Inside the U.S. Treasury

March 31, 2009

Don’t worry, you won’t have to pay it back.  (Your grandchildren will get stuck with the tab)

From McClatchy News:

Welcome to life in Mendota — the unemployment capital of California. With a 41 percent jobless rate, the town’s social fabric is tearing at the seams. Alcoholism and crime are on the rise. To save money, some mothers wash and re-use disposable diapers. Unemployed men with nothing to do wander the streets and sit on benches.

Why did I bring that up?  Because Mendota listings are in my local phone book.

It’s my birthday

March 31, 2009

And you thought trips with your kids were bad

Some blogstalkers:

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March 29, 2009

Rehab – Bartender Song (partial – dirty version)

March 28, 2009

Here’s the full length version:

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5 Stages of Drinking

March 27, 2009

Mathmagical Formulas

March 27, 2009


Usually when economysterians like Dakinikat explain money stuff they use a semi-secret special language that makes my eyes glaze over and I slump lifelessly in a semi-comatose state until they are done.  Even Paul Krugman droneswrites in a narcolepsy-inducing shrill monotone.  That’s why I have had trouble understanding WTF happened to our economy until  Matt Taibbi explained in plain English how Joseph Cassano caused the AIG meltdown:

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebodyis going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you’ll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or “tranche.” They then convinced ratings agencies like Moody’s and S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. “The banks knew they were selling crap,” says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. “They had some back room somewhere where a bunch of Indian guys who’d been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years,” says one young trader who sold CDOs for a major investment bank. “It was nuts.”

The mathmagical formulas were based on a truthiness that sounds kinda like life insurance.  When you buy life insurance you’re betting on how long you will live – if you die sooner rather than later you win the bet.  With any one person there are so many variables that the bet is a crapshoot, but the casinos insurance companies figured out that with a big enough pool of people the variables cancel each other out and they can accurately calculate the odds of when bettors suckers the insureds will croak so that the house wins more often than not.  Those odds are called “actuarial tables.”

So what these smooth-talking number crunchers did was they cooked up a “system” and sold it as a sure fire way to beat the odds.  As many of us have learned the hard way Las Vegas was built on such schemes.  The difference is we were gambling with our own money.

But AIG wasn’t investing in collateralized debt obligations, they were insuring them:

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes for no money down — to fill them all. As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or “warehousing” CDOs when they wrote more than they could sell. And that’s were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice “Hank” Greenberg, the head of AIG, who admired the younger man’s hard-driving ways, even if neither he nor his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG’s internal operations, Cassano basically told senior management, “You know insurance, I know investments, so you do what you do, and I’ll do what I do — leave me alone.” Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of “insurance” to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS.

The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the “Morgan Mafia,” as many of them would go on to assume influential positions in the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted a way to help boost the bank’s returns. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans. What they came up with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can’t make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope’s mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.

What Cassano did was to transform the credit swaps that Morgan popularized into the world’s largest bet on the housing boom. In theory, at least, there’s nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn’t have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don’t have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called “naked” CDS deals. In a “naked” CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A’s mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else’shouse would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn’t have the cash to pay off if the kick went wide.

So basically AIG bet money it didn’t have and lost, and all the bailout money we gave it (and any more that we give it) will go to pay off the bookies.  All the controversy over bonuses was misplaced – we’re talking BILLIONS of dollars in bad bets, while the bonus issue only concerns MILLIONS of our (not-yet) hard-earned tax dollars.

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“Everybody does it” whines TOTUS

March 26, 2009


The Confluence is one of several blogs that has been calling attention to the forbidden love between a man and his TelePrompter.  If you Google “Obama TelePrompter” you will get 1,150,00o hits in .55 seconds.  The TelePrompter Of The United States even has it’s own blog.

It must be having an effect because this past week we have seen a strong push-back to the stories about Obama’s dependence on technology when he’s speechifying.  Not only have the barbarian hordes of the Kool-aid Kingdom been unleashed on the blogosphere, but even late-night unfunny comic Dave Letterman (reading from a TelePrompter) defended Obama:

They make an interesting point, why would a president want to be prepared and careful about what he says? The guy who had the job for the last eight years didn’t need no stinkin’ teleprompter!

The TOTUS defenders miss the point – we’re not criticizing Obama for using a TelePrompter, we’re pointing out a foundational lie about his qualifications to be President. 

Obama first gained national fame for giving the keynote speech at the 2004 Democratic convention, which was also the first time he ever used a TelePrompter.  Prior to that speech he wasn’t well known for public speaking, and the only prior speech he is known for (the 2002 anti-war speech) was so forgettable it wasn’t recorded or reported on when it was given.

The keynote speech made him a star and was used as evidence to support one of the fundamental claims about Obama – that he is a great public speaker.  His supporters have proclaimed that Obama’s rhetorical abilities rival or exceed anyone in modern history, including JFK and Martin Luther King Jr.

Most of Obama’s “accomplishments” are speeches, not legislation or policy ideas.  Besides the two speeches noted above there was the 2006 speech at Saddleback, the Iowa caucus acceptance speech, the March 2008 Greatest Speech on Race Evah!, last summer’s “Free Beer and Bratwurst” speech in Berlin, the Mile-High Faux-Grecian Temple speech last August and the election night victory speech in Chicago.

If Obama is merely a good reader of speeches that begs the question – who is writing his speeches?  What’s that Mr. Obot?  You say he writes his own speeches?  Then what is this guy’s job?:

Jon "Titty-Groper" Favreau

Jon "Titty-Groper" Favreau

Think about that for a minute.  Every time Barack Obama reads a speech from a TelePrompter, you’re hearing Jon Favreau’s words, as well as David Axelrod’s and probably some people you never heard of.  These people are paid to manipulate us with words and they are good at their jobs.

Right now we are paying their salaries, but who first hired them to package and sell an empty suit and his agenda to the American people?

More importantly, why?