Links 3/8/09

Dancing black hole twins spotted BBC

Jailed for a MySpace parody, the student who exposed America’s cash for kids scandal Guardian (hat tip reader michael t)

The Bottomless Bailout Ralph Nader, Common Dreams (hat tip reader David)

Mortgage Fraud Case Poses Federal Quandary New York Times

Why is the CIC buying Big Four state bank shares? Elite Chinese Politics and Political Economy (hat tip reader Michael)

The knives are out for Geithner UK Bubble and Is it time to fire Tim Geithner and Ben Bernanke? Economic Populist

The Next Hit: Quick Defaults Washington Post

How to take back the money Steve Waldman

How the Rules Were Rigged Josh Marshall TPM (hat tip reader Tim). We made mention of this (2005 bankruptcy law changes and how they changed the treatment of CDS) when the FT article he references came out, but any further reader comment would be welcomed. For instance I was under the impression it wasn’t just CDS that were exempted from a bankruptcy stay……

Antidote du jour:

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  1. fresno dan

    I find the article “how the rule were rigged” very interesting. Can anybody verify that it is a correct interpretation of the 2005 bankruptcy law?

  2. Anonymous

    Yves: "If you read the article again, notice the complete lack of any interest in cost or risk to the taxpayer. The tacit assumption is that the public exists to serve the banks, not vice versa."

    Alan Blinder is against nationalizing banks because he owns a consulting firm that works for banks. Blinder is the vice chairman of Promontory Interfinancial Network, which provides consulting services to banks. Blinder is also on the board of directors at On Deck Capital which takes wall street money to make small loans to individual.

    Everything Alan Blinder says is bought and paid for by the wall street banks.

    Promontory Financial:

    On Deck Capital:

  3. Anonymous

    “How the Rules Were Rigged Josh Marshall TPM (hat tip reader Tim). We made mention of this (2005 bankruptcy law changes and how they changed the treatment of CDS) when the FT article he references came out, but any further reader comment would be welcomed. For instance I was under the impression it wasn’t just CDS that were exempted from a bankruptcy stay……”

    The comment in the article that derivatives counterparties could come ahead of customers on insurance contracts and annuities is wrong. The insurance and annuity contracts are written by AIG’s regulated subsidiaries. The derivatives contracts are written by the holding company and/or unregulated subsidiaries. The derivatives counterparties get a priority over unsecured creditors, and are free from the automatic stay in bankruptcy to terminate their contracts, net payments on contracts with the debtor (so a creditor’s payment obligation and payment rights under a swap are netted to a single net amount), and creditors can seize the collateral (if any) securing their net claim against AIG.

    Beyond the collateral, the derivatives holders have to wait to get any money from AIG. And as noted they come after the holders of annuities and insurance policies written by the regulated insurance subsidiaries, so the derivative counterparties would just have a claim on the equity in those subs, or the proceeds the sale of the equity.

  4. David

    I love reading Chris Whelan but I think he is underestimating the political implication of the banking crisis. That is, I think he is thinking of Citi as just another bank and coming to the conclusion that it will be resolved. I don’t see it happening and that has nothing to do with the numbers. It has everything to do with politics. It is really hard to know where Wall Street ends and Washington begins. Are they not all the same big nexis? Whelen perhaps is correct in predicting what should happen, but probably not what will happen.

  5. lineup32

    Re: FHA

    Since I have been actively looking and bidding on a few REO’s this year the attitude of lenders towards FHA low down loans has sharply changed from don’t bother us with these to suddenly we love you guys. Realtors here in Sonoma county have their clients using FHA to buy REO’s with extremely high bids. I have been wondering lately if the asset managers now are ex-mortgage brokers and others from the subprime business that are connecting up again. Clearly the government has become the new subprime lender.

  6. Anonymous

    “Jailed for a MySpace parody, the student who exposed America’s cash for kids scandal”

    It is a “privatizing prisons” scandal.

    The issue of privatizing prisons (prisons for profit) came up in one my undergraduate economics classes early in the 2000s.

    I am glad you posted this particular article. I noticed it a couple of weeks ago and it has haunted me because of the financial incentives provided that made this despicable event inevitable. There must be others more subtle in the system that are pervasive but unreported.

    Those who wonder how anyone could spend so much time on something like the ‘dismal science’ have a clue here. We are basically interested in incentives at the bottom of all human behavior. How we allocate benefits and disperse punishments and how we motivate others and are motivated. How we can make better use of our common sense. We were not able to anticipate the use of computers to override common sense.

    Being 20-40 years older than my fellow students at the time, my contribution to the debate on the issue of prison privatization was that some things are just wrong. From my point of view there could be no stronger argument since the discussion had been going nowhere and because the motivation for justice would be replaced not enhanced by motivation for money.

    My experiences as an undergraduate in a large private school after having 20 years in Wall Street are priceless; from getting sub-prime loans for a sub-prime education to contrasting what had become of education from my experience in 1984 compared to 2001 in that very same school. It wasn’t good.

    I wish to point out from the prospective of seniority that the generations spawned by the 1960s have been cursed with reinventing the wheel. That reinvention has brought us to inevitable misery in the ruin of the great country they inherited.

    Those currently in charge having created a system of domination, where you are in charge or in chains, seem not to understand the meaning of principled behavior. And without principles -of decency, respect for law, and all that is articulated in the American Constitution and the Bill of Rights, and all they inherited we have come to this impasse where even discussing markets is useless, markets having been taken over by criminals educated by some of our most prestigious universities.

    Now that the markets have collapsed, manipulated for years by moral midgets there is nothing to discuss but politics.

    Thank you for all you’ve done Yves. It is the right time to go to another level. The subject of legitimate markets is over.

    You have enabled me to understand much of what is actually happening in real time. The remarks and information provided by your commentators have been entertaining, enlightening, witty and insightful by turns -most of all, educational. Its like having the best kind of mentor where you are encouraged to think for yourself -but ‘this is what I have to offer.’

    I am hopeful that you will continue informing and directing us with your irascible style.


  7. Anonymous

    @9:03 AM Anonymous:

    The majority of AIG’s life insurance customers are in Asia. Are you sure the overseas subsidiaries are subject to the same protections as the ones regulated by US states?

  8. brushes9

    What does Megan McArdle and Karl Denninger have to say? I know that they want to shift all the cost of the commons away from the young, intelligent and healthy persons in society, like themselves, and all onto the very young, the very old, the sick, the dumb and the powerless.

    I just can’t wait to click their links to dream along with their impossible, libertarian dreams!

    Am I attacking them, not their ideas? You could make that stretch, but libertarians are all about savage competition. They love it, so please don’t blame me.

  9. Anonymous

    LeeAnne – good comments all, and yes, it is all political now, and not limited to just finance — the selectively enforced, scam ‘rule of law’ needs a reset.

    Principled people would recognize the gangster judges involved in the ‘Kids for Cash’ scam for what they really are – willfully arrogant child molesters. Personally I think the bastards should be shot and that kind of perverse violation of the public trust, where it involves children, should be made a capital offense.

    The system of domination you speak of is also apparent in the ‘war on drugs’, where the ATF law enforcement industry (read mindless goon squads), which is heavily funded by the scamerican alcohol and tobacco cartel, sends a steady supply of inmates to privatized US prisons.

    The TV show, “COPS”, is in reality an infomercial for the scam. The good guys really are the bad guys!

    Deception is the strongest political force on the planet.

    i on the ball patriot

  10. From Mount Holiday

    Re: "Democratic National Committee Chairman Tim Kaine said GM's failing can be attributed to the overwhelming cost of health care. He said that's why Obama is addressing health care at the same time he is shoring up the banks, working on a budget for next year and trying to help the auto manufacturers.

    "What is probably the most cited reason for GM's difficulties — or one of the most cited is the legacy costs on health care and retiree health care that GM has to carry that other automobile companies, particularly those in foreign companies, don't," Kaine, Virginia's governor, said.

    "So the president was elected to try to deal with this health care challenge, which is — can be a choker on the economy. … If we can start to get that right, that can be part of growing out of these economic doldrums," he said."

    >*> One issue that hits home for me, is car repairs, i.e, yah take your car into a dealership and they want $80 an hour to tinker with it and then gouge every penny they can from yah. In terms of a systemic financial collapse, which is taking down all the auto builders and banks and home builders, the disparity in common wages versus those that rip off people is an issue about social ethics.

    We have a lotto mentality in this world and everyone wants to get rich at the expense of the other guy, and as more and more people are laid off and as more businesses fail, there will be fewer people that will buy cars, and have cars serviced, and fewer people will see doctors, fewer people will invest in homes, stocks, bonds, fewer people will go on vacations, fewer people will give other people, opportunities to rip them off.

    We are in a cycle of distrust and people lack confidence, thus the people that do remain in business will be those that become more and more competitive, by cutting costs. That may seem counter-intuitive, but it's the only way to survive. The auto dealership that reduces the cost of service costs, reducing cost to the customer, will win customers in search of deals, dealerships will survive if they offer cost reductions; the mechanic that is willing to work for less cash, will gain business, and the credit card company that has a lower fee, will gain customers. The donut maker that cuts down on frosting and makes a smaller donuts, will go out of business, the pizza maker that reduces toppings and makes a thinner crust with less cheese, will go under, the butcher that tries to sell more fat, will fail, the bikini maker that sells a bikini with less fabric will be rewarded, the homebuilder that builds a crappy overpriced spec home will go into foreclosure and or deeper debt, the blogger that tries to use other peoples words, will eat those words and have less future value. Those that do not contribute honestly to society will fail and those that are willing to work and accept less will gain more in the long run.

    This is my sermon and I really should care less what anyone thinks about an auto dealer charging $80 an hour to repair a car from a company like GM or Ford that is going belly and teats up …. it's friggn stupid to act as if our economic structure will bounce back to a point where business as usual will be the norm; if yah wanna survive, cut your costs and be competitive and work for less!!!!! People do seem to have a vision that there will be 2 slow years of challenging times and then things will take off for the next big growth cycle, but IMHO, that next cycle will be even more challenging, because the opportunities for growth will be limited and the competition will be greater. Obama suggests that now is a great opportunity and in this suggestion, he seems to be focused on economic opportunity, versus ethical opportunity, i.e, this is a time to rebuild corrupt bans and to re-invent banking regulations and to slam the shit out all the people involved in this collusion and restore confidence through justice, which comes from law and order. This, Obama and The Dream Team continue to sidestep the issue of accountability and fraud and dance around why it will be retarded to reward the crooks, versus make them accountable for fraud. This is an opportunity for America to be accountable, then after demonstrating authority and changing the way things have been, only then, will there be economic opportunity. If Obama bypasses this opportunity to serve justice, he will be remembered by history as being nothing less than a complacent political component of a corrupted system that failed to ethically respond to systemic account fraud.

    Amen, pass the plate

  11. brushes9

    So, a just, law and order system, with all the right people behind bars, with healthcare, broken or, not, under the hood, is what you want vs. Obama’s laser focus on healthcare, while finance boils in its on filthy, decaying fluids, in the MEANtime?

    I’m sticking with Obama. He is do, or die and so am I.

    Click “brushes9” for Amazon link to Charles Mackay’s, “Extraordinary Popular Deslusions and the Madness of Crowds,” following an earlier thread no NC.

  12. doc holiday

    .. And another thing,

    That sermon triggered the idea that yes, GM and F will go teats up and what will emerge will be a return to square one, a friggn simple car that is friggn dirt cheap that will out sell other cars, because it is a well engineered friggn car.

    This next car will be the equivalent of a VW bug and a return to Great Depression thinking with a bit of Ford offering a car in any color yah want, as long as it's black!:

    FYI: In 1933, Adolf Hitler gave the order to Ferdinand Porsche to develop a "Volks-Wagen" (the name means "people's car" in German, in which it is pronounced [ˈfolksvagən]), a basic vehicle that should be capable of transporting two adults and three children at a speed of 100 km/h (62 mph). The People's Car would be made available to citizens of the Third Reich through a savings scheme at 990 Reichsmark, about the price of a small motorcycle at the time (an average income being around 32RM/week).

    Erwin Komenda, Porsche's chief designer, was responsible for the design and styling of the car. Production only became financially viable, however, when it was backed by the Third Reich. War broke out before the large-scale production of the "People's Car" could commence, and manufacturing capacity was shifted to producing military vehicles. Production of civilian VW automobiles did not start until after the post-war occupation began.

    The car was designed to be as simple as possible mechanically, so that there was less to go wrong; the aircooled 985 cc 25 horsepower (19 kW) motors proved especially effective in actions of the German Afrika Korps in Africa's desert heat. This was due to the built-in oil-cooler, and the superior performance of the flat-4 engine configuration. The innovative suspension design used compact torsion bars instead of coil or leaf springs.

    >> Ok, got that? These are cars for poor people, people that are being layed off, who can't afford $80 an hour to have a $35,000 car fixed — this is about re-supplying transportation to the masses and providing a realistic solution to re-inventing the auto business. The current auto business is held hostage by health benefits and dependent on the illusion that digitalized and computerized components are superior to analog simplicity.

    We have auto dealerships that are now centers for high tech worshipping where your blackbox car has to be connected to a series of computers that make it impossible for an owner to repair anything, and so, the owner is held hostage to a system that bleeds more and more cash from a consumer that just can't fucking afford it anymore.

    This is going to be class separation at its finest hour, we will have cars for the majority of poor people and then there will be a narrow stream of luxury cars, produced for people that don't care if they spend $2000 on an oil change. The middle class is shifting in this recession and the vast majority of people that were in the middle are now going to make less cash and they will be driving cheaper cars or the other alternative, which is that more people will be using public transportation — and don't get me started on Obama's bullshit to rebuild infrastructure, because yah know damn well, that rebuilding implies that we keep everything the same and then call that change.

    Good day!

  13. Anonymous

    These are the important points to watch on the CSPAN videos of senate finance questioning Kahn, Dinallo, and an OTS official.

    42.16 dodd v Kohn on maiden lane disclosure: Lack of disclosure on AIG counterparties not acceptable

    49.56 shelby v kohn on maiden lane disclosure: Lack of disclosure on AIG counterparties not acceptable

    1.09 bunning v kohn: Refuses to authorize more funding unless disclosure of counterparties benefiting from Fed/Treasury aid

    1.22 corker v kohn: Fed bumbled by paying counterparties at par

    1.34 menendez v dinallo: AIG using aid to undercut competitors; no more funding unless more better disclosure on systematic risk

    1.45 warner v kohn: kohn says he doesn’t want haircuts on counterparties/creditors of AIG because it would make people less likely to deal with US financial institutions. Warner wants tougher negotiations with counterparties/creditors and disclosure of their names.

    1.56 merkley v dinallo: dinallo says regulating cds as insurance would require capitalization that would make them non-economical, but CMA prevented that. Dinallo says CMA prevented the bucketshop laws from making cds illegal

    2.14 shelby v kohn: shelby believes the money the USG put into AIG is not safe

    2.15 corker v kohn: corker doesn’t believe systematic risk in refusing to provide counterparties collateral, but rather offer a guarantee in the event of losses to the counterparties. Believes counterparties made out like bandits.

    2.21 dodd: it is unacceptable to continue paying counterparties at par, given 2 trillion of exposure.

  14. Anonymous

    Wow Yves,

    I am encouraged by the commentary here and hope that it continues out in the world we live in.

    People only buy costly deception when it is the only game going. People would rather buy real value and when the choices are available will demand such as disposable income becomes dearer.

    We need to force our elected officials to represent us and not big corporations or finacial institutions. This country was founded on that concept and it is time that a BIG RESET was done on that button.

  15. dd

    The complex issue is the myth of bondholder priority that has comforted financial analysts without a legal background. General corporate bonds are now no different from stock because the of counterparty priority. Add to the mix CDS on debt (think the Delphi mess) and corporate bonds are a loser. Might as well gamble on the stock. Not advice; JMHO

  16. Anonymous

    That little kitty isn’t involved in a “staredown”. Those are his pals out there. They just want that cutie to come out and play but he’d too comfortable inside in the warmth. Wish he were mine, I’d give him a kiss.

  17. Anonymous

    Schapiro failed to assert control over derivatives trading as the head of the CFTC in the mid-'90s, a time when it was already beset with fraud and manipulation. When a successor, Brooksley Born, came in, she called the unregulated derivatives market "the hippopotamus under the rug." As CFTC chair, Born tried to rein things in but was rebuffed by the Treasury Department, of which Gensler was a part.

    his is great stuff:

    While on the commission and after becoming its chair two years later, Born tried to bring derivatives, specifically swaps that are traded at no central exchange, known as the dark market, and thus have no transparency except to the two counter-parties, under the regulatory oversight of the CFTC. She was opposed in this effort by Federal Reserve chairman Alan Greenspan and Treasury Secretaries Robert Rubin and Lawrence Summers.[1] Specifically, on May 7, 1998, former SEC Chairman Arthur Levitt joined the other members of the President’s Working Group – Treasury Secretary Rubin and Federal Reserve Board Chairman Greenspan – in objecting to the issuance of the CFTC’s concept release, in which Born attempted to shed light on the dark market, citing grave concerns about the possible consequences of the CFTC’s action. In particular, these concerns focused on the risk that the report would increase legal uncertainty concerning swaps and other OTC derivative instruments and, thus, destabilize what had become a significant global financial market. The potential turmoil created by the report and concerns about the imposition of new regulatory costs also might have stifled innovation and pushed transactions offshore.[2] As the financial crisis of 2008 gained momentum, newspapers began reporting on what might be some of its causes, including the adversarial relationship Greenspan, Rubin and Levitt had with Brooksley Born, with Greenspan leading the opposition, and how Born's recommendations were suppressed. She is retired from Arnold & Porter and has declined to comment on the unfolding crisis.

  18. MyLessThanPrimeBeef

    Doc Holiday, regarding your comment on VW’s design simplicity, I think it can best be summed up in the phrase, Keep It Simple, Smardiot!

    What is a smardiot? It involves a kind of idiocty that only the so-called smart people can commit. It’s easier to become a smardiot if you have a college degree than if you’re a messiah finishing school dropout…like me, for example.

    Some people are confused when I tell them you need to be ‘smart’ in order to be idiotic. But the truth is that the ability to comprehend simple things resides in a different part of the brain than the ability to understand comletx things. And just because you can understand complex issues does not automatically mean that you can understand simple issues – this is a common fallacy people make. But it is simply not correct and we as a society have been under-estimating the ability to understand simplicity while having a bubble in over-valuing complexicty.

    So, let hope that we can go back to where we were before (another fallacy is that today is always better than yesterday – simply not truth; propaganda by the rich to keep the masses happy) and remind ourselves daily to keep it simple, smardiots (KISS)! And if you have a choice between being a smardiot or a regular kind of idiot, be the latter. Life is simipler that way.

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