Understanding the Meltdown and Bailout

Matt Taibbi of Rolling Stone is my newest hero. The Big Takeover is essential reading to understand what is going on between Wall Street and Washington.

People are pissed off about this financial crisis, and about this bailout, but
they're not pissed off enough. The reality is that the worldwide economic
meltdown and the bailout that followed were together a kind of revolution, a
coup d'état. They cemented and formalized a political trend that has been
snowballing for decades: the gradual takeover of the government by a small class
of connected insiders, who used money to control elections, buy influence and
systematically weaken financial regulations.

I also recommend Taibbi's take at The Smirking Chimp on the whining AIG exec who feels ill used because he's not going to get his retention bonus:

DeSantis has a few major points. They include: 1) I had nothing to do with
my boss Joe Cassano's toxic credit default swaps portfolio, and only a handful
of people in our unit did; 2) I didn't even know anything about them; 3) I could
have left AIG for a better job several times last year; 4) but I didn't, staying
out of a sense of duty to my poor, beleaguered firm, only to find out in the end
that; 5) I would be betrayed by AIG senior management, who promised we would be
rewarded for staying, but then went back on their word when they folded in
highly cowardly fashion in the face of an angry and stupid populist mob.

I have a few responses to those points. They are 1) Bullshit; 2) bullshit;
3) bullshit, plus of course; 4) bullshit. Lastly, there is 5) Boo-Fucking-Hoo.
You dog.

Former House Majority Leader Dick Armey: CNBC Guest Jackass

Dick Armey's analysis consisted of nothing more than a bunch of laissez-faire talking points about how wonderful markets work when freed from government regulation, e.g., “let the market settle this stuff and let the people who created the problem take the consequences.”




The problem Dick is that the people who created the problem aren't taking the consequences. The guys who wrote all the credit default swaps at AIG collected their millions in salaries and bonuses. The guys who created the mortgage backed securities at Lehman and Bear Stearns have already cashed their checks.

They may be out of work for the moment, but Geithner's plan is going to create demand for people who understand how these instruments work. I have no doubt that many of these guys are going to wind up collecting huge paychecks to help clean up the mess that they got paid to make in the first place.

Michelle Cabruso-Cabrera: CNBC's Jerk of the Day 3/19/09

My nominee for jerk of the day at CNBC for Thursday is Michelle Cabruso-Cabrera for scoffing at the idea that notions of right and wrong might have some role in the discussion of what went on at AIG. Everyone on Power Lunch had agreed that scapegoating the AIG executives who got the big bonuses was a bad idea, however, Steve Liesman suggested (at the 3:50 mark) that there might be legitimate reasons to examine the situation more closely.

Liesman: There is one purpose that I think President Obama talked about—a new era of business executives having certain values that are, how do you say this, take into consideration those of society in general.
Cabruso-Cabrera: (snorts)

Liesman: You know what Michelle, you can laugh at that, but when you have a situation where these guys are happy to take as much as they want, as much as they’re given, and maybe it’s not the right thing to do, I think there is something to be said for it.

Cabruso-Cabrera: All this right and wrong, morality play, you’re going down a very dangerous path.

What about the path that we have already gone down Michelle?

The AIG Financial Products unit wrote insurance in the form of credit default swaps on $2.7 trillion dollars in bonds without establishing any reserves in case it had to make good on those contracts. Isn't this something that we can talk about in terms of right and wrong? Does the fact that they were able to get away with it absolve the executives of any responsibility?

How Wall Street Works: Bonuses Aren't Bonuses

[C]ompanies play these games because they think it would be unseemly for investors to know how much they are paying managers for just doing their job. Companies think executive talent is far more important than financing, so they want to pay executives a lot of the profits that might otherwise go to investors. But they try to have their cake and eat it by portraying the pay as performance-based. Now the extraordinary attention over AIG is showing the phoniness of of most incentive plans.

The editor of the Harvard Business Review, John T. Landry, explains that the payments to the AIG executives really were salary rather than bonuses. They only call them bonuses in order to convince investors that they are somehow based upon performance. AIG did not want anyone to know the ungodly sums of money it was guaranteeing to its executives regardless of how well the company did.

How Wall Street Works

"I thought Bear Stearns was honest." Jim Cramer.

I don’t believe this.

I think that Jim Cramer believed that the guys who ran Bear Stearns would pull the same kind of deceptive shenanigans in order to line their own pockets that Cramer pulled when he ran his own hedge fund. Cramer might have thought that there was some limit to what those guys would pull and that wherever that limit lay, there would still be a piece of the pie left over for the shareholders. That is not at all the same thing as thinking they were honest.

This is where I think Jon Stewart nailed it. I don’t think Jim Cramer knew that Bear Stearns was going to collapse. I do think he knew the kind of things that people on Wall Street do to make money and I think he understood the ways in which the interests of the guys running the firms diverge from the interests of the shareholders. The problem is not that the executives at Bear Stearns were not exposed to declines in the stock. The problem is that the benefits of short-term high-risk strategies were enjoyed to a much greater extent by the executives than by the shareholders while the risks were shared equally. This is what I think Cramer understood without ever trying to make his audience understand.

The bonuses at AIG illustrate the problem perfectly. The compensation of the executives who wrote the credit default swaps was structured in such a way that they are entitled to millions of dollars in bonuses even though there actions brought down the company and cost the taxpayers of the United States billions upon billions of dollars. The scale may be enough to shock Cramer, but the basic methodology shouldn't be.

Stewart Nails It

For a guy who is not in the business, this is an incredibly shrewd analysis.

I got to tell you, you know, I understand you want to make finance entertaining. But it’s not a fucking game. And—when I watch that [video of Cramer describing hedge fund tricks], I get—I can’t tell you how angry that makes me. Because what it says to me is: You all know. You all know what is going on. You know, you can draw a straight line from those shenanigans to the stuff that was being pulled at Bear and at AIG and all this derivatives market stuff… These guys at these companies were on a Sherman’s march through their companies, financed by our 401k’s. And all of the incentives of their companies were for short-term profit. And they burned the fucking house down with our money. And they walked away rich as hell, and you guys knew that that was going on.

Olberman and Maddow: Corporate Sell-Outs?

I found it very disappointing that Keith Olberman did not mention Jon Stewart's interview of Jim Cramer and that Rachel Maddow only mentioned that it had gotten a lot of press without showing any clips from it or explaining what had happened. It is very difficult to escape the conclusion that someone up the corporate ladder decided that no one on any of the NBC networks should mention the story.

On the Daily Kos, Olberman denied any such censorship and claimed that he simply did not consider it to be an important story. He pointed out that he had featured CNBC's Rick Santelli as a "Worst Person in the World," but that seems pretty thin. Santelli is a very minor CNBC contributor while Jim Cramer is one of its best known personalities with an hour-show of his own everyday. Santelli's rant did not reflect upon the the network's coverage as a whole.

For all the right wing ranting about the liberal media, the content is still controlled corporations like NBC parent GE who can nix any story that strikes too close to home

Stephen Colbert on Ayn Rand

The Colbert ReportMon - Thurs 11:30pm / 10:30c

The Word - Rand Illusion

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"This book (Atlas Shrugged) is like the conservative Bible" . . . "Preachy and can be used to justify anything."

More Ayn Randian Douchebaggery From the Wall Street Journal

Yaron Brock, the president of the Ayn Rand Institute, weighs in on the relevance of Atlas Shrugged in today's The Wall Street Journal in a piece titled "Is Rand Relevant?"

The novel's eerily prophetic nature is no coincidence. "If you understand the dominant philosophy of a society," Rand wrote elsewhere in "Capitalism: The Unknown Ideal," "you can predict its course." Economic crises and runaway government power grabs don't just happen by themselves; they are the product of
the philosophical ideas prevalent in a society -- particularly its dominant moral ideas.

F**k you! The dominant economic philosophy of absolute laissez-faire capitalism is what got us here. The financial system imploded because too many people believed the Ayn Randian bullshit espoused by Alan Greenspan that said that the best people to police the financial markets are the players in the financial markets.

Rand also noted that only an ethic of rational selfishness can justify the pursuit of profit that is the basis of capitalism -- and that so long as self-interest is tainted by moral suspicion, the profit motive will continue to take the rap for every imaginable (or imagined) social ill and economic disaster. Just look how our present crisis has been attributed to the free market instead of government intervention -- and how proposed solutions inevitably involve yet more government intervention to rein in the pursuit of self-interest.

F**k you! How the hell did AIG and Lehman Brothers get away with writing hundreds of billions of dollars in unregulated credit default swaps that they couldn't make good on? It was because free market Randophiles like Greenspan believed that the "rational self-interest" of the counter-parties was a better check on inappropriate extensions of credit than government regulation. The economic meltdown was generated in the areas of the market where the government refused to intervene.

Why do we accept the budget-busting costs of a welfare state? Because it implements the moral ideal of self-sacrifice to the needy. Why do so few protest the endless regulatory burdens placed on businessmen? Because businessmen are pursuing their self-interest, which we have been taught is dangerous and immoral. Why did the government go on a crusade to promote "affordable housing," which meant forcing banks to make loans to unqualified home buyers? Because we believe people need to be homeowners, whether or not they can afford to pay for houses.

F**k you! The loans were made by mortgage brokers pursuing their rational self-interest of generating fees and commissions for themselves while ignoring little things that weren't in their self-interest like the ability of the borrower to repay. Those loans were repackaged into collateralized debt obligations by executives at investment banks who were pursuing their rational self-interest of huge bonuses while ignoring little things that weren't in their self-interest like the long-term viability of their companies.

Yes Rand is relevant. Everyone needs to understand her glorification of unregulated capitalism and everyone needs to understand that the financial system collapsed as the result of people putting her ideas into practice.

Jim Cramer on the Daily Show

As a market-maker on the trading floor of Chicago Board Options Exchange, I knew lots of people like Jim Cramer. He has the trader's mentality that the stock market is a game to be played. As long as a trader plays by the rules (which Cramer may or may not have done when he was running a hedge fund), there is nothing wrong with that. The problem comes when the people who are playing trading games pretend that they are champions of capitalism who are investing in America and creating wealth. The problem with CNBC is that it shills for the Wall Street players and helps perpetuate the deception.

Jon Stewart did a brilliant job of exposing that deception last night in his interview with Cramer on The Daily Show. Stewart usually takes it easy on his guests regardless of their political leanings. Even someone as detestable as Josh Bolton or Doug Feith need not worry about much more than a pointed question or two. However, Stewart never let Cramer off the hook, forcing him to watch video clips of a three-year old web interview in which Cramer explained many of the tricks he played as a hedge fund manager. Stewart was not having fun and neither was Cramer.

So what turned Stewart into a pit bull last night? I don't think he held any particular animosity towards Cramer who seems to be a personable rogue. I think he did it because nobody else does. There are tons of people out there who are going after the Boltons and Feiths of the world, so Stewart doesn't mind going for laughs when they come on his show. However, nobody is going after the financial pundits and Stewart knew that someone should.

It was an impressive performance. Watch Part 1, Part 2, and Part 3 of the unedited interview.

Charlie Gasparino: CNBC's Jackass of the Day 3/12/09

CNBC’s jackass of the day for Thursday, March 12 is on air editor Charlie Gasparino. You might think it was Jim Cramer who found that being satirically skewered by The Daily Show was a walk in the park compared to the ass-whipping he got under Jon Stewart’s questioning, but I give Cramer credit for going on the show and taking it like a man (unlike Rick Santelli). Gasparino, on the other hand, clearly displayed the partisan hackery that makes CNBC such a cesspool.

In a segment titled “Seeking Solutions,” Clinton’s Labor Secretary Robert Reich and Bush’s Labor Secretary Carlos Gutierrez are supposedly on the show to talk about creating jobs. For years Gutierrez appeared regularly on CNBC to shill for Bush’s disastrous economic stewardship and in yesterday’s appearance he mouthed trite conservative pieties about letting the private sector handle things without any challenge from the commentators. On the other hand, Dennis Kneale asked Reich a rather pointless question about whether Obama should be reaching out to Wall Street for advice on handling the economy. This was followed by Gasparino ranting about the fact that Obama wants to allow tax rates to return to the level that they were under the Clinton administration and rudely talking over Reich when he tries to address the question, even going so far as to imply that Reich is lying about the prosperity that the country enjoyed in the 1990’s.



This is not to suggest that there is anything illegitimate about questioning whether Clinton deserves as much credit for his management of the economy as his fans would give him. Nevertheless, it is incontrovertible fact that job creation in the 1990’s was superior to that under Bush. It is also incontrovertible fact that the recession that Bush inherited was relatively mild. It is inexcusable that Clinton’s Labor Secretary can’t make his case for Obama’s economic policies without being shouted down by a jackass like Gasparino.

Erin Burnett: CNBC's Twit of the Day 3/10/09

Erin Burnett gets my vote for CNBC’s biggest twit today although her twittiness was on display on NBC’s Today Show rather than her usual gig on CNBC’s Street Signs. Burnett appeared with CNBC’s Jim Cramer who was struggling to defend himself against another beat down from Jon Stewart on The Daily Show. In a column on MainStreet.com, Cramer had accused Stewart of taking his comments about Bear Stearns out of context. Cramer said that he had not been encouraging viewers to buy Bear Stearns stock one week before it collapsed as the clip played on The Daily Show implied; he had merely assured viewers with accounts at Bear Stearns that the money and securities in those accounts were safe. Stewart acknowledged the error, but the Daily Show’s researchers found that Cramer had recommended Bear Stearns stock at $69

Ever Cramer's loyal side kick, Burnett piped in with “Just to defend you Jim: Jim has to go out everyday and make these calls.”

Apparently, for Erin Burnett, the fact that Cramer gets paid to go out and shoot off his mouth about stocks everyday absolves him for any responsibility for pretending to know more than he really knows. I suppose that same logic would absolve all the mortgage brokers who sold subprime loans to unqualified home buyers. After all, they had to go out and recommend negative-amortization/interest-only/no-down-payment/teaser-rate loans to fools because that was what they were getting paid to do.

Burnett’s logic is actually quite consistent. Nobody should complain about China selling poisonous products because people are willing to pay for them. Nobody should complain about Cramer talking out of his ass because CNBC is willing to pay him to do it.

Dennis Kneale: CNBC's Jackass of the Day 3/9/09

The biggest jackass on CNBC today was Media and Technology Editor Dennis Kneale who posed the following question to Vice-President Joe Biden's chief economic advisor, Jared Bernstein (at the 2:10 mark of the video): "Warren Buffett had kind of a tacit little warning for Obama, the president that he supports and he gave advice to during the campaign He said first of all, the economy is priority one, two, and three, that’s the major thing that he should be focusing on. The economy is tha major thing that he should be focusing on. And yet Obama has launched this major health care reform. He’s going after alterative energy even though we’ve been subsidizing solar for thirty or forty years. It sounds like Buffett is almost trying to get a new message out there to Obama saying slow down 'Slow down and get back to the economy and the banking system.' What do you think?"



What I think is that Kneale is a liar.

In fact, Buffett expressed unswerving support for Obama saying that he was "very very smart" and that he was "the right President" for "the right country" and that he had "exactly the right goals." Buffet did say that he didn't think that Obama should try to get everything right away, but declined to identify any programs that should be deferred. It was Kneale who was criticizing health care reform and alternative energy, not Buffett. Rather than trying to send Obama a "new message," Buffett said "I don’t think it’s a good idea to use CNBC to talk to the President."



Kneale's take on Buffett was echoed by the rest of CNBC's hacks all day long. No one seemed to hear any of the positive things that he had to say about Obama. The only heard him say that the economy had to take precedence.

A Bit More Cognitive Dissonance

"Will the Dow fall to 5000? We don't think so. Here's why."
Barron's cover story, March 9, 2009.

"Dow 5000? There's a Case for It."
The Wall Street Journal's lead story in the Money and Investing section, March 9, 2009.

Cognitive Dissonance

It seems that I have worn out my welcome on another Bible-believing Christian's blog. While there is nothing particularly remarkable about this, I did find interesting that the straw that broke the camel's back was a critical comment about an atheist. I ran across PheistyBlog shortly before the election. Its proprietress is pretty far out on the right fringe to my way of thinking, but my comments were always met with reasonable civility. Last week, however, I responded to a post that invoked Atlas Shrugged as an analogy for the state of America today by pointing out that we are in this mess because our financial system has been operated on Ayn Rand's free-market principles for the last three decades.

That comment inspired the following tirade (as well as the deletion of my follow-up comment):

And Vinny, if you’re going to comment here, please at least attempt to disprove any of the points I make. So far, all you’ve done is make some half-baked comment about Ayn Rand. Don’t you have anything to say about anything else I’ve pointed out?

Of course you don’t, because you have no valid argument. Get lost, Vinny. I’m past the point of being pissed off at you socialists and am nearly to the point of rage. I’m not going to waste my time trying to be nice and decent to you because you’re a tyrant and you support measures that seek to steal my freedom (and my children’s) and the fruits of my labor. I’ve raised myself up from being a poor single mother by working very hard and making good choices, and I don’t have the time nor the patience to read your logic-lacking posts because this has gone beyond politics and has become VERY PERSONAL for me. YOU SEEK TO PUNISH ME for making good choices, paying my debts, and for working hard…and what gives you that right?? Are you that arrogant that you believe that your views are so correct that stealing from others is somehow justified? Do you think it’s fair that I should work harder and make more responsible decisions, only to have Obama and his minions force me into slave labor, so that I may provide for others who make poor decisions and are irresponsible?

I WILL NEVER labor for the sake of another human being other than myself and my own family, and will NEVER expect any human to labor for mine. The alternative is REPUGNANT and IMMORAL.

PheistyBlog is paraphrasing the oath required of entrants into the capitalist utopia of Galt's Gulch in Atlas Shrugged in that last part: “I swear—by my life and my love of it—that I will never live my life for the sake of another man, nor ask another man to live for mine.” Nor is she the first evangelical Christian I have run across who is a fan of Rand's opus. This raises several questions for me:

• Isn’t there something strange about a Bible-believing Christian embracing the creed of a militant atheist like Ayn Rand?


• When the Apostle Paul instructs: “Slaves, obey your earthly masters with respect and fear, and with sincerity of heart, just as you would obey Christ” in Ephesians 6:5, doesn't it at least refute the notion that there is anything immoral or repugnant about a about a Christian submitting to slavery (even if you don’t take the passage as an explicit endorsement of slavery)?


• When Jesus says “Render unto Caesar that which is Caesar’s” in response to a question about paying taxes in Luke 20:22-25, doesn’t that suggest that the Bible-believing Christian would be wrong to equate taxation with stealing?

CNBC: Dumber Than a Bag of Hammers

The gutting that the Daily Show gave CNBC last Wednesday inspired me to look for what I had recalled as the stupidest thing I had ever heard from one of its on-air infotainers. Amazingly, when I watched the video, it was even stupider than I remembered.



Here is what Burnett had to say:

I think people should be careful what they wish for on China. You know if China
were to revalue its currency or China is to start making toys that don’t have
lead in them or food that isn’t poisonous, their costs of production are going
to go up. That means prices at WalMart here in the United States are going to go
up, too. So I would say China is our greatest friend right now. They’re keeping
prices low and they're keeping prices for mortgages low.

In my mind, I recalled that this was the implication of whatever comments she had made; I suppose because I could not believe that she would have been so stupid as to say it explicitly. She did though.

I was originally going to title this post "The Stupidest Thing I Ever Heard on CNBC," but Burnett is disqualified on a technicality: she made the statement to Chris Matthews on MSNBC.

Daily Show Skewers CNBC

John McCain learned last September that it is not a good idea to bail out on David Letterman. Ranter Rick Santelli cancelled his appearance on the Daily Show last Wednesday and Jon Stewart ripped on the entire CNBC network.

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Since I make my living trading stock options, I have CNBC on in my office all day long in order to catch breaking news, but listening to these blowhards can be painful. Larry Kudlow, Dennis Kneale, Rick Santelli, Melissa Francis and Michelle Caruso-Cabrera are libertarian ideologues who simply chant the free market mantra all day long while ignoring the role that lack of regulation played in the economic meltdown.

Stewart stayed with the stock market theme in the following segment by ripping on conservatives who attempt to judge Barack Obama's performance based on the latest level of the Dow Jones Industrial Average.

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(Stewart's discussion of the AIG bailout with business reporter Joe Nocera of the New York Times was also very interesting.)

Interestingly, I have yet to hear anyone on CNBC mention Wednesday's Daily Show although I don't watch all the shows that come on after the stock market closes. However, I have noticed that some of the more thoughtful analysts losing patience today with the blowhards. This morning, Steve Liesman took Melissa Francis to task (at the 2:30 mark in the video) for trying to suggest that the day's market decline had less to do with 8% unemployment rate announced this morning than a speech Obama gave to some new police officers in Columbus, Ohio.



This was followed by Phil Lebow calling Larry Kudlow "crazy" (at the 3:15 mark) for suggesting that a union-busting bankruptcy would provide a quick fix to General Motors' difficulties.



There are in fact a number of fair-minded analysts and reporters at CNBC. Unfortunately there are too many idiots who stick there fingers in their ears and try to drown out inconvenient facts by shouting laissez-faire shibboleths.

Oh My Gosh! "Atlas Shrugged" is Coming True!

The staff fully recognized the power of counterparty surveillance as the first line of protection against overextended or inappropriate credit. Alan Greenspan The Age of Turbulence p. 373.

There you have it. For eighteen years, the chief overseer of the financial system was a student of Ayn Rand who trusted the market to allocate credit risk.

How did that work out? This week, the government announced that it's pouring another $30 billion into the black hole that is AIG because the counterparties to AIG's credit default swaps had NO FUCKING IDEA what AIG was up to. Counterparties were powerless to keep AIG in line just as they were powerless to keep Lehman Brothers in line.

Why do we continue to bail out AIG? One reason may be because AIG is the biggest insurance company in the world and letting it fail might cause people to start cashing in their life insurance policies. This could lead to a run on the life insurance industry that would rival the run on money market industry that followed Lehman's bankruptcy last September. This would force the government to guarantee life insurance policies like it guaranteed money funds.

So to all those Randophiles who see her prophecies coming true, please remember that they are coming true because the government allowed the financial system to operate on her principles.

Finishing Ayn

I have more or less finished Atlas Shrugged although I stopped reading much of Rand’s philosophy about half way through. My basic rule was that anytime one of Rand’s prime movers talked for more than a couple of paragraphs, I skipped ahead to look for plot. That saved me fifty pages on John Galt’s big radio speech.

One of the things I can’t help but wonder was whether Rand actually knew anything about American history. At one point, Francisco d’Anconia spouts the following nonsense:

To the glory of mankind, there was, for the first and only time in history, a
country of money--and I have no higher, more reverent tribute to pay to America,
for this means: a country of reason, justice, freedom, production, achievement.
For the first time, man's mind and money were set free, and there were no
fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and
slaves, there appeared the real maker of wealth, the greatest worker, the
highest type of human being--the self-made man--the American industrialist.

I can’t help but think think Blacks and Native Americans might have a little bit different take on the slavery and conquest questions.