April 17, 2010

Throw a little vampire calamari on the barbie

The title taken, of course, from Matt Taiibi's superb description of Goldman Sachs: A vampire squid wrapped around the face of humanity. The SEC, rousing itself from the persistent vegetative state which characterized its handling of the Bernie Madoff affair, is hacking away at GS's flailing tentacles in much the same way that Captain Nemo, in James Mason's protrayal in "20,000 Leagues Under the Sea," fought the giant squid trying to wreck the Nautilus.

I'm convinced that Goldman Sachs is guilty of security fraud. What convinces me is the character of its absolute rebuttal: their oft-quoted PR flack, Lucas Van Praag, meticulously and categorically denied everything the SEC alleged except for the one point that matters. A telling omission. Somewhere down at the bottom of the bowl of alphabet soup, the swirling RMBS and CDS and CDO, lies the answer, and it's not good for Goldman Sachs.

Goldman Sachs got too cozy with a big investor, John Paulson of Paulson & Co., who only a couple of years ago was the toast of Wall Street. Paulson devised ways of betting against the U.S. housing market through use of credit default swaps (CDS), which are essentially bets that a given asset or security will decline in value. I remember discussing Paulson's celebrity with my cousin Jim, at one of our breakfasts out on the wharf in Santa Cruz (those breakfasts, like the great American housing market, are gone forever). With Sinatra, as always, playing on the restaurant's stereo system, Jim chuckled in his inimitable way and noted that only in America could someone become a social hero by betting that America would go to hell in a hand basket. Paulson made billions with his CDS bets.

Now we see that Paulson, unlike the intrepid small guys described by Michael Lewis in The Big Short, had his finger on the spinning roulette wheel. He isn't such a hero after all. The fix was in, and he paid GS to rig the game. Paulson ponied up $15 million to Goldman to salt a collateralized debt obligation (CDO) with hand-picked residential mortgage backed securities (RMBS) culled by Paulson from a long list of such RMBS. Paulson specifically chose lousy credit risks - low FICO scores, zero down payment, adujstable rates, no wage documentation, zero equity. Loser loans, in other words. To Paulson's credit, he saw the housing bubble and put his money down.

Paulson's specific investment vehicle, we now know, was something called a synthetic CDO, which is (as described by Michael Lewis) a kind of mirror image of a real CDO built up from mortgages. The synthetic version is comprised of credit default swaps (CDS), and to Morgan Stanley, apparently, must go the honor of this great breakthrough in American financial engineering. The synthetic CDO allows short bettors to scale up their negative bets to the same level as the investors on the long side in MBS CDOs. In the case of the ABACUS CDO involved in the SEC complaint, here is what the SEC then accuses of Goldman of doing:

Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure.

To beat the rap on a 10b-5 allegation, here is what the vampire squid would need to be able to say: We told the long-side investor (a German bank and others, including ACA) that the sack full of shit they were investing one billion dollars in had been assembled from turds specifically chosen by another investor, John Paulson, who selected those excremental pieces based upon their foul odor and disgusting appearance.

Here, however, is the squid ink excreted by Goldman in its defense:

Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

An artful dodge, which is very telling under these excruciating circumstances. The SEC complaint does not base its case on failing to "disclose to one party of the transaction who was on the other side of the that transaction." That would not have told ACA and the German bank much of anything, by itself. What Goldman Sachs did not tell the long-side investors, those redoubtable Germans who believed in the American mortgage-payer, was that the CDO they were buying had been hand-picked to fail by the short-side investor (Paulson), a right granted to Paulson because he greased the Squid's tentacles with fifteen million bucks. Now, if Lucas Van Praag could deny that explosive allegation, now would surely be the time to do so. But he doesn't. Goldman Sachs did not represent "to ACA that Paulson was going to be a long investor," of course, because Paulson was going to be no such thing. This is entirely beside the point.

Where things will really get fun for Goldman Sachs, as the SEC knows, is in the lawsuit that ACA and the German bank will surely file against Goldman Sachs and probably against Our Hero, John Paulson. Since fraud is involved, Goldman could be looking at punitive damages along with the billion in compensatory, humongous legal fees and other fun debit items.

Meanwhile, the American housing market continues its descent into the sink hole of deflation. At least, from time to time, we'll have the distraction of watching those (and GS won't be the last) who once profited from everyone else's misery take their turn in the dock. Too bad my cousin, who really believed in America, or at least in the America that used to be, can't be around to see the final act.

April 16, 2010

Whither the Tea Party Movement?

The function of the Mass Media, of course, is to reduce any social phenomenon to a catch-phrase or pigeon hole so that all references to the phenomenon have a "theme" or commonly-understood meme which fits easily within the microns-thick coverage of contemporary "journalism." We often forget this (the MSM count on such forgetfulness) and thus we are prone to believing that the once-over-lightly discussion of a mass movement such as the Tea Party people is all there is to say on the subject. By now most of us here "progressive" types are inured to the characterization of the Tea Party as anti-abortion, anti-gay, "Birther" racists who are motivated mainly by a hatred of Barack Obama's African-American complexion, and use fancy "Constitutional" arguments to give their sordid movement the patina of respectability.

I think that fairly characterizes the popular take. If I've left anything out, let me know. I think one of the reasons that the MSM of the moderately progressive ilk would tend toward such characterizations (pundits such as Chris Matthews and Keith Olbermann) is that they instinctively realize that they are in the cross-hairs of any such "anti-Big Government" movement, because Big Media depend on Big Government every bit as much as Big Business depends on Big Government for financial support and a favorable legislative "platform" for carrying on multi-national business or chain store oligopoly and corporatism. Their "scale" is the same as Big Government's, in other words.

Whether they always realize it or not, I think that's the sum and substance of Tea Party thinking- anti-Bigness. I suspect there's a little of that in most "progressives" as well. At the deepest psychological level, we're very tired of a mediated existence - government mediated through the TV set, political campaigns run through Internet programs, hundreds of billions here, hundreds of billions there, imagery, falseness, inaccessibility, a pervasive sense of powerlessness. I don't doubt for a moment that there is a racist element within the Tea Party movement, but, to be fair, another element contributing to the rise of an "alternative" politics is the complete failure of Barack Obama to be anything other than a conventional D.C. politician, making all the same moves as his predecessor, using many of the same people, talking the same rhetoric, covering up the same government crimes, relentlessly increasing the concentration of power within the federal government.

Here's a statement of Tea Party political philosophy from a University of Michigan supporter of the movement, published in the Daily Michigan:

The defeat of President Barack Obama’s radical agenda is one of the main focuses of this movement, which seeks to restore limited-government Constitutionalism to its proper place in our society. Tea Party members view the massive deficit spending and growing size of the federal government (with all of its new regulations that are supposed to protect people from themselves) as directly in conflict with the principles espoused by our Founding Fathers in our founding documents.

We view higher taxation as an imposition upon economic prosperity. A man’s right to earn, create and own property is the essential building block of a free market society. We view governmental mandates to buy healthcare as an imposition upon personal freedom and choice. We view cradle-to-grave entitlement programs as irresponsible and as “generational theft,” a term invented by Sen. John McCain (R–Ariz.).

The Tea Party movement is all about personal responsibility, hard work, and the ability of the individual to improve his or her own condition through their efforts. We see bankrupt entities like Social Security and Medicare, and then listen to D.C. politicians promising newer, bigger programs that will “work”. And we don’t buy it. At least someone hasn’t fallen for the sugar-sweet but nevertheless insubstantial and poisonous rhetoric of “hope and change.”

At one level, this is a correct restatement of some of the principles of key Founding Fathers, such as Thomas Jefferson ("that government is best which governs least"). Yet I think the underlying theme is pretty simple: this is a new version of States' Rights -- the "Constitutional" arguments being raised do not concern the Bill of Rights so much (what's left of them) as they do the fantastic expansion of government's reach through the Commerce Clause - that legal Swiss Army knife which has permitted the federal government to regulate everything it feels like regulating. This was the focus of the Southern racists of another generation - if they could wrest control away from the central government by means of the Tenth Amendment (residual powers in the States), they could continue to segregate lunch counters, motels, train stations, water fountains, swimming pools, anything they wanted to segregate, and the Justice Department would have nothing to say about it. But the federal government was seen as the hero in those days, and the substantial majority of Americans wanted it to succeed.

That's not true anymore. The degree of public discontent with Washington D.C. has gone critical. The vast majority of Americans do not approve of Congress at all, and this is a proxy for disgust with rule from afar. So that when the central government now trots out some huge program, such as the recent health care legislation (which is a very tepid, pro-business piece of largely useless law-writing), there is an instinctive revulsion at its very promulgation. People don't want it because of where it came from.

The pols in D.C. recognize what's going on. The viability of their careers depends on recognizing which parade to jump in front of.

I personally think that re-delegating government functions to the local level could be a very positive thing. The United States, the third largest country in the world and riven by partisan and regional divides, has become essentially ungovernable. The compromises necessary to get anything done have become so extreme that nothing effective can be accomplished anymore.

It would be interesting to me if the Tea Party people begin to realize that Big Endless War, Big Government Spying, Big Terrorism Paranoia, Big Defense and other Bush-Obama Era accretions are also anathema to classic American principles. I don't see a lot of that, which makes me wonder (despite their protestations that the core Tea Party principles are not dictated by Sarah Palin and Glenn Beck, et al.) if the Tea Party isn't just a stalking horse for an even more Right Wing form of the Republican Party. Time will tell. At least they're kind of interesting, which is a lot more than you can say for the Democrats or Republicans.

April 14, 2010

Congressional Freudian Projections

Ben Bernanke attended one of his regularly-scheduled public floggings today, this one before a Joint Congressional Committee overseeing something or other. Some pretty big names were there, including Chuck Schumer of New York, Sam Brownback of Kansas and Ron Paul of Texas. It was more of the same: talk about a "modest recovery," low interest rates from now until the End of Time, "subdued" inflation trends. Schumer wanted to talk about Chinese currency manipulation and theft of intellectual property, Brownback wanted to talk about the national debt, and Ron Paul wanted to hammer Gentle Ben on monetization. This last occurred when Bernanke answered someone else's question by stating that the Fed does not monetize the debt, and Paul reminded him that Quantitative Easing (the process by which the Fed bought up about $1.25 trillion worth of mortgages and $300 billion of Treasuries) was accomplished through money conjured out of thin air, which is to say, printed.

Bernanke conceded the point, but in reality the Quantitative Easing approach did not really have anything to do with the national debt, per se. The conjuration of money by the Fed to stabilize America's ravaged mortgage market was to avoid adding to the national debt, which is a very different thing. The Fed did it because it thought it could get away with it, as opposed to borrowing yet more money and driving this year's fiscal deficit to $3 trillion, that is, roughly 100% of the budget. And we do appear to have gotten away with it, for now at least. I always thought it was one of Bernanke's more clever tricks, to turn the Federal Reserve, in essence, into America's Bad Bank. When you think about it, why not? The Fed isn't really a bank, after all; it occupies the same position relative to ordinary banks as Superman does to mere mortals - it has superpowers, the most important of which is to decide how much money ought to be in circulation. The Fed now has a balance sheet of about $2.3 trillion, or about $1.5 trillion more than it did when the fiscal crisis started in late 2008. A lot of those assets are of very uncertain value, consisting as they do of dodgy mortgage backed securities for which there is really no public market. But again, so what? The Fed can't go bankrupt because it just prints money to balance its books. I don't think the mortgage purchasing program is strictly legal under the Federal Reserve Act (and a lot of other people don't either) but one precedent that was established during the Bush Era is that any government official or agency can break the law with complete impunity. No one will ever call you on it. You don't want to obey a Congressional subpoena, as Karl Rove elected not to do? No problem. Blow it off. You want to torture? Be our guest. Wiretap without a warrant? Eliminate due process? Abolish habeas corpus? No one cares anymore. Knock yourself out.

So under that standard, Bernanke can say that at least he's trying to do something positive. What's a little weird is when Bernanke gets blamed, at all, for the deficit spending. Under that tattered Constitution referenced above, at least last I checked, authorizing and spending public funds are under the exclusive jurisdiction of Congress. That didn't stop Brownback, one of Bush's chief supporters in any war he cared to start, from asking Bernanke to put a stop to the deficit spending. As in, stop me before I kill again! Brownback, as with most Congressional members, counts on the basic stupidity of his electoral constituency and the inability of the public at large ever to follow Congress's trail of destruction. If the public can't figure out that Bush doubled the national debt during his tenure, then so much the better for Republicans. They've been able to reinvent themselves as fiscal conservatives out of the same thin air that Bernanke prints money.

No one ever brings up the subject of runaway defense spending, of course, including Chuck Schumer, vaunted liberal and champion of the little guy. Okay, maybe little hedge fund manager. Yet the question keeps coming at every one of these hearings: what does Bernanke, who appropriates no Congressional budget money nor authorizes its expenditure, intend to do about these huge fiscal deficits? Huh?

It's fitting that Bernanke, who is avuncular, Jewish and bearded, should serve as the projection screen for Congressional dereliction of duty. Schumer and Brownback, and most of the rest of them, are simply talking to themselves when they grill Bernanke about the deficits. Bernanke knows it, too, but he's subtle about his ripostes. To Brownback's question about America's "credibility" with foreign creditors, Bernanke admitted it's a problem going forward, and added that the world is interested to see whether America has the political will to do what has to be done. And Bernanke knows the answer: probably not.

Sometimes when I watch Bernanke drone his way through these dog and pony shows, I'm reminded of that great scene in "The Right Stuff," when the flyboys at the California Air Force base are making fun of Gus Grissom's bailing out from the capsule, and Sam Shepard, as the classiest of the classy guys, Chuck Yeager, puts them in their place by saying, "Ol' Gus, he did alright." Sort of like that. At least Bernanke is trying to get something done, to elevate us from the abyss. As America appears to show signs of hope, his critics' greatest fear is that he might succeed.

April 12, 2010

Krugman sets us straight on the housing bubble

Naturally, we all turn to Paul Krugman when we want to understand what's going on in this crazy world of ours. Although he is no stylist (unless you believe that most sentences should begin with prepositions and conjunctions), Krugman is famous for being rigorous and logical. In today's column, for example, the Nobel Laureate explains (very patiently) why the state of Georgia has experienced so many bank failures. Just in case you were thinking that a big part of our problem in the housing bubble was caused by securitization of lousy mortgages and big banks committing fraud, Paul explains otherwise, using Georgia as his prime example. The problem there was that many smaller banks were unregulated, and a 1980s-style, S&L crisis was the real culprit. Thus, in our upcoming financial reform, we should not be overly concerned with banks Too Big to Fail, but with regulating the banks in Atlanta. The logic that this internationally renowned economist uses to reach this somewhat iconoclastic conclusion is unassailable, and quintessentially the work of the kind of mind which earns and wins Nobel Prizes. Here is the sweet spot of his insight:

To appreciate Georgia’s specialness, you need to realize that the housing bubble was a geographically uneven affair. Basically, prices rose sharply only where zoning restrictions and other factors limited the construction of new houses. In the rest of the country — what I once dubbed Flatland— permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases and therefore prevented a serious bubble.

Most of the post-bubble hangover is concentrated in states where home prices soared, then fell back to earth, leaving many homeowners with negative equity — houses worth less than their mortgages. It’s no accident that Florida, Nevada and Arizona lead the nation in both negative equity and mortgage delinquencies; prices more than doubled in Miami, Las Vegas and Phoenix, and have subsequently suffered some of the biggest declines.

If you are scratching your head right now, you should not feel slow or uncomprehending. My first time through, I was also reduced to: WTF did he just say? It is true that Florida, Nevada and Arizona lead the way in the catastrophic aftermath of the housing bubble, with California bringing up a close 4th. Yet if we follow the Oracle's logic, the reason is that Florida, Nevada, Arizona and California do not have permissive zoning and abundant land. So the problem in an area like Las Vegas, Nevada is not that huge securitizers, such as Bear Stearns and Lehman Brothers, provided an end market for subprime loans made up of no-down, no-doc, no-income, interest-only, neg-am adjustable rate mortgages which were freely available to pole dancing real estate speculators; no, that is a red herring. The problem is that Las Vegas, in its tight-ass regulatory way, had such restrictive zoning and land use laws that the city fathers (or godfathers) just wouldn't allow any growth in housing, thus artificially inflating the price of the existing housing stock. This anti-sprawl approach only allowed the metro area of Las Vegas to grow 17% in the eight years between 2000 and 2008. In Riverside, California, another Ground Zero area in Foreclosure Nation, the story is much the same. Between 2000 and 2008, Riverside's population only increased 20%. Clearly, what happened was that all those people moving into the area simply rented rooms from existing homeowners, drawn to Riverside by its scenic and cultural advantages (Riverside is often compared to Paris, or at least to the sewers of Paris).

This, you see, is what "you need to realize." Paul saw it first: if California, Nevada, Arizona and Florida had simply allowed house construction and population growth, they could have been spared the fate of the housing bubble.

In my naive, pre-Krugmanite days, I mistakenly believed that a chief driver of the housing bubble was the availability of easy credit, and not the tight, anti-growth philosophy of Las Vegas and Phoenix. My overly simplistic analysis proceeded on the assumption that if interest rates and terms are initially so low that a kid on a paper route can sign and close on a million dollar house, this will naturally ratchet up the housing market to unsustainable levels.

It seems like a surprising thing to say about a Nobel Laureate, but I'm reaching the conclusion that Krugman literally has no idea what is going on in the United States. I'm beginning to see that his failure ever to mention the offshoring of American manufacturing jobs owes to his myopic adherence to his "free trade" principles, the subject of his highly suspect Nobel Prize (I think he won because of all of his anti-Bush columns, a favored approach of the Swedish jury.) He doesn't seem to understand that the United States has any sort of long-term budgeting problems. Krugman appears to latch on to some isolated circumstance, such as the large number of bank failures in Georgia, and then reinterprets an obvious history (securitization of mortgages created a mirage of "safety" by bundling loans, when actually the effect was to correlate the entire national housing market into a death spiral) by arguing that a fringe, local effect is actually the dominant paradigm.

A recent profile suggested he writes some columns while sitting in a lawn chair at his condo in St. Croix. I wonder if he gets his data by holding sea shells to his ear.

April 11, 2010

Ratzo's Shuck & Jive

The bombs appear to be exploding closer to Pope Ratzo as the unrelenting attacks on his handling of the myriad molestation cases presented to the Vatican's chief pedolphile bureau during his directorship continue. The office, the Congregation for the Doctrine of the Faith, is the successor organization to the Spanish Inquisition, which makes Ratzo, in a sense, in the direct line of succession from the great Torquemada. From whichever Ring of Hell the Torque is watching these latest shenanigans, he must be proud indeed.

The Reverend Federico Lombardi, chief flak-catcher for Ratzo, is trying a different tack with the latest outrage, involving a priest from an East Bay diocese in the 1980's. The man of the cloth in question had spent three years on probation for tying up and molesting a couple of young boys (actually a remarkably light punishment, but I imagine that Catholic priests got the benefit of the doubt in those days). Here's Lombardi's take on that sordid history:

The press office doesn't believe it is necessary to respond to every single document taken out of context regarding particular legal situations," the Rev. Federico Lombardi said. "It is not strange that there are single documents which have Cardinal Ratzinger's signature."

The diocese recommended removing Kiesle from the priesthood in 1981, the year Ratzinger was appointed to head the Vatican office which shared responsibility for disciplining abusive priests.

The case then languished for four years at the Vatican before Ratzinger finally wrote to Oakland Bishop John Cummins. Los Angeles Times

I imagine the thinking is that where direct refutation just seems silly, because Pope Ratzo is dead to rights, the Vatican can try hauteur: it's just beneath us to comment on this letter, because although it makes the very point everyone is trying to make, that Ratzinger didn't do shit when presented with the most damning evidence in the world, it's still only one letter and it's not surprising Ratzo signed it, because that was his job, to do nothing about cases of pedophilia reported to the Vatican's Office of Pedophilia.

I don't think it's working much better than the previous argument that criticism of the Vatican for enabling child molestation is morally equivalent to anti-Semitism. Anyway, such arguments are dangerous if for no other reason than that they tee up hilarious spoofs for Jon Stewart on "The Daily Show."

The Oakland Bishop (Cummins) who wrote Ratzinger in 1981 had to wait four years for a response from the Vatican home office. That's a lot of boys under the refectory table for the miscreant in question, Father Kiesle, who bragged at one point that he had molested "tons" of children during his illustrious career as Priest-Pervert. Still, Ratzo made it clear that there should be no rush to judgment where this Holy Man was concerned; there were other things to think about:

In the November 1985 letter, Ratzinger says the arguments for removing Kiesle are of "grave significance" but added that such actions required very careful review and more time. He also urged the bishop to provide Kiesle with "as much paternal care as possible" while awaiting the decision, according to a translation for AP by Professor Thomas Habinek, chairman of the University of Southern California Classics Department.

But the future pope also noted that any decision to defrock Kiesle must take into account the "good of the universal church" and the "detriment that granting the dispensation can provoke within the community of Christ's faithful, particularly considering the young age." Kiesle was 38 at the time.

I think we can all agree with Ratzo that no precipitous action should be taken against a priest who ties up and molests little boys in the refectory of the church if he's only 38 years old. Hey, it may have been just youthful indiscretion, an immature prank, and what's the congregation going to think if we start throwing out pedophiles who are really just kids themselves? Apparently, the "paternal care" admonition, when translated from the Latin, is roughly equivalent to "keep an eye on this guy." But look at the timing: Ratzinger is finally telling Cummins in 1985, four years after the initial report, that Kiesle should be watched "while awaiting the decision." And during the previous four years? Nothing, no advice at all about keeping the perv on the payroll while the Vatican did its "investigation?"

Which brings up another point. What possible investigation could the home office be doing if there is no communication with the branch office (Oakland, in this case) which originated the complaint? Why do Cummins, and all the other local bishops and whatnots, have to keep writing in vain attempts to get a response if the Vatican is actually "investigating?" Wouldn't you investigate by talking to Cummins some more? Wouldn't you get the DA's file, a trial transcript, talk to the parents of the kids, the probation officer? Wouldn't you do something?

The pattern seems very clear, although I haven't seen a Mainstream Media report that says it quite this way. The noncommunication, the stonewalling, the bullshit responses - those were Ratzinger's policies. You can picture it: Ratzo and the other Cardinals (or Dodgers or Diamondbacks or whatever they're called) sitting around their own refectory table, with or without little boys tied up underneath, yukking it up over the latest Molestation Memo, smoking and drinking chianti -- and not really worrying too much, because the Catholic Church wasn't hemorrhaging money in the 1980's from the tsunami of molestation cases that would inundate it in the coming decades. They had cheap labor, the income was good, and if they had a lot of flunkies on the payroll with some bad habits -- well, what do you expect with our hiring criteria? Meanwhile, the important work, making sure that families were too big in poverty-stricken countries, that AIDS would remain unmitigated, proceeded apace.

John Lennon's dream in "Imagine" sometimes seems within grasp. If the Catholic Church went down, that's about half of one of the big monotheistic religions. So far to go, so little time left.