Felix Salmon

From today’s WaPo report it seems that the shortlist to replace Larry Summers at the NEC has been whittled down to three men — Gene Sperling, Roger Altman, and Richard Levin.

The first thing to note here is that, as Brad DeLong notes, the delay in replacing Summers does not reflect well on the White House’s professionalism and ability to get things done. It’s been over 14 weeks since Summers officially announced his departure, and I’m sure the White House has been looking for a replacement for longer than that. But they’ve left it so long that the position is now unfilled. Writes DeLong:

Either promote Jason Furman to the job, or tell him who he is going to be working for. Keeping your staff positions staffed is the first task of government. It’s not rocket science.

The second notable characteristic of the three is that they’re all multi-millionaires with close ties to Wall Street. None more than Altman, of course, who has his own bank. But Levin is on the board of American Express, which paid him $181,362 in 2009, and where he has shares and “share equivalent units” worth $539,000. Which might not be a huge sum compared to the $1.5 million or so that he’s earning at Yale, but is still more than enough to make him a denizen of Wall Street rather than Main Street.

Finally there’s Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street. The other two have well-defined and easily-understood jobs; Sperling, by contrast, signed up with the Harry Walker Agency and started giving speeches to anybody with cash, including not only Citigroup but even Allen Stanford. He also wrote a monthly 900-word column for Bloomberg for $137,500 a year, which works out at about $13 per word. Then he started “advising” Goldman Sachs on its charitable giving, which advice came very expensively indeed:

Goldman Sachs paid Sperling $887,727 for advice on its charitable giving. That made the bank his highest-paying employer. Even Geithner’s chief of staff Patterson, who was a full-time lobbyist at the firm, did not make as much as Sperling did on a part-time basis. Patterson reported earning $637,492 from Goldman Sachs [in 2008].

As Ezra Klein says,

His duties at Goldman Sachs were primarily on a $100 million charitable project to help raise the skill levels of poorer women in developing nations, but in some ways, that makes the transaction more peculiar: You tend not to get paid that much for offering guidance to charitable endeavors. It is very hard to believe that Goldman Sachs wasn’t attempting to buy influence with a politically savvy economist who had good relations — and would later go to work for — the incoming Democratic administration.

Noam Scheiber does his best to defend Sperling, but is far from persuasive—the general picture he paints is of a man whose heart might be in the right place but who never seems to get anything done. The last time he was at the NEC he sat quietly by while Treasury pushed through various deregulatory measures; within the Obama administration his main claim to fame seems to be the bank tax, which never actually got enacted.

More generally, Sperling has done nothing to counter the general impression that he’s one of many Rubinites in the administration, in the context of a political atmosphere where one of the few points of agreement between the right and left is that the departure of Summers can and should be taken as an opportunity to finally put as much distance between Obama and Rubin as possible. As Mark Thoma says,

A break from the Wall Street connected side of the Clinton administration would have political value. Even better, no matter the choice, would be to show through action that the administration is, in fact, determined to reduce the chances of another meltdown by being tough on the financial sector. But, so far as I can tell, that doesn’t seem to be the direction Obama intends to go.

The problem, of course, is that Wall Street became so big and so pervasive over the course of the boom that it’s hard to find people to run the NEC who haven’t been paid large sums by banks at some point. And even if they are relatively pure on that front, there’s every reason to expect that they’ll pull an Orszag and start taking millions of Wall Street dollars the minute they leave. Obama can try to distance himself from Wall Street, but it isn’t easy.

On Saturday, Joe Nocera aimed a well-deserved broadside at Peter Wallison, one of the Republican commissioners seemingly doing their best to scupper the work of the Financial Crisis Inquiry Commission. He said that Wallison’s theory of the genesis of the financial crisis is “not, as they say, reality-based,” and noted Wallison’s idiosyncratic defense of his position:

Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he’s right and I’m wrong. Well, we’ll see.

This is silly: if Wallison had smoking-gun documents proving Frannie’s culpability in the crisis, I’m pretty sure we’d've seen them by now. Nocera and his co-author, Bethany McLean, have done a lot of digging into Frannie, and for the time being I’ll trust Nocera that such documents simply don’t exist.

But Wallison isn’t giving up, and has responded today with a blog post entitled “Joe Nocera’s Hypocritical Attack.” He adduces no hypocrisy in what Nocera writes. But he does repeat that he has a super-secret stash of documents which will back up his case:

The primer that I and three of my Republican colleagues signed sought to outline the major issues that we thought the Commission should address. It was not a reply to or a dissent from the report of the Democratic majority, which is still a work in progress. It was issued on December 15 because that was the date on which, under the law that established the Commission, its report was supposed to be issued, and the primer was released in recognition of this statutory deadline…

In our conversation as he was writing this article, he told me that his reporting “has shown that Fannie Mae and Freddie Mac simply followed Wall Street” into buying subprime and other risky loans. I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report.

This isn’t even internally consistent. If Wallison wanted to release his report in time for the December 15 deadline, why wait until January, long after that deadline passes, to reveal these facts? More to the point, Nocera has researched the financial crisis in detail—to the point of publishing an entire book about it—and has a job, as a newspaper columnist, where he’s meant to publish his opinions on the causes of the crisis. There’s no way that he should hold off on doing so just because a Republican hack like Wallison hints that he might have new information.

Indeed, Wallison’s language here shows just how weak his smoking gun is likely to prove: note that he talks about “what I might write in connection with the Commission’s report.” The word “might” is weaselly enough; the word “I” is the biggest giveaway, however — since if there really were compelling new information here, “we” would surely be writing it up in the main body of the report, instead of shoving it off into a Wallison-penned addendum.

Still, it’ll be interesting to keep an eye on Wallison’s blog after the FCIC report is published. Maybe then he’ll come clean, and point out exactly what information he thinks will change Nocera’s mind.

I did enjoy reading John Cassidy on Larry Summers:

There are things not to like about Summers, one of which is the fact that he appears to hold the Fourth Estate in contempt. At the same event where he failed to thank his boss, a speech to the Economic Policy Institute, a journalist asked him what he would miss most about being in the White House. “Reporters like you,” he replied with a chuckle. Doubtless, Summers thought he was being amusing. Still, reporters need to get over it. After all, we aren’t the only folks Larry considers intellectually beneath him. Such a category would include most members of President Obama’s cabinet and their top policy advisers; many of his colleagues in the White House; virtually all foreign officials; ninety per cent of the Harvard faculty; and a similar proportion, or possibly higher, of his fellow academic economists.

Cassidy goes on to criticize Summers on quite a lot of other fronts too, before saying that ultimately we have to judge him on whether he guided Barack Obama in the right policy direction. His conclusion there: Summers noticed the “glaringly obvious” fact that there was a crisis going on, and did something about it. After that, “the Obama Administration has made a series of policy errors for which Summers must share responsibility”.

Essentially, the only good thing that Cassidy can find to say about Summers is that he was “largely right” in terms of identifying and responding to the crisis. What Cassidy fails to note is that Summers had already identified the crisis and said what should be done about it before he joined the Obama team. In many ways, his crisis-related policy prescriptions, which he laid out quite pompously in the pages of the FT before getting tapped by Obama, were his very public job application — and he wound up being passed over for both of the jobs he was applying for.

Obama always knew, pretty specifically, what policies were needed to respond to the crisis — and in many cases those policies had already been enacted by the Bush administration. Summers was chosen because he believed in those policies; it’s simply not the case that the policies were enacted because Summers was chosen.

Which brings Cassidy’s list of “things for which we owe Summers some gratitude” down to absolutely nothing.

Shahien Nasiripour reports this morning that the Financial Crisis Inquiry Commission has, to all intents and purposes, fallen apart. The four Republicans seem set to issue their own minority report, sticking to discredited Republican talking points which blame the government and Frannie for the crisis, with especial focus on the long-standing and harmless Community Reinvestment Act. As a result, the official report will be received as some kind of equal-and-opposite Democrat view, rather than a definitive take along the lines of the 9/11 Commission report.

Given that putting this report together seems to be impossible, here’s my suggestion: it should go open-source. The FCIC’s great advantage over other narratives of the crisis is its subpoena power: it has access to enormous amounts of information no one else has seen. If it can’t collate that information into a definitive report, it should make all the information public—including everything in that notorious Goldman Sachs data dump—and let all of us have at it. Collectively, we should be able to do at least as well as the partisans in DC.

Update: You really can’t make this stuff up:

During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

I enjoyed Dana Milbank’s farewell to Larry Summers today, complete with cameo from Reuters’s very own Caren Bohan:

It was the final question from the audience following Larry Summers’s final speech as President Obama’s chief economic adviser. “What,” asked Caren Bohan of Reuters, “will you miss most about being in the White House?”

Summers could have taken the chance to wax eloquent about the virtues of government service, but instead he glared at the questioner. “Reporters like you,” he said. Awkward laughter followed. Bohan’s eyes widened, and Summers chuckled at his little joke.

For a man delivering his valedictory, with TV cameras rolling, it was oddly petulant…

The parting shot was vintage Summers: a man who rose to national prominence because of his intellect but is now leaving government known more for his dyspepsia…

In his remarks, he spoke of not a single wrong decision he made.

Summers decided to leave public service with a long speech recapitulating a lot of the economic themes of his tenure at the NEC. There are notable parts to the speech; I’m particularly astonished that Summers thinks the government needs “to make it easier to patent a new idea or innovation”, for instance, in a world where patent-trolling is rife and where Nathan Myhrvold can rack up a multi-billion-dollar portfolio of more than 30,000 patents in a very short space of time, any one of which could stifle genuinely valuable innovation for years.

More notable, to me, is the fact that Summers did not, on leaving the White House, take the opportunity to thank the president for the opportunity to serve his country during this most tumultuous economic period. I don’t think Summers thinks that way: in his mind, the thanks should all flow the other way.

Summers is a virtuoso at not answering journalists’ questions, partly because he doesn’t feel accountable to the public in the first place. Instead, he feels that the public, and its elected representatives, are little more than political obstacles standing between himself and some kind of optimal policy which he would happily implement if only it were politically possible to do so. The public is often wrong; Summers himself, not so much, even as the unemployment rate has remained stubbornly elevated far above the levels that he foresaw when he joined the Obama administration.

It won’t take long, I’m sure, before Summers, like Peter Orszag before him, decides that a hefty academic salary is insufficient for his needs, and starts accepting millions of dollars from the financial services industry which was in large part responsible for the crisis he’s been trying to navigate. And as Summers revolves through that ignoble door, the president will surely be wondering who got the better deal out of the arrangement of the past two years.

At the bottom of the NYT‘s long and fascinating account of the feud between Andrew Cuomo and Steve Rattner, there’s a startling kicker:

After earning millions from managing Mr. Bloomberg’s fortune, Mr. Rattner now advises the billionaire mayor without pay, as the terms of his S.E.C. settlement require, reducing a onetime Wall Street titan to a volunteer.

This is news, I think, and fascinating, to boot. In its press release, the SEC said only that Rattner had “consented to the entry of a Commission order that will bar him from associating with any investment adviser or broker-dealer with the right to reapply after two years”; when Dan Primack called Bloomberg for comment, he was told that “Mr Rattner is a friend whose advice the Mayor has and will continue to rely on.”

Why is Rattner working without pay for Bloomberg? A few possibilities present themselves:

• Bloomberg is somehow paying Rattner under the table, or in kind, or with some kind of nod-and-a-wink understanding that Rattner will somehow be able to invoice for services rendered at some point in the future, a bit like Mike Milken managing to charge $50 million in M&A advisory fees even after he was barred from the securities industry for life.
• Rattner is hopeful that he’ll be able to charge for his investment-advisory services once he’s able to reapply in two years; obviously it’s worth staying in charge of Bloomberg’s multi-billion-dollar portfolio for a couple of years unpaid if you get to start charging for managing it in the foreseeable future.
• Rattner loves the idea that he’s found a loophole in the SEC agreement he made, and can continue to manage Bloomberg’s money for him even though it would seem that the SEC agreement prevented him from doing that.

I suspect that the real reason, though, is hinted at a bit earlier in the NYT story, when it says that Bloomberg is Rattner’s “most coveted and prestigious client,” and that Rattner’s relationship with the mayor “has conferred credibility and stature on Mr. Rattner despite the legal pall that hangs over him.” Rattner needs a rabbi to protect him, and Bloomberg is the best possible rabbi he could have, with the possible exception of Barack Obama himself.

Earlier in the piece, there’s this:

The attorney general was known to be especially galled that in February 2009, in the midst of the investigation, Mr. Rattner had accepted the high-level post in the White House, overseeing a task force reorganizing the American automobile industry, and later announced he would write a book about the experience.

Cuomo clearly thinks that Rattner was hoping to protect himself with Obama’s coattails, and generally bolster his reputation as much as possible through public service. When that didn’t work, Rattner turned from Obama to Bloomberg for protection. I wonder how much that’s worth to him—how much Rattner would be prepared to pay in order to retain his connection to Bloomberg.

I love the way that Michael Mundaca, the assistant Treasury secretary for tax policy, has taken to the blogs to help up some of the perennial confusion surrounding taxes. And yes, he tackles the biggest question of all, about those 1099s:

While businesses do not need to start filing information returns on the expanded set of payments until January of 2013, some groups have already raised concerns about the burden that this new provision may impose. As the President has said, it is important to look at whether this burden is too great for businesses to manage. Treasury and IRS are sensitive to these concerns and will look for opportunities to minimize burden and avoid duplicative reporting… Already, we have used our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. So, whenever a business uses a credit or debit card, no information report will need to be filed, and there will thus be no new burden under the new law.

This is a start, even if it’s clearly insufficient; the good news, at least, is that there does seem to be a bit of time to fix things. If we can’t reach bipartisan consensus on this, then we’re never going to be able to pass anything in the next two years.

More interesting is the way that Mundaca defends the way in which dividend and capital-gains tax rates are lower than income-tax rates. I’ve never understood it, but Mundaca gives the best explanation I’ve yet seen:

The arguments in favor of taxing capital gains at a rate lower than that for ordinary income include offsetting the taxation of purely inflationary gains; reducing the tax on risky investment that would otherwise be disadvantaged by the tax system, especially because of the limits on deducting capital losses; and offsetting the “lock-in” effect where high capital gains rates can impede economically desirable asset and portfolio reallocations by imposing a tax on the sale of capital assets that can be deferred to the extent that the assets are not sold. With the exception of a few years following the Tax Reform Act of 1986, long-term capital gains generally have been taxed at preferential rates since 1921.

I’m not convinced, and I’d still love to see the tax rates brought into line with each other, if only because financial engineering makes it pretty easy to take income and convert it into capital gains, if you’re rich enough. (Don’t get paid yourself, just set up a company, then sell the company.) That’s what the private-equity honchos all did, and their low tax rates are unconscionable.

Still, the inflation argument is a good one: inflation is bad enough without having to pay taxes on it. The next argument, about encouraging risky investment, is weak—capital’s always going to flow to where it gets the best return. And as for “lock-ins”, I have some sympathy, but suspect that if it was really a problem then total return swaps would simply become a lot more popular.

In any event, let’s have more of these forums where Treasury technocrats talk directly to the public. Anything which disintermediates journalists has to be a good thing, right?

Update: Jimmy P reckons that far from raising capital gains taxes so that they’re the same as income taxes, they should instead be lowered to zero!

Is Vikram Pandit going to go back to Davos in January? He certainly seems to enjoy himself at well-meaning technocratic gabfests:

“I kind of feel like I’m living in parallel universes,” Mr. Pandit said in a forum that included Peter Sands of Standard Chartered Bank and Stephen A. Schwarzman of the Blackstone Group. “I’m here in Korea and I feel this warmth and need and the sense of trying to have a dialogue with each other, but then when I get back to my real universe, it’s cold in that universe.”

Well yes, Vikram, places like the G-20 Business Summit can credibly be described as a parallel universe. But not in a good way. They’re little bubbles of hubris and self-regard, where everybody is admirable, no one ever asks tough personal questions, and the enemy is a faceless mass of populists who just don’t know what’s good for them. I’m sure you feel all manner of warmth when you enter that particular universe, but don’t let it distract you from cold reality.

It’s good that Pandit is cognizant of the disconnect, and is willing to call such conferences out for being divorced from reality. But still, it’s so tempting to give in to their charms. Who doesn’t love to be loved?

Bloomberg’s news reporters still haven’t worked out how to link to external websites, even the US Treasury: they say that “Geithner’s appointments calendar, updated through August on Treasury’s website,” shows an off-the-record meeting with Jon Stewart, but they don’t link to it.

That’s sad, because finding the link is non-trivial. First, you go to the Treasury homepage. Then you ignore all of the links and navigation, and go straight down to the footer at the very bottom of the page, where there’s a link saying FOIA. Click on that, and then on the link saying Electronic Reading Room. Once you’re there, you want Other Records. Where, finally, you can see Secretary Geithner’s Calendar April – August 2010.

Be careful clicking on that last link, because it’s a 31.5 MB file, comprising Geithner’s scanned diary. Search for “Stewart” and you won’t find anything, because what we’re looking at is just a picture of his name as it’s printed out on a piece of paper.

In other words, these diaries, posted for transparency, are about as opaque as it can get. Finding the file is very hard, and then once you’ve found it, it’s even harder to, say, count up the number of phone calls between Geithner and Rahm Emanuel. You can’t just search for Rahm’s name; you have to go through each of the 52 pages yourself, counting every appearance manually.

Is this really how Obama’s web-savvy administration wants to behave? The Treasury website is still functionally identical to the dreadful one we had under Bush, and we’ve passed the midterm elections already. I realize that Treasury’s had a lot on its plate these past two years, but much more transparent and usable website is long overdue.

Update: Tom Lee explains that the horrid format of the calendar might well be a function of the fact that there still isn’t decent electronic redaction technology.

Update 2: ProPublica puts up the calendar in searchable form! Rahm appears on 49 of the 52 pages.

This blog became a locus, in my absence, for a fascinating debate about economics and economists, which wended its way from David Segal to Stephen Gandel to Barbara to Justin to Brad DeLong and back to Barbara again.

My favorite part of the discussion was Brad’s response to Justin. Justin made a simple point: the central tenet of economics is that incentives matter, and financial incentives in particular; economists get paid lots of money by financial institutions; and yet they get strangely touchy when anybody links these two facts.

Justin had John Cochrane in mind as the strangely touchy economist, as following his link would have shown, but Brad thought he was the person being referred to, and launched into a defense of Larry Summers and his response to Raghu Rajan at the 2005 Fed meetings in Jackson Hole.

Here’s Paul Krugman on the debate in question:

The 2005 Jackson Hole event was a sort of Greenspan celebration; still, it does come across as excessive — dangerously close to saying that if the Great Greenspan says something, it must be so. Second is the extreme condescension toward Rajan — a pretty serious guy — for having the temerity to suggest that maybe markets don’t always work to our advantage. Larry Summers, I’m sorry to say, comes off particularly badly.

Brad sees it differently; he says that Summers “did not ‘dismiss’ Raghu’s concerns”. But Summers did start off with this:

I speak as a repentant, brief Tobin tax advocate, and someone who has learned a great deal about the subject, like Don Kohn, from Alan Greenspan, and someone who finds the basic, slightly Luddite premise of this paper to be largely misguided.

Summers fits three things into this opening sentence. First, he renounces his previous dalliance with a Tobin tax — a tax based on the idea that a tiny amount of fettering of unlimited and virtually cost-free financial transactions might be a good thing. Second, he pays obligatory obeisance to Alan Greenspan. And third, he says that Rajan’s entire paper is based on a “slightly Luddite premise”.

All of these are things that Summers would do if he had been captured by the financial services industry: they’re entirely consistent with such capture. As were all of Summers’s deregulatory impulses when he was at Treasury, including overseeing the Commodity Futures Modernization Act.

Brad stands up for Summers’s intellectual honesty:

If you think that Larry pulled his punches in August 2005 on the importance of reforming compensation schemes because fourteen months later he was going to take a job at the hedge fund of D.E. Shaw, you attribute an extraordinarily degree of precognition–back in August 2005 I thought Larry had weathered the storms at Harvard and would be president until 2010 or so.

But this misses the point: Summers had already been captured when he was Treasury secretary, and he was hired by DE Shaw partly because he was captured.

Being captured is not some kind of intellectually dishonest overt bribe, where you truly believe A but profess to believe B because doing so makes you rich. It’s much more subtle than that, based partly in the wealth and success and sterling reputations of those (like your mentor Bob Rubin, perhaps) who believe B. And it’s a survivorship-bias thing, too: if you don’t believe B, you’ll never rise to the kind of position where your opinions matter as much as Larry’s do and did.

And as Barbara says, there’s a lot of framing going on too:

We have all, to a large extent, adopted this world view as our own—and that has altered both the way we perceive problems, as well as the way we analyze and try to solve them. But this way of understanding the world is, ultimately, only one of many. In certain circumstances it will fail.

Summers has a pretty unique way of perceiving, analyzing, and solving problems. Many policymakers, including Barack Obama, value his particular insights. But the fact is that most of the time Summers seems to end up doing and proposing exactly what Wall Street would most want him to do. Pace Brad, he might well be fully aware of the problems with Wall Street. But yes, by using words like “Luddite”, he does dismiss those concerns, or persuade himself that the costs of acting on them are greater than the benefits. And given that incentives matter, it’s silly to believe that his conclusions are wholly unrelated to his status as an extremely powerful multi-millionaire.

I’m a fan of Steve Rattner’s book about the auto bailout, Overhaul, and I’m also a fan of Malcom Gladwell’s very tough review of it.

There are lots of reasons to read the book: it’s a surprisingly candid and open account of life in the early days of Obama’s White House, and Rattner is happy going public with a lot of information that the White House officials in question simply assumed was tacitly off the record. He’s also happy being very rude about lots of people who rubbed him the wrong way, from Sheila Bair to former GM CFO Ray Young.

Gladwell’s main problem with the book is Rattner’s view of former GM CEO Rick Wagoner. That view is pretty simple: Wagoner had overseen the decline of GM to the point at which the only choices were bankruptcy, bailout, or both. He therefore had to go. Gladwell, by contrast, is much more charitable: he sees Wagoner as a man who fundamentally transformed GM into a competitive powerhouse, and who, in doing so, did a certain amount of unfortunate collateral damage to GM’s balance sheet.

Gladwell’s view understates the financial nightmare that was GM pre-bailout: at one point its book value was negative to the tune of $98 per share. Wagoner caused billions of dollars in unnecessary bankruptcy costs by refusing to consider or prepare for any kind of bankruptcy at all, despite the fact that his quarterly SEC statements had been showing that GM was insolvent since 2006.

On the other hand, Rattner is comically out-of-touch when it comes to running companies: finance is all that he cares about, and it’s a very narrow view of what corporate finance can and should be, too. Let’s see if you can detect a pattern here.

On Ron Bloom: “Unlike most aspiring labor activists, he went to Harvard Business School”

On Rick Wagoner: “By most accounts, he had been a golden boy at GM. After graduating from Duke University and Harvard Business School, he’d begun as an analyst”

On Harry Wilson: “Harry had been the first in his family to earn a college degree, from Harvard, and he’d gone on to earn an MBA at Harvard Business School.”

On Sadiq Malik: “a skinny, intense Pakistani American who had graduated near the top of his class at Dartmouth, taken a Harvard MBA, and worked at the Blackstone Group”

On Bob Lutz: “Harry had admired Lutz ever since hearing him speak at Harvard Business School”

On Rob Fraser: “resumed his position at his private equity firm and then matriculated at Harvard Business School”

No other institution gets this kind of obeisance in the book: Harvard gets 17 citations in an Amazon search, while Princeton and Yale get precisely one between them. And it seems that what Rattner loves about HBS — and his own Team Auto taskforce more generally — is the way that everything can be reduced to clever questions about capital structure, and decisions can then be made in an incredibly dispassionate and pseudoacademic way. For instance, the bailout of Chrysler was a very close-run thing, and the company could easily have been left to die. Here’s how it was saved:

Larry pressed us to attach probabilities to our recommendations and countered with odds of his own… he confessed that as we gave our answers, he was discounting our probabilities based on what he thought we would say… Plainly, Larry was loving this debate…

Larry called for a show of hands. His question was precise: “If you assume that the probability is 50 percent or greater that Chrysler would survive for five years, would you save it?”

This says volumes about Larry Summers: how he acts, how he thinks, how he operates politically. And it’s clear from this book that it was Summers, rather than Rattner, who ultimately made the decisions which would then be presented to the president for sign-off. (Geithner was nominally involved too, but let Summers take the wheel when it came to Team Auto.)

The fact is that neither Rattner nor Summers nor just about anybody else in Team Auto knew anything much about Detroit, about car manufacturing, or about running industrial companies. They did know that GM’s treasury was a shambolic organization which could require weeks to find out how much money it had — so they judged the treasury operation, because they were good at doing that, and then they damned the whole company by association.

There’s another fact, too, though — which is that Team Auto did wonders for the future health and sustainability of GM by forcing it into bankruptcy and extinguishing large chunks of its actual and contingent liabilities. Gladwell is far too grudging here:

Team Auto was engaged in an act of financial engineering: it used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back. This was cleverly and swiftly done. It was badly needed. But, at the end of the day, cleaning up a balance sheet is cleaning up a balance sheet.

In fact, it’s not remotely as easy as that, and the restructuring needed some very inventive bankruptcy lawyers, some extremely hard-nosed negotiators, the jettisoning of a lot of conventional wisdom about the abilities of automakers to withstand bankruptcy — and, of course, many billions of taxpayer dollars.

That Rattner’s team managed not one but two insanely complex bankruptcies in a hitherto unimaginably short timeframe is a real and noteworthy achievement of the Obama administration. Rattner is right about that. But Gladwell’s got a good point too. This kind of biz-school restructuring is easy to show off about. What’s hard is making millions of cars which are so good that the picky US consumer will buy them rather than the incredibly well-made competition — and making a profit by doing so. Eliminating GM’s monstrous debt burden by sending it through bankruptcy was a necessary step in getting there. But it’s not at heart what managing a company like GM is or should be about.

In the UK, it seems, the revolving door from big private banks into a grandee’s public-sector role doesn’t turn quite as smoothly as it does in the U.S. And so sometimes it needs a not-so-gentle shove:

John Varley, Barclays’ chief executive, has broken ranks with the rest of the global banking industry, arguing that the availability of credit should be unaffected by tough new capital rules for banks, which he regards as fair.

He praised both the “substance and timetable” of the Basel III proposals in an interview with the Financial Times, in comments that contrast starkly with other senior bankers…

Mr Varley’s stance is particularly surprising because Barclays is among the hardest hit of Europe’s banks by the Basel III changes to regulatory capital…

Mr Varley’s comments will fuel predictions that when he leaves Barclays, he will seek a significant role outside banking.

He has been linked, by those who know him, with possible roles at the Bank of England, in government or as chairman of a blue-chip company. To make the transition from lambasted banker to a role in public service or the broader corporate world Mr Varley needs a softer image, these people say.

There’s no doubt that if any bank will lend less as a result of Basel III, it’s Barclays: not only is it too big to fail, but it’s also more highly leveraged than most of its peers. Its risk-weighted assets are likely to rise substantially under Basel III rules and its capital commensurately.

Which means that Varley’s comments can be taken one of three ways.

Either Varley is right, in which case the Institute of International Finance and the banking lobby generally are wrong and are being unnecessarily alarmist.

Alternatively, Varley is wrong and is making these noises in a nakedly political attempt to ingratiate himself with public-sector technocrats.

Or nobody really knows what the truth is, least of all Varley himself and one’s view of Basel III is fundamentally a function of your job title, or what you’re hoping that your job title will be.

In any event, it would have been nice if Varley had made these noises back when he wasn’t a lame duck, when he actually had influence in the IIF and among banking-industry lobbyists. One thing you can be sure of: at this point, Varley’s views no longer carry any weight in the industry. As such, there’s frankly not much reason to appoint him to a senior position at the central bank.

Charlie Gasparino takes a swing at Nouriel Roubini today; I’m not sure why, beyond general unhappiness at the fact that Nouriel still gets a lot of respect both inside and outside Washington.

Gasparino apparently conducted an “informal survey”, in which, he says, he couldn’t find a single investor who regularly uses Roubini’s research. He tells us nothing about the participants in this survey — who they are, how many of them there are — and neither does he tell us what he would consider “regular use”. (Note what he doesn’t say: that his survey turned up no subscribers to Roubini’s research.)

It’s not entirely clear what the point of this “informal survey” was, since all he needed to do was phone up Nouriel’s spokesman, who was happy to tell him that Roubini has over 1,000 institutional clients. Maybe it was just an excuse to start bashing Nouriel’s research output:

Roubini’s record shows that while he was predicting doom and gloom for the US in 2004, his initial call had nothing to do with a runaway housing bubble…

It wasn’t until about August 2006 that Roubini began talking about a housing crisis, and he was hardly alone. Several economists and investors, from John Paulson to Stan Druckenmiller and around this time Goldman Sachs, were also predicting the housing decline…

Last year he predicted that the rising price of gold was in fact a bubble, just like the housing one a few years earlier, and like housing, it would burst as well. But as we all know gold prices remain strong.

Someday, Roubini might be right about gold’s demise, but what good does that do me as an investor now?

This doesn’t even make internal sense. Gasparino implies that Nouriel’s bearish prediction in 2004 would have had value if he had tied it to the housing bubble, even though the housing bubble didn’t burst for a good three years after that. But then he slams Nouriel for talking about the gold bubble last year, on the grounds that identifying a bubble more than a year in advance doesn’t do him good “as an investor now”.

If Gasparino spent time on the phone with Nouriel’s spokesman, he surely knows that there’s a great deal more to Nouriel’s research product than Nouriel’s own predictions. Those are highly publicized in any case: you don’t need to pay Roubini.com thousands of dollars to find out what Nouriel thinks about, say, Greece. Instead, his product gives you access to a large team of smart economists, who do a lot of very useful aggregation, analysis, and strategy. And if you pay enough, you also get access to Nouriel himself, which means he’ll answer your questions and have interesting and provocative conversations with you, which in turn will be informed by all the other interesting and provocative conversations that he’s constantly having with clients, policymakers, and other smart and important people.

Does Gasparino really believe that the reason to subscribe to Nouriel’s research product is so that you can find out where Nouriel thinks that asset classes are moving, place bets in those directions, and then make money when he turns out to be right? I can’t imagine that he does, but clearly he’s happy to pretend to believe that if doing so will give him anti-Roubini ammunition.

The truth is, of course, that Gasparino’s only real beef with Roubini is that he’s a successful liberal. But the secret of Nouriel’s success is only partially a function of his early and loud insistence that the collapsing housing bubble would prove catastrophic. If Gasparino considers himself a student of how to successfully navigate Wall Street, he should take a much more serious look at Roubini.

(Full disclosure: I was fired from Roubini’s shop in early 2007, but he did give me enough exposure as an econoblogger that I was soon hired by Portfolio.com.)

Update: Watch Gasparino stammeringly recapitulate his argument on air, adding for good measure that “the only person that has disagreed with my analysis so far is Felix Salmon of Reuters, who — besides that he has a screw loose — is maybe the worst reporter in the world”. He says all this while bashing Roubini and while sitting right next to Mike Norman of John Thomas Financial. About which you might want to learn more here or here.

Andrew Ross Sorkin’s column today is entirely based on what he learned talking to Jim Millstein, the chief restructuring officer at Treasury, who seems to be very happy to talk now that he’s officially announced Treasury’s plan to exit its investment in AIG. I spoke to him for 70 minutes this afternoon, and now have a much clearer idea of how Treasury is thinking, how its math works, and why there’s a disconnect between Treasury and critics like Kid Dynamite.

Millstein made a number of interrelated points.

First, the really big picture here is being missed. There’s now an end in sight to a huge and enormously complex corporate restructuring, of an entity — AIG — which was too big to fail, too big to manage, and which had an enormous black hole at its heart known as AIG Financial Products. Today, AIG is set to emerge as a viable entity roughly half its former size, small enough to fail, with the black hole gone. That’s not only a substantial achievement; it’s also a good proof of concept when it comes to the FDIC’s new resolution authority.

This involved a big strategic change of direction at AIG and Treasury. When Treasury installed Ed Liddy as AIG CEO in the immediate aftermath of the bailout, says Millstein, the idea was very much to sell off everything — essentially, to liquidate AIG entirely. But that’s no longer the vision: instead, the idea is now to keep AIG going as a good-sized US insurance company, with a very strong property and casualty franchise and a solid life insurance franchise to boot. That company looks as though it’s going to be worth something north of $60 billion, given its inherent profitability and general stock-market valuations of insurers.

But there’s an enormous difference between an insurance company you’re trying to liquidate, on the one hand, and an insurance company which you want to survive as a going concern, on the other: it’s not just a difference of taking various assets off the auction block. Rather, it all comes down to credit ratings: in order to be viable as a going concern, any insurance company needs a solid investment-grade credit rating.

If AIG was just selling off its assets or putting its insurance operations into run-off mode, then its credit rating wouldn’t matter so much — although the higher AIG’s credit rating, the easier it becomes to unwind AIGFP’s derivatives positions without facing enormous margin calls. But Treasury looked at the bids that AIG was receiving for its assets, and determined that they were being lowballed by the likes of MetLife, since potential buyers smelled a fire sale. As a result, Treasury needed to credibly be able to say that it didn’t have to sell off all AIG’s assets.

In order to do that, Treasury needed to take a large chunk of AIG’s debt and convert it into some kind of equity. That’s why Treasury ended up owning tens of billions of dollars in preferred stock: the ratings agencies don’t consider preferred stock to be debt, and so they disregard it when assigning their ratings.

Now a lot of the arithmetic being done by the likes of Sorkin and KD is based on that preferred stock essentially being debt. After all, that’s how AIG itself shows it on their website. But it’s a very peculiar kind of debt: in fact, to a first approximation, it really is that nerdy joke, the zero-coupon perpetual bond. There’s a dividend associated with the preferred stock, but AIG is under no obligation to pay it, and it’s non-cumulative: if AIG doesn’t pay the dividend then it doesn’t remain on AIG’s books as any kind of obligation. And there’s no maturity date, either. So the obligation that AIG has to Treasury is essentially zero: it has to pay back $0 per year, in perpetuity.

The only real value to the preferred stock is that unless and until AIG starts paying the coupon, it can’t make any dividend payments on its common stock. So the preferred stock is not entirely without value. But no one in their right mind would actually pay money for it.

So when Treasury swaps its preferred stock for common stock, it’s swapping something with essentially zero secondary-market value for something much more liquid and marketable.

Of course, Treasury brought this on itself, back in February 2009, when it swapped cumulative preferred stock paying a 10 percent coupon for new non-cumulative preferred stock. Without that move, there would never have been any equity value in AIG at all — AIG would have been a loss-making entity in perpetuity. But of course Treasury owns most of the equity in AIG, so it essentially made the decision to swap debt in an insolvent AIG for equity in a solvent AIG. And the reasoning was that the liquidation value of an insolvent AIG was much lower than the market value of a solvent AIG which could operate as a going concern.

At some point, Treasury was always going to insist on converting its new zero-coupon perpetual bonds into something a bit more useful, like secured debt or unsecured debt or cumulative preferred stock or common stock. They were always a halfway house, a way of getting here from there. And in the end, Treasury decided that the easiest and most profitable thing to do would be to just convert them all into common stock.

I’m not sure I would have made the same decision. AIG is making about $8 billion a year at this point, which is more than enough to support a bit more in the way of debt without making too much of a dent in its credit rating. If Treasury had converted say $20 billion of its current preferred stock into new preferred stock paying a 5% coupon, that would pay Treasury $1 billion a year in perpetuity, and could probably be sold at or near par. Instead, that $1 billion a year is being valued on a p/e basis in the stock market, at between $8 billion and $12 billion. That’s less than the $20 billion (ish) it would be worth if it looked more like debt.

But Treasury wants to exit its investment, and selling $20 billion of perpetual AIG preferred stock would be decidedly non-trivial. Selling AIG stock is a lot easier. So Treasury decided to simply convert everything to common stock, in an attempt to get out of the insurance business as quickly as possible.

Looked at this way, it’s silly to assign hard dollar values to the Series E and Series F preferred stock and then complain when they’re being swapped for equity worth less than that sum. Instead, the only number which matters is the total amount of money which Treasury ends up getting from selling off bits of AIG and, ultimately, AIG itself. And there’s a secondary consideration, too: Treasury wants to do that sell-off as quickly as possible.

Treasury’s exit strategy certainly maximizes the speed of the sell-off. And Millstein makes a credible case that at the end of the day, Treasury is going to get out of AIG more money than it put in — some $13 billion or so in profit. That sum is not nearly commensurate with the risk that Treasury took when it bailed out the insurer. But really, Treasury had no choice: when it was bailed out, AIG had a whopping $2.4 trillion in derivatives contracts, which would have caused major systemic consequences if they had been unwound in a Lehman-style forced liquidation. We would all be much poorer, today, if AIG had not been bailed out. Any profit on the bailout is just gravy.

So it’s easy to get caught up in the weeds here. But rather than getting caught up with the relative valuations of Series C and Series F, the big picture is relatively simple: Treasury put about $47.5 billion into AIG, and the Fed added a bunch more. The Fed is soon going to get paid off in full, with interest. And Treasury is going to end up with an equity stake in AIG worth something north of $60 billion; it’s optimistic that it’ll be able to sell that stake in the market, much like it’s selling off its Citigroup stake right now. That equity stake is a matter of choice; Treasury could have structured things many other ways, and probably could have ended up with something less liquid but more valuable if it had wanted to do so.

Millstein is a fan of common equity, and is looking forward to the day when he can start selling off the government’s AIG stake in the secondary market. Then we’ll be done with AIG, we won’t have big losses to show for it, and we will have dealt with the AIGFP black hole in the interim. It’s a pretty impressive achievement, all told. And the technical dynamics of exactly what the government is doing with its current slightly peculiar preferred stock are ultimately something of a distraction.

(A couple of footnotes, which don’t fit into the broader narrative: right now, AIG has the right to borrow $22 billion more from Treasury, in the form of that Series F perpetual zero-coupon preferred stock, at any time. Under this exit plan, AIG has to use that whole credit line to pay off the Fed, and then needs to repay it with various asset sales, including the sale of the assets it’s getting from the Fed. So the plan puts Treasury at less risk that suddenly it will have no choice but to send lots of money to a hungry AIG. And, AIG won’t only be an insurance company: for the time being, it still owns an aircraft leasing company called ILFC. But it has said that ILFC is non-core, and it will be happy to sell it at the right price.)

Update: It seems that Kid Dynamite had a similar conversation.

The WSJ has a great little story proving once and for all that just because something is secret doesn’t mean it’s interesting. Apparently, for a year or so, a “secret task force” met at ungodly hours on the sidelines of various euro-events in cities like Brussels and Luxembourg. Its members were hand-picked, its task momentous: to come up with a plan should a eurozone country enter a crisis and threaten the currency union.

But it achieved, to a first approximation, exactly nothing, beyond simply keeping its own existence a secret. (If the markets had found out that the committee existed, they would probably have taken it as a sign of weakness and worry on the part of the Europeans, and increased pressure on the likes of Greece.) By the time that the Greek crisis flowered, there was no plan at all, and ultimately the European bailout had to be hammered out at summit level, mainly between Nicolas Sarkozy and Angela Merkel.

Technocrats love secrecy, especially when they work in or around the finance ministry or the central bank. But it’s impossible to negotiate something as politically momentous as a sovereign bailout in secret, or even to construct a mechanism which might help smooth the course a little. If the Europeans want to minimize the chances of a country leaving the eurozone, they’re going to have to put together something robust in public. Secret meetings at 6am might feel terribly thrilling at the time, but they’re never going to have any lasting effect.

So what’s the point of secret meetings? In the public sector they achieve nothing, and in the private sector they risk causing scandal and legal investigations. I suspect that most people who take part in them probably ultimately regret doing so.