Links 1/14/10

Proof of Martians ‘to come this year’ Scientific American.

Scanners aren’t the solution Josh Fulton

Groups ask U.S. to regulate shipping of commercial bumblebees Washington Post (hat tip reader John D)

The Sky Is Falling Before Schedule. Again Dale Coberly, Angry Bear and I’m No Chicken Little Bruce Krasting. A running slugfest dialogue about Social Security. Bruce has the latest salvo; I’ll link to any update from Angry Bear.

Rehn to propose economic ‘high representative’ EurActiv (hat tip reader Swedish Lex)

If you could write a song about the financial meltdown, what would you say? Tim Solanic

The future of Tim Geithner James Pethokoukis

Too Big Too Fail Tax Barry Ritholtz. Far from the first argument along these lines, but Barry, as always, is colorful

John Paulson’s high-risk hubris Felix Salmon. High time SOMEONE is saying this! I just wish he had been even more pointed

The Carter Syndrome Walter Mead, Foreign Policy (hat tip reader Michael T)

Antidote du jour:
Picture 18

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  1. dearieme

    “chief of astrobiology at NASA’s Johnson Space Centre in Houston”: I wonder what his incentives are.

  2. craazyman

    High risk hubris?

    Puh-leeze. Oh the money men and the scribes that follow them around. What a dog and pony show.

    All these rich dudes trading cash back and forth in the big casino, crying in their martinis when their trades go bad and they have to ‘fess up at the club that they’re a few million shorter of stature than they were. The big humiliation.

    ha ha hh ahahaha.

    YOu want risk and stress? Try working for a living, in a real job, that doesn’t siphon money-spirit from the people’s purse with computers and equations and lawyers.

  3. kevin de bruxelles

    The Foreign Policy article is rather naive about the true nature of politicians. It fails to distinguish between actual policy, which is formulated for the politician by the powerful interests that position him in power, and the theatrics (for lack of a better term), that is the real art of a politician, which is directed towards getting the subjects of his power to either support these policies, or failing this, to at least minimize opposition.

    The article posits four foreign policy tendencies among American politicians but by failing to make a distinction between real policy and the resulting political theatrics to justify these policies, it obscures to point that since WW2, among America’s elite – the actual patrons of power – there has been no fundamental debate about foreign policy. Up until the fall of the Soviet Union the policy of containment was agreed by all. This meant the world was divided into three camps, the US, the USSR, and the non-algined nations. US policy, naturally enough was to increase the members of the US camp, and at the same time to reduce the numbers in the Soviet camp. After the fall of the USSR, all four subsequent administrations have had the same base policy, global American hegemony, even if they applied different theatrics to describe these policies, from Bush I “New World Order; to Clinton’s “We are the Indispensable Nation” to Bush II’s “Pre-emptive War (for America only!); to the current Obama policy of “Hegemony with a Smile”. While the theatrics differed, Bush I was successful in bringing much of Eastern Europe and the Middle East further into the US fold. Clinton accomplished the amazing feat of conquering the Balkans (historically a difficult region to dominate) and in many parts of East, and South East Asia into play. Bush II mopped up some of the remaining pockets of resistance, but left the job unfinished, in the Middle East while informally declaring America’s monopoly on international violence. Obama will continue mopping up in the Middle East and will try to turn North Korea, Cuba, Venezuela by peaceful means through manipulation of the dynastic change overs. Iran is the one big question mark as to whether war or internal revolution will due the trick.

    And to understand the current American Empire, one only needs to look back to antiquity to the Greek and Roman political systems of sovereignty. The sovereign had very little power over the private sphere, the slaves, servants, wives, and other dependants were ruled by the head of the household. It was only in the public realm, where the heads of the household came together, where the sovereign held sway. And so it is with the current American empire. The US exerts its sovereignty not over individuals in other countries but by getting the ruling elites of these countries to submit to US hegemony. There are three key ways the US asserts its sovereignty over these elites: by maintaining a monopoly on international violence (civil wars may be considered an internal matter), by maintaining the dollar as the global reserve currency; and by requiring these elites to pay tribute (in the form of buying US Treasury Bills). Additionally the US also often requires that troops or matériel be garrisoned by these elites on their territory.

    So Obama’s actions on the question of Afghanistan are quite intelligible if seen though the filter of policy vs. theatrics. The real policy for any US President is that troops are staying in Iraq and Afghanistan until such time that a reliably pro-American elite is in power that will submit to the US and will allow a permanent garrison of US troops. Obama’s hesitations and promises of a withdrawal in 2011 are theatrics meant to dampen down and minimize any opposition to these policies. Of course his version of “compromise” is that the needs of his true masters are immediately met while the needs of the people are only “met” through vague promises of future actions that in most cases will never occur. But Obama’s “Hegemony with a Smile” policy is meant for more than just internal consumption. The deeply unpopular policies of his predecessor has placed the subject elites in other countries under intense pressure, and they in turn have been pleading for a softer whip hand from the US.

    1. DownSouth

      I’m with you, Kevin.

      I’m reading this and I’m thinking: Has this guy never picked up a history book in his life? Or a book on political philosophy? Or on political theory?

      And this feckless bumbling appears in a major journal! It’s all so crude and clumsy–uncriticaly taking the word of these politicians at face value, rewriting history, mangling current events.

      So I’m baffled. What purpose does it serve? Why was it published in this journal?

      Is this mangled botchery the best the American elite can do to perpetuate the American myth?

      1. Valissa

        Wow, that Foreign Policy article was a real piece of crap pseudo-anlysis. It reads like a student homework assignment to… ‘please compare and contrast the 4 main historic foreign policy modalities as related to Obama’s challenges in the world today.’ The article completely neglects to mention anything about long term geo-political strategy, past and present, or about the prime directive of all US presidents to expand their empire vai power and influence while attempting to limit and control any who doesn’t want to fall in line with Pax Americana. Why is it that so many academics today get so caught up in abstracting and categorizing and being ever so clever in this that they somehow miss what’s going on in messy, chaotic, and ideology-free reality.

    2. craazyman

      Youse guys are oversimplifying and only observing the shadows. Here at the Institute for Contemporary Analysis we start from the premise that DNA is a radio and the nooousphere is a reality, populated by the amnimus and anima mundi and their variegated forms created from imagination, but more real than phsyical reality — which as we know from Quantum theory and Heralcitus is only vacuum made real through what the artists call “form”.

      And the DNA is a radio that tunes in the voice of the Lord of Hosts though his many angels, and the demons that make the static.

      We are all only sock puppets of these higher imaginary strata. This, admittedly, is sort of dorm-room Plato I’m articulating. But that dude was on to something and he, more than any western philosopher, made mysticism respectable.

      WE only see through the glass darkly, But if we saw face to face it would be the wonder of such a bright light that it would blind the mind to any form of thinking other than a sublime and unarticulateable shock, beyond reason or even imagination.

      And so it is that the Lord’s justice makes its way through the corpses, slowly. Consider it’s only been 2000 years since Jesus and 30,000 since the great cave painters with their amazing and lucid conscious forms of expression. That out of 3 billion years or so since the plants, who think but don’t reason with logic.

      It’s all like a big snail crawling across the driveway and it’s only through the grace of God or Fate that it happens at all. Consider what all these theories would look like in 4 dimensions. They’d be a sculpture of time, light, atoms, emotions and deliberative instinct. There would be little cause and effect, only the urging of the divine will to justice, with all its slop and splash.

      -Professor Delerious T. Tremens, PhD, Master of Divinity
      Institute for Contemporary Analysis
      University of Magonia.

    3. Cynthia

      Stephen Walt is perhaps my favorite defense and foreign policy analyst. I also like Andrew Bacevich, but I don’t think he’s got a blog like Prof. Walt does:

      Too bad that Obama didn’t have enough sense to appoint one of these two men to his foreign policy team. Instead he appoints Hillary Clinton who is clueless, Robert Gates who is just a Bush retread, and Stanley McChrystal who is downright dangerous!

      1. DownSouth


        I hadn’t heard of Stephen Walt, but if the article you linked is any indication, he sounds like somebody who’s got a firm grasp on reality.

        Bacevich did an absolutely outstanding interview with Bill Moyers that tipped me off as to his existence:

        In my dispute with kevin de bruxelles over American empire (we agree on just about everything except I believe America is losing whereas kevin believes America, at least the American elite, is winning) I find an ally in Bacevich:

        The sole superpower lacks the resources–economic, political and military–to support a large-scale, protracted conflict without, at the very least, inflicting severe economic and political damage upon itself.


        Moreover, a state of perpetual national security emergency aggravates the disorders afflicting our political system, allowing the executive branch to accrue ever more authority at the expense of the Congress and disfiguring the Constitution.
        –Andrew Bacevich, The Limits of Power: The End of American Exceptionalism

        I can accept kevin’s cynical take on the American elite, the fact that it doesn’t give a damned whether it destroys the American economy and it doesn’t give a damned whether it destroys the United States Constitution. The American elite’s deportment over the last few years leave little doubt in that regard. Where I disagree with kevin is, if the American elite does indeed destroy America, from where does it plan to project power? And what power?

        I believe kevin gives the US elite way too much credit. He sees it composed of some sort of strategic masterminds. I see it as the emperor with no clothes.

        1. kevin de bruxelles


          Only in certain areas do I think our elites are masterminds!

          Internationally, the US grand strategy is called “full spectrum dominance” and believe me, it doesn’t take a mastermind to come up with something like this:

          1.Get a map of the world.
          2.Color all the countries dominated by America blue.
          3.Color all the countries dominated by anti-American terrorist scum red.
          4.Force all those damn red countries to turn blue.

          Domestically we have to admit that the American elites are true masterminds in taming their population and are second to none in delivering pacifying bread and circuses.

          On economics I see an inverse relationship between the decline of American economic might and the rise of their global sovereignty. I have no doubt that as the US moves even closer towards its goal of “full spectrum dominance” that this will cause its productive capacity to decline even further. But don’t worry, the rest of the world will be called upon to make up the difference. And if that doesn’t happen then the American people will be asked to do with less. I don’t know if this is all so brilliant but I am sure it will not end well. These things never do.

          1. DownSouth

            kevin de bruxelles,

            You might find interesting what Bacevich had to say about “full spectrum dominance” in the Bill Moyers interview I linked:

            ANDREW BACEVICH: Politically, and strategically, the outcome of that war (Gulf War 1990, 1991, Operation Desert Storm) was far more ambiguous than people appreciated at the time. But nonetheless, the war itself was advertised as this great success, demonstrating that a new American way of war had been developed, and that this new American way of war held the promise of enabling the United States to exercise military dominion on a global basis in ways that the world had never seen.

            The people in the Pentagon had developed a phrase to describe this. They called it, “full spectrum dominance.” Meaning, that the United States was going to exercise dominance, not just capability, dominance across the full spectrum of warfare. And this became the center of the way that the military advertised its capabilities in the 1990s. That was fraud. That was fraudulent.

            To claim that the United States military could demonstrate that kind of dominance flew in the face of all of history and in many respects, set us up for how the Bush Administration was going to respond to 9/11. Because if you believed that United States military was utterly unstoppable, then it became kind of plausible to imagine that the appropriate response to 9/11 was to embark upon this global war to transform the greater Middle East. Had the generals been more cognoscente of the history of war, and of the nature of war, then they might have been in a better position to argue to Mr. Rumsfeld, then the Secretary of Defense, or to the President himself, “Be careful.” “Don’t plunge ahead.” Recognize that force has utility, but that utility is actually quite limited. Recognize that when we go to war, almost inevitably, there are going to be unanticipated consequences. And they’re not going to be happy ones.

            Above all, recognize that, when you go to war, it’s unlikely there’s a neat tidy solution. It’s far more likely that the bill that the nation is going to pay in lives and in dollars is going to be a monumental one. My problem with the generals is that, with certain exceptions, one could name as General Shinseki, with certain exceptions-

            BILL MOYERS: Who said, “We are going to need half a million men if we go into Iraq.” And-

            ANDREW BACEVICH: Right.

            BILL MOYERS: -he was shown the door for telling the truth.

            ANDREW BACEVICH: By and large, the generals did not speak truth to power.

          2. DownSouth

            Kevin de bruxelles,

            The other statement you made that I wonder about is this one:

            Domestically we have to admit that the American elites are true masterminds in taming their population and are second to none in delivering pacifying bread and circuses.

            I’m not so sure we’re not in unchartered waters here. Has there been another time in American history when the congress and the president have taken such a defiant posture against the will of a majority of the American people? I don’t think there has been.

            Daniel Yankelovich, writing in Coming to Public Judgment: Making Democracy Work in a Complex World observes that:

            More often, public opinion makes itself felt indirectly through watershed elections. The election of 1980 is a good example. The country turned to the right-wing populist Ronald Reagan out of disillusionment with the policies of liberalism that had characterized both political parties in earlier years (including the Nixon and Ford administrations). The public forced the change in the country’s direction.

            And as Bacevich points out, 2006 was another such year. But the Democrats betrayed the voters:

            ANDREW BACEVICH: Well, I may be a conservative, but I can assure you that, in November of 2006, I voted for every Democrat I could possibly come close to. And I did because the Democratic Party, speaking with one voice, at that time, said that, “Elect us. Give us power in the Congress, and we will end the Iraq War.”

            And the American people, at that point, adamantly tired of this war, gave power to the Democrats in Congress. And they absolutely, totally, completely failed to follow through on their commitment. Now, there was a lot of posturing. But, really, the record of the Democratic Congress over the past two years has been – one in which, substantively, all they have done is to appropriate the additional money that enables President Bush to continue that war.

            I believe the Democrats, including President Obama, again betrayed the voters in 2008. The voters turned to Obama and the Democratic Party out of disillusionment with the policies of 30 years of Reaganomics.

            Bacevich describes the overall crisis in American politics in his interview as follows:

            BILL MOYERS: Here is what I take to be the core of your analysis of our political crisis. You write, “The United States has become a de facto one party state. With the legislative branch permanently controlled by an incumbent’s party. And every President exploiting his role as Commander in Chief to expand on the imperial prerogatives of his office.”

            ANDREW BACEVICH: One of the great lies about American politics is that Democrats genuinely subscribe to a set of core convictions that make Democrats different from Republicans. And the same thing, of course, applies to the other party. It’s not true. I happen to define myself as a conservative.

            Well, what do conservatives say they stand for? Well, conservatives say they stand for balanced budgets. Small government. The so called traditional values.

            Well, when you look back over the past 30 or so years, since the rise of Ronald Reagan, which we, in many respects, has been a conservative era in American politics, well, did we get small government?

            Do we get balanced budgets? Do we get serious as opposed to simply rhetorical attention to traditional social values? The answer’s no. Because all of that really has simply been part of a package of tactics that Republicans have employed to get elected and to – and then to stay in office.

            The point I am trying to make is this: these things take time to play out. This is not a one-act play. This play has in only in its first act.

            Barry Sussman, former editor of the Washington Post, once wrote that public opinion is “the great gorilla in the political jungle, a beast that must be kept calm.” So the public is feared as a beast to be managed and controlled with care. But the public is also respected as the voice of the sovereign voter who always has the last word–the responsible jobholder and the respected citizen.

            Our elites have decided to defy that ethic and that tradition.

            So grab your soda pop and popcorn and get a ringside seat. My guess is that you’re fixin’ to see some fireworks in America, and politicians are going to learn the hard way the meaning of Vox populi vox Dei.

        2. Skippy

          May I point out that there are 4 feeder tubes to the Military Elites, Citadel, West Point, Annapolis and USAFA (occasionally a ROTC is elevated for show). Not unlike the Ivy league dilemma a problem is concentrated by gate keeping.

          Skippy…Disclaimer in my time I found the Citadel out put vastly Superior to West Points, now there is a sharp stick in the eye and await the wailing to commence.

    4. Anonymous Jones

      Thank you, Kevin. I don’t remember a more cogent and illuminating comment in a long time. Just terrific analysis. [And honestly, I don’t believe it requires any masterminds to pull this off. It’s like water flowing downhill because of gravity; the elites just sense it is in their best interest because they keep getting richer following it.]

  4. sherparick1

    Reading the Bruce Krasting versus Angy Bear debate it occurred to me that Bruce does protest to much and shows all sorts of supercillious sensitivity to the needles from Coberly and Bruce Webb. Whether he work with AEI or not, his proposals to begin mean testing social security and medicare are very similar to proposals coming out of AEI, the Concord Project, and Pete Peterson’s various groups. He also lost credibility with me by using the “Bill Gates” straw man as the person who no longer gets social security. If means testing is brought in, it will be set at much lower income levels then Bill Gates and reducing social security payments to even upper middle income retirees and shifting medical costs to them will reduce their standard of living. Which means very unhappy campers. And of course, means testing will devastate long-term political support for Social Security and Medicare since middle class and above people, especially middle class and above white people, will not want to be paying taxes that will simply be a transfer payment to poor (many of them Black and Brown) people. We had a program like that called “Aid to Families withe Dependent Children” and look what happen to that program.

    It is interesting that the elite in the U.S. don’t seem to think out the unintended consequences of transitioning the U.S. back into a 3rd World/Latin American style society. Shifting more and more risks to individuals may mean that non-state institutions like Churches will fill that gap (with people agreeing to conform to Church rules in return for support and assistance) but other informal institutions like criminal gangs can perform the same role. There will be less consumption, more saving, less mobility (people will want to stay close to family for protection from the vicissitudes of life), and less willing to invest in their own and their children’s education since it will seem less and less likely to pay while at the same time it grows more expensive.

    Nothing is more revealing of the current desperation through out much of the country is that despite several awful, bloody wars, the military is having to turn away recruits since pay is better than most starter jobs and the benefits are vastly better. One has to wonder how long the elite will continue to be willing to pay an “above market” rates for their military. Of course as the Roman elite found out, handling soldiers are a tricky thing and the servant can become the master if the old masters start getting miserly with the servant).

  5. LeeAnne

    I’ve personally had it with these political theatrics.

    Mary Shapiro testifying right now on inquiries into rumor enhanced short selling: ‘she has a lot of data to go through.’

    She doesn’t have any contacts in the business who can ‘splain things to her?

    This situation and these people are hopeless.

    A devoted daily CSPAN watcher, I stopped after Paulson’s repulsive bended knee theatrics at the feet of Nancy Pelosi followed by authorization of the bill that handed the US treasure over to Paulson along with BTW sovereign immunity from corporate and securities law.

    The photos and videos of smiling Dems grouped around the Pelosi signing as she giggled should come in handy for the opposition when they’re ready to use it.

    Today, the pandering and feigned good humor of officials on the dais is repulsive.

    I’ll go back to reading the conclusions of those who are a lot more observant and articulate than I on the issues of the day.

    Yves, Jesse and Denninger area a must. Jesse’s reiteration on the state of the US economy 2005-2010 is great reading. Scroll down to “Forecast 2005 – 2010: The Humpty Dumpty Economy”

  6. Cynthia

    According David Brooks (see link below), Israel managed to dodge the global financial meltdown. This doesn’t make much sense to me given that Israel is one of our closest allies, second only to Great Britain.

    Now I do understand that war profiteers from both Israel and the US continue to make enormous profits even as the economy remains in the ditch, simply because Congress and the White House have decided that Islamic terrorism is such a huge threat to our national security that they’ve made the defense industry, unlike the health care industry, exempt from being deficit neutral, thus propping up the war economy with billions and billions of taxpayer dollars. But I don’t understand how Israeli banks didn’t get killed in the derivatives market like the US and British banks did. So I was wondering if someone here could help me make sense of this.

    1. kevin de bruxelles

      On the Israeli economy, the reason that they are not suffering any more than usual is the same reason a slum dweller in Baltimore has not seen any appreciable lowering of his standard of living. Welfare recipients, be they nations or people, tend to tread water during an economic downturn; as long as those welfare checks keep coming that is. And for Israel the flow is steady; they have received at least $113 billion in US welfare since its inception and are currently getting more than $2.5 billion a year. A few years ago they received $9 billion in loan guarantees of which they have only burned through $5 billion or so.

      But just like the aforementioned Baltimorean, life on welfare wasn’t really all that great before the downturn so the fact Israel is treading water in a cesspool of poverty, social fractures, and despair is no reason to celebrate. Unfortunately Brook’s piece didn’t get into any of this. The most honest description of the state of the Israeli economy I have read is by an Israeli historian, Ilan Greilsammer, Clivages and fractures (Chasms and ruptures?) but it was in French and I cannot find a text on line without buying it. He paints an ugly picture of divisions between rich and poor, Ashkenazi and Sephardic, religious and secular, Jewish and Arab. it was written in 2002 but I don’t think things have changed much since then. This is the kind of article about Israel that you would never find in the English language press.

      1. Cynthia


        Thanks for letting me know about the wide gap between rich and poor in Israel. This surprises me given that Israel is thought of as a developed nation with an advanced economy.

        But this still doesn’t explain why Israeli banks weren’t hit by the financial meltdown. Either they never entered the derivatives market, or they entered this market but exited it right before the bubble burst. But because the herd mentality is so strong within the banking system, I seriously doubt that Israeli banks never entered the derivatives market. So maybe David Brooks is right in saying that Jews are so much smarter than the rest of us because you’d have to be exceptionally smart to time the bursting of the bubble just right.

        1. justaslakker

          There is $3 Trillion that the Fed cannot account for. Missing in action, you might say. Who could hide that kind of cash if it were transferred to them. Any private firm, including Golden Sacks, would have difficulty. The military is large enough, but their very size entails the risk of a leak somewhere. Want to guess who the best candidate would be?

          The Rothschilds were behind the Balfour Declaration by Britain that making it a policy of the British government do do whatever it could to Establish a national homeland for the Jews in Palestine.

          Think about it for awhile. If your were the predominant financial power in the world, and desired a home base from which to control the rest of the world, where would you want that to be. Possibly a small country that you could control and would then control all of the major political players. You had enough power to get all of the major countries to use their taxpayers money to support your little domain as it was constantly threatened by its neighbors who object to having been force marched, women and children, out of the land they had lived in for centuries. To this day, some of those families still have the keys to the homes that they were forcefully evicted from many years ago.

          This would have to be a permanent base spanning many generations. How to accomplish that? Well, put in members of your family and extended family who would do the same.

          Do you find it ironic that not only Hitler was descended from Jewish blood, none other that the baron von Rothschild of Austria; so were the Roosevelts. Churchill’s mother was Jewish. Lady Jerome bore an anglicized version of the family’s name, Jacobsen. Her grandfather is on record of having been a Jewish immigrant from Europe. Even in her day she was notorious for having been promiscious. Since her husband had syphilis (he went insane and eventually died from it) and she never did, you might surmise that both were having extra marital affairs. That leaves open the question of who was Churchill’s biological father.

          Who suffered the most from this effort to control the world – the Jewish people. They were simply used, and still are, to do the bidding of an elite who are willing to visit on this small minority the worst horrors one can imagine, to force them to cooperate. The elite are in fact godless and worship money, and the power it gives them. I would go so far as to say they are satanic if their actions are any indication of their beliefs. The Jews of Europe, and now Israel, are innocent victims as are the Palestinians. Both would much rather have peace and learn to live together. than continue their bloody war. Both are ruled by violent extremists.

          You don’t think Benjamin Shalom Bernanke, and all of the 12 board members of the Federal reserve have any connection to the elite, do you? Rahm Emmanuel is an Isreali, and former(?) member of the Mossad. No connection there.

          The real division in the world is between the uber elite, and the rest of us, regardless of race or religion.

          1. Cynthia

            And I find it hypocritical of the neocons on both sides of the aisle to love Israel so much that they want us to protect Israelis at all cost, yet they don’t want us to have the one thing that Israelis have: a non-for-profit, universal health care system.

  7. MyLessThanPrimeBeef

    Today’s my ‘hug Earth’ day. So, I won’t be posting alot, as I will be busy hugging Earth all day long.

    Next month is my ‘hug the Moon’ day and that’s a bit trickier.

  8. Francois T

    Barry’s post on TBTF tax; I think he’s on to something here.
    If corruption in Congress prevent any meaningful regulation, make the TBTF tax progressive based on total assets until it becomes punitive to be THAT big.

    I like his conclusion:

    If our broken Congress cannot regulate the Too-Big-To-Fail banks, at the very least, we can tax the hell out of them.

  9. Minh,1518,671926,00.html
    “The US government is actively supporting Google in its confrontation with China. But how will the political power of the company develop? Is it set to become an indicator of freedom and prosperity like Coca Cola and McDonald’s? Or a sinister global player like the United Fruit Company once was — a company which once benefited from coups performed in South America by the CIA?”

    I wonder is this a kind of soft power projection ? Could China develop Yahoo into a Google direct competitor ? It’s fascinating to watch this game.

  10. Amit Chokshi

    How did Paulson have hubris? Because he engaged in a negative carry trade on the best bet of the decade if not more? That’s like saying those that shorted bank stocks or REITs exhibited hubris as those stocks pay higher dividends and shorting those stocks would mean you’d be paying out 2-10% in annual dividends. Jim Chanos has hubris too then (he is arrogant but rightfully so).

    No trade is an act of hubris alone, the lack of risk mgmt is where hubris plays a role -> i.e. Peter Schiff losing his clients 60-80% in 2008. Paulson was a merger arb guy before his CDS trade made him so it’s very hard to see that he would not have had a way to unwind those and minimize his losses.

    Paulson made his score thanks to Pellegrini and guys like Michael Burry and Lahde did well for seeing the risks and acting on them. I give them credit but also think the media deifies this people. Using OPM is the ultimate wealth creation mechanism/transfer. I put up Tepper #s last year but dont run the money he does so my take home is a pat on the back.

    1. Yves Smith Post author


      First, Paulson had massive CDS trades on and unlike merger arb, which is in listed stocks and therefore very liquid, there were no easy exits if the trade failed to work.

      Second. one way monster betting is not prudent risk management. And it’s funny you contrast him with Schiff, who lost his clients a ton due to making only two bets (on energy and gold, via crap junior mining stocks, which often do not correlate well with the metal, but are a way to level up if you are not willing to use futures). What Paulson did was conceptually identical to what Schiff did, except he did set himself up for his customers not to go broke as fast as Schiff’s would if he was wrong (I will agree with you that Schiff is a complete horror show, but citing a completely dreadful money manager is a real straw man, so I am deliberately being contrary here). But this was a huge undiversified bet. If the government had allowed mortgage mods, he would have been toast. The junior tranches he was betting against have losses alloted against them sequentially (bottom of the capital structure first) while a mod (and maybe a BK cramdown too), distributes losses across all the tranches.

      1. Amit Chokshi

        I don’t think what Paulson did is anywhere near what Schiff did/does. Paulson was out raising his two credit opportunity funds to specifically implement this strategy and because of the negative carry and housing bullishness permeating across the globe, he didn’t raise as much as he’d like. But I’d imagine he must have been very very deliberate on what he was presenting because his real estate/hollywood friend Jeff Greene read the presentation and side stepped investing in Paulson’s fund and implemented that strategy through his broker at ML. Schiff markets himself as a cautionary/sage adviser that holds a mix of assets (albeit with correlations of 1) that should protect investors.

        I never saw the presentations but if he made 600+% on the funds, a part of the presentation may have presented the risk/reward scenario. So his investors would have known what they were getting into. In contrast, Schiff markets to retail.

        And why do you think if the gov’t allowed mortage mods he’s have been toast? The trade started working in 2007 when many people still believed there was nothing wrong. So by the time the mortgage mods would have been discussed, Paulson would have been up, no? Second, even assuming the mod programs were offered in 2006. How badly would have Paulson been crushed? He was essentially buying puts when volatility was at its lowest. In addition, his funds capital wasn’t geared so he could take time to unwind his positions. I guess the ultimate question is what is “toast” in the context of having a 6-10 bagger in a matter of 24 months. If he lost 30-50% on a fund raised SOLELY for that trade and plainly communicated that way to clients, I see nothing wrong with it.

        1. Yves Smith Post author


          I suggest you read the Zuckermann book. Paulson was completely freaked out when mortgage mods were proposed and did what he could to oppose them. BY HIS OWN ADMISSION they were devastating to his strategy.

          The puts would not have worked out. He was betting against BBB RMBS tranches. In a default, losses effectively eat through the capital structure from the bottom up. With a mod, the losses are distributed pro rata across all classes. Only 3% of the face value of a RMBS is the BBB tranche. It would have take only a deminimus hit in a mod, while in defaults, it had good prospects of being wiped out. He was taking very serious regulatory risk, which you seem to ignore.

          And if you read the book, they were clearly punting, when he started, he didn’t really understand how CDS worked, really did not understand RMBS market. You get a very poor impression of his level of due diligence. He was punting and learning as he went. That is astoundingly amateurish for someone who has a hedge fund pay arrangement (unlike Schiff, who as I said is a horror show, but precisely because he charges much less in fees and appeals solely to retail, the standards for his professionalism are much lower).

          Personality-wise, he has a lot in common with Schiff (and I have had the vast misfortune to meet Schiff) Convinced of his genius, convinced he is not sufficiently recognized, bullying, drawn to very concentrated bets because he is so desperate to get the recognition he craves.

          1. Amit Chokshi

            Yeah I did read Zuckermann’s book and it was clear that Paulson was dying to be one of the Masters of the Universe and looking for the trade to make him as were Burry and Lahde. Pelligrini appeared to be highly diligent and a data-phile of sorts so I’d imagine that he knew the ins/outs of the trade but in either case the buck stops with Paulson. In the book I didn’t get the sense that Paulson was driving with blinders on, he could smell that this was the right trade but did he know every detail when he first implemented the trade, no. Is this amateurish though? It depends on how clueless Paulson was when he first implemented this trade.

            Joel Greenblatt is mentioned in that book as well and was prob the most interesting to me given what I know about him and to see a side of him where he was ticked off. I am familiar with Greenblatt being a value type of guy myself and he’s known for sometimes using a Ready, Fire, Aim approach for some situations. So this practice has been used by a stellar investor like Greenblatt so provided Paulson was not just totally cruising into this position knowing zero about it, I wouldn’t say it’s amateurish when another well established pro and I’m sure countless others do the same.

            I also take exception to the fact that because Paulson charges hf fees that he should be more diligent than one that doesn’t. As it is, illiquid strategies are for the institutional set that need Cambridge Assoc or another consulting firm to tell them to invest in it and pay the hf fees. Citadel lost 64% in 2008 and plenty of funds in the structured products arena completely imploded so clearly it was amateur year in 2008 for many people that could charge hf fees. Not to mention the highly compensated CEOs of various financial cos that had no clue what dreck they stockpiled their balance sheets with.

            Re reg risk, yes I did not emphasize it. But if Paulson was raising money from mostly “sophisticated” investors, during the dd process, wouldn’t someone say, “interesting but what if the gov’t offers mods?” P and P I think would have had to have an answer prepared. And secondly if there answer was simply, we will have a total loss…so what. They are being straight forward with their potential investor and saying we have a risk of 100% on reg risk but we assigned a 1% chance of this occuring based on x,y, z. But in most scenarios we see a return of 600+%. I have no clue if this was the case, I don’t know who is privy to how the marketing and dd process went with Paulson’s two funds but if guys like Protege Partners didn’t ask those questions why the hell are they charging FoF fees too? I would like to see some study corresponding to fees and performance but difficult to do because of survivorship bias with high fee offerings.

  11. Freethinker

    Regarding the Bruce Krasting versus Angy Bear debate…

    While Krasting’s naming of the reactions of Coberly and Webb to his analysis of the 2009 SSTF results as hubris seems on target, his counterblast speaks of the same. All authors seem to operate from different ideological boxes that assure them that they speak the truth, whether accurate or not.

    Krasting’s sneering assumption that “If a public company missed by 45% on the bottom line we would take the stock out back and shoot it” as a means of understanding the import of the SSTF’s 45% miss, begs the question of who that “we” might be. Certainly the apparent “we” that might decide to shoot the SSTF for poor financial performance has made quite different decision when “we” confronted the problems of illiquidity at AIG, GM, Fannie Mae, Freddie Mac, Citibank, BofA, etc.

    And as far as Krasting’s gauntlet throwing question that “we” can only choose to reduce payments to all beneficiaries or base payments on a beneficiary’s income (wealth?) places political limits on the range of options available. One of these is moving from a funding source based on taxing income to one based on taxing wealth. Another is to raise the annual income cap for Social Security payroll deductions.

    While Krasting assures us his bottom line concern in his analysis is the reaction by the markets to continuing Funding deficits, many of us are aware that the markets will again certainly be rescued by the government at the expense of the commonweal whenever is is deemed politically doable.

    This public is growing sour on hearing “politically doable” justifications for embracing certain policies. Arguing for political feasibility seems intended only to portray the status quo as reasonable and rationale. Given world circumstances, it seems to many of us that the maintaining the status quo is choosing insanity.

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