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?

This Looks Interesting

March 26, 2009

I don’t have a clue what they’re saying, but I want to see the movie.

It’s Hard Out Here For An Obot

March 24, 2009


What a difference a year makes. 

At this time last year Obamanation was telling us that Teh Precious was the greatest thing since sliced bread.  They boasted and bragged that they weren’t just supporting a political candidate, they were part of a once-in-a-lifetime  movement led by a “game-changer” who was going to permanently alter the political system in this country.

According to them, Barack Obama was the most inspiring public speaker in a generation.  His ability to connect with voters through both traditional and new forms of media would allow him to mobilize the public to pressure Congress to end gridlock and enact his agenda.  But he probably wouldn’t need to do that because Obama had mad political skills and he would use “11th dimensional chess” moves that leave anyone he couldn’t persuade frustrated and unable to fight back.  They told us that Obama was a nth degree black belt in political Kung-Fu and not only would his opponents attacks not touch him they would end up backfiring.

We were told that Obama would govern as a “post-partisan” and would unite the “middle” into a cohesive unit by reaching out to GOP moderates and religious fundamentalists and convincing them to focus on the common values we all share.  He would make sure that they knew their voices were heard.  By the end of his second term the radical Republican conservatives would basically be a minor party as the United States became a “single-party” (or “no-party”) democracy.

Obama would assemble a “team of rivals” from among the best and brightest of both parties and in academia.  Under Obama’s guidance these technocrats would pick the best ideas to solve whatever problems arose because they would be free of ideological straitjackets.

The Obots told us that Obama was uniquely qualified to lead because he would be the first truly intellectual President since Jefferson and Madison.  Unlike certain people whose last names start with a “C” he didn’t let himself get bogged down memorizing the finer points of policy which freed him to look at the big picture.  And along with his superior intellect Obama had excellent judgment.  This allowed Obama to master the intricacies of Washington D.C. in only a couple of years, unlike others who spent decades learning the skills necessary to lead.

But things weren’t perfect in Obamanation last year.  They had already been forced to abandon their claims that Obama was a “post-racial” candidate when he ran the most racially divisive and race-conscious campaign since George Wallace in 1968.  The Obots helped play the race card by accusing anyone who didn’t support Obama of racism, even though their primary targets were liberal Democrats.  And they wept with joy when Obama gave the greatest speech on race in their lifetimes (as if Martin Luther King lived in the 19th Century)

That was then, this is now.

So far, Obama’s efforts to connect with the voters seems focused on persuading them not to march on Washington with pitchforks and torches.  Although he is thus far successful in keeping the mobs at bay, speechifying is pretty much the only thing he’s been doing.  He travels the country giving speeches, just like he did last year.

His motivational qualities turned out to be overrated, and we know know he needs a Teleprompter to say good morning to his daughters.  When he speaks without a script he makes more gaffes than Joe Biden.

His mad political skills turned out to be imaginary, and the GOP is recalculating and moving up the target date of their post-Bush rebuilding period.  It’s telling that the Kool-aid bloggers have mostly ignored the faux pas with British Prime Minister Gordon Brown, but if that affair is indicative of Obama’s political skills then it’s going to be a long four years.

As for “post-partisan” the Obots are starting to realize that the FISA vote wasn’t a fluke, when push comes to shove Obama will abandon liberal principles on civil liberties and economics.  Actually, he doesn’t even put up a fight, he seems pretty eager to break their hearts.  His “reaching out” policy turned out to be pandering to bigots and sexists.  The Obots’ movement is rapidly turning into one of the “bowel” variety.

Obama’s “team of rivals” is a mixed bag.  Appointing Hillary Clinton as Secretary of State was the lone outstanding pick, but it was probably the price she demanded for her support last summer.  A couple picks seem pretty good (Holder, Solis) but they are overshadowed by the bad picks (Geithner, Gates) and the problems so many nominees have had getting vetted and confirmed (Richardson, Daschle)  Two months have passed since inauguration day and it’s still a work in progress.

Anyone who wants to claim that Obama is an intellectual won’t have much evidence to back them up.  I’m not saying the man is stupid, his Ivy League degrees prove that he is above-average in intelligence.  But there’s a big difference between “above average” and “genius.”  Unfortunately for us Obama doesn’t seem to have the work-ethic that the not-quite genius types use to compensate, he tires easily.  Nor does he have experience to guide him.  He never even bothered to master the details of his job as a Senator before spending most of the last two years running for the job he has now.

It goes without saying that Obama’s judgment is suspect (to say the least) and the advisors closest to him appear to be political operatives rather than policy wonks.  It’s the “Mayberry Machiavellis” thing all over again, and even having somebody like David Sirota in there would be an improvement, but it ain’t gonna happen because Obama’s top advisors are connected to his top financial supporters. 

Never forget, somebody spent a lot of money just to make Obama a viable candidate.  If you think Obama raised $99 million dollars back in 2007 from small online donors you’ve been smoking hopium.  He has wealthy and powerful backers.  I don’t believe they are intentionally trying to wreck our economy but they will push solutions that maintain their wealth and privilege.  From the beginning they have surrounded Obama with advisors who advocate lifestyles of the rich and shameless.

Well, we didn’t get the game-changing leader that was advertised, so what did we get?

We got an ambitious political neophyte who is in way over his head.  He will almost certainly improve between now and the next election, if only because he really can’t get worse.  If he’s lucky the economy will turn-around by early 2012 and he can convince people he deserves the credit.  But if the majority of the people decide he’s incompetent they may conclude the economy improved in spite of Obama, whether it’s true or not.

All is not lost.  Our founding fathers designed a system to prevent Presidents from becoming tyrants, and it works pretty well to mitigate incompetance too, at least if Congress does it’s job.  History indicates the economy will eventually recover no matter what Obama does, but that doesn’t mean everything will go back the way it was. 

The voting public is starting to realize what we’ve known since last year – Obama is an empty suit.  Unfortunately the immediate beneficiaries of voter disgust will be the Republicans.  Don’t underestimate the American people.  This nation has faced worse problems and survived.  The important thing is to not allow ourselves to be overwhelmed.  This too, shall pass.


Where’s the Money?

March 17, 2009
Charles Ponzi

Charles Ponzi

Joseph Cannon recently a really good post about Sir Allen Stanford over at Cannonfire:

Yes, he’s American, and yes, that really is his name. Before taking French leave (the FBI caught up with him at his girlfriend’s home), he bilked investors of some $8 billion. He did this, in part, by establishing Stanford International Bank, run by family members and cronies and located in the Caribbean.

According to the SEC, the bank

sold approximately $8bn worth of certificates of deposit to investors, promising “improbable and unsubstantiated high interest rates”

Joseph covers some things about Stanford you probably haven’t heard before, so you should go read it.  I wanted to cover something else that applies to Stanford, Bernie Madoff (who pled guilty last week) and the current financial mess: 

Where did the money go?

Whenever I read about one of these fraud schemes or financial scandals I have to wonder how they determine the amount of the loss, and why so little attention is paid to where the money went.  Anyone who has seen how cops calculate “street value” of confiscated drugs knows you can’t rely on what you read in the paper.

In the Enron meltdown people said they lost millions when the stock price flatlined, but in reality the stock was grossly overvalued in the first place. They lost whatever money they put in, not what they would have got from selling the stock when it was at peak overinflated value.  I’m not suggesting it wasn’t a big deal, innocent people lost their life savings when the crash came.  What made it more painful was they thought they had made a lot of money with Enron stock and some of them liquidated or borrowed against everything they owned to buy more. 

But the fact is the stock was never worth what people thought it was.  In fact, it wasn’t even worth what they originally paid.  I’ve heard people saying they lost huge sums of money because they were prevented from selling their stock when the price started to fall.  But if they had sold Enron at its overinflated value they would have profited from the fraud, even if they were unaware of it at the time. The person that bought the stock would have been left holding the bag and would have lost whatever money they put in.

Here’s a simplified scenario that may help explain what I’m talking about:

Your next door neighbor Al tells you he has an plan to make high tech widgets but needs cash.  He offers to sell you stock in his new company “Fraudco” and promises you will double your money in 30 days.  So you get a second mortgage, liquidate your retirements and hock everything else you own and get $100,000 which you use to buy 10,000 shares at $10 each. 

If Al promptly disappears with the money and is found a month later flat-broke in Vegas you have lost the $100,000 you invested, not the $200,000 you were promised.  If Al says he spent  money on drugs, hookers and gambling then you know where your $100,000 went.

But let’s suppose Al doesn”t disappear and a month later he gives you an earning statement that says your investment is now worth $1 million.  Are you a millionaire?  No, you just have a piece of paper that says you are.  If Al runs off to Vegas now you’re still only out $100,000, not a million.

But what if you sold your stock in Fraudco to your other neighbor (Bob) for $1 million just before Al disappeared?  Bob will have lost a million dollars, but Al will have only got $100,000 of it.  You, on the other hand, will have made out like a bandit.

Ponzi schemes, stock market swindles, real estate scams and pretty much every big disappearing money scandal have one thing in common – overvalued assets.  The overvaluation may be due to fraud or just excessive optimism on someones part, but when the you-know-what hits the fan it turns out the assets aren’t worth nearly as much as the last buyer paid for them or the loan for which the assets were used as collateral.   Sometimes the assets turn out to be worthless or even nonexistent.

In the period before the crash the assets are bought, sold, traded or used to secure loans.  Lots of people make money directly (capital gains) and indirectly (sales and brokerage commissions) from all these transactions, but the people left holding the bag when the music stops get screwed.  A Ponzi scheme can be very profitable if you get in early and cash out before it collapses.

So in all these multi-billion dollar cases, why is there so little interest is where the money went? The media act like it was a magic trick and the money really vanished.  But it didn’t disappear, the money went somewhere.

It’s virtually impossible to spend that kind of money and have nothing to show for it. Remember, we’re talking about double digits in front of the word “billion,” and neither of those digits is a “1.”  The interest on that much money accumulates faster than you can spend it, even if you have a lavish lifestyle.  If you buy luxurious mansions and expensive cars they’ll still be there when the cops come.

So where’s the money?  If it was gambled away then the casinos got it, if it was lost in the stock market then some Wall Street types have it.  If it was transferred to some bank in the Caymans then it’s sitting in a numbered account in the tropics.

 Sir Allen Stanford and Bernie Madoff operated Ponzi schemes on a scope and scale that is breathtaking but they couldn’t have stayed in business as long as they did if they never paid off any investors (and a few politicians too.)  I bet if you tracked every nickle carefully you would see that a favored few of their investors did quite nicely.  Of course to do that somebody was literally robbing Peter to pay Paul.  But if Madoff had used most of the money to pay off early investors he wouldn’t have been $65 billion in the hole.

The reports indicate that if you add everything they own neither man still possessed more than a fraction of the missing money when they were arrested.  I suspect that the money isn’t hidden anywhere nor do I think that Stanford and Madoff actually spend that much of it.

As anyone who saw Brewster’s Millions knows, it’s hard to spend that kind of money.  There’s only so much stuff you can buy.  If you spent a million dollars a day it would take you the better part of three years to spend a billion.  If Bernie Madoff had spent a million dollars a day for the last twenty years he would still have only spent less than 25% of the missing loot.  The amount he gave to politicians was chickenfeed – a few million.

I’m guessing that most of the missing money was stolen by smarter crooks than Stanford and Madoff.  Not just any crooks though – Bankers, Wall Street types, bandits with briefcases, pirates with pedigrees.  You can fool your investors by transferring money around the world and claiming you’re investing overseas but the bankers won’t be fooled.  And those guys know how to steal without getting caught.