March 27, 2010

All quiet on the financial front

The Black Swan arrived in the form of the "subprime mortgage crisis," so named because a species of massive, gigantic, unprecendented fraud, based on the housing industry, became Wall Street's standard operating procedure. The big investment banks (Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, Deutsche Bank, numerous others) became the huge vacuum cleaners for every piece of marketable mortgage debt which New Century and a hundred other loan originators (now almost all defunct) could scrounge up from America's vast crapscape of modular ticky-tack, particularly in California, Arizona, Nevada and Florida. And when the mortgage companies could not produce the raw material fast enough (the subprime and Alt-A loans), a number of the banks, such as Bear Stearns and Merrill, went directly into the mortgage business themselves so they could produce their own fraud-fodder. Ah, what days those were! They could take hundreds of loans, such as the five that one Vegas stripper took out in order to buy five houses in one week, moosh them altogether into tranches, perform some alchemy, take them over to Standard & Poor or Moody's, and voila!, Grade Triple A "investments" which could be sold to insurance companies, pension funds, hedge funds and credit unions, all around the world, generating enormous commissions and fees.

It was all fraudulent and it was the biggest business in America. During the boom years the FIRE (finance, insurance and real estate) sectors of the economy generated over 40% of all corporate profits in the United States, and an enormous proportion of the money made was based on the quintessentially fraudulent business of packaging crap loans into bonds and calling them gold. That's stunning when you think about it. An entire economy based on lying and cheating, and to date virtually no one has been prosecuted for securities fraud (a couple of guys at Bear Stearns running a hedge fund were prosecuted and found not guilty). There were two ways to get rich during the subprime heyday: to defraud the general public by selling all the shitty loans to them, or by betting against the shitty loans by means of credit default swaps written by stupid (and greedy) companies like the Financial Products division of AIG. Or, in the case of companies like Goldman Sachs, by selling shitty loans to investors on the basis of fraudulent misrepresentation that the paper was Triple-A, while simultaneously betting against the same shit by means of credit default swaps. And then when the loans inevitably collapsed, by having the payor on the credit default swaps (AIG), which became insolvent by writing insurance on loans vastly in excess of its reserves, bailed out by the Treasury Secretary, who just happened to be the former Chairman of Goldman Sachs, who used to be a big mucky-muck in the securitization-of-shitty loans business.

Interesting, huh? That's actually the America we live in. All of that really happened. Even though all of the Wall Street banks, and many standard commerical banks as well, were engaged in massive, systematic fraud, all of the big ones (the Too Big to Fails) were bailed out, on a selective basis, so that particular favorites of the Bush and Obama Administrations (Goldman Sachs and JP Morgan Chase) could emerge with their old competitors (Lehman Brothers, Bear Stearns, Merrill Lynch) either destroyed or dissolved by digestion in the alimentary canals of other Too Big to Fails.

So now the federal government controls about 80% of the mortgage business, such as it is. The pole-axed GSE's, Fannie Mae & Freddie Mac, have been placed on federal life support, with their $5 or $6 trillion in liabilities explicitly entered on the government's ledger sheets (adding about 1/3 to the national debt, but in a quiet, ambiguous way). The feds felt they had no choice, because so many of Fan & Fred's "agency debts" were owned by our Commie payday lender, the People's Republic of China, and the Reds were none-too-happy about getting fleeced in the first place. The Federal Reserve itself went on a buying binge of Fan & Fred mortgage-backed securities and agency debt to the tune of about $1.3 trillion, along with another $300 billion in Treasuries of various maturity durations, as part of its "quantitative easing" (money printing).

Now, in four days, the Fed's QE program comes to a close. No more buying of mortgage-backed securities. No more "support" for the federal bond market. The housing business is "on its own" now, because Bernanke has stabilized the economy and the recovery is well underway.

So a question which you, as a thinking person, might ask at this point: but where did all the debt go? Didn't the economy tank because trillions in unpayable debt were issued by fraudulent loan originators, on the basis of fraudulent loan applications, packaged by fraudulent securitizers and fraudulent investment banks, and then sold by fraudulent bond salesmen? And all of this insured by the fraudulent writers of fraudulent credit default swaps? And since the housing market has not "reinflated," doesn't this mean that all the loans that were bad are still bad, and all of that debt, on someone's books, still has to be out there? The former residential occupants of the Desert View Mesa subdivision in Toiletcrap, Nevada, may have abandoned their 4-br (incl mast ste), 3-ba, fam rm, pool, 3-car ga, 3k sq ft haciendas in favor of the local trailer park, so that the debt is certainly off their books - but it went somewhere, right? Someone made a cash investment in those houses to the full extent of the mortgage. Maybe it was a Norwegian teachers pension fund, or maybe it was CalPers, but somebody somewhere is holding that debt, and is out a lot of money as a result, are they not?

That's why we're not out of this, not by a long shot. The Federal Reserve's load of this unpayable debt increased its balance sheet from $800 billion to $2.3 trillion, and that only represents a fraction of the loss. There's plenty more where that came from, and foreclosures and the shadow inventory push more debt down the line like the Conveyor Belt from Hell. Banks keep failing, every Friday like clockwork, and every time the FDIC takes over, they find the banks have substantially understated just how far underwater they really were, by playing the game of "extend and pretend," where banks hold zombie loans on their books which haven't been paid in a year, but if they haven't foreclosed, and no one says anything - hey, the loan might still be good, right? There might be a sudden 100% inflation in the housing market, couldn't there? Haven't stranger things happened? (Not really, but nice try.)

Through all this, the Fed has prided itself on its ZIRP (zero interest rate policy), which means that Americans who want to do the prudent thing with their money and save it receive absolutely no reward for their virtue. ZIRP is necessary because the vast Himalayas of debt which the U.S. took on to salvage the mortgage business, and rescue the states, and bail out the Wall Street firms with good Administration connections, and "stimulate" the economy, cannot be managed unless interest rates are kept at artificially, unreasonably low, rates.

And now a few disturbing signs are appearing that this fantasy is also about to melt, as Prospero said, "into air, into thin air." The Wall Street Journal reports today that Treasury auctions over the last week have been weak, with the bidding down and the interest rate required in order to sell all the scrip creeping up. Right as the Fed tries to drop out (Bernanke: "Every time I try to get out, they pull me back in...") of the shill business, the Chinese (whom we are stupidly provoking at precisely the moment we can't afford to) and other "indirect buyers" are losing interest in our tincupmanship. It's hard to overstate how ominous this development is. We really are just getting started on financing all of this debt the USA has taken on over the last couple of years. We have to sell $150 billion in Treasuries a month just to service the current budget deficit, let alone meet all the rollover debt that keeps maturing because of the desperate attempt to keep durations short to keep interest rates down.

So not so long after the last Black Swan dropped a huge whitish-gray load of goop right on top of our heads, here comes Rodan with another pantload, and this one might cover D.C. to the top of the Washington Monument

March 26, 2010

Ratzo the Pope in Modified Limited Hang-Out Mode

It's great to use those timeless phrases from the Watergate era. Where would be without them? Without the whole "-gate" industry, for one thing. The barren imaginations of regular journalists just keep recycling that "gate" ending in less and less euphonious ways. Irangate, WMD-gate, Wide Stance-gate. But "what did he know, and when did he know it?", "cancer growing on the..." whatever, "twisting slowly in the wind," and Nixon's decision, instead of telling the truth, to engage in a "modified limited hang-out" gave birth to a classic, still used today, like all these slogans from the Golden Age of American scandal.

Also, "the coverup's worse than the crime," currently a problem for His Eminence, Pope Ratzo of the Catholic Church. The Pope's problems stem from yet another pedophile on the payroll, this one Father Peter Hullerman, a German who messed with boys up around Essen, in northern Germany, then was reassigned to Munich, where Ratzinger was Cardinal, and began diddling boys all over again, finally leading to his prosecution and imprisonment in 1986. The New York Times has been all over this story, focusing attention on a 1980 memo which was sent to Ratzinger's attention, among others (including his main aide, Gerhard Gruber), concerning the decision to reassign Hullerman from Essen, where the heat was on, to Munich, where he would have a supply of frische Jungen. Gruber has taken one for the Papist team by insisting that Ratzinger was not personally involved in the usual hide-and-relocate m.o. of the Catholic Church in dealing with its many perverts, although the documentary evidence strongly suggests otherwise. Anyway, whether they can fend off the Pope's complicity in the actual decision to move Hullerman into duties involving contact with young boys (while undergoing therapy to "cure" his pedophilia), there doesn't seem to be much doubt, because of the 1980 memo, that Ratzo was at least aware that Hullerman was in his archdiocese in situations posing risks for Bavarian boys. As proved the case when Hullerman was busted six years later. And it's very reasonable to assume that the Pope is being insulated from his real involvement by bureaucratic layering, much as John Dean tried to do, for a while, in insulating Nixon from Watergategate.

Since I'm not religious, I tend to look at the Catholic Church as simply a business providing employment and career opportunities, and increasingly as a Racketeer Influenced Corrupt Organization (RICO). Ratzo's the Godfather, the capo di tutti capi, and one of his business lines, offering salaried gigs to pedophiles, is crushing the church's P&L, especially since this practice, like everything else these days, has undergone globalization. It's getting ridiculously expensive to keep buying up all these molestation claims. The Catholic Church's "Fresh Start for Diddlers Program," exemplified in Hullerman's case, has caused not only life-long misery for many victims, but has extended the reach, so to speak, of the many perverts working in the Catholic Church. Once discovered in one parish, they have traditionally been moved to a new groping ground, where the outrages start all over again, which should be no surprise to anyone. Hasn't Ratzinger ever heard the old cliche, wherever I go, there I am?

On "Real Time" last week, Bill Maher was weighing in on all of this and immediately concluded that it is the celibacy requirement which gives rise to all the mischief. I'm not quite sure I follow his logic. It might be the case that closeted homosexuals would be attracted to employment in an organization with a celibacy cover story, since this peculiar requirement supposedly ends all questions about how the employees are getting off, as well as providing a work environment with lots of other men who like wearing bright robes and fancy dress. But Maher's criticism presupposes by two-step logic, I think, that homosexuals are more likely to be pedophiles, and there is really no evidence for this at all (although it's used as part of the Right Wing agenda against homosexual teachers). If that isn't what Maher means, then what does he see as the connection between a formal celibacy requirement and pedophilia? I don't see it. If he means that sexual frustration leads to pedophilia, he's just dead wrong, and anyway there are always the other priests (and the nuns, for the other persuasion).

It makes more sense that the Catholic Church's reputation has preceded it; that's the answer, I think. Pedophiles get something in the Catholic Church that's hard to come by (all these phrases seem slightly off today) in normal employment for pervs who want access to illegally young bodies. Three hots, a cot, and rooms full of altar boys, plus parochial schools where there are more boys and even girls. The priest has authoritative power over these youngsters which he can abuse to his heart's delight, but he has something you just can't get from a public school or other places where pervs go a-hunting: an employer who will hide your crimes, move you to a new locale and set you up with a new batch of victims. Talk about writing your own ticket!

So it's probable that Ratzo was just following the corporate manual back in 1980, but it's become very inconvenient to admit that's the way things were done. It gives rise now, in these sad times when the Catholic Church has been pilloried as a den of pederasts, to a legal notion known as "ratification" of outrageous conduct, which, if it leads to punitive damages and extends all the way to the coffers of Vatican City (because even the Pope is involved), could spell Game Over for the boys in red.

March 24, 2010

Major Kong's Last Mission

Presidents Obama and Medvedev, of the United States and Russia, respectively(note to Tea Baggers: only the second is an actual former Commie), expect to sign a new strategic arms treaty in Prague next month, a pact replacing the expired START treaty of 1991. Essentially, the new deal will reduce each side's deployed nuclear missiles to 1,600 from the present level of 2,200, and halve the number of strategic bombers each side has loaded and ready to go (down to about 800 each).

This sort of news doesn't have quite the hopeful impact it once did, back in the days of Carl Sagan's "nuclear winter" and Jonathan Schell's "Fate of the Earth." Those were the days, huh? I think one of the really reassuring things about the old days of Mutual Assured Destruction was that our opposite number, the USSR, was a nation of godless Communists. It was for that very reason that I trusted them not to do anything too crazy, such as destroy all human life on Earth. If anything, they were less of a risk to do so than the United States, because it's this country which exhibits the powerful influence of Millenialist, Rapture-befuddled thinking. Not so the Commies: I figured their favorite American soap was "One Life to Live," and they were living it right here on the third rock from the sun. So what was in it for them to engage in a virtually certain act of suicide by an attack on the United States with nuclear weapons?

I suppose you could say I'm a sort of Mystic, in that I do wonder about the origins of Reality but never get anywhere, there being nowhere to get. I have no answer to Gottfried Leibniz's very old question, why is there something instead of nothing? Other than to say, of course, ya got me, Herr Leibniz. It got him, too, and he's the one who came up with the notations for differential and integral calculus. However, my outlook is a minority view in this country, where millions and millions of my fellow citizens have a clear, definite understanding of the origins of the Universe, and many of them are not convinced at all that this life on Earth is really the main event. I do, actually, so I'm in no hurry to see it end "prematurely."

Reducing our stockpiles of nuclear weapons doesn't really reduce the danger of nuclear war, because there was no real danger of nuclear war with Russia, anyway, not unless someone like Sarah Palin is elected President, and if that happens we might welcome a nuclear war just to distract us from the other catastrophes. With the end of the Cold War, we've seen extensive nuclear proliferation, with the cases of Iran and North Korea being the most problematic to date. With such countries, the prospect of nuclear arms reductions through negotiations doesn't look too promising. They want nuclear arsenals so they don't have to negotiate.

So we've entered the era where nuclear arms reductions are more likely to be carried out by preemptive attack to destroy nuclear capability than by meetings around green baize tables. It's part of the gruesome logic of the very existence of nuclear weapons. If they're in the "wrong hands" (the hands of people who might really use them), what do you do? I've made reference before to the University of Colorado study that an exchange of 40-50 Hiroshima-sized atomic bombs (say, of the kind that would probably happen between Pakistan and India), if dropped on urban centers where "dirt fountains" would be thrown into the high atmosphere, would probably destroy enough ozone in the Northern Hemisphere to wipe out everyone living there. We're in a time where there isn't much margin of error, and the nuclear reductions of the USA vis-a-vis Russia only serve the purpose of improving the "good faith" argument the USA can use as a reason to enforce nonproliferation against the "rogue" states.

Iran, Pakistan & India are religiously-minded places, too, of course, like the United States, and the first two, if under the influence of radical Islamic extremists, pose an existential threat to the survival of the world. Like the Christian Millenialists in this country, they see Paradise or Heaven as a shot at a do-over for anything that doesn't work out here, which predisposes a believer to Drop the Big One. India is mostly Buddhist and Hindu, which means they don't believe that even this life is real. I'm not sure how that one cuts re: nuclear war.

So good for Prez O, and Prague should be lovely in April, but we haven't really figured a way out of the nuclear maze, which just seems to get more complicated with the passing years. The existence of nuclear weapons anywhere imposes a kind of implacable logic of necessary responses. I'm sure at some point we'll get around to bombing Iran's nuclear development sites, and I assume the real reason we remain in Afghanistan, nine years after the event to which Afghanistan probably had only a tangential relationship, is so we can rush across the border into Pakistan and seize their nuclear facilities if things get too wacky there for our perceived interests.

This is the sort of nightmare which J. Robert Oppenheimer was worried about in letting the nuclear genie out of the bottle, yet for his troubles he was also called a "godless Communist." If only godless Communists were our only worry.

March 23, 2010

Swiping your ATM card in the ambulance

This post is inspired by the already burgeoning cottage industry of gaming the new health care bill. I've been a lawyer for over three decades, and one thing I've learned is that one of the reasons that lawyers become legislators is that they can't hack the legal field because (a) they can't think clearly and (b) they don't like hard work. I have deduced this hard-won lesson from reading thousands of legislative enactments under conditions where I positively must make sense of what has been written by some blowhard in the state house or in Congress (or more likely, by the lobbyist who wrote it for said blowhard).

Anyway, Karl Denninger at the The Market Ticker thought one way to play the new law ("America's Affordable Health Choices Act of 2009" - uber-clunky) is to forgo any coverage and wait till you need insurance; that is, when you become ill. (Can't get a lot more "affordable" than that.) Since an insurer cannot deny coverage on the basis of a preexisting condition under this new law, the simple solution is to save, every year, the ten grand you were going to throw away on insurance and wait till you need it. All routine medical costs could be paid with cash (which usually add up to less than a standard deductible anyway). The government's fine for not carrying insurance is much less (on the order of 1/5th) than the cost of buying insurance you don't really need (until you do need it) The fine is 2% of AGI; if you make $100,000 as adjusted gross income, the $2,000 fine is only 20% of what you were going to throw away on Humana.

Inspired idea, I thought. It could give rise to a new business paradigm as well: the ambulance or EMT wagon equipped with a credit card terminal so you can buy insurance on the fly, as they speed you to the emergency room. Also steady work for lawyers, because everyone playing this game should have a power of attorney drawn up designating someone to buy the insurance for you in the event your myocardial infarction leaves you temporarily in non-business mode. Just think of it: there you are in the oncologist's office, inhaling deeply on your Marlboro as the doc gives you the bad news from the MRI. He asks if you have insurance, and you casually answer no, not right now. But can I use your phone? Lung cancer, as a preexisting condition, might only have existed for a couple of minutes, but in the old days you would have been on your own. Now you phone up and demand insurance from any insurer you like to cover the few hundred grand your surgery, chemo and radiation are going to set the insurer back. The premiums don't bother you because you've saved fifty thousand large over the last five years going without insurance. (You spent a lot of the savings on cigarettes and booze, in fact.)

Can it really be that easy? I looked the statutory section up:


    A qualified health benefits plan may not impose any preexisting condition exclusion (as defined in section 2701(b)(1)(A) of the Public Health Service Act) or otherwise impose any limit or condition on the coverage under the plan with respect to an individual or dependent based on any health status-related factors (as defined in section 2791(d)(9) of the Public Health Service Act) in relation to the individual or dependent.

Ah shit, here we go. This is what I hate about these statutes. They're so damn lazy they refuse to just put everything you need to know in one place. You can see right away this is not going to be so easy. It starts right off with the words "qualified health benefits plan" which strongly suggests you're going to have to read the definitions to find out if that's the same thing as an "insurance policy" in our quixotic fantasy about the guy in the ambulance. But what's worse is that you've got to look up something called the Public Health Service Act to find out what a "preexisting condition exclusion" is and what a "health status-related factor" is.

Am I willing to do that? No. Too much damn work, and useless, because it would be folly to attempt living without insurance until 2014, when this provision finally kicks in for adults. Between then and now there will be many test cases for children, who will benefit from the liberalized laws immediately, and an anguished cry from the insurance industry will rise up over this great land as they write, not an insurance policy, but a simple agreement to accept huge debts where the "insured event" is a 100% probability, having already occurred prior to issuance of the policy.

Surely there must be more to it than this. The ATM terminal in the cardiac wagon is supposed to be a kind of burlesque, a joke, not a test question on the bar exam. Yet I think that's the way things, as written, would play out. (I cheated a little, by the way. I read the Public Health Service Act, the relevant sections, and I didn't see anything there which changes the story. That law was written in 1944 and has been amended a few million times so it's hard to follow, but the basic premise seems to hold together. The only caveat is that the insurer is not required to cover an illness or condition which they don't cover anyway, as a general rule, so that if your preexisting condition is something which they always don't cover, then the new law does not compel them to cover it. For example, if the insurer in question does not cover cosmetic surgery, then you, in your uninsured condition, suddenly deciding you want a nose like Demi Moore, could not require your new insurer to pay for the guy with the rubber mallet.)

Anway, something to think about, for those of you who like to play games with Congress's poorly conceived and incompetently structured enactments. And who doesn't like to do that? I don't have anything against health care reform, by the way. It's obviously desperately needed. But I think this particular "discontinuity" between the private sector and public health is going to cause massive litigation, amendments, et cetera, and it's all because the Democratic Congress tried to appease capitalists while selling a pig in a poke to their "liberal" base (giving us a "choice" about which private insurer will get our money). Having refused to do the right thing, they're now attempting an absurd thing.

March 22, 2010

Much Ado About Not Much

In the gestural world of American politics, symbols are now everything. Why were the Democrats mostly for health care reform? Because they had made it their signature issue and needed to prevail in order to show that "big things were still possible." And why did the Republicans oppose HCR so vehemently (and unanimously)? Because the Democrats wanted it.

Did the substance of the bill have anything to do with these polar positions? Not that I can see. It seems like no huge, courageous accomplishment to eliminate preexisting conditions, beginning in 2014, as a reason to deny health coverage. It's amazing the American public (and their elected "representatives") tolerated this outrage as long as they did. It should always have been part of the charter of every health insurer to provide some means of insuring the "uninsurable," or to create at least an assigned risk system. Nor should they be allowed to drop someone from coverage because they get sick while insured.

Beyond that, we have a very complicated method now of subsidizing the purchase of insurance by those near or under the poverty line. The private system is not only maintained, it's enhanced by additional customers, driven to them by the federal government and its refusal to do anything vaguely "socialist" like a single payer system.

So what on earth was all the sturm und drang about? One test I use is to ask whether this bill will have any effect whatsoever on my personal life. Bearing in my mind that I am what used to be thought of as the Epitomized Standard American (ESA), that is, white, male, Baby Boom and self-employed, I can say that, as always, the "system" assumes I can take care of myself and so the various enactments of our "activist" Congress never have anything to do with me. Nothing will change at all. I will continue to pay $8,000 per year with a $5,000 deductible for health insurance which I hope I never use. Since Congress, to show everyone how tough they are, did not provide any sort of coverage mechanism for "undocumented Americans," these people will continue to use emergency rooms as their primary care physician and so, in the event of an accident or actute illness involving me or a loved one, that situation will remain unmitigated.

It's scary to think that such an innocuous piece of legislation, bringing together in one place, finally, bits and pieces of ideas that should have been law long ago, could spark such implacable hatred and partisanship. A very, very bad sign. I never watch or listen to any of the Right Wing hatemongers (Rush, Beck, Hannity, et al), so I'm uninformed, I suppose, as to the tidal forces pushing the Right toward hysteria. One sad effect of all the confusion is that it allows the real miscreants, such as the bandits on Wall Street, to get away with murder, while the Tea Party rages on about Obama as Hitler or Stalin or Pol Pot and the rest of his predecessors in evil. The complete severance of popular movements from any rational basis should be freaking people out, but it appears there is nothing that can be done. You can't reason with mob rage when there is no underlying rationality. The lock-step Republican Congress hopes to ride this wave of nihilism back into power in order to accomplish...what, exactly? I suppose what any authoritarian national party uses power for, to wield it with the assistance of the Useful Idiots in the mob supporting it, much as Hitler (him again) employed the systematic violence of the Brown Shirts, in pursuit of the grandiose and delusional.

Meanwhile, polarization just gets worse and worse. Rather ironic, I think, that the post-partisanship President should wind up presiding over the most schismatic populace in American history since the Civil War.