mouth and evaluating the words coming from his mouth, and then instantly offering up a reformulation, emendation, verbal footnote or other bye the bye to almost anything he's just uttered, although it must be admitted that he resists as much as he can the temptation to completely drop what he was originally saying to follow along the trail of the interceding idea and its sequalia which is ever-receding end of so much of this kind of talk.

Which is not to say that this is not the way people speak. This is the way people speak. In conversation, people flit from one thing they've just said to some other whatever it may suggest as a matter of course, irrespective of the tangentiality of the suggested matter. When there's only one person speaking, this inclination can be policed, but in Krugman's case, alone there in front of his listeners, it is not.

He's worth listening to because he manages to convey, pace the disorderly delivery, real, informed alarm about the health of global financial institutions today as they grapple with the catastophic effects of the subprime mortgage meltdown.

He describes the current situation as unique, contrasting it with earlier episodes of instability — the Savings and Loan debacle of the late 80's, the economic collapses in Russia and East Asia, the bursting of the internet bubble at the turn of the millennium among the recent episodes which seemed to indicate as they played out that global financial institutions had the tools at hand to mitigate every foreseeable shock to the system. Krugman notes that the tactics used so successfully earlier simply don't seem to apply to this situation, which isn't a liquidity crisis — lenders unwilling to lend, drying up available capital, although there's a lot of that going on in an understandably skittish environment— so much as it is a solvency crisis brought on by a tidal wave of worthlessness settling in on a vast array of securities backed by subprime mortgages.

Krugman says that housing prices must fall by up to 30% if they are to return to historic costs relative to other parts of the economy. In that eventuality, housing bought at the height of the market, when customers were being shoehorned in to new homes or convinced to refinance using one of these vehicles, is now and for years to come worth less than the paper that must be paid off on it.

In a rising market, the usurious rate adjustment built in to the most liberal of these sub-prime instruments, which kicked in after a specified period of time in which the borrower paid some laughably small amount against the debt, could be easily eluded by the simple expedient of refinancing using the collateral of a house now worth more than the original loan to pay off that first loan, and rinse and repeat as needed to avoid the consequences of the unsupportable mortgage payment required when that loan's rate adjustment kicks in. The market slows, steadies, falls. Houses bought with sub-prime loans are now worth less than what is being paid for them by their owners. The chances to avoid the rate adjustment dry up. Borrowers are squeezed to pay more than than the house is worth, and at a faster rate, more's the pity. Foreclosures skyrocket.

And the market isn't really sure who owns all that bad debt, who'll be stuck with the payable bill for it all. Currently it's just sort of materializing out of the vaporous realm of serial securitizations which sought to leverage the collateral of the now thoroughly sunken value of those subprime mortgages into vaster and vaster loan arrangements, which according to best practices in business come due just as the monthly mortgage statement comes due for the homeowner, and must by the ineluctable laws of accounting properly materialize on the balance sheets of financial institutions left holding the bag, payable in full, at the end of a given reporting period.

Bear Stearns, whatever other irregularity it may have indulged in over the past 80 years, has never failed to show a profit for its investors, but this year reports a multi-billion dollar loss. Merrill Lynch, of the famous bull on Wall Street commercial, exposed itself to its first loss in almost three quarters of a century and made Bear Stearn look like it got off easy. Citigroup? … well, jayz. Who knows how far into the future they'll be paying for it? And the insurance bought by prudent investors to mitigate risk should the market go bad, as markets sometimes do, appears more and more to be worthless itself, being carried by insurers who, like the owners of those unpayable mortgages, cannot themselves meet their obligation to pay up in full for their share of the same failed investment in subprime-backed securitizations owed by Bear Sterns and Citigroup and Merrill Lynch and all.

When Paul Krugman says he's alarmed, listen.