The Bush administration on Saturday formally proposed to Congress what could become the largest financial bailout in United States history, requesting unfettered authority for the Treasury Department to buy up to $700 billion in mortgage-related assets.
The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.
Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.
Finally, there is the question of how much it will ultimately cost. “Institutions so far have written down $550 billion globally of bad debt,” said Daniel Alpert, managing director of Westwood Capital. “We think that when you add up all the problems in the residential housing market still to come — further erosion of housing prices, mortgage foreclosures and so on — we are going to need another $1 trillion of write-downs.”
In other words, for all the toxic securities that Wall Street has acknowledged holding, there will be yet more mortgage-backed paper that will go bad as the housing market continues to fall. As much as we all hope the worst is over, it’s probably not.
And as much as we might hope that the government finally has the answer, it probably doesn’t.
The administration is requesting “unfettered authority” to buy whatever with the $700 billion worth of bailout money they’re asking for. And of course that’s what they want. If you were to give me authority to do something, I’d prefer to get the unfettered kind. But you almost certainly wouldn’t give it to me. And you especially wouldn’t give it to me if the problem the authority was meant to resolve had occurred under my watch. If this scale of funds is going to be spent. Here’s Ed Paisley for CAP on what a reasonable package could look like:
Thanks to the leadership of Federal Deposit Insurance Corporation Chair Sheila Bair, Congress has a model to work with. The FDIC is doing just this at failed California-based IndyMac Bank. By engaging in systematic loan restructuring, rather than foreclosing on the failed bank’s mortgages, the FDIC will likely end up preserving more value and reducing taxpayer exposure. Whatever agency Congress assigns to this broader task should do the same, restructuring troubled loans in the portfolio of mortgages they purchase in a systematic manner, rather than through piecemeal modifications. The result of refinancing more loans than private holders have been able or willing to do will be fewer defaults and foreclosures.
The financial markets are but one of the economic problems we face. The last eight years brought stagnant wages and weak job creation—with the situation getting even worse over the course of this year. Restoring our economy requires a plan to address the financial crisis and the underlying weakness in our economy. We need to make job-creating, growth-producing investments in our infrastructure and transform to a low-carbon economy. The legislative package that moves rapidly through Congress to implement Paulson’s new plan should also include expanded unemployment benefits and heating assistance for low-income families, increased food stamps, and assistance for states in providing health coverage to families in need during these difficult times. The folly of Wall Street and the negligence of the Bush administration has produced today’s pain on main street. It would not be right if the rescue only rescues firms and not families.
To give the regulatory authorities who failed to prevent this crisis carte blanche to hand out money to the financial institutions who caused the crisis while doing nothing for ordinary people would be outrageous.
WASHINGTON — The next president will take office in January with little hope of getting his pet programs enacted quickly, if at all, because of already-massive budget deficits likely to balloon even further from the hundreds of billions expected to be used to bail out Wall Street.
"The next president is just not going to have the money to meet his promises," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a nonpartisan budget-research group.
In August 2007, the SCLC formed a partnership with CompuCredit, a subprime credit card issuer and payday lending company. (The Post later updated its story to reflect this.) The deal included plans for an affinity card that would put the famous civil rights group's name on CompuCredit Visa cards and joint "economic empowerment" workshops around the country to help educate minorities about credit. When Steele announced the deal last year, he said, "Consistent with SCLC's historic commitment to civil rights and economic justice, this partnership represents a critical part of our campaign for economic empowerment."
While the civil rights group has been lauding its corporate partner, the federal government has taken a slightly different view of CompuCredit's contributions to economic empowerment. Last month, the Federal Trade Commission sued the company for unfair and deceptive trade practices, as well as violating the Fair Debt Collection Practices Act. The FTC alleged that CompuCredit bilked consumers out of at least $217 million through a scheme in which consumers paid so much in fees that they rarely had any credit available on the company's Visa cards. The CompuCredit cards are better known as "fee harvesting" cards—that is, credit cards sold to people in dire financial straits that have high interest rates, low credit balances, and lots and lots of fees for people who generally can't afford them. The practice is enormously lucrative. The National Consumer Law Center reports that in 2006, CompuCredit made $400 million in fees on such cards, simultaneously saddling consumers with more than $1 billion in debt.
The FTC also alleged that CompuCredit was working in tandem with its debt-collection arm, Jefferson Capital, in a complex scheme that used the credit cards as a way of duping consumers into paying off old debts that had been discharged by other lenders. Far from lifting consumers upward, CompuCredit was leaving its customers mired in debt, from which they would have a tough time escaping.
I keep hearing how "complicated" this present financial crisis is, and while formulaically that may be true - and certainly the implications as well any potential responses will be very complicated - at its heart it doesn't seem all that complicated to me. It was just a bunch of people who went looking for free money and when the time came to pay up, they tried to hide it, and when that didn't work they tried to hide it some more. It was a chain and a system of denial where when the shit finally hit the fan this week everybody went scurrying for the protection of the government.
So I went looking for people who could explain the present global financial crisis to me this week and this is some of what I found:
The documentary does very good job of tracing the entire process; beginning with people like former homeowner Clarence Nathan:
It’s a no-income verification loan. They don't do
that. It's almost like you pass a guy in the street and say: lend me 540,000
dollars? He says, what do you do? Hey, I got a job. OK. It seems that casual
even though there are a lot of papers that get filled out and stuff flies all over
with the faxed and emails. Essentially, that's ... that the process.
I wouldn't have loaned me the money. And nobody that I
know would have loaned me the money. I know guys who are criminals who
wouldn't loan me that and they break your knee-caps. I don’t know why the
bank did it. I’m serious ... 540 thousand dollars to a person w/bad credit.
And then without ever meeting him face to face Clarence is eventually hooked up with a guy like Mike Francis - former Executive Director at Morgan Stanley on the residential trading desk. Adam Davidson explains:
Mike was one link in a chain that connected the global pool of
money to its new favorite investment, these residential mortgages, the US housing
market, and guys like Clarence Nathan.
Think how attractive a mortgage loan is to that 70 trillion dollar pool of money.
Remember, they're desperate to get any kind of interest return. They want to beat
that miserable 1 percent interest Greenspan is offering them.
And here are these homeowners, they're paying 5, 7, 9 percent to borrow money
from some bank. So what if the global pool could get in on that action?
There are problems. Individual mortgages are too big a hassle for the global pool of
money. They don't wanna get mixed up with actual people and their catastrophic
health problems or debilitating divorces, and all the reasons which might stop them
from paying their mortgages.
So what Mike and his peers on Wall Street did, was to figure out how to give the
global pool of money all the benefits of a mortgage – basically higher yield - without
the hassle or the risk.
So picture the whole chain. You have Clarence. He gets a mortgage from a broker.
The broker sells the mortgage to a small bank, the small bank sells the mortgage to
a guy like Mike at a big investment firm on Wall Street.
Then Mike takes a few thousand mortgages he’s bought this way, he puts them in
one big pile. Now he’s got thousands of mortgage checks coming to him every
month. It’s a huge monthly stream of money, which is expected to come in for the
next thirty years, the life of a mortgage.
And he then sells shares of that monthly income to investors. Those shares are
called mortgage backed securities. And the 70 trillion dollar global pool of money
loved them.
Mike Francis: it was unbelievable. We almost couldn’t produce enough to
keep the appetite of the investors happy. More people wanted bonds than we
could actually produce. That was our difficult task, was trying to produce
enough. They would call and ask “Do you have any more fixed rate? What
have you got? What’s coming?” From our standpoint it's like, there's a guy
out there with a lot of money. We gotta find a way to be his sole provider of
bonds to fill his appetite. And his appetite’s massive.
Alex Blumberg: To be fair, they knew there were risks. But investors have a system
to assess those risks. They’re these special companies. Credit rating agencies.
Moody’s, Standard & Poor’s, Fitch. Their job, their main job, is to assess risk for Wall
Street and the global pool of money. They rate every kind of bond according to its
risk. Triple A is the safest, then there’s double A, single A, all the way down to single
B and below.
And that’s all most investors look at - the letter grade. They trust the credit rating
agencies. And these agencies blessed most of these mortgage-backed securities.
Gave them AAA ratings - which means they were considered as safe as a US
government bond.
This was the magic of this whole system. You could take a pool of thousands of risky
mortgages, and create a security that was called money-good, as safe as any
investment out there. At least that's what people thought.
But now we know those agencies relied on the wrong data. That same historic data
that had nothing to do with these new kinds of mortgages.
Adam Davidson: And then things got even worse. The thing that took this problem
and turned it into a crisis was something else that was new, something called a
Collateralized Debt Obligation. A CDO. And that brings us back to the guy we met at
the awards dinner in the beginning, Jim Finkel.
Adam Davidson: Jim Finkel runs this CDO shop, Dynamic Credit. It takes up three
modified apartments on the upper East Side of Manhattan. The trading room is like a
factory floor for CDOs, it’s where they make the things.
Adam Davidson: Maybe factory is the wrong term. But this is where he makes
CDOs. But what is a CDO? He shows us on a computer screen.
Jim Finkel: Here’s our deal Monterey...
Adam Davidson: To start with, every CDO has its own name. Finkel loves his
country house in the Berkshires, so he always names his CDOs after towns in
western Mass. Like Monterey.
Jim Finkel: Monterey CDO limited. 189 assets...189 tranches of different MB
pools
Alex Blumberg: Let’s translate some of that. A mortgage-backed security, you
remember, is a pool of thousands of different mortgages. These are all put together
and divided into different slices. Jim used the word tranche. Tranche is just French
for slice - some of these slices are risky, some are not. OK, a CDO is a pool of those
tranches. A pool of pools.
And Jim and most companies like his weren’t buying the top-rated tranches - the
safest ones, the AAAs. They were buying the lower-rated stuff. The high-risk stuff.
Jim’s company was buying tranches that came from Glen Pizzolorusso’s company.
The guy who hung out at nightclubs with B-list celebrities. The guy who said he was
selling mortgages to people who didn’t have a pot to piss in.
Adam Davidson: There's another term the industry uses, no joke, they call these
lower-rated tranches toxic waste. They're so high-risk, they're toxic.
Alex Blumberg: So, a CDO is sort of a financial alchemy. Jim takes that toxic stuff,
these low-rated, high-risk tranches, puts them all together. Re-tranches them, and
presto: he has a CDO whose top tranche is rated AAA, rock-solid, good as money.
If this seems too good to be true to you, you're in good company. Guys like
billionaire investor Warren Buffet said the very logic was ridiculous. But back in
2005, 2006, the global pool of money couldn't get enough of these things.
And the CDO industry was facing the same pressures everyone else was at every
other step of this chain. To loosen their standards. To make CDOs out of lower and
lower rated pools.
And then those "toxic" though triple A rated "tranches" of CDO's" were disseminated out into the markets of the international financial system in many forms and at many levels, instantaneously and electronically, implicating and involving pretty much everybody- wait a couple of years and voila: biggest financial crisis since The Great Depression.
Money ain't for nothing, as Dire Straits used to sing. If you have the time its very well done, very revealing and illuminating and well worth your time.
This was the week the world changed. It started with the US authorities trying to rescue Lehman Brothers. It ended with the US taxpayer preparing to pick up the tab for the mistakes of Wall Street's elite. It started with the prime minister sipping cocktails with financiers in Canary Wharf.
It ended with the government slapping a ban on short-selling and Gordon Brown pledging to clean up the City. Britain's biggest lender was rescued and the Chinese government lined up to take a 49% stake in Morgan Stanley, one of the last US investment banks left after a week of carnage. Ben Bernanke, the chairman of the Federal Reserve and Hank Paulson, the Goldman Sachs tycoon who became US Treasury secretary, have done more for socialism in the past seven days than anybody since Marx and Engels.
Over and above the extraordinary individual events, there was the capitulation of the prevailing economic model. History will show that the great experiment with financial deregulation lasted from the first post-war oil shock in 1973 to the third oil shock in 2008.
Sin Two: Allowing Unregulated Bond Rating Agencies to Decide What was Safe. Sub-prime is only the best known of a widespread fad known as "securitization." The idea is to turn loans into bonds. Bonds are given ratings by private companies that have official government recognition, such as Moody's and Standard and Poors, but no government regulation. These rating agencies have become thoroughly corrupted by conflicts of interest. If you want to package and sell bonds backed by risky loans, you go to a bond-rating agency and pay it a hefty fee. In return, the agency helps you manipulate the bond so that it qualifies for a triple-A rating, even if the underlying loans include many that are high-risk. Without the collusion of the bond-rating agencies, sub-prime lending never would have gotten off the ground, because it would not have found a mass market. Had regulators looked inside this black box, they would have shut it down. They might have needed new legislation, but they never asked for it. And public-minded regulators might have done a lot under existing law, since banks (which are regulated) were heavily implicated in the financing of sub-prime.
When I taught a journalism course at Princeton a couple of years ago, I was captivated by the bright, curious minds in my class. But when I asked students what they wanted to do, the overwhelming answer was: “Oh, I guess I’ll end up in i-banking.”
It was not that they loved investment banking, or thought their purring brains would be best deployed on Wall Street poring over a balance sheet, it was the money and the fact everyone else was doing it.
I called one of my former students, Bianca Bosker, who graduated this summer and has taken a job with The Monitor Group, a management consultancy firm (she’s also writing a book). I asked her about the mood among her peers.
“Well, I have several friends who took summer internships at Lehman that they expected to lead to full-time job, so this is a huge issue,” she said. “You can’t believe how intensely companies like Merrill would recruit at Ivy League schools. I mean, when I was a sophomore, if you could spell your name, you were guaranteed a job.”
But why do freshmen bursting to change the world morph into investment bankers?
“I guess the bottom line is the money. You could be going to grad school and paying for it, or earning six figures. And knowing nothing about money, you get to move hundreds of millions around! No wonder we’re in this mess: turns out the best and the brightest make the biggest and the worst.”
According to the Harvard Crimson, 39 percent of work-force-bound Harvard seniors this year are heading for consulting firms and financial sector companies (or were in June). That’s down from 47 percent — almost half the job-bound class — in 2007.
Institutions and products are graded by various credit-rating firms so as to supposedly give an objective view of the risks and of the possibilities of default. Can anyone say, while keeping a straight face, that the current system of having the institutions themselves pay for this service is a good idea? The moral hazard is so obvious you can almost taste it.
I spend a great deal of time speaking to people in banks about their mathematical models. I know which are using good models (a very few banks) and which are using bad models (most banks). I know of the dangers present, from a quantitative-finance and risk-management perspective. And for many years I have explained these dangers to anyone who would listen, and I will continue to do so. So it is incredible to think that ratings agencies, which must also have detailed knowledge of the nature and, more important, size of the toxic transactions, will happily give out their multiple A grades without any feeling of shame.
And then the word “theoretically” becomes very important. I have attended many conferences on quantitative finance, at which professors and practitioners describe their latest models for derivative instruments and the like. All the time I’m sitting in the audience thinking that these models are far too simplistic and based on countless unrealistic assumptions. I tell people that these instruments are dangerous, that no one understands the risks. But no one cares.
As long as people are compensated hugely for taking risks with other people’s money, and do not suffer equally on the downside, then those risks will inevitably become outrageous. Whether markets are efficient or not I don’t know for sure, but I do know that if there’s a way for someone to make money at another’s expense, he will. In spades. I want out.
Thus the current system of compensation at financial companies does not lead to anything good at all. If you give $10 million to random people on the street and tell them that they’ll get 20 percent of any profit they make, without any consequences if they lose it, then many of them will go into the nearest casino and bet it all on red. (The really clever ones will find a way to leverage it up first — after all, a $2 million bonus is nothing; you can’t seriously expect people to live in New York or London on less than eight figures, can you?)
If Wall Street gets away with this, it will represent an historic swindle of the American public--all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics--exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.
And as a bonus have some fun watching cheerleader Larry Kramer try to blame it all on the "guilty liberal consciences" of the U.S. Congress
Haiti has been lashed by four devastating storms in thirty days. Cellphones are dead in much of the country, and reports are coming in only slowly, but sober estimates suggest that more than a thousand have died--so far--and up to a million have been left homeless. Although Hurricane Ike's full fury was unleashed on Cuba, the death toll in Haiti was more than ten times that of all of the neighboring islands combined.
Why is Haiti so vulnerable to such storms? Coastal cities like Gonaïves--where in 2004 Tropical Storm Jeanne killed twice as many as Hurricane Katrina did in New Orleans--are situated on a flood plain, making them vulnerable to flash floods and mudslides triggered by heavy rains in the deforested mountains. Haiti is almost completely deforested, and still its poor majority fell trees for fuel to cook whatever meager rations are on hand. Forest cover, already sparse, has been reduced by half in the past twenty years. In more than twenty-five years here, I've never seen significant flooding in the central highlands, but recently our co-workers in Hinche, the district capital of the Central Department, were wading through chest-deep water to rescue families whose frail homes were under water or swept away. Deforestation is to blame.
What can be done to lessen the impact of severe weather in Haiti? Several steps must be taken immediately to assuage the massive suffering. The first is direct relief: Hanna hit Gonaïves September 2. A full week later, after the New York Times and the Washington Post had measured the tragedy, portions of the city remained under several feet of filthy water and tens of thousands were still stranded on rooftops, hungry, thirsty and increasingly angry. Who can blame them? Much talk yields little action, and that action is poorly coordinated, tentative and underfunded.
Just in case anyone was wondering what was up on this score , this is a fascinating issue we hope to examine more closely over time, but for now: an overview:
Back in January in his state of the nation address to Zambian Parliament President Levy Mwanawasa facing much public and political pressure 'announced the cancellation of of all tax concessions for copper mining companies operating in Zambia' and stated that the government had decided to 'introduce a new fiscal and regulatory regime in order to bring about equitable distribution of the mineral wealth'.
The 'new fiscal regime' as it came to be known 'introduced a variable profit tax at 15% on taxable income above 8% and raised corporrate income tax to 30% from 25% in a move that will effectively raise mining taxes to 47 percent from the previous 31.7%, and increased royalties on sales from 0.6% to 3%.'. The changes in the Mines and Mineral Act were made and passed in late March.
Copper accounts for 70% of Zambia's export income and all companies were due to make record profits this year, as production in the mines has been steadily climbing since the once state owned mines began to be privatized beginning in 1999. Copper prices which were as low as 65 cents a pound U.S. in 2001 and appeared to close today at 3.30 (UK) (according to the London Metals Exchange - you can do the math) Or about 1600 dollars (US) a tonne in the early 2000s, to about about 7200 dollars (US) earlier this year.
The government and people of Zambia, and mining companies operating in the country, are facing a dilemma which is increasingly faced by many countries with significant mineral or hydrocarbon resources: against a backdrop of a sustained boom in the price of commodities such as copper, how can one ensure that all of the people of Zambia can share in this boom, whilst at the same time maintaining a climate attractive enough to the investors which have contributed to that boom?
In Zambia it is a dilemma which surrounded by significant history and tensions between various groups. It is clear that at the time of the privatization of the state-owed Zambian Consolidated Copper Mines (ZCCM) in the late-1990s that the sector was suffering from low copper prices and sustained under-investment. As a result the sector was in severe decline and was a significant financial burden on the Government of Zambia. Those companies which then bought into the sector were more than often able to negotiate attractive terms from a government which was in a weak position. The negotiation of these mine development agreements remains today a controversial process, which many stakeholders perceive as having been opaque.
Today’s tensions subsequently are focused on three key areas:
A doubling of Zambian copper production and a quadrupling of copper prices over the past 7-8 years combined with a favorable outlook for the sector has not resulted in significant revenues for Zambia’s Government. However, it is expected that the mining companies in Zambia have either started to pay corporate income taxes or will be doing so shortly.
The terms of mine development agreements negotiated at a time of stagnation in copper prices are very favorable to investors, particularly in the light of the changed outlook for the sector, globally as well as domestically.
But at the same time Government has not been able to fill the gap in the provision of key infrastructure and social services which were previously maintained by ZCCM.
It is the interplay of these factors which leads to the question with which this report opens, i.e. how to develop a more equitable balance between the development needs of the Zambian people and an investment climate which encourages mining companies to continue to invest and create wealth.
(boldness mine)
There was a time when those Developmental Agreements referred to above were "guarded secrets" between the government of Zambia and the companies involved - but now, thanks to Alastair Fraser's excellent MineWatchZambia website some of them at least, can be viewed - here.
And now, in recent developments, President Levy Patrick Mwanawasa died in France on August 18 following complications from a stroke - and the country has now been plunged into the constitutionally mandated process of picking a new President expected to culminate some time in November. It will be interesting as this issue was probably the most significant during the last Presidential election in 2006, but that should (or at least could) be different this time as "Standard Chartered" (via Zambian Economist) points out in this analysis:
While the opposition deliberately played on voter discontent with Zambia’s share of the copper windfall in the previous election, making strong gains on the copperbelt and in other urban constituencies as a result, the MMD government has since then itself moved to increase mining sector royalties and impose a windfall tax on mining companies, seeking to secure a greater proportion of copper-related revenue for Zambia. In doing so, the government had taken an important step towards neutralising the opposition. (Sata’s subsequent about-turn on the issue of mining sector taxation, claiming that the government had gone overboard with policy to the detriment of long term prospects on the copper belt, will also be recalled). Policy differences are no longer likely to be an important voter differentiator – it is how policy is implemented, rather than the policy itself, on which the various parties are likely to differ. In a short space of time, Zambia has seen an important maturing of its multiparty democracy. Political risk – at least to the extent that it might impact on policy - has receded meaningfully.
But the larger macro-issue remains:
In today's international economic climate and prevailing economic conditions what is the best (though perhaps not ideal) way for low income countries to receive maximum revenue and developmental benefits from the extraction of their natural resources?
The result of China's demand for raw materials and its sales of products to Africa is that turnover in trade between Africa and China has risen from £5million annually a decade ago to £6billion today;
Paul Collier, author of the recent bestseller The Bottom Billion has an idea (his prescriptions have been described as unsentimental)) His goal, he says, is to provide 'credible hope' to low income countries who may be presently experiencing an entry into one of the global commodity booms and to avoid the 'mistakes of the past'. He believes that in order to get maximum economic return the rights to such resources should be 'auctioned off' in what he calls "verified auctions" in the most transparent, open manner possible. Its a theory that he outlines in the below talk he recently gave as a part of the TED lecture series:
