Wednesday, May 27, 2009

Buying things from yourself

There is a story today in the Wall Street Journal about banks which want to buy assets from themselves through the PPiP program. PPiP was put in place to help buyers of toxic assets, basically because if no one bought them, the banks that held them would be insolvent. But no one was buying them, and the banks needed to get rid of them quickly, and so PPiP uses taxpayer money to make a crappy asset seem less crappy to potential investors. Now, however, the banks who own these crappy investments want to use taxpayer money to buy them so they they themselves can profit from the very program that was intended to keep them solvent. And the only way they can do this is by selling the assets to themselves!

Sound like a scam? It's not, because scams are things that small-time con artists do, and these guys are in a different league. This is a massive transfer of wealth from taxpayers to shareholders. And the bankers who are engineering it will get a cut. They always do.

I think this is one of those issues where the Obama administration needs to speak out. Obviously, they need to make it very clear that this is unacceptable.

But Obama should do more than that. He should use the presidency as a bully pulpit here. We have been asked to understand his reluctance to make the banks suffer, or to speak out strongly against them, because those kinds of words or actions might harm a bank that was on the brink of insolvency.

This, however, is a perfect opportunity for the president to speak out against banking executives and to shame them in front of the taxpayers. The crisis has passed, as the administration says. It's obvious to investors that no big bank will be allowed to fail.

But if the administration wants to enact any kind of meaningful legislation regarding the industry, it will need public support. And the industry is making it easy for them.

Here's what I would like to hear from the mouth of the president himself:

"You may have heard stories in the media about banks trying to profit from the program that we set in place with taxpayer money to ensure that these banks did not fail. These stories are true. We bailed out these banks, not because we agreed with what they did, but because we felt we had no choice. In fact, we believe that many of these bank were financially irresponsible. However, because we allowed them to become too big to fail, we had to hold our noses and help them out.

"Today, however, these same banks are trying to profit from this program by using a loophole to buy investments from themselves, using taxpayer money as a guarantee in case these investments go bad. This means that if their investment does well, they make money. If it does poorly, you, the taxpayer, will pay for it.

"I am telling you this because I want to assure you that I will not allow this kind of behavior to continue, and that I will do all in my power to ensure that these banks never again have the kind of influence that they have today."

I'm very disappointed in the fact that the administration has not spoken out more strongly. This is a perfect opportunity for them to do so.

Friday, May 8, 2009

McCain-Feingold vs Us

The Supreme Court is currently reviewing yet another appeal of the McCain-Feingold Bipartisan Campaign Reform Act, which is a law passed in 2002 that limits the way money can be spent on political advocacy. The case in question involves a movie made by an admittedly partisan group, Citizens United, which runs 90 minutes or so and is decidedly anti-Clinton. In fact, by all accounts, (I have not seen it), it is not much more than a 90 minute campaign ad masquerading as a movie. And the problem with that is that the Federal Election Commission (FEC) claims that, as a corporation, Citizens United is prohibited by McCain-Feingold from spending money from its treasury on candidate advocacy. Nina Totenberg at NPR explains:

"That means the producing organization must publicly disclose who paid for the movie, and any broadcast ad must have a tag line disclosing the sponsoring organization and disclaiming any connections to any candidate's campaign. In addition, the court said, the movie could not be broadcast 30 days before a primary election."

I hope the Supreme Court finally uses this case to strike down McCain-Feingold. This is not because I agree or disagree with the content of this particular movie. But what McCain-Feingold tries to do is to differentiate between different modes of political speech, all of which is protected by the first amendment.

It is important to note that McCain-Feingold does not actually ban this type of speech, but it does place limitations on it. In this case, the most onerous is the one prohibiting corporations (yes, this includes your local homeless shelter) from paying for political speech which is made within 30 days of an election, if it mentions by name a candidate who is in that election.

I would point out that the most appropriate time for this kind of speech is precisely within 30 days of an election, as that is when people are most focussed on it.

I would also say that, for all practical purposes, this allows restrictions on books, movies, music, breakfast speakers, signs, and pretty much anything else in the wide universe of communicable ideas which the Court has wisely, and for many years, considered free speech.

Furthermore, this law is extremely susceptible to political influence. The prosecution of this law is left up to the FEC; in other words, the government will decide whether your speech will qualify as political advocacy or not. There is no possible way that the FEC can investigate everything might be covered by the law, and so they will have to pick and choose whose speech they will try to stifle. And in the course of doing so, they will also have to decide what they believe is political speech. Is Michael Moore's Fahrenheit 911 advocacy? Is a speaker at a historical society's breakfast meeting who mentions Bush in a passing comment practicing advocacy? Under the law, one would have to conclude that the answer is yes.

So we have government deciding what is advocacy, and what is not, which is a purely subjective endeavor from the start. And then we have government deciding what it will attempt to stop and what it will ignore, also a subjective enterprise. And this whole circus act is supposed to give us fairer and more free elections.

How did we get here? There has been a wringing of hands over the amount of money spent in national and state campaigns. The perception among the general public has been that the money is a corrupting influence. This perception has been encouraged by incumbents of both parties. But missing in this debate is the fact that incumbents have advantages that outsiders can only dream of. They have the political connections and favors owed that only incumbents can have. The media, in the course of doing their job, gives them unparalleled coverage, which they naturally use to promote their point of view, and of their candidacy. On a recent walk through San Francisco, I saw a sign proclaiming how Mayor Gavin Newsom was responsible for building a city park. What challenger can make that claim?

And the money, while at first glance seeming obscene, really isn't that much. According to the Center For Responsive Politics, total spending by presidential candidates was around $1.3 billion dollars, or roughly double that of the 2004 election. Seem high?

Consider that the fleet of helicopters being built to support the president is projected to cost $13 billion, or roughly 10 times the total expenditures by all candidates.

Consider also that $1.3 billion dollars is about $5.60 per eligible voter. $5.60 for each voter in arguably the most important presidential campaign in our lifetime.

This money is spent to educate voters on which candidate to vote for. It is not a necessary evil; rather, it is essential to the functioning of democracy. You could say, and I would agree, that some of this information is misleading, and much of it caters to the lowest common denominator, but to the extent that it is and does, it is the fault of the voter who has neither the time nor the inclination to think for themselves. But this also is the nature of democracy; it's ugly and imperfect at times, but it seems to be the best system we've got.

The lifeblood of democracy is ideas, and McCain-Feingold seeks to limit their propagation. At best it is a misguided attempt to make the system fair, at worst it is a cynical and Machiavellian attempt to game it for the benefit of incumbents. The Supreme Court should strike it down.

Wednesday, May 6, 2009

...and back

I took a break in early January to do some research, and found myself still researching four months later. I've found that my tendency to write about things I don't understand is balanced by a quixotic desire to understand everything before I write anything. The latter has kept my from writing lately. And the fact that I am posting today does not mean that I believe I understand very much.

I've been following Simon Johnson and James Kwaak at, and they, in turn, have been following the power struggle within banking system. Their belief is that the large banks and financial instiutions in the U.S. have formed an oligarchy, and that the oligarchs have now captured the regulatory and political system. They believe, and Johnson written as much in an Atlantic article, that the U.S. is becoming more like an emerging market, with all of the associated problems that that entails. They believe that in order to prevent crisis such as the current one from recurring more and more frequently, we will need to ensure that financial institutions are smaller and have less power. Banks that are "too big to fail", are also too big to control.

The struggle for power between these banking giants and the Obama administration is epic. It is easy ask why the government cannot just do something about these banks, or to assume that they are not unnecessarily rewarding them for their colossal failures. But to understand the power that the industry has, we must understand the manner in which it's derived. The Atlantic article is an excellent place to start.

Johnson and Kwaak have made a convincing argument the banking industry, and, indeed, the entire financial industry, must be reduced, both in scope and concentration. They focus mainly on the negative aspects of oligarchy and regulatory capture. However, a professional risk-management analyst has written a book which I believes points out another reason for the breakup of large banks and a downsizing of the industry. Richard Bookstaber's "A Demon of Our Own Design" makes the point that financial complexity can increase risk in a non-linear fashion, and that the industry's quest for perfect allocation of capital, and the realization of complete market efficiency, leaves it exposed to unseen risks.

In other words, the marginal efficiency gained from complex systems is overwhelmed by the added, and unseen, risk inherent in such a system. If you haven't been following the financial industry, the past 30 years or so have been marked the proliferation of modeling (which attempts to predict the future based on the recent past, through complex mathematical theories), an accompanying explosion in complex derivative securities (which add opacity and complexity to an already complex system), and the mergers and growth of financial institutions into corporations which are so big they cannot possibly understand or react to the risks they face.

These are issues that need to be resolved. The outcome is uncertain. Our government has loaned, given or committed to the cause close to the gross domestic product of the United States for an entire year, in an attempt to save the system. Some of this money was necessary. Some was not. Some was an outright gift to the management and shareholders of the institutions that precipitated the collapse. There are no easy answers here, no room for blind ideology or sound bite solutions. If we are going to have a say in our future, we need to learn and engage. And then speak out.