Links 10/12/08

In Defense of Piracy Lawrence Lessig, Wall Street Journal

McCain tussles with Palin over whipping up a mob mentality Times Online

Barack Obama would offer John McCain a job if he wins the US election Telegraph

In Japan, Hope Fades for Disposable Workers New York Times. A sign of things to come in the US?

SEC Announces Extension of Emergency Short Selling Orders and Related Action James Morphy, The Harvard Law School Corporate Governance Blog. This looks like the SEC can extend the ban until Friday October 17….and I see no late-in-the week last week regarding a change in the SEC’s having permitted shorts again starting at 11:59 PM on October 9. Any informed comments appreciated.

Failing Lehman in $100m payout plan Times Online. The company was wasting its time on larding up executive comp a mere three days before the collapse.

Contrast What History Tells Us About the Market Jason Zweig, Wall Street Journal (hint, I think it is sophisticated and fair-minded) with this Those With Sense of History May Find It’s Time to Invest, Alex Berenson, New York Times (the latter notably gives prominent play to Marty Whitman, who has already had his head handed to him in his previous efforts to find bargains in this market. Among his other bottom fishing bets was MBIA, which he declared in March to be worth at least $35 a share. It has traded below $19 all year and closed below $6 on Friday. I had wanted to do a long-form treatment of this and other pieces on bottom fishing, but I am verging on burn out).

The Bernanke conundrum Steve Waldman. A short but very good post. Argues that Paulson took advantage of the Fed’s balance sheet constraints to elicit its support for the lousy TARP. I suspect it goes further: having spent so much time under fire with Paulson, Bernanke mistakenly sees him as an ally, when in fact their interests are not fully congruent.

Sept. 23 Tyler Cowen

A damp squib from the G-7 in Washington DC Willem Buiter

Antidote du jour. Another bonus day, just don’t get used to them….the music parody is very funny, although the screen image, at least in my preview, is uninviting…..but do not be deterred.

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  1. Anonymous

    Thanks for the Lessig link. I wrote a few papers in law school on copyright law, many based on a Lockean property rights analysis. So I’m a basic believer in the importance of copyright and its place in what appears to be a general social acceptance of certain “fair” ways to protect the rights of creators. But it saddens me to no end to see how out of control the system is in this country and how it has been thoroughly co-opted by corporate interests. It seems to be just another example of the “shadow plutocracy” that has been obscured beneath the recent plethora of bread and circuses.

  2. EvilHenryPaulson

    While I may not have looked at MBIA as an undervalued company worth jumping into, I do believe there are significantly undervalued companies even in the context of a severe economic depression.

    As my eager opportunism has taught me however, there is no sense in fighting the weather

  3. Yves Smith


    I am not disputing the general point, the cliche that even in bad markets that there are good stocks. It is that the New York Times cites several sources contending that the market is cheap. One is Marty Whitman, and per the MBIA example, his recent calls have been notably off.

  4. Anonymous

    “I am verging on burn out”

    Yes. Your blog has become vitally important, along with two or three others, and critical brainpower is in short supply. Not a good reason to hurt yourself, ma’am. This is perhaps the most interesting week in modern history, so I understand why you want to be on deck to witness and document it. Rest and food are important, if you want to do a good job.


  5. doc holiday

    God I love interspecies mingling, it just says more than can be expressed in words — this is all about tolerance and acceptance, companionship and the simplicity of friendship!

    On that note, I have zero tolerance for wall street and corrupt government.

    The evolution of this financial crisis is now like a contagion spreading from bank-to-bank and country-to-country, even from people like Buffett-to-Pimco. Bailout madness apparently is a coordinated effort for the global financial system to outrun the unregulated derivative monster it created.

    This race against the destruction of capitalism does seem dire and profound as it challenges modern society, but thanks to years of foot-dragging by G7-like regulators, this financial crisis is now spreading at the speed of light.

    This economic event continues to remind me of The War Of The Worlds, where the alien attack is eventually resolved by the collective failure of all the martians immune systems — they all fail together, as a group, because they are all exposed to the same bacteria from the same environment. The theme of a collective group of pirates on the same rat infested sinking ship clearly comes to mind this weekend.

    I hate to jump right in to bees and Colony Collapse Disorder as yet another metaphor for this financial virus, but there is a very clear shared responsibility here, a deficiency shared from wall street, to Washington, Tokyo, London and the vast network of infected alien bees all exposed to the same toxic derivative poison, which remains un-recognized, un-controlled, un-confined and un-contained.

    The current poisoned environment has obvious DNA roots in The South Sea Corporation. Hence, it may be worth going back through 300 years of toxic history to find similar examples of why financial viruses spread like fires, tsunamis or plagues. These previous events often rely on actions from G7-like leaders, who eventually spin words around in a haze of magic dust in an effort to gain confidence — yet, these are the same people that dance around in the loop to repackage Enron derivatives, bless subprime CDO Squared accounting fraud — and then dose out injections of liquidity to the drunken pirates.


    In the late 17th and early 18th centuries, England was waging numerous wars which it financed with continuous borrowing. This debt took the form of the government securities shown on the balance sheets of the Bank of England and the East India Company. The Bank, the East India Company, and later the South Sea Company, all were granted increased monopoly privileges in either banking or trading for their part in buying up government debt at lower interest rates.
    Through his interest in the Bank of England and the East India Company, Law expanded his view of what forms money could
    take. As early as 1707, only two years after Money and Trade was published, Law began to view exchequer bills, bills of exchange, and tallies as money.

    In addition, new money was being created in the form of shares of stock in the Bank of England and East India Company.

    What approximates most to a new type of money is the East India Company. The stock of this Company is divided into shares like that of the bank. They are traded each day on the exchange and the current price is published for the public’s information in the gazettes. As the transfer of these shares is easy they are given and received in payment at the
    price at which they are traded, so that the
    merchant or trader with payments to make does not need to hold money as a reserve. As part of his capital is held in the Indies Company he can use these shares for payment and if difficulties in exchanging them at that day’s market rate all he has to do is send them to the Exchange and convert them into specie, but as they are convertible they will not be refused. Law believed that this “new” money would rise in value along with inflation, as opposed to silver specie that would
    decline in value as more was discovered or produced. Law felt that the exchequer bills and bills of exchange, like silver, were subject to this decline in value, because ultimately these instruments would be liquidated for specie.
    But Law was beginning to view shares of stock, the way he had viewed land, as being superior to silver, believing that these shares could never decrease in value.
    In ‘Me’moire, ‘ Law continued to propose a banking system based upon his land-bank proposal. However on a theoretical
    level he was beginning to place more emphasis on liquidity. Murphy writes: ” He was defining as money any financial instrument that could be used as a medium of exchange.

  6. Anonymous

    so, by posting such a video, you’re suggesting that you’d rather see elected a corrupt chicago pol with no record at all, a slew of corrupt friends and associates (not one that is honorable), a man with a history that raises so many questions of judgement and character? those who would ignore all these facts betray an overwhelming distortion in their thinking. or, perhaps, like obama and his team, they have no pride for their country and are happy to see it turned into a collectivist authoritarian nightmare. Think seriously. No one is suggesting that John McCain is heaven-sent, but do you want to see elected a man whose followers actually believe that he is? have so many taken leave of their senses?

  7. Anonymous

    I also enjoyed the Lessig article. Copyright is supposed to balance creators’ interests with society’s interest in cultural development. The balance has tilted completely to [mostly corporate] creators. Most copyrighted works from our childhood will never be available for adaptation during our lifetimes. For example, a 1955 novel that my wife would like to adapt to film is still locked up by the author’s heirs, and will remain so for decades. That’s oppressive. It leaves us culturally exploited and culturally impoverished.

    Please help me with “The Bernanke Conundrum” article. Steve Waldman says, “The ‘stabilization act’ included a clause that gives the Fed authority to pay interest on bank deposits, which permits the central bank to partially sterilize cash injections without having to sell securities from its much depleted portfolio.”

    I understand the concept of stabilization. But I don’t understand how paying interest on reserves serves as a “partial sterilization” mechanism, or any sterilization at all.

    The Fed’s H.4.1 report shows a balance sheet that has balloned from $900 billion to over $1.5 trillion in the past few months. It includes $414 billion of liabilities to the Treasury. As I see it, essentially the Fed has monetized $414 billion of questionable securities on the asset side of its balance sheet, and booked a $414 billion liability which can be spent on minority stakes in banks, tax rebates, helicopter drops, champagne baths, or whatever.

    Or to adapt the Mises article quoted by Doc Holiday above (copyright law be damned!):

    “Bernanke was beginning to view derivative securities, the way he had viewed land, as being superior to silver, believing that these instruments could never decrease in value.”

    And if you book ’em at cost, never writing them down to market … THEY CAN’T!

  8. Anonymous

    “(the latter notably gives prominent play to Marty Whitman, who has already had his head handed to him in his previous efforts to find bargains in this market. Among his other bottom fishing bets was MBIA, which he declared in March to be worth at least $35 a share. It has traded below $19 all year and closed below $6 on Friday. I had wanted to do a long-form treatment of this and other pieces on bottom fishing, but I am verging on burn out).”

    The big problem with Marty Whitman, Chris Davis, and other value investors who tried to bottom fish in financials is that they didn’t do enough hard thinking about whether the balance sheets and income statements of the financials massively failed to reflect the economics of the business, regardless of whether the accountants and lawyers say the filings complied with disclosure rules. They got lazy or careless after making lots of money on financials since the early 80’s.

    The value investors who questioned assumptions about the financials reporting, like folks at FPA and First Eagle, sidestepped the crisis.

  9. Anonymous

    Obama announced that he is looking into changing bankruptcy law to allow individual debtors to modify mortgages on their primary residence. As many of you know, corporations can have mortgage debt modified in bankruptcy, and before the 1970’s, individual debtors also could.

    This will help current homeowners and hurt current lenders. But going forward, stregnthening bankruptcy protections this way will reduce credit lenders are willing to extend. Nevertheless, I am in favor of allowing this because borrowers, lenders, and the brokers and other facilitators involved have tendencies to make imprudent loans, and bankruptcy protection for debtors puts limits on their imprudent behavior.

  10. Anonymous

    "you'd rather see elected a corrupt chicago pol with no record at all, a slew of corrupt friends and associates (not one that is honorable), a man with a history that raises so many questions of judgement and character?"

    YES. After the last eight years of constant looting & hideous governance, how can any Repulican even say the word "corrupt"?? You will have OBAMA and you might just learn to like it. By the way some feel Paul Volker has just a touch of honor.

  11. Anonymous

    Another fact-free drive by shooting. No support for the Obama corruption assertion, when we have this:

    “The McCain/Palin ticket is the first in American history in which both candidates were found to have violated ethics standards before a national election.

    McCain, of course, was admonished by Senate Ethics Committee “for exercising ‘poor judgment’ for intervening” with federal regulators on behalf of Charles Keating, as part of the infamous Keating Five scandal.

    And now McCain’s running mate has also been found to have violated state ethics laws and abused the powers of her office, as part of the “Troopergate” scandal.

    The nation has had 102 major-party tickets covering 51 presidential elections over more than two centuries. And we’ve never had a ticket in which both candidates on the same ticket were responsible for ethics violations before a national election. McCain/Palin is the first.”

  12. Anonymous

    My husband is originally from England, so he’s a dedicated Republican. However, he has an excellent education, master’s degrees in math, physics, and electrical engineering, and has not had so much as a telephone call for a job interview in the past six years. Rest assured he is NOT voting Republican this year, and that’s a warning balloon to Roger Ailes, Rush Limbaugh, the Swift Boat Veterans for Truth, and Karl Rove. My husband has learned the hard way that the Bush Tax Cuts do not work to create jobs in the US. Remind me what sort of people did Barack Obama associate with in law school?

  13. Anonymous

    The link to the Harvard Law School site discussing the ban on short selling is discussing the previous ban, which allowed the SEC to keep the ban in place until October 17. The ban was lifted last week. There is no new SEC ban as you can find by visiting the SEC web site.

  14. yoyomo

    Bless you Yves,
    This picture of the fawn makes up for that heartbreaking picture of the cheetahs traumatizing the baby gazelle. This sort of inter-species harmony is cheering.

    Don’t bother.

  15. Richard Smith

    OT but…Morgan Stanley, anyone??

    It’s been awfully quiet on that front.

    Mitsubishi are limited to a maximum 24.9% stake, last I heard, which at market prices is ~$3 Bn of capital injection. Not sure that helps much.

    So either the limit goes, or Mitsubishi. Barring miracles, this has to be sorted out by Tuesday, otherwise…it’s MS that goes.

  16. John

    Ya know… We’ve ONLY got a two party state in this country. The Dems are practical socialists the Republicans are practical fascists (or maybe were practical fascists, we’ll see of Palin and her followers imaginary-friend take the country to martial law before this election is over with). 75% of Americans have been perfectly happy with having EITHER a smothering guilt-ridden mommy-party or a kick-ass frat-boy daddy party. This allows the Joe-six-packs to vote without thinking; which is really all he wants. After all, when you talk with the average Joe-six-pack he hasn’t got a clue about the purpose of government other than using it to punishing somebody else. Sadly, the other 25% of the population have to pick from these two parties. That’s been the game for the last ~40 years anyway. Nothing’s going change as long as the two parties have a lock on the political process. Socialist and fascists philosophies of life are too contrasting for compromise and without a third party to force some sanity the US is stuck careening from fascism to socialism, with both parties giving away the country to the ruling party’s owners. Is dis a great country, or what?

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