G.M. Wagoner No Longer in Production

Obama has moved to fire the head of General Motors, likely to get in front of any criticism when he gives the company additional bailout funds.

This dictate from Washington is causing alarms among conservative throngs who see this as just another sign of creeping socialism that will lead to our ruin (and ignoring the previous existing ruin that should have caused similar outburts but didn't and doesn't).

We think the car companies should be allowed to fail, aside from perhaps a generous line of credit to Ford. But you save car companies for populist reasons, not practical ones. The problem is that you need to save your banking system so that companies will have the necessary loans, securitization and day to day cash necessary to function. But nobody wants to save typically well paid Wall Street types, nor does the average person realize how important it is to the country's success to make sure the credit markets function smoothly.

Instead, you throw the masses a bone by saving something they can understand. After all, we all drive cars and have seen enough truck and beer commercials to know that all auto workers are sufficiently American, salt of the earth, and hardworking.

Wagoner at G.M. was part of the non-solution, and thus had to go, but the real directive from Obama should have been to send G.M. on its way into its own unfathomable future.

Wall Street Journal's Kimberley Strassel Distorts Truth, But Never You Mind

(Listen to the audio mp3 of this post here, 2.8mb).

Sometimes reality takes you back to certain pieces of information and makes you think. I was in my bathroom today, taking a leisurely hot shower, and reading an opinion piece in the Wall Street Journal by staffer Kimberly Strassel. It dated back to Friday March 20th, which is only a sign of the priority I place on the WSJ opinion pages, which to me are rather heavy on flights of inaccurate fancy.

Strassel's piece, labeled "Greed Is Not Good" and featuring a cute little picture of Obama reading Grimm's Needy Bankers (instead of fairy tales) to a bunch of smiling white people while Washington burns in the distance, is the type of writing that only adds to the collective stupidity of those who are inclined to be reflexively disposed to mocking Obama in the first place.

What troubles me is her suggestion that Obama is stoking the populist fires and encouraging the average guy to hate Wall Street and bankers, and at the expense of being able to bail out those industries in a manner that would improve the economic situation for the country as a whole.

Her concerns about rampant populism are well placed, but her attempt at sourcing all of this back to Obama or Democrats is wickedly cynical at best. Since point A in this entire crisis, it has been Republicans who have been railing the loudest about bailing out fat cats, in addition to their general desire to place the entire cause of the situation on lax Freddie and Fannie lending to minorities. We know better than that, but the Republicans and certain libertarians have not exactly hidden their disdain for and mistrust of Treasury, the Federal Reserve, and Obama himself. It's not Democratic governors who are making a mockery of stimulus efforts, or marching lock step in circles of donothingism.

Strassel goes on to say that "Washington does have its grown-ups: Those few Republicans who tried for years to reform Fannie and Freddie, but who also voted for a necessary banking rescue..." She does make a somewhat valid point (about how bailing out bankers IS bailing out America), but the start of the sentence begins with the basic lie that Republicans have taken the lead in reform.

I am reminded again of this piece that ran before the election that points out that private sector loans were the ones in default by a wide margin, and that neither Freddie or Fannie actually wrote loans themselves. This seems to be a hard fact for Republicans to swallow while they ignore their own policies of easy money and lax to nonexistent regulation.

Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
• Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
  

 (McClatchy)

It's all distasteful, and especially from the pen of a writer at the Journal. One would think that the actual facts would be available, or that at least she would attempt to write a different piece that conformed with some set of facts. Instead Kimberley Strassel relies on the high probability that her readers will be to eager to agree, all bliss and ignorance atop the soapbox.

Daily Update: China, Russia: Diverging Economic Paths of Power

Let's see now. The Russian economic development and trade minister, Elvira S. Nabiullina, predicted growth of 2 to 4 percent a year, while the Russian government predicts a 2.2 percent contraction. We would bet on the latter as it is hard to imagine how Russia can grow when so much of the world is in recession, and when Russia's economic model is currently focused on commodities.

The positive factor seems to be, according to the N.Y. Times, that Russian officials know this, and want to use this period of difficulty to make structural changes to the economy by broadening it.  In rewriting their budget to reflect $45 oil, it would seem they are at least trying to maintain a clear head and firm grasp. It's always mildly disturbing when governments create budgets based on the most optimistic set of numbers that require every good thing to happen at exactly the same time. We don't expect Russia to come out of this without considerable unrest, but they seem to be clear about the challenges.

*

Meanwhile, our friends in China are making rumblings about currencies, no doubt taking a certain glee in having an opportunity--validated by reality--to hit hit the United States back in the same manner that we badger them. Except, of course, that China has a bit more wisdom on its side when making points about the United States economy and currency.

In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.

A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”

While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world. Russia recently made a similar proposal.

(N.Y .Times)

Every time we read something about China we are reminded of one particular friend who contains such an irrational non-love for that nation, induced by a fear that China wants to become a bit more powerful and poses a threat to the United States. We tend to think that most countries are working under the same principals (as in, wanting more power, becoming greater threat) so fixations on China (via say, not shopping at Walmart, home of many Chinese goods) are less productive than fixating on the United States and its flaws. We can only fully control what we do here in the United States, and changing oneself to meet challenges is always the tough option; it's much easier to point the finger that way and complain. And as can be seen, on currencies at least, China is now pointing back at us.

Bernanke the Beard Keeping it Real Clear on "60 Minutes"

In a smart move, Federal Reserve Chairman Ben Bernanke takes to "60 Minutes" on CBS and explains the reasoning and rationale for much of the government action.

The big news of the day is centered around A.I.G. and the contractually required yet obscene payments being made by that company to certain employees. Everyone is appropriately outraged and expecting the government to do something rather Soviet, like break the contracts.

Of course when you do things like that, you ended up with situations like that taking place in Russia, where a Siberian court is stripping a Norwegian firm of its stake in a Russian joint venture. This is making investors in Russia rightfully jittery. Paints a rather interesting contrast with China. China, the communist nation, is by and large pushing for regulation and responsible economic policy and clarity, while the ostensibly free Russia practices a rather murky version of capitalism that ends with all funds flowing to central authorities.

Already jittery investors were alarmed on Thursday when a Norwegian cellphone company announced that a Siberian court had seized its multibillion-dollar investment in a Russian joint venture and would turn it over to a company thought to be allied with a Russian oligarch.

The decision signaled an escalation in a long-running dispute between the Norwegian company, Telenor, and the Alfa Group, an alliance of Russian businessmen that was also at the center of a separate fight with the British oil giant BP last summer. That dispute also shook faith in the Russian market. 

Russia’s stock market fell on the news of the asset seizure.

(N.Y. Times)

Clearly the Obama Administration is also attempting to make the workings of the Fed less opaque to the casual observer, and that's a good move. We get some nice background on Bernanke and his working his way through Harvard. If a guy with a 1590 on his SAT's can't solve our problems, the various politicians and pontificators certainly won't.

*

Also, nice interview with Alice Waters on "60 Minutes".  She is indeed a bit of a utopian but the ideas are worthy. It's people with vision, and who are a bit extreme, who serve to institute necessary changes in society. Improving how and what Americans eat, and establishing a connection to the bounty of the land is truly important, even if the actual application will be in scaled down form.

A.I.G. Secrets: Maybe Too Much Information Helps Speculators Speculate?

Here is Gretchen Morgenson at the N.Y. Times once again--as in didn't she just report most of this a week or so ago-- bringing up the issue of A.I.G. and how taxpayer money given to the company has been used to pay off counterparties who had purchased credit insurance from the huge firm.

It is asked why these parties are not revealed in total, and why money was given to make the counterparties whole, when there have been no defaults on insured securities to cause losses to those counterparties. Indeed one can question the governments desire to close out the contracts at full price.

SUCH secrecy raised hackles because the insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.’s counterparties whole on losses that have not happened yet? Why didn’t it force these financial companies to close out the contracts at a discount, making them take what is known on Wall Street as a “haircut”?

Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., and an expert in insurance, speculated that the United States was afraid that A.I.G.’s foreign bank counterparties would suffer large hits to their capital cushions, the amount they must set aside in case of losses.

“If somebody takes away the A.I.G. guarantee, all of a sudden the banks’ capital ratios look bad,” he said. “It might have stretched some of these banks.”

Still, Mr. Arvanitis said, it is not clear that the government had to pay out 100 percent of the contracts’ value to all the counterparties. Healthier institutions could have been persuaded to take a haircut, he said. “That is what tough negotiators do,” he added.

(N.Y.Times)

But do we really need to know the exact details of who is insuring what, and for how much? That is handy information for those controlling a large pools of cash, like certain hedge funds. Of course knowing who got paid out on their contracts would imply greater stability for those companies and thus upward pressure in their securities; nevertheless too much detail can lead to speculation that might catch some delicately purched company unawares.

They always push for disclosure on behalf of taxpayers, but more likely it's the politicians who are looking for some upper hand (and underhand) to play.

Business As Usual: S.C. and Texas Reject Parts of Stimulus

If you are in South Carolina, and seeing your unemployment rate rise like a sudden flu, with no medicine in sight, thank your wonderful governor for taking an ideological stand to let you sweat this particular crisis out the hard way.

This comes along with the decision by Rick Perry, the governor of Texas, to reject expanded jobless benefits, a move that pits the unemployed in need of help against businesses who really don't want to be bothered with paying out more money in tough times. The Republican governor sided with business, as usual.

Both Perry in Texas, and Republican Mark Sandford in South Carolina, are selective warriors, excepting some money, but not other money, and largely making symbolic stands that allow them to frame themselves for future elections as being fiscally responsible. Nevermind how we got in our current economic situation, or the party that led us there.

Fortunately for the citizens of each state, the stimulus bill includes a clause that allows state legislatures to bypass willful governors and accept help

A.I.G. Gives Candy To Its Many Bank Friends

With each additional grant of cash or support the government gives to dying insurance giant A.I.G., my coworkers stand amazed and outraged. "Why is the government not bailing us out?" goes the question, and to which the usual answer is that, "You have no obligations that would wreck everyone around you if they go unpaid"

"Well I have three sons. Those are my counterparties and nobody helps me with them," says one particularly spirited coworker.

All too true, if somewhat irrelevant. Last week the Wall Street Journal named some of the counterparties who essentially received cash from the government via the A.I.G. bailout. Congress is in high verbal outrage mode, as though the cash pumped into A.I.G. was to serve some vague "A.I.G. only" purpose, and as if there were no credit default contracts to unwind with concerned others. Just why then did they think the Treasury was so hell bent on propping up A.I.G. if there was no string of related firms whose contract ties needed to be unwound?  What are these politicians thinking?

So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way. And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit.

Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.

Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

So, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.

(Gretchen Morgenson, N.Y.Times)

Most of what is going on in these transactions between the government and private industry will go largely unfathomed and misunderstood by the average person, not due to lack of intelligence, but lack of interest in anything remotely complex. But one expects that politicians would dial the outrage down a bit given the precarious nature of it all, and try to add insight to the national economic injury.

The A.I.G. counterparty story is rather a non-story, and brightly obvious to anyone paying attention, but it will be played as new, with enough posturing all around (via media and political types) to insure no greater productivity in actually solving our problems.

Representative Smith Will Next Point Out The Moon

Difficult times. Busted computers leaving us offline. Busted stock market sinking to ever lower lows. Busted political system, where Obama and his efforts have been minimized or mocked by certain conservative minded folks.

The latest charge, brought to us by Fox News--and to some degree accurate in the same way that noting a blue sky is accurate-- is that Obama is the "Abortion President."

Rep. Chris Smith, R-N.J., accused Obama of launching two attacks on pro-life measures. In addition to lifting President Bush's stem cell restrictions, Obama intends to lift regulations from the Bush administration that allow health care providers and institutions to refuse to participate in abortions on grounds of conscience.

For Smith to point this out in an attempt to make an argument out of the obvious, just reminds us as to why our economy is in the position that its in, and why the Republicans have not been able to be part of any coherent solution. Unfortunately they remain diverted into narrow areas of interest, rather than forming comprehensive policy that embraces worldwide economic difficulties.

We are always resolutely pro-life here, but don't imagine being pro-life in a collapsing nation will do much for anyone, living or dead. Putting the nation's well being above the ability of Republicans to continue to do nothing really substantial on abortion was a no brainer in backing Obama. While we are not pleased with this little string of "reversals" on social issues, it is nevertheless not a surprise, nor will Obama be remembered by these little executive actions that get flipped and flopped with each new administration.

If these embryonic stem cells indeed arrive from fertility clinics,  perhaps Representative Smith should seek some legislation affecting the source of the cells, since those cells would exist and be destroyed regardless of what happens on the Federal usage level.