Felix Salmon

Corzine’s culpability

Felix Salmon
Dec 8, 2011 15:40 UTC

The good news, today, is that Jon Corzine is testifying; the bad news is that he’s almost certainly not going to say anything substantive in his testimony. His prepared statement is a bit odd: he says that he has “had limited access to many relevant documents, including internal communications and account statements, and even my own notes, all of which are essential to my being able to testify accurately” — and then says that somehow he might have been able to gain such access between now and January, as though anything will have changed between now and then.

In any case, when it comes to the huge black hole where MF Global’s customer funds should be, Corzine’s testimony is clear: “I simply do not know where the money is, or why the accounts have not been reconciled to date.”

But Christopher Elias has an idea — he reckons that the hole in MF Global customer accounts might well be due to rehypothecation.

You’ll remember rehypothecation from the Lehman bankruptcy: brokerage customers of Lehman in the US got their money back much more easily than brokerage customers of Lehman in the UK, because in the UK brokerages are allowed to “rehypothecate” customer funds — essentially, to use them for their own corporate purposes, including putting them up as collateral in their own trades.

And guess what: MF Global, too, had a UK subsidiary, MF Global UK Limited, which had over 10,000 accounts. Just as Lehman monies sloshed back and forth chaotically from New York to London and back in the company’s final days, it seems that something similar was going on at MF Global: after all, JP Morgan Chase in London seems to have been transferred quite substantial sums in the days before MF Global’s bankruptcy.

This is all highly speculative, of course. And given the utter mess which investigators seem to have found when trying to piece together what happened to customer funds, it’s entirely possible that we’ll never know exactly where they went. Money’s fungible, and once it disappears into the global financial system, it can’t easily be traced.

Corzine’s statement includes an apology “to all those affected” by MF Global’s bankruptcy; he also takes responsibility for entering into the ill-fated repo-to-maturity trades. But he doesn’t seem inclined to admit that as CEO of the company, it was his job to ensure that customer funds were well looked after:

As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm. I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business.

This is an abrogation of responsibility, but it also rings true: back-office clearing and settlement operations are largely ignored by senior management most of the time. Still, Corzine was responsible for them. And he testifies that in its final week, “MF Global undertook extraordinary steps” in an attempt “to sell assets and generate liquidity”. It it possible that those extraordinary steps included hands entering cookie jars where they weren’t actually allowed to enter? I’d say it’s not only possible but likely. And that the more “extraordinary” the steps that Corzine was encouraging his lieutenants to take, the more likely that he would have been effectively condoning the idea that customer funds could be used in an attempt to stave off bankruptcy.

Ultimately, of course, it was the missing customer funds which torpedoed any prospects of MF Global being sold to a deep-pocketed buyer: Corzine might have scrambled a bit too much in those “chaotic, sleepless nights” which he now recollects so dimly. I sincerely hope that his actions in those days and nights can be pieced together with hindsight. Because at some point he’s going to have to be held accountable for what he did.


“Is Sarbanes-Oxley still on the books?”
Yes, yes it is.
The problem is the meaning of the word “is” adequate…..Whoops!!!! Another president.

The problem is the meaning of the word “adequate”
“Adequate” is…uh….er, adequate to make it appear that we have laws that are EFFECTIVE to stop financial fraud,and to deflect attention from Wall Stree criminality.
But not ACTUALLY effective to prosecute, and certainly not effective enough to convict anyone of anything. So Sarbanes Oxley is a perfect law….from the standpoint of our leaders (Wall street).

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Hank Paulson’s inside jobs

Felix Salmon
Nov 29, 2011 14:55 UTC

What on earth did Hank Paulson think his job was in the summer of 2008? As far as most of us were concerned, he was secretary of the US Treasury, answerable to the US people and to the president. But at the same time, in secret meetings, Paulson was hanging out with his old Goldman Sachs buddies, giving them invaluable information about what he was thinking in his new job.

The first news of this behavior came in October 2009, when Andrew Ross Sorkin revealed that Paulson had met with the entire board of Goldman Sachs in a Moscow hotel suite for an hour at the end of June 2008. He told them his views of the US and global economies, he previewed a market-moving speech he was about to give, and he even talked about the possibility that Lehman Brothers might blow up. Maybe it’s not so surprising that Goldman Sachs turned out to be so well positioned when Lehman did indeed do just that a few months later.

Today we learn that the Goldman meeting in Moscow was not some kind of aberration. A few weeks later, on July 28 2008, Paulson met with a who’s who of the hedge-fund world in the headquarters of Eton Park Capital Management — a fund founded by former Goldman superstar Eric Mindich.

The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” — a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets…

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out…

The fund manager who described the meeting left after coffee and called his lawyer. The attorney’s quick conclusion: Paulson’s talk was material nonpublic information, and his client should immediately stop trading the shares of Washington- based Fannie and McLean, Virginia-based Freddie.

When we found out about the Moscow meeting, I asked how on earth Paulson thought such behavior was OK. But now I think he was downright pathological in giving inside information to his old Wall Street buddies. And the crazy thing is that we have no idea how many of these meetings there were, or how long they went on for — the only way that we ever find out about them is when reporters like Sorkin or Bloomberg’s Richard Teitelbaum manage to find a source who was in the meeting and is willing to talk about what happened.

Given that it’s taken two years since the release of Sorkin’s book for the Eton Park meeting to be made public, it’s fair to assume that there were other meetings, too — possibly many others. Paulson was giving inside tips to Wall Street in general, and to Goldman types in particular: exactly the kind of behavior that “Government Sachs” conspiracy theorists have been speculating about for years. Turns out, they were right.

Paulson, says Teitelbaum, “is now a distinguished senior fellow at the University of Chicago, where he’s starting the Paulson Institute, a think tank focused on U.S.-Chinese relations”. I’d take issue with the “distinguished” bit. Unless it means “distinguished by an astonishing black hole where his ethics ought to be”.


For help with transparency, read this book (See http://www.amazon.com/gp/reader/08070032 12/ref=sib_dp_kd#reader-link)

Have your US Congressperson ask the questions, the reason is the punishment for lying to US Congress is 5yrs in prison. Did that help?

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Ed DeMarco’s obstructionism

Felix Salmon
Nov 16, 2011 19:34 UTC

Representative John Tierney of Massachusetts is one of those politicians whose questions tend to be substantially longer than the answers they elicit. But that doesn’t mean the questions, pared to their essence, aren’t good ones. Here he is grilling FHFA head Ed DeMarco, asking why he’s refusing to consider principal reductions on mortgages.

DeMarco’s answers come at 2:15 and 4:50. He starts off quite explicitly:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

Later on, he agrees to furnish Congress with these analytics: I, for one, would love to see them. There are two ways that you can come to this conclusion, and I suspect that the analysis uses both. First, you can try to maximize the probability that underwater borrowers will continue to make payments after a loan modification, rather than simply strategically walking away; and secondly, you can maximize the probability that borrowers who are current on their mortgages will strategically default if they think they can get a principal reduction by doing so.

At heart, what any lender needs to do with regard to any given loan in default is make a choice. You can modify it in any number of different ways, some involving principal modification. Or, you can just foreclose. You know, pretty much, what the costs of foreclosure are — and they tend to be enormous. So there’s a good case for modifying the loan, if the present value of the modified loan payments is decent. But in order to calculate that present value, you need to have a handle on the probability of a redefault. The lower the redefault probability, the more attractive a modification is to the lender. The higher the probability of a redefault, the more likely it is that you’d be better off simply foreclosing now.

Now here’s Tierney’s point: redefault rates are significantly lower when you do a principal reduction than they are when you don’t. It stands to reason: if you have equity in your house, you’re going to want to keep that equity. If you have negative equity in your house, not so much. As a result, principal reductions reduce redefault rates, and are a good way of maximizing the value of a loan.

In order to demonstrate that Tierney is wrong, then, DeMarco is likely to attempt to show that redefault rates don’t drop very much if you do a principal reduction. I think that’s going to be hard, not least because we haven’t had much in the way of principal reductions, so the data on redefault rates is going to be pretty thin.

And then there’s the second leg of the argument DeMarco has to make, which is even harder to get good data on. It’s the moral hazard problem: if you start doing principal reductions, everybody’s going to want one — even people who are current on their mortgage right now. And you don’t want to do anything which will give people an incentive to default, just so that they can get their mortgage modified.

Again, however, the argument here is a relative one. Any kind of modification program, at the margin, is going to provide an incentive to default. So DeMarco is going to have to demonstrate that people are more likely to strategically default the minute a principal-reduction program gets implemented. And I can’t imagine where he could possibly find the data to support that conclusion.

It’s worth noting that DeMarco made neither of these arguments in his answers to Tierney. Instead, he started attacking straw men:

I do not believe that I’ve been appropriated taxpayer funds for the purpose of providing general support to the housing market…

I believe that the decisions that we’ve made with regard to principal forgiveness are consistent with our statutory mandate… I do not believe I’ve been authorized to use taxpayer money for a general program of principal forgiveness.

Tierney was not asking DeMarco to provide “general support to the housing market”. He was not saying that DeMarco’s actions to date were somehow illegal. And he certainly wasn’t suggesting that DeMarco use taxpayer money for a general program of principal forgiveness.

In fact, he wasn’t suggesting that DeMarco use taxpayer money for anything at all. He was suggesting, instead, that DeMarco would save taxpayer money if he did principal reductions on certain mortgages. And he rattled off a long list of private-sector lenders who are doing just that, which suggests that there’s definitely a profit motive in there somewhere.

Obviously, no one’s suggesting that the FHFA start doing principal reductions across the board for all mortgages: Tierney’s only suggesting that DeMarco allow such things where it makes financial sense to do so. That’s a no-brainer; what’s weird is DeMarco’s certainty that it never makes financial sense to do so. Fannie and Freddie own a lot of mortgages; surely a few of them, at least, are good candidates for principal reduction — especially ones where the home is worth half or less the amount of the mortgage.

DeMarco does have one other alternative — he could just come clean and be honest. In which case he’d say something like this:

“We’re keeping millions of underwater mortgages on our books at par. We know they’re not worth 100 cents on the dollar, and so do you. But our accounting conventions allow us to pretend that they are worth that much, and as a result we’re managing to kid ourselves that our assets are worth a lot more than they really are. If we modify the loans while keeping the principal amounts constant, we can continue to carry those loans on our books at par. But if we do principal reductions, the accounting conventions finally grow some teeth, and we’re forced to take a write-down. Since we don’t want to recognize reality and take that write-down, we’re simply going to avoid doing principal reductions instead.”

Since it seems to be impossible for anybody to remove DeMarco from his supposedly interim position, he might as well come out and say this. After all, no one seems to be capable of firing him, no matter what he says.


StephanieRenee, what you are proposing is much like a “short sale”. The borrowers are able to sell (if they wish) but any profit over the reduced principal goes to the lender. The difference is that your proposal would also reduce the loan payments *without* the borrower needing to move out.

Any government spending program would stimulate the economy, but they might not all do so equally. Your proposal involves a large immediate writedown (e.g. $100k) to provide reduced mortgage payments (e.g. $5k/year lower) over a 30-year period of time. The stimulus would be greater if that $100k were spent over a shorter period of time. This program would benefit a small number of households at a high cost with only a slight increase in expendable income. Simply not effective stimulus.

“The average American did not create the problem we face today.”

Nonsense. The average American happily joined in the game, believing that this was the easy path to wealth. (After all, real estate always rises, right?) The average American was clearly duped — but nonetheless played a critical role in creating the problem. Prices do not shoot through the roof without average American’s borrowing and buying at inflated prices!!!

P.S. Can’t really call them “homeowners” when they have no equity in the property.

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America isn’t crowdsourcing its policies

Felix Salmon
Nov 10, 2011 17:26 UTC

Anil Dash, of Expert Labs, is very excited about the latest government action on student loans, because he’s convinced that it was driven by the White House petition site he helped to set up.

Something remarkable happened here:

  1. A regular citizen, not a lobbyist or politician or CEO, made a suggestion of a smart idea on the White House’s petition website.
  2. That idea got promoted through social media, filtering its way out through Twitter and blogs and Facebook.
  3. One month later the administration endorsed a variation of the idea, making it actual policy and helping over a million and a half Americans to have more money in their pocket at the end of the month.

Every time these milestones and successes are achieved, skeptics want to scoff. “Maybe this guy’s a plant!” “They’re only gonna accept ideas they already agree with.” “I bet most of the ideas are stupid.” “Why would they really listen to us?”

In this example, we see refutations of many of these objections.

This would be quite amazing and wonderful, if it were true. But it’s not true.

For one thing, it’s worth looking at the original petition, which got 32,008 signatures. Here it is in full:

Forgiving student loan debt would provide an immediate jolt to the economy by putting hundreds and, in some cases, thousands of extra dollars into the hands of people who WILL spend it – not just once, but each and every month thereafter – freeing them up to invest, buy homes, start businesses and families. This past year, total student loan debt finally surpassed total credit card debt in America, and is on track to exceed $1 TRILLION within the next year. Student loans themselves are responsible for tuition rates that have soared by 439% since 1982 and for saddling entire generations of educated Americans with intractable levels of student loan debt from which there is, seemingly, no escape. Relieve them of this burden and the middle class WILL rebuild this economy from the bottom-up!

This is pretty extreme stuff: both the idea that student loans have caused rising tuition rates — which seems to get things exactly backwards — and the idea that a trillion dollars of debt could or should simply be eradicated at a stroke. Yes, it would “provide an immediate jolt to the economy”. But it would do so in an incredibly inefficient way — if you’re going to do a $1 trillion stimulus, there are much better ways of doing so.

Yes, the idea got some traction — enough traction that Justin Wolfers felt the need to comprehensively demolish it in a piece headlined “Forgive Student Loans? Worst Idea Ever”.

So Anil’s first point is simply wrong. Yes, a regular citizen suggested something on the White House’s petition website. But it wasn’t a smart idea: it was a pretty stupid idea.

Anil’s second point is right — the stupid idea did indeed get promoted through social media. Social media can be quite good, it turns out, at promoting stupid ideas.

But what of Anil’s third point? Did the Obama administration indeed sign on to the Worst Idea Ever? No, it did not. Instead, it tweaked something called the income based repayment policy so that certain benefits will go into effect in 2012 rather than in 2014. And it allowed students to consolidate their federal student loans into one loan, to “give borrowers the convenience of a single payment to a single lender”. Which is nice, but hardly a big deal.

It’s a real stretch to call this “a variation of” the original idea, which called for student loan forgiveness. There’s no new forgiveness in the new announcements — and the old forgiveness is the kind of forgiveness which only takes effect after 20 years. Not exactly what “Robert A” of Staten Island had in mind.

On top of that, it defies credulity to suggest, as Anil does, that the White House announcement was in any way of form “crowdsourced policy”. Robert A’s suggestion — which, remember, had none of the elements of the policy that was eventually put into place — was uploaded on September 23; the new policies were announced on October 26.

Earth to Anil Dash: policies like this do not get hatched, implemented, and announced in the space of 23 working days. I can guarantee you that these student-loan proposals were in the works long before Robert A’s suggestion was made, and that they would have been announced anyway, even if the petition hadn’t existed.

It’s pretty obvious what happened here: the administration wanted to make it seem as though the petition site was having some useful effect, and so it took a policy it would have announced anyway, and declared that the policy was in response to some petition. It just didn’t do that very well, since the announced policy in fact bears almost no relation to what the petition was asking for.

So let’s not get cyber-utopian about crowdsourced policies: they haven’t happened yet, they’re unlikely to happen in the future, and insofar as they do happen, the crowds in question will not be virtual crowds on a White House website, but rather real crowds at places like Tea Party rallies or Occupy Wall Street. The internet is a good way of organizing people to turn up in person. It is not in any way an alternative to doing so, at least if you want to change government policy.


“Better to restore support to bring state schools back down within reach of more students.”

An admirable goal, but I would like to see the additional funds spent on education rather than luxury dorms and sports complexes. Can we not find a way to tease these costs out of the core operations? Perhaps make them optional, so that cost-conscious students who are interested in a quality education might not be forced to take out loans to support the Penn State football team?

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Europe’s leadership deficit

Felix Salmon
Nov 8, 2011 16:09 UTC

photo.JPGSometimes the conventions of dead-tree newspapers are much more effective at getting a story across than the same article on a website. Landon Thomas’s 1,100-word piece on George Papandreou is a case in point: you can work through the whole thing, or you can glance at it in the paper, where a pair of sub-heads do the job rather effectively. “Prime Minister Lacked Forcefulness” says one; the other tells us that “a leader proved unable to connect with constituents.”

Meanwhile, a similar prime ministerial ousting seems to be taking place in Italy, where the highly forceful Silvio Berlusconi — a man who connects viscerally with his constituents — looks as though he might get pushed aside in the national interest much as Papandreou was.

What we’re seeing here is the crucial role that national leadership has to play in sovereign debt crises. There have been questions over Italy for a while, but conventional wisdom has generally had it as being either the third or the fourth of the PIGS dominoes to fall. Instead, it now looks as though it’s falling so fast it could even, conceivably, overtake Greece.

The amorphous blob known as the “international community” — as represented by the likes of the ECB, the IMF, and even the US Treasury — is playing a dangerously technocratic game in Italy, largely oblivious to the enormous tail risks involved. The general idea seems to be that Berlusconi is a massive liability, but that underneath it all, the fiscal program he’s being forced to agree to is a good one. Kick him out, install a more professional technocrat, and all should be fine.

But just look at Greece, and the fate of Papandreou — the very model of a modern professional technocrat. When the populace is revolting and the government is imposing tough choices on its citizens, you need someone in charge who can do more than navigate committees and corridors in Brussels and Washington. In fact, that kind of thing is best delegated to finance ministers and central bank governors. The leader of the country has a much more important job — which is to lead the country.

I’m thinking here of Brazil, which managed to come out of its own debt crisis, in 2001, thanks to some very smart and able technocrats at the finance ministry and central bank. But — and this is crucial — it was also led by a popular and charismatic leader, who managed to persuade the country that he was acting in its best interests. There are many people who deserve credit for the fact that Brazil avoided default in 2001-2, but Lula — an uneducated union leader without a technocratic bone in his body — has to be at the top of the list.

At the same time, and crucially, Lula had the full support of the international community in everything he was doing. At no point was any entity as powerful as the ECB or the German government using sticks, threatening to force him into default if he didn’t do what they wanted. Everybody understood that their interests were aligned, and that it would be best for all concerned if they tried as hard as possible to work with rather than against each other.

And this is why the current Europe crisis is looking so bad. Interests aren’t aligned at all: everybody wants to push the costs of the crisis onto someone else. And in the past couple of weeks, things have gotten significantly worse: the northerners have started quite explicitly threatening the southerners with a lack of cooperation and the consequent inevitable default if they don’t pick up their game.

This is a strategy which is almost certain to end badly. It can work in the short term — but only in the very short term. Because if the markets think there’s a serious risk that the Eurozone powers might let Italy fall, then they will simply walk away. And suddenly the entire burden of financing Italy’s budget deficit for the foreseeable future will fall on the ECB, Germany, and the rest. Which is a situation which is simply unsustainable.

Or, to put it another way: Europe has a leadership problem raised to the 17th power. One weak or bad leader — Papandreou, or Berlusconi — can suffice to hole the euro project below the waterline. But parachute in the best of all possible leaders into Greece and Italy, and you still have a problem. There’s Germany, and France, and the ECB, and even the likes of David Cameron and Tim Geithner meddling where they’re not really welcome. And the only way that this crisis can work itself out effectively is if they all agree on the same solution.

But the essence of leadership is, well, leading. It’s not simply agreeing to do the same thing that the other 16 guys want to do. In Brazil, Lula set the course, and the international community — as well as his own technocrats — implemented it and made sure it worked. There was no doubt who was in charge. In Europe, no one has a clue who’s in charge, and 17 different people all want to set the course. Which means, I fear, that it’s doomed.


“Europe’s” leadership deficit? What about ours? Not only do we have a bigger leadership deficit, but we have bigger trade and budget deficits, too. Do lots of deficits make us a deficient nation? If we’re a deficient nation, can we still be considered great, just because we have low taxes? And if that’s the only criteria for greatness, isn’t Greece great also, as I hear they have low taxes?

Posted by KenG_CA | Report as abusive

Has Davos Man sold out Greece?

Felix Salmon
Nov 7, 2011 18:51 UTC

George Papandreou is Davos Man, literally: he’s been there for the past couple of years, and even if he steps down now I suspect we might see him up the alp in 2012, too. Matt Yglesias reckons this is bad for the Greeks:

At the end of the day, had Greece played chicken and insisted on a better deal, I think the Germans would ultimately have paid up…

That it’s playing out this way is, I think, an example of a benign consequence of the rise of the global ruling class. The leadership of a small upper-middle-income country is willing to do something unpopular and likely contrary to the interests of its population for the sake of the greater good. Still, as a structural matter I think it’s a fairly disturbing trend.

It’s definitely possible for national leaders to act in the best interests of Davos, rather than in the best interests of their own country. Or, rather, to kid themselves that what’s in the best interests of Davos is in the best interests of their own country. Exhibit A is probably the 2008 decision by Irish finance minister Brian Lenihan to guarantee all the debts of Ireland’s banks — although ultimately that decision hurt the entire Eurozone much more than it helped a relative handful of Irish bank creditors.

As for the decision by Greece’s leaders to close ranks and refuse to allow the Greek populace to throw a spanner in the works of a bailout, it’s certainly possible to see this — as Yglesias does — as a capitulation to Germany and the international community. On the other hand, it’s easier to see it as a way of cutting off some very nasty tail risk. Even if Yglesias is right and the Germans would ultimately have paid up, there’s a significant non-zero possibility that they wouldn’t have done, and the whole situation would have ended up collapsing, with Greece getting nothing. And that would have been disastrous, not only for the eurozone but especially for Greece.

More generally, it’s really hard for a country to play chicken with its lenders when it’s running a massive primary deficit. In fact, I can’t think of a single case where that ever happened. Greece needs Germany more than Germany needs Greece, both of them know it, and Germany is looking increasingly willing to cut Greece off if it refuses to cooperate.

The only way for Greece to get real negotiating leverage over Germany would be to start running a primary surplus, thereby giving itself a credible threat in terms of simply repudiating its sovereign debt. But of course running a primary surplus would require significantly more austerity than even the riot-inducing policies currently in place. For the time being, Greece finds itself in the same position as most distressed debtors — ceding control and authority to its creditors. That might not sit well with Greece’s proud citizens. But it’s a natural consequence of borrowing so much money from other European countries and international banks.



The notion that any country needs private banks more than the private banks needs them is not just stupid, it is down right dangerous. If your assertion were correct; how is it that the ONLY country in the world to tell the bankers to stuff it ICELAND is doing so much better than any of the countries that gave in to the private bank black mailing? The people as a whole of a an entire country OWE NOTHING to any private bank anywhere in the world. Banks loan money at interest. They receive interest payments for the simple reason that every loan has inheirent risk associated with it. Have any of these private banks ever, ever paid out dividends to the citizens of entire countries from which they are now demanding payment? No of course private banks have never, ever shared private profits with the public. As such the public has NO LEGAL, MORAL OR ETHICAL responsiblity to repay loans gone bad.

The current world wide private banking fraud and blackmail scheme is simply a gobal criminal conspiracy. A small group of powerful international banks got together and are trying to rip of the world at large. So far with the media in their pockets they are succeeding.

All the people of the world have to say is no thanks. Take you private profits and private debts and have a nice day. It really is that simple. Iceland proved it is possible to stand up to the crooked banks and the crooked politicians they own by just saying NO!!!!!

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Bailouts: Geithner vs Barofsky

Felix Salmon
Nov 7, 2011 06:05 UTC

David Leonhardt has managed to get a quite astonishing on-the-record quote from Tim Geithner:

“The central paradox of financial crises,” Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, “is that what feels just and fair is the opposite of what’s required for a just and fair outcome.”

This is textbook Geithner. For one thing, it’s pure Technocrat. Geithner, here, is the worldly policy wonk, explaining why it’s silly to simply do what feels right. In fact, you should do what feels wrong!

The quote is also extremely defensive — as it probably should be, coming from the one member of Obama’s economic team who played a central part in orchestrating the Bush bailouts.

And I can’t help but see the influence of Occupy Wall Street here, too. They’re demanding justice; and Geithner is, essentially, dismissing them as unsophisticated rubes. If only they understood what he understands — then they’d see that the bailouts were in their own best interest! Still, they’re setting the terms of the debate — to the point at which Geithner now considers such questions “central” to financial crises in general. (I don’t recall him talking that way when he was at the New York Fed.)

Meanwhile, Zachary Goldfarb gets an equal-and-opposite quote from Neil Barofsky:

“There’s a very popular conception out there that the bailout was done with a tremendous amount of firepower and focus on saving the largest Wall Street institutions but with very little regard for Main Street,” said Neil Barofsky, the former federal watchdog for the Troubled Assets Relief Program, or TARP, the $700 billion fund used to bail out banks. “That’s actually a very accurate description of what happened.”

Goldfarb goes into chapter and verse explaining what Barofsky is talking about — the way that too-big-to-fail banks have gotten ever bigger and more profitable, at the expense of the rest of us. And after reading his article, it’s extremely difficult to understand what Geithner might be talking about. Does he think that what we’ve seen on Wall Street in the past year or two is a “just and fair outcome”? If not, is he saying that he did “what feels just and fair” instead of what was the right thing to do?

What’s undeniable is that Barofsky is easy to understand, while Geithner is being cryptic and opaque. That might be because Leonhardt didn’t give him enough space to explain himself more fully, or it might be because Geithner simply isn’t a great communicator. But knowing the Treasury press office, I suspect that negotiations between Leonhardt and Treasury were required before Geithner’s quote became on-the-record. Which does make me wonder what they thought that they were saying here.


Europe was forgiven their debt after WWII. They will try this again but we are in a different time and have no assets to help.

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Corzine’s tone-deaf statement

Felix Salmon
Nov 4, 2011 15:23 UTC

Jon Corzine has not said anything in public since his firm and his reputation imploded at the end of last week. So his first public statement was always going to be closely watched. And it’s a doozy:

I have voluntarily offered my resignation to the Board of Directors of MF Global. This was a difficult decision, but one that I believe is best for the firm and its stakeholders.

I feel great sadness for what has transpired at MF Global and the impact it has had on the firm’s clients, employees and many others.

I intend to continue to assist the Company and its Board in their efforts to respond to regulatory inquiries and issues related to the disposition of the firm’s assets.

Firstly, this was a difficult decision? No, Jon, it wasn’t. You had no choice. If you hadn’t quit, you would have been fired. In fact, I’m kinda shocked the board hadn’t got around to firing you before today. If you drive a broker-dealer into bankruptcy with the loss of $630 million in client funds, resignation is a no-brainer. The only question is whether you’re going to end up going to jail.

And secondly, would it be too much to ask for just a tiny hint of remorse here? A short apology, perhaps, to the thousands of employees and customers who have lost their jobs or their money?

I’m sure you’re sad — that often happens, when you become the living embodiment of the destructive greed of the 1% and a hate figure for millions. But are you sorry? Or are you going to pull a Dick Fuld and live in denial, convinced “until they put me in the ground” that you’re a victim rather than a perpetrator?

This kind of thing is why there’s so much anger aimed at the 1%. Chances are, Corzine will never be prosecuted, let alone convicted, and that he’ll enjoy the comfortable retirement of a centimillionaire for decades to come. He deserves much worse. But right now, when it matters, he can’t even bring himself to say he’s sorry.


I wonder why we don’t see any reference to the fact that Corzine has to have committed at least one felony, and probably many? Certainly as the CEO of MF Global he was required by Sarbanes-Oxley to certify personally that they had adequate accounting controls. The missing money is incontrovertible proof that they didn’t, and the nice thing is that the prosecutor doesn’t have to prove intent to defraud.

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The Obama administration’s biggest macroeconomic mistake

Felix Salmon
Oct 13, 2011 14:05 UTC

I’m late to Ezra Klein’s big article about whether the Obama administration could have avoided our current economic woes, because I was having dinner last night with the head of the Bureau of Economic Analysis, and I wanted to see what he had to say first. And I’m glad I did!

In any case, here’s Ezra, who looks at the famous chart projecting falling unemployment with the stimulus plan — something which, obviously, never happened.


To understand how the administration got it so wrong, we need to look at the data it was looking at.

The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didn’t know that it had been run over by a truck.

This is an argument I’m very sympathetic to. There’s a counter-argument, which Ezra goes into at some length, which says that even if we’d known how bad the economy was at the end of 2008, it simply wasn’t politically possible to get a bigger stimulus than the one we got. But how far off were we, really? I talked to the director of the BEA, Steve Landefeld, last night, and he made the case that we weren’t all that far off. If he’s right, the Romer and Bernstein projections wouldn’t have been all that different even if we’d known the exact figure.

One thing it’s important to remember, here, is that the numbers Ezra’s quoting are quarterly figures which are then annualized by raising them to the fourth power. So what we’re actually talking about, for the fourth quarter of 2008, was en estimate that the economy had shrunk by 0.9% that quarter, which was ultimately revised to say that the economy had in fact shrunk by 2.2%. That’s a big difference, of 1.3% of GDP in one quarter alone. So how come, if you look at the size of the recession as a whole, the revision actually seems to shrink, to just 1%?

The revised estimates show that for the period of contraction from 2007:Q4 to 2009:Q2, real GDP decreased at an average annual rate of 3.5 percent; in the previously published estimates, it had decreased at a rate of 2.8 percent. The cumulative decrease over the six quarters of contraction is now estimated as 5.1 percent, compared with 4.1 percent in the previously published estimates.

The problem here is that the “previously published estimates” were the ones which came out a few months after the Romer-Bernstein graph, showing the economy shrinking by 6.3% in the fourth quarter of 2008. Here’s the BEA’s chart; note that it simply doesn’t show the 3.8% estimate.


But what this chart does show is that the really big miss, as far as GDP statistics are concerned, was in the fourth quarter; the other quarters weren’t nearly as bad. And I just don’t believe that a single datapoint for advance GDP would have thrown off the unemployment estimates of some of the world’s smartest economists by that much. Would Romer and Bernstein have projected slightly higher unemployment numbers if they’d known the truth about GDP? Probably. But I doubt they’d have been substantially higher. And there’s no way that their “with stimulus plan” estimates would have gotten anywhere near 10%.

Ezra does a very good job of explaining why that is. Romer and Bernstein were basically treating the recession as though it were a common-or-garden cyclical downturn. Which was a big mistake, and one which was pointed out in March 2009 by Carmen Reinhart and Ken Rogoff. “The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage,” they wrote, adding that “so far the U.S. experience has mirrored past deep banking crises around the world to a remarkable extent”. And economies simply do not recover quickly from deep banking crises — financial crises, as a rule, cause L-shaped recessions rather than V-shaped ones.

The fiscal prescription for an L-shaped recession is very different from the fiscal prescription for a V-shaped recession. And what we got was a prescription for something which would accelerate the pace at which we recovered. It was not something which would try to fix the fundamental problem of overleverage, which both caused the crisis and which now threatens to hold back the economy for a decade or more.

Here’s Ezra:

In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.”

To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”

The Obama administration, perhaps cognizant of the politics, was not nearly so bold. It focused on stimulus rather than housing debt. The idea was that if people could keep their jobs and pay their bills, they could pay their mortgages. But today, few on the Obama team will mount much of a defense of its housing policy.

Overall, I’m still unhappy with the state of macroeconomic statistics. I’m not necessarily unhappy with the BEA itself, which basically just has the job of cobbling together GDP data from a very disparate set of inputs, many of which — especially when it comes to the financial sector — are of surprisingly low quality. But I do think that we’d be much better off with a coherent, unified, and well-funded system of data-gathering, rather than outsourcing it to dozens of different public and private sources.

And I’m definitely (albeit with hindsight) unhappy with the way in which the Obama administration hasn’t even tried to fundamentally tackle the enormous amount of debt in the US economy, and the way in which that debt overhang is likely to hold back economic growth for the foreseeable future. We’re turning Japanese, here, and we’re not doing a damn thing about it.


1. If to dig deeper into BEA’s publiations one can find an unofficial estimate of the uncertainty in the GDP growth rate of 1% per year or annualized 4% per quarter. Thusall revision you have mentioned are within the limits and 8.9 not worse, actually, than 6.3%. Both values inside 4%.
2. Okun’s law is very relibale for the US(http://mechonomic.blogspot.com/2011/1 0/some-corrections-to-david-altigs-job.h tml) but BEA statistics makes a big difference when used as it is – dhttp://mechonomic.blogspot.com/2011/10/ beware-of-bea.html
3. real proble is that there is no comparability of GDP estimates over time – http://mechonomic.blogspot.com/2011/10/b eware-of-bea.html

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