Woll on Bank Bailouts

Props to Henry Farrell for putting me onto the imperfect-but-still-superb account by Cornelia Woll, offering a comparative analysis of bank bailouts.   It's the only thing that I know of that so much as tackles this ambitious line of inquiry and the fact that it might have been better is only a quibble.

Woll analyses six cases: USA, Britain, France, Germany, Ireland and Denmark (with some useful side comments on Iceland).  The takeaway: it's complicated.  Every case is different, thanks to chance and the alchemy of local circumstance.  Still, she offers a valuable framework: how far (and how) did any individual nation solve its problem through the collective action of bankers, how far via taxpayer intervention.   The "collective action" prize pretty clearly goes to France where a small gaggle of insiders who went to the same schools and built the same resumes (I'll bet they lunch at the same restaurant) were able to come up with a package that seems to have worked with efficiency and at relatively low cost.  Apparently some say the sovereign could have squeezed the bankers to pay a bit more but so far as I can tell, the political backlash has been only modest.  Oak leaf cluster to Denmark where a smaller country with an (apparently) tougher problem seemed to be able to deploy a tradition of collective effort and cut through problems that prove insoluble elsewhere (or wait a minute--maybe I just said that Denmark did better even than France).

On the "collective action: continuum, perhaps the extreme opposite may be the United States, where the possibility of solving the problem within the banking community seems never to have gotten much thought.  Odd, perhaps, when you recall that New York bankers did an impressive job of pulling together in the Long Term Capital Management fiasco just 21 years before.  Perhaps inevitably, the US wins also in terms of number of dollars pumped into the system--though in percentage terms, it seems to me they score fairly well (returns still aren't all in on how much it actually cost).    Germany and Britain seem to me to have performed in a somewhat similar manner: aggressive public intervention once it became clear that private collective action was going nowhere.  

Which leaves Ireland. By Wolls' account--and so far as I know, just about everybody else's, Ireland's response seems to have been the most amateurish and ham-handed: panicky response to individual crises with not so much as hint of an overall strategy.  Woll seems to sure the common view that Ireland's response proved costly to the state. She also argues for the less obvious proposition that it didn't help bankers much either: individual bankers may have come off worse in Ireland than in any of the others.

All this is wonderful but I can identify at least to respects in which she might have done better.  One, for all her superb general analysis, her individual narrative chronologies.   It's often quite unclear just why she is telling you what and when.  And I don't see any point at all to laundry-lists of individual names.  Perhaps the point is to show you just how individual each case is. Perhaps, but a lot gets lost in the shuffle. For example, I can believe the Irish case was an expensive shamble, although I'm not sure ever specifies just where the expense came about and how it could have been avoided.

A larger point: Woll presents her cases in the frame of a power play between banks and "government," perhaps better "the public."  She seems to take it as a given that a bailout/solution is good to the degree that it dumps costs on banks and not on the public.  My instincts tell me this is true. But as I read on, I realized that she never told me just why this is true: is there a clear moral or functional reason why banks instead of the public ought to be the payer-of-first-resort?  To my surprise, I realize that I am not so sure. I suppose the very fact that I am thinking about the issue is some testimony to her acuity in laying out the issues.  

Taub and the Long, Bleak Story of Housing

Jennifer Taub's Other People's Houses is likely to be about as good a book as we are going to get by way of overview of the woes of the housing market over the last generation. Which is a pity because it might have been better.   It has some great virtues, of which more in a moment.   I suspect its primary problem is that the author set herself too ambitious a goal and wasn't able to get control of her material.

In particular, she decided it was necessary, in order to tell the story of the recent uproar, also to go back and (re)tell the story of the Savings and Loan debacle of the 80s.   I can understand her thinking here:  much of our late calamity does indeed have its roots in the S and L mess, and you can understand today better if you understand yesterday.  But there are similarities as well as differences and would be useful to try to isolate and identify those differences for whatever lessons they may offer. On the same theme, while we may not yet be ready for the last word on the Savings and Loan era, still, we ought to be in a position to impose some kind of framework (however simplistic) and to formulate some useful questions.  

  Taub doesn't do that, and so she is reduced to telling some individual stories.  Some of the stories are good, but there's no identifiable pattern to what she has put in and what she has left out.   Moreover in the nature of things, she winds up relying heavily on secondary sources: if you read Martin Mayer or William K. Black on the S and Ls (or, to one forward, Kirsten Grind on WaMu) you're going to find a lot here that you have read before (exhaustively footnoted, I should say--Taub is nothing if not conscientious about sourcing).

One irony is that, protean as her reach may be, it is remarkable how much she feels she has to leave out. Sometimes the choices appear just arbitrary. For example, she includes an account of the notorious "Keating Five"--the senators who earned themselves a moment's notoriety for their role(s) in seeking to protect the infamous Charles Keating, one of the poster boys of S and L bad behavior.  Yet she does almost nothing with the underlying Keating story.  Very well: she had to leave a lot out--but if Keating isn't important, how can the Keating Five be?

Perhaps a deeper structural flaw is that she tells the reader almost nothing about Michael Milken and the junk bond revolution.   Needless to say, I feel her pain: the Milken story is stuff enough for a book in itself (actually, there are several good ones).  I certainly can't blame her for not wanting to tackle it here--but if she doesn't tackle it, she can't really claim to be telling the whole story.

She also spends what I would regard as an undue amount of time on one Supreme Court case--Nobelman, well known to bankruptcy cognoscenti.  For those outside the inner circle, this is the case where the Supremes held that the Bankruptcy Code debars a Chapter 13 ("regular income") debtor from rewriting his home mortgage.  Taub disapproves.  She's strongly of the view that rewrites in troubled times. But here matters get complicated.      She also believes that rewrites should be done via the bankruptcy court.    After some waffling, I've pretty much come round to the view that rewrites are a good thing (see this).   But must it be done by the bankruptcy court?  Again, I think she might be right that it should be.  But I don't think it is a deal point: I would rather have seen her concentrate on rewrites per se, leaving the question of who and how as a side issue.   Linking the two as if they were necessary corollaries unduly complicates her argument. 

[And FWIW I think she was too hard on the Supremes.  The issue was a fairly straightforward matter of statutory interpretation.  I think they read it correctly (and the decision was nine-zip, so I am not alone).  But right or wrong, statutory interpretation is all they saw themselves as going.  So if Taub has a beef, it's really with the Congress that wrote the statute to begin with.]

But enough about stories  In contrast to the early chapters, I think far the best part of the book is, ironically, also perhaps the least salable.  That would be Chapter 14, her careful account of the institutional structure, both in the banks and in government, its slow, inexorable path to disaster.  She identifies five "links" (supine Fed; securitization;  collateralized debt obligations (CDOs) and CDOs-squared; credit default swaps (confusingly, CDSs); and leverage.  The tag lines will be familiar to anyone paying attention, but it is the richness of her detail that gives her account density and heft.  To this we can add her final chapter, in which she traces the failure of housing reform in the Obama administration--and lays the blame like a dead rat on the doorstep of the President himself (she tops it off with a useful aide-memoir of the arguments against mortgage rewrites, together with rebuttals).

There is, in short, a lot of good stuff here.  I'm glad I read it, and I'll go back to it. But at the end of the day, I think she does nothing so much as just prove how damn complicated the whole story is.

Chintzy afterthought:  the title is touching, but does it make any sense?  Her whole point (with which I would agree) seems to be that it is these people we are talking about, the owners, and that these are their houses, not those of anybody else.

The Best (Though Incomplete) Case Against the Bailout

House of Debt by Atif Mian and Amir Sufi seems to be receiving a warm reception.  Still, I'm not sure the reviewers have made clear what is truly distinctive about this important and original book.  What we have here, specifically, is a radically unfamiliar narrative of the Great Meltdown, together with the best account I've seen so far as to why the bank bailouts were a mistake.  It's an imperfect or at least incomplete account as I will try to show.  But still, it deserves a place in the curriculum for any study of just what went wrong and how.

For starters, then: M/S undertake to show that the Great Meltdown should not be understood as a crisis in financial system.  There was a financial crisis, granted--it began in September of 2008 and extended through all those months necessary to sluice out all the taxpayer dollars directed at saving the financial system.  Rather, the real Meltdown was was a crisis of debt.  It began more than two years earlier.  It generated to foreclosures and unemployment; it led to an unprecedented collapse in household wealth, particularly among those least able to bear it.

Ar first blush, one thinks that this analysis shouldn't be all so unusual.  It shouldn't be, but it is; just about every other account I've read of those dark days begin with "Lehman Week," when the eponymous investment bank collapsed into bankruptcy and when AIG and the GSEs and Merrill Lynch all passed through near-death moments.  Debt appears in all these accounts, of course--something had to trigger all the trouble.  It appears but it is a curiously abstract and offstage kind of monster, like the Maguffin in a Hitchcock movie.  It is left for M/S to show how turmoil in the real estate market drove people out not just of their homes but also their jobs;  Its a story that would have left a blot on the triumphal narrative of recent history even if (somehow) the banking crisis had never ensued

Having situated the debt crisis at center stage, M/S proceed to an even more provocative suggestion: that the bailout was a mistake, bad or misdirected policy unnecessary itself and probably at the expense of other policies that might have served us better.  Once again, this may sound familiar but it isn't.  Plenty of people have called for the bankers' heads, generally on  some variant on the theme of "greedy bastard."  Many defenses appear to finesse the "greedy bastard" issue, arguing that anything other than bailout would have destroyed the financial system, ruining both Wall Street and Main Street in the process.

M/S also sidestep the "greedy bastard" part of the case. They do argue that saving the banks was solving the wrong problem: that it misdirected resources and attention away from mortgages and related issues. Deal with mortgage, on this analysis, and we get the economy back up on its wheels again; ignore mortgages and we are stuck in a cycle of anemia.

Ah, but what about the larger consequences of ignoring Wall Street you will say).  Didn't you just say that saving Wall Street would have saved Main Street, and that letting Wall Street go would be an unspeakable calamity?   And this is where M/S get really interesting. They argue that there are really two banking systems at issue here: one, the mundane, boring payment system that keeps the fluids flowing through the body politic every day. the other is the business of mega-borrowing and mega-lending that gives Wall Street so much of it swashbuckling charm.   The government did need to step in and save the "fluid flowing" part of the banking system, the authors concede--and it did so.  But here is where it gets really interesting: once they'd saved the fluid-flowing system, they could safely have let the swashbuckling system just dangle from the yardarm.  No, strike that: not only could we have let the swashbucklers go: it would have been good to let them go. After all, the whole cause of the problem was that the bankers had made to many bad loans.  How would it improve them back into the business where they could make bad loans again?

And that, dear reader, is the case.  It's almost elegant, straightforward, and as a contribution to our understanding of the crisis, I'd say it is as helpful as anything since The Banker's New Clothes by Anat Admati and Martin Hellwig,  But there is, I concede a gap in the argument.  That is: I'm not as clear as I would like to be on the relationship between the two parts of the banking system. Can it really be that one could collapse without destroying the other. Perhaps so; I remember Alan Greenspan just a while back defending himself against the charge that he overhyped the market by saying that he only worked with short-term rates and that long-term rates were an independent story.    Maybe it is Greenspan we should call on to show us how random bankruptcy among major banks can be easily tolerated.

Coda:  M/S end their book with a spirited plea that we reconceptualize our banking system and vastly increase the role of equity as distinct from debt.  It is a beguiling argument and it does flow logically out of what went before. Still, it is ambitious enough that it probably requires a book of its own of which this one is, perhaps, just the teaser.

Geithner: A Pronouncement

We're back from socialist hell Paris where, I have to say, life seemed not  bit different the day after Marine Le Pen's 25-percent landslide than it did before.  Which means back to decent computer hardware (I'm in love with my iPad mini but as a blogging tool, it really doesn't have the chops).

I do have a few afterthoughts about France that i hope to post over the next few days but for the moment,  a word about Tim Geithner's memoir.  He's certainly receiving a lot of attention, most (not all) from those who want to tie him to an anthill and cover him with honey.  I can relate: I went into the book expecting to dislike him and--

--and, well, I still can't say I really want to sit down and have a beer with the guy.  Nor he with me either, I suppose, but I'm not that crazy about beer anyway.

Thing is, though, it is actually quite good book.  I'm sure there are some self-delusions and some careless errors. But for the most part, it's what you want in a memoir: detailed, intellectually honest, fact-driven record of how and why he did what he did.   He's also refreshing on his likes--Barney Frank, President Obama and lots of other people, really (there are many appreciative comments about his staff).  Also his dislikes--Neil Barofsky and perhaps Ed DeMarco; after that, really not much of anybody.  But no, not Elizabeth Warren--he seems to think she grandstanded him, but in the end, he seems to have enjoyed her company (I can believe both).  And not Sheila Bair, whom he treats with respect, although I'm still not sure he takes her as serious as she deserves to be taken.

I liked the book; this is not the same as saying I'm endorsing the message.  Let's agree that we've pretty much simplified the conflict over policy in recession management down to a sound byte question: bankers or homeowners, Wall Street or Main Street (or both, or perhaps even neither)?  Geithner's clear: he thinks saving the banks was unambiguously right.  He thinks his crowd got the tactics/strategy mostly right, although he certainly is willing to offer up regrets about particulars.  He thinks it is/was important to save Main Street also but that's the thing--he thinks they did do a lot to save Main Street.  He also thinks they did do a lot to help home owners. He would have liked to do more (damn that DeMarco anyway)--although he appears not to give home owner relief the same high priority as many of his critics.

I have to admit, I'm still on the fence on that one.  I'm still hung up on the great counter-factual: what would have happened had we not saved the banks?  And that is the great counter-factual: we don not and cannot know.   I gather there are people--Ludwig von Mises, Dean Baker, who say "let it burn."  And we can't prove they're wrong. And never will, either, because I can't imagine a world in which the political elite will have the will to do nothing while the banking system collapses around them.   I'm on the fence also because just today on the plane, I read what must be the most useful intelligent, thought-provoking challenges on the Geithner (etc.) program that I've seen so far.  I hope to say a word about that reading tomorrow  Meanwhile: agree with him or not, I think Geithner's book will endure as one of the indispensable primary-source documents of the whole sorry business.

Hank Paulson Says "I Ain't Yo' Mama"

Gearing up to read Tim Geithner's tell-all about his years on the bridge in the storm, I dusted off the pixels on the memoir of his colleague, Hank Paulson.  I expect I'll offer some side-by-side thoughts in a bit but for the moment, here's a fascinating not-quite-on-topic offering from Paulson on his management philosophy at Goldman Sachs:

Long hours at the office can cause problems at home, and this was a period of great stress in my marriage. I’d come home too tired to want to do much with the children when they were very young. We couldn’t afford to finish our bedroom, so we were living in an open loft, with the kids in rooms right next to us. I sometimes locked myself in the bathroom with Sports Illustrated to relax in quiet . Wendy made it clear I had to help out and get home earlier to give the kids baths, read a story, and put them to bed. With Gorter’s support, I began a pattern where I’d leave the office at 4: 30 p.m., run for the 4: 42 p.m. train, and be home at 5: 25 p.m. After supper, I’d read to the kids. I had them trained so I could zip through a bedtime story very quickly. One night Wendy came in and urged, “Slow down and read with expression.” I tried, but as soon as I did, both kids started crying: “No, no! Read like a daddy , not like a mommy.” Once they were asleep, I’d get on the phone and start talking to clients, who’d say, “Good Lord, you’re still in the office working?” When I tell this story about work-life balance, people say: “Paulson, you SOB, you worked people harder than anybody at Goldman Sachs.” Fair enough. But I always told folks at Goldman: It’s not your boss’s job to figure out your life.   You spend so much time planning your work schedule and your career, you need to make that kind of effort to manage your private life, too. Learn how to say no. Remember, you are not going to get ahead, in any case, being a grunt. 

Paulson, Henry M. (2013-09-03). On the Brink: Inside the Race to Stop the Collapse of the Global Financial System -- With Original New Material on the Five Year Anniversary of the Financial Crisis (Kindle Locations 1104-1106). Grand Central Publishing. Kindle Edition. 

It's a thought, baldly put.  Some will find it severe. But for several years, I've been telling law students--those who are going to the fancy firms, the ones that represent the likes of Goldman Sachs--that one of the ways in which they will be tested is in the determination of their capacity to manage conflicting, irreconcilable, unreasonable commitments. 

Comparison: a colleague whose name I shall not mention got his start at one of those fancy law shops. He quickly learned that there was an office poker game-no, wait, two office poker games: one for the big dogs and one for the puppies.  Your choice.  Anybody could join the puppy game.  Anybody could join the big dog game also but it was made clear to you that the big dog game was not for puppies and that if you went in there, you went at your own risk, with all that the term implies.  I suspect Hank would agree. 

Alan Blinder and the Treehouse Syndrome

Halfway through Alan Blinder's After the Music Stopped: The Financial Crisis, the Response and the World Ahead--it's a rewarding read, one of the best I've run across on the financial crisis so far (and I've read them in numbers way beyond the point of cost effectiveness).  I suspect what we've got here is the transcript of his "crisis" course for undergraduates--and that is no bad thing, not a bit worse than watching Yale on-line or some such.  It's far shorter on anecdote, much richer in analysis than the standard presentation.  For comparison, I think I've said before that you might rank these books in inverse order as indexed by the number of F-bombs: on this scale, it is important to report that Blinder is (so far) an F-bomb free zone, which I count as a plus.

Blinder also displays a gentlemanly nonpartisanship.  As a former Vice-chair of the Fed, he's obviously deep into the system and you'd certainly have to account him among those who believe that the system, within broad limits, works.  But is temperamental disposition doesn't inhibit his disapproval for so much of what went on before the great meltdown--of how much, to put it shortly, we brought it on ourselves (or at least "they brought it on themselves," which is different, but perhaps not greatly different).  He makes it clear, inter alia, that he does not buy into the "Barney Frank done it" school of crisis analysis--the school that blames it all on the Congressional Darth Vaders who made the banks their bitch and forced them to make lunatic loans to the unemployable and the illegal (though perhaps unfortunately, he doesn't linger to spell out the evidence on point).

In the same vein, it's clear that he thinks Paulson/Bernanke/Geithner made horrendous mistakes in the eye of the cyclone but he is inclined to be charitable in light of the consideration that they were making decisions unprecedented in scope and scale, and under the worst sort of pressure.

But I think one telling way to get a handle on Blinder's approach is to consider his presentation of the persistent conflict between Geithner at Treasury and the independent-minded head of the FDIC, Sheila Bair.  Blinder pretty much comes down on the side  of Geithner.  Given his natural civility, he speaks with none of the angry intemperance we got from Geithner himself (and speaking of F-bombs...).  But he makes it clear: Bair's insistence that bank creditors (as distinct from depositors) take some of the hit--that insistence, per Blinder. jeopardized the functioning of the entire system.

Ever fair-minded, Blinder does, in effect, concede that it's a couinterfactual and one that (absent the discovery of an alternate parallel universe) we'll never be able to test completely.  Okay so far, but let me offer two reservations.  One, a little more nihilism, please.  If you really are not sure that Bair was wrong, why not say you're not sure Bair was wrong and leave it at that?  I don't see an urgent need to legitimatize a position (Geithner's) of which you are less than convinced yourself.  This might be just the time to mimic the questioner on "Says You" who likes to say "could be that...could be something else."

And two--for myself, I'd feel a lot more comfortable with Geithner's no-creditor-left-behind policy if I trusted his motives.  That is,  I think all the evidence compels the conclusion that Geithner was driven by an almost manic determination to please the banks.  In short, if he was right, I'd say it is for the wrong reason.  

There is a kind of an irony here.   People who wish to blackguard Geithner frequently brand him as a former banker.  Of course he was nothing of the sort: he is one regulator type who never worked for a bank a day in his life.  But of course, this in itself may be the problem: could it be precisely his status as an outsider on the ground, gazing up the treehouse with admiration and envy?--thereby so much more willing to prostrate himself before the bullies on the block?

You might almost call it a reverse of the Joe Kennedy system.  Recall the flac that FDR got when he sent Kennedy, the old fox, to mind the chicken coop at the SEC.  Recall how FDR blithely dismissed the critics with the insight that it Takes One to Know One--and recall how correct he turned out to be.  

No such risk with Geithner.  And precisely for that reason, I would have been grateful had Blinder treated him with a bit more cynicism/skepticism.  In short, perhaps, been a bit less polite.

Sheila Bair and the Slow Boring of Hard Boards

In her memoir of her service as head of the Federal Deposit Insurance Corporation, Sheila Bair tells  cute one on herself on how she emerged from a meeting with bank CEOs to be confronted by a gaggle of protesters who mistook her for a CEO.  One yelled: "How much did that suit cost that you have on?"

Bair recounts gleefully, "his jaw dropped when I responded truthfully that it had cost $139 at Macy's."

It's a moment to savor although I think it might impart meaning beyond what she seems to notice.  I've said before that I have thought   that one reason she had so much trouble getting along with all the other bank regulators is that they treated her like a grrrrl: cutting her out of critical negotiations, failing (or choosing not) to keep her informed, seemingly ignoring any of her own policy proposals.

I'll stick to that but I'll add: in this crowd, can you really take seriously a person in a $139 suit?

I guess I don't quite have my heart on this.  Truth is, I haven't any idea where Ben Bernanke or Tim Geithner get their suits, and indeed if they are spending a lot of  money on fancy threads, I'd have to wonder where it was all coming from.

Still, I think I'm right on fundamentals.  For good reasons or bad, Bair was never deploy the same heft as the rest of the crowd.  So in a lot of press accounts, and also in Steve Rattner's (mostly fascinating) account of his work in the auto bailout, she comes across as a pesky irrelevance who just didn't get it, who was willing to throw the entire economy into a shambles only to suit her own private vanities.

Shorter Sheila Bair: she is one of those who thought that the bailout should have been far less generous with  the shareholders and bondholders of the banks, far more willing to kick out old inculpated management, far more aggressive about capping sweetheart compensation deals for so many who helped to create the mess.  It's a position in which I am largely in sympathy  although I'll admit that it's a complicated complex of issues and that the devil is in a great many details.

By every account, the soft-on-bankers policy appears to be the handiwork of one who was not a banker himself--Tim Geithner, the bureaucrat's bureaucrat, who has survive so many storms to continue as Secretary of Treasury.  Her memoir is now the third memoir I've read by people who ran crosswise with Geither during the crisis times.  The other two--Neil Barofsky's Bailout and Jeff Connaughton's The Payoff.  Both are worthwhile reads in their way but both are heavy on their own frustration and disappointment with the administration's financial leadership, particularly as exemplified by Geithner.  [Noam Schieber's The Escape Artists  is similar in tone but it is reportage, not a memoir.]

Given this background,  one might well have expected Bair's book to be more of the same.  It is, sort of, but in the end it is, perhaps surprisingly, the least rancorous of the three.  Oh, no doubt she's frustrated with Geithner and his no-banker-left-behind approach  But this is a lady who has spent a good deal of her adult life on Capitol Hill: implicitly, you can tell she understands that you've just got to deal with some people whether you like them or not.  And she seems to take a certain pride in the fact that at the end, Geithner, even Geithner, comes to her farewell party--and makes a wry but not ungraceful joke about their difficult relationship.

Perhaps a second reason the book is not mired in disappointment is that   Bair won a fair number of incremental battles even if she did not win the war.  She seems to have been able to make some deals go the way she wanted them to go, and in particular when it came to the matter of reform, she seems to have played a large, albeit not dominant, role in shaping the Dodd Frank Act.  And one more reason for lack of ranker: although she may not have noticed it herself, she seems to have had an immense good time doing what she did.  At least by her own account, she seems to have been kept herself well briefed on every relevant issue.  Also, again by her on own account, she seems to have enjoyed the support of a loyal, talented and energetic staff who were delighted to fight the good fight alongside her.

So what you get in the end is not precisely story of triumph.  What you do have, however, is one of the better books I've read about how this kind of high-end policy scrum really works.  The tictoc can get a little numbing after a while--it has taken me about a month to get through the whole thing.  But I'll gladly keep it on hand as an offering as prep material for any student who finds himself lucky enough to get a chance actually to observe this kind of dustup in real time.

Two disconnected afterthoughts.  I said that Bair ran crosswise with Steve Rattner on the auto bailout.  Th issue was the use of FDIC resources to support the car companies.  In his book (Overhaul), Rattner make it clear that he found her obstructive, parochial and short-sighted; Bair in her book makes it clear she thinks she is being treated unfairly.   I though Rattner's book fascinating and I think in general he deserves top marks for his management of the bailout.  On the substance of the particular issue, I tend to side with her, not him.  I think her concerns were legitimate and she was right to push them.  In this case, then, I think it is he who is being parochial and short-sighted. On the other hand, I can hardly blame him.  It was his job to ram through the auto bailout and it is in the nature of things that he won't have an easy time understanding those who take a different view.

Second afterthought: on issues of grand strategy in the financial crisis,  the reader will have surmised that I count myself as part of the anti-Geithner faction.  I think his banker-protective policy--ring fence and coddle your friends, let everybody else go to smash--is bad politics and terrible policy.  I don't doubt his integrity or his seriousness of purpose: I just think he is catastrophically wrong.  Yet as DeLong likes to say, the cossacks work for the tsar.  If we have been stuck with this wrongheadedness for so long, it is because Obama wants him there.   Odd because in accounts by many people, Obama alone seems capable to entertain a much broader and more wholesome view. But for the foreseeable future, it is Geithner we've got and Geithner we will keep.  And that is because Obama wants it so.

Third afterthought: would be fun if Bair got the not to chair  the new Financial Stability Oversight Council, though.

Obama, Geithner and "No Banker Left Behind"

I've just now caught up with Noam Scheiber's The Escape Artists and it is just as good as the reviewers say it was (for one of the best, go here).  For crisp and coherent accounts of difficult economic concepts, this guy really is way above the common ruck.  But he brings me back to a favorite theme of mine: that Obama and his ilk are way too deferential to Wall Street.

I've taken some heat for that one  before from some of my friends who say no no, one of Obama's great virtues is that he is not part of the Wall Street cabal.  Wall of course, he is not.  But is that a virtue?  The more I see of him, the more I sense that Obama, whatever his virtues (many) and his intentions (good) simply does not have a feel for the way markets work.  It's precisely the reason why he is far too much  at risk of being mesmerized by those who (sound like they) know better.

But next, direct the spotlight to Tim Geithner.  Per Scheiber, Obama and Geithner are genuinely sympatico. But the terrible truth is that Geithner suffers from another strand of Obama's own hypnotizing virus. Recall that Geithner's great claim to fame is that he has never worked for "a bank" ("Federal Reserve Bank of New York," ironically, does not count).  Well yes, but one corollary of never having worked for a bank is that Geithner feels himself totally dependent on banks for his street credit.  Read a few pages of Scheiber and you get the feeling that this guy doesn't blow his nose unless he decides it will play well on Wall Street.

Plug in Larry Summers as chairman of the National Economic Council and you have somebody whose role is more complicated and perhaps easier to misunderstand. The vulgar (that would be me) would think--oh, Summers, he's sold out for the big consulting fees, he is just another shill for his corporate masters.  Per Scheiber, there is a large kernel of truth in that,  but the back story is more complicated.  It's not solely that he's a corporate tool (heh). The thing is, in a more general way he just wants to make sure he has a place at the power table--you get the sense he might have behaved much as he did were he buttering up to Joseph Stigliz, rather than Robert Rubin.  It's Summers who get to pass on economic advise to the inner circle. In Scheiber's telling, "pass on" means that Summers gets to listen to the great advocate of "more help for Main Street" Christina Romer, in her role as chair of the Council of Economic Advisers.  At the start, Summers agrees with her (Are you surprised?  One surmises that Romer may have been surprised).  But then Summers, no slouch at bureaucratic intrigue, puts Romer on ice (or more crudely, "shoves her out onto the ice floe").  Had he changed his views?  Evidently not on substance; but it appears he had made a judgment as to what would win, and he was afraid that if he stuck with (what he perceived to be) the loser, he would lose his street cred.

It seems that Summers' decision set the stage for a tragic misunderstanding.  Evidently Rahm Emanuel, still the chief of staff, figured the political decision was his, subject to input on the economics from Summers. But by the time it got to Rahm's desk, a political decision had already been made: Rahm just didn't know it.

So the winners here turn out to be Geithner, though he may not have known how or why, and Summers, for reasons of his own.  Romer it seems,  no matter how competent an economist, was not Summers' match at intrigue.  And Obama--and, ironically, Mr. Steeetwise himself, Emanuel--apparently didn't even know that they had been rolled.

There is an added irony here, way beyond the scope of Scheiber's book.  That is: I have no idea how good Romney is at bureaucratic intrigue (not very good, I suspect)--still when it comes to not being mesmerized by  big money, he is probably far better equipped than Obama.   He's been dealing with these guys all  his life and he seems to have taken them to the cleaners more than once.  Is this reason enough to dump Obama for Romney?  IMO, not by a long shot. Far better a serious but mediocre president, than a slapdash moneygrubber in thrall to a zoo full of knuckle dusters.  But it does make the point that politics, as well as being a dirty business, is also complicated.

You Don't Want Neil Barofsky Thinking You are a Pompous, Careerist, Lackey to the Banks

Elevator pitch for Neil Barofsky's  Bailout: "Mr. Smith Goes to Washington starring a guy with as highly actuated sense of right and wrong, and  the brass balls of an assistant U.S.Attorney from Manhattan."    Which latter is, of course, exactly what Barofsky was before somebody plucked him out of obscurity to make him the first inspector general of TARP, the benighted "troubled asset relief fund, so much the center of our narrative of the 2008 meltdown.

You really have to wonder who had the bright idea of giving him this job in the first place.  It's unlikely that any government official would have handed such a this guy this mandate had they entertained any notion of just how big a loose cannon (I use the phrase in the nicest possible sense) he might be.  In retrospect, you'd have to say they might have known.  Manhattan USDAs are not famed for winsome self-constraint, and in Barofsky, they picked a guy who had (if you believe him) faced down FARC guerrillas in Columbia--including one who (if you believe him) had been sent to kill him and relented only when she learned that there might be a spot for her in a witness protection program.

Whatever; but it couldn't been many days before they realized they had given the secret handshake to a guy disposed to assert the broadest possible definition of his mandate, and great enthusiasm to explore any opportunity that presented itself.   And in addition to his work with narco-warriors, he brought to the table an impressive background in the intricacies of financial fraud.  What he did not bring was equally impressive: he had zero ambitions for a Washington career.  By his own account (and the evidence richly supports him) he was a political naif. And if he had any humility, he must have left it in the commuter waiting room at Penn Station.

All of which makes for, if not else, a riveting read--one of the best first-person memoirs that I've read coming out of the crisis.* It's a ripping yarn in which you wouldn't want to be one of the legions whom Barofsky came to hold in contempt. His high-mindedness is somewhat defanged by the consideration that he is also severe with himself: it can be fun (by reason of rarity?) to read anyone who is so candid and forceful in owning up to blunders on his own.

Barofsky almost certainly defined the job more broadly than his handlers would have expected him to. He took on "audits"--the boring shuffle of paper that makes up so much of the life of inspectors general. Much more he seems to have preferred fullscale "investigations," and it was only a blink of an eye before he had clothed his staff with full law-enforcement powers--guns and badges--and making referrals for prosecutions.

Early in the book he takes note of so-called "media whores"--IGs who define their job their name in the paper. The phrase was not Barofsky's, but by the end of the book he more or less acknowledges that he pretty much became one himself: he concluded, almost certainly correctly, if he was going to have any impact at all, he had to make enough of an uproar that Congress and the press would pay attention.

So it is hard to go through it without accepting his conviction that he is one of the good guys. But dig down under the hood a bit and there are some interesting issues that bear further exploring. This is so in at least two respects.

First, as to the nature of the mandate. There can't be much doubt that an IG has a brief to work for prudent management: to try to make sure that government dollars are not stolen, neither by recipients, nor by government employees themselves.

But (second) "stolen" quickly morphs into "squandered," and "squandered" very quickly leads to the question of what the government is supposed to be doing with the money--in a word, to questions of policy. Subtleties like this don't seem to have bothered Barofsky a lot. By his view,this is a battle of--what shall we say?  Main Street versus Wall Street?  The Banks versus the little guy? Choose as you wish, but Barofsky clearly sees himself on the side of the Main Street, the little guy.   However sympathetic one may find him in this role (I find him very sympathetic indeed), still there is the question: who died and made you king?  How far is it your role to establish the agenda for the program?

One answer to that question might be: well from the start, the program had a dual mandate.  It had the job of assuring that the banking system did not fall off the cliff.  And it had the job of providing some succor for all the assorted innocents who fell victim to financial dysfunction.
 
If you grant that ambivalence, then you will be impressed by the next insight. Specifically--it's clear beyond any cavil Secretary of Treasury Tim Geithner has never seen it that way.  By all the evidence--not just Barofsky's--we can see that Geithner saw and sees his mandate under a banner that says "no banker left behind."  If some consumers get helped in the process, why that might be okay (or does Geithner even care that much?).  But it can't be anything more than an incidental and unintended side effect of the world according to Tim.

Insofar as Barofsky blew the whistle on this kind of blinkering, I think we can thank our lucky stars that he was on the job.  But the issue doesn't end there.  Even--especially--if you accept this kind of dual mandate, then  you have to face some questions of how or whether the two stakes can ever be reconciled.

Take HAMP, the Home Affordable Modification Program that got so many straitened debtors deluded with false promises of loan workouts.  I think everybody except the program's administrator's mother would now concede that HAMP is a classroom example of bad governance, poorly conceived and appallingly excecuted.  And Barofsky provides compelling evidence that Geithner saw it only as a device to help banks, not consumers.

But what if you decided that you do want to help debtors on underwater mortgages? Just exactly why do you want to help them?  And what exactly do you do?  The first question--why?--itself invites an ambivalent response. Are you doing it out of compassion?  But why compassion?  Aren't these just risk-takers who took a risk and lost?  And is compassion to these debtors compatible with compassion for other homeowners who did pay their bills and did not get whipsawed by the economy?  But maybe you are not doing it out of compassion; maybe you are only doing it because you think the economy needs it, in which case a different set of questions may arise.  And in general, if we give this relief, where does the money come from, and why?

Or take a somewhat less earthshaking issue that appears, nonetheless to be dear to Barofsky's heart: auto dealerships.  One facet of the Rattner auto bailout was that it generated a rash of dealer closings.  Barofsky is not at all happy with that decision which he thinks ill-founded or at least ill-thought-out.  And he is surely right that closing a dealership hurts, very likely the dealer and probably also the community he serves. But it's less clear how you allocate the costs/benefits of this sort of thing.  Barofsky floats (though he does not really embrace) the idea that the dealers took the fall for the employees--that there wasn't enough money to save both, and the (largely Democratic?) employee cohort at the expense of the (mostly Republican?) dealers.  That's certainly a possibility and I'm not sure how I'd come down on it myself.  My point is I'm not sure the issue was quite so much within Barofsky's brief as he seems to believe.

Concerns like this may seem nitpicky, mere lawyer stuff.  The hell with the fussiness, his friends will say.  Those are just excuses and evasions. Barofsky was a man of action.  Even or perhaps especially (they say) you read what his enemies say about him, you can see that he's a man of integrity who was doing what he felt was best for the system.  The hell of it is, I think his friends are right.

==
*Others: Steve Rattner's Overhaul on his work in the auto bailout (sounds like Rattner and Barofsky are not the best of friends); Harry Markopois' No One Would Listen by a guy who seems to have gone half nuts trying to tell the world about Bernie Madoff before Bernie told on himself.

In a Word, Bleah

Best short not-very-technical intro to the Euromess I've seen anywhere: link.

England and Whelan on FannieFreddie

Who caused the great metldown? There's a school of thought that blames it all on the GSEs--FannieFreddie--and their cockamanie project of providing access to housing for poor people.  Peter Wallison is the prime culprit here, but he gets help from plenty of people who ought to know better, like Gretchen Morgenson and Michael Bloomberg.

 I'm one who has always thought this a vulgar oversimplification: a mean smoke-and-mirrors attempt to deflect attention to more fundamental failures in the banking system. I'm sold on the idea that the GSEs are a mess, but it has seemed to me (I think I have said this before) that the problem is not their "public" role: the problem is that they behave too much like banks. 

 Comes now Robert Stowe England (via Chris Whelan) who seems to me to have it just about right. In Whelan's words (reviewing England's new book) "The housing GSEs and the Wall Street banks are one and the same:" As interpreted by Whelan, the GSEs are best understood as part of the whole complex of banking (or more broadly, "finance"). The GSEs may have been players--perhaps the players--but their role cannot be understood aside from the larger context. This seems about right to me. England (whose name is new to me) goes on the stack (bur wait a minute, why is the Kindle price $38.40?)

Madrick's Uneven Greed

Still can't make up my mind just what to think of Jeffrey Madrick's Age of Greed.  There were times when I found myself thinking that it was one of those books that should be on the pre-inauguration reading list of any new president.  At other times, I thought it old stuff, recycled--and patchy and incomplete at that, with not much (not even greed, really) by way of common theme.

I suppose the main difficulty is that it is patchy, in the sense that it is a collection of pretty much self-contained vignettes--each chapter bears the name of one or more persons, as if you were thumbing throw a collection of Time Magazine "Man of the Year" profiles.  Some are better than others.  Still, if you're looking for takeaways, I can offer at least two.  One--maybe this is the reason I want it on the pre-inauguration list--is the appalling incompetence of the 70s regimes in Washington--Nixon, Ford, Carter--all of whom seemed to flounder or lurch through turbulent economic waters that they never came close to understanding.  No one of the three seems to have had even the beginnings of a feel for economic policy on their own.  The advice they got was of varying quality, some pretty good.  But they all seemed to grasp impulsively at whatever seemed closest at hand no matter how it might relate to the advice of yesterday (or tomorrow).

Perhaps one exception: Carter the peanut farmer sincerely disliked "regulation" and through the instrumentality of Alfred Kahn, he conducted the first great wave of deregulation since the beginning of the New Deal--trucking, airlines, natural gas.  Since I'm generally a fan of that sort of thing, I'll give him points for that (but cf. banking, infra).  But on the macro issues--inflation--he seems to have had no more notion of what was going on than the guy with the newspaper kiosk out by the White House gate.  The much-lauded Paul Volcker plays a role at this point in the story, of course.  Madrick treats Volcker with due respect for competence, and for being almost unique among major economic policy heavyweights in truly not giving a rat's patootie about accumulating personal wealth.  But he makes it clear that Carter's choice of Volcker to head the Fed was something close to accidental, and that Volcker's implementation of anti-inflation policy was probably far more brutal than it needed to be.

The other takeaway involves the steady and inexorable dismantling of anything like government regulation of banking.  One of Madrick's best chapters is his account of Walter Wriston at Nat City, the arch-deregulator who solved most of his government constraint problems with the beautifully simple strategy of shootinig-from-the-hip first, asking questions later, as in "an ounce of apology is worth a pound of explanation" (except that Wriston's "apologies" rarely amounted to more than "oh--sorry.")    The large question is, how did they get away with it, the systematic abandonment of anything like government oversight of a quintessentially public business?   Sure, you can talk about pressure from the bankers (Wriston in particular); you can talk about the corruption of politicians (okay, let's talk about the corruption of politicians).    But the deeper trouble is that nobody had a good counter-story.    The collapse of the Soviet Union removed all but the most vestigial support for "socialism" in any guise.  And ironically, bank regulation had worked so well since the 30s that it had become more or less invisible to friend and foe alike.    Then came the Latin American collapse, and the savings and loan debacle, and the Asian meltdown and he dotcom bust and the housing bubble and o lord, what have I missed?

Oddly enough, after stuff like this, Madrick ends by kicking a hole in what he bills as his own central premise.   Sure, there was greed aplenty but isn't there always?   Sure, rich bankers played heads-I-win, tails-you-lose. So the fault was all in lousy incentives, government guarantees.  "But this argument," Madrick argues, "is exaggerated, implying that speculative bubbles are more rational than they are.  ...  The nature of herd behavior  is to cast common sense aside (emphasis added-ed;)... Moral hazard is among the causes of overspeculation but not likely the determining part.  Herd behavior is hardly rational."

So to the question, "what, were we all nuts?"  the answer may be, "in a sense, yes."  This may not be a very helpful answer, and no matter how persuasive, it isn't complete.  Still, Madrick's presentation, however partial, is a vivid and one hopes therapeutic reminder  of just how nuts we really were.

Larry Summers Decides, What the Hell, No Point in Pretending to be a Liberal Any More

Squeeze 'em until the pips squeak:

Lawrence H. Summers, President Obama’s former chief economic adviser who has returned to his previous role as a professor at Harvard, said that exacting a toll from creditors could constrain future growth by discouraging future investments.

“No one is satisfied with the efforts to reduce foreclosures and support the housing market,” he said. “The barrier to doing more has not been ideology or any solicitude for the financial sector, but concern about the adverse effects of inducing nonpayment by homeowners or reducing the flow of new mortgage credit.”

Mr. Summers argues instead that the government should focus on tax cuts and directed spending to stimulate private spending and investment, policies for which there is little political appetite.

No one?

Growth Stock: No Release but the Grave

For twenty year or so now, I've taught the "Gordon Growth Model" of valuing stocks, to be used when earnings are retained and reinvested.  It's stylized and simplified, sure, but it's supposed to focus on the mind on the skill (or incompetence) of managers in making reinvestment decisions.  I think it's an important point to make but I don't think I've ever done a good job of making it plausible or even interesting to students who, to be fair, are pretty much beginners at this stuff.  On reflection, I need to present it more like it is: as a blood sport, a bearbaiting in which the bear can win.

   If I choose this route, I could  worse than deploy the account furnished by Robert Boyd in Fatal Risk, his account of the rise of American International Group and its formerly legendary CEO, Maurice "Hank" Greenberg.  Per Boyd, the lesson of AIG/Greenberg is that the category of "growth stock" is one of the trickiest in which a corporate manager can find himself:

In the 2st century, being the CEO of a growth stock was a designation unlike any other in the capital  markets.  Your stock stayed well bid when others in your sector sold off; the bad news or ill omens that forced the stock prices of your bitter rivals ever lower affected you half so much.  Even if a full-bore contraction took place when

The flip side of being a growth stock was being a company that had engendered deep-seated investor disappointment.  Growth stock investors didn't rotate out of a stock, they  abandoned it, resulting in the unrestrained selling of shares--it took very little time in globally integrated securities markets to go from overvalued to undervalued--and a board that would likely decide that a change of leadership was needed.  The growth stock CEOs club was not one that you could voluntarily leave, save for feet first.

All this may be true of any company but it takes on special piquancy in the case of insurance:

The details of running an insurance company--reserves against clams, claims liquidity, underwriting discipline, an aversion to risk--all come into conflict with the pressures of growth stock status.  An insurance man at his core, Greenberg did not seek the easy path to goosing earnings in the short term, by underreserving and writing insurance coverage on anything and everything in a grab for premiums.  He chose growth ...

And as Boyd shows, the thing about growth is that it works until it doesn't work any more:

Greenberg's situation in 2000-2001 left him little cover.  The company was so big and in so many sectors of the market that there was no "natural" target left for them.  So, in a move that was rare for him, he did what other CEOs did in this dilemma: he bought other companies simply because that's where the growth was.

You know the rest of the story: once growth topped out, the marketing superstars made a play for accounting trickery--this on the heels of the Enron debacle, when regulators for once found themselves in a mood to try to prove they offered some relevance to the world.   It was Greenberg, once the most legendary of CEOs, who found the gods abandoning him, like Antony after Actium; it was he who found himself departing feet first.  And still later, of course, came the hard lesson that left us all on the hook for ($182 billion) ($50 billion)  (whatever).  Greenberg has the consolation of saying (if he wants to) that he wasn't on board at the time of the bailout.  Still, there's an implacable logic here that is built into the growth model: you start out chasing the bear, and  one day the bear starts chasing you.  

I'm Still Trying to Get my Mind Round

A carriage house with a 12-car garage.

Update: details and a picture here.

Felix Salmon Channels Tim Geithner

Felix Salmon has certainly matured into one of our most helpful and generally instructive commentators on the mare's nest that is modern finance.  Such a surprise, then, to hear him utter flapdoodle like this:

Balance sheets have two sides, of course: assets and liabilities. And I suspect that what Mark might have in mind here is attacking the liability side of things, through pushing principal reduction on mortgages or allowing them to be reduced in bankruptcy.

But there’s a problem with trying to reduce liabilities: when the markets lose faith in credit instruments, as we saw during the crisis, the repercussions can reverberate around all markets and all countries. So governments around the world made a conscious decision to keep most bondholders whole, while injecting new capital and diluting equity holders in their attempt to shore up balance sheets.

Say wha--?  So we want a universal put  under all senior claims?  Do what you will as long as the bondholders don't feel any pain?   "Markets [might] lose faith in credit instruments."  Felix, baby: this is exactly what we want.  We want markets to pay attention to what kind of credit they are underwriting, and not buy crap--or at least, not unless they can get it at Matterhorn prices, such that they can expect to cover their own losses.  Or, if the problem is "interconnectedness," so they will do a lot to try to police the system against a fatal meltdown.  


Instead, we live in a world of "let Tim do it," where the lenders can take any kind of risk no matter how ill-considered because they know the guy with the briefcase shackled to his wrist will move mountains (= mountains of taxpayer money) to make sure they don't suffer the consequences of their own folly.

I admit that housing (of which Felix was writing when he made this uncommonly silly remark) might be a somewhat special case, in that most of the attention has been focused on keeping debtors in the homes they so improvidently purchased: a more hairy-chested market solution would recognize that some foreclosures are going to happen.  But in general: senior does not mean "don't worry, the taxpayers will pay."  Senior just means you are above the Plimsoll line.  The ship can still sink.

The Blogger has Questions

  They say the Devil has nine questions. Barry Ritholtz has ten; he poses them to the four guys who didn't finish their term paper:

1. From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?

2. How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?

3. The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?

4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?

5. For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?

6. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?

7. These firms abdicated traditional  lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?

8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders.  How did this cause a worldwide boom and bust — even bigger than that in the US ?

9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?

10. Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?

Comment:  Some of these come close to being purely rhetorical in the sense that (I suspect) Barry feels he knows the answer, and that the answer is damning to the culprits.  For every one of them, I suspect somebody over at the American Enterprise Institute will be ready with a memo showing that it was a total non-issue and oh look!  There's Barney Frank!  Even given AEIs risible record of "research," still a number of these do represent real issues on which I'd love to have a better sense of who is right.  Example: repeal of Glass Steagall is part of the standard mantra.  Yet wouldn't I be right that the worst afflicted banks (Bear Stearns, Lehman) are the ones least diversified, the ones that took least advantage of Glass Steagall repeal?  Can we document that Federal preemption really changed anything?

I know, that's not really his point--his point being to try to shame four guys who seem to have no sense of shame, and who pass on, as an "investigation report," a set of AEI talking points that they could have drafted before the commission was ever appointed.

Changing the Culture at GM

I'm still chewing on Steve Rattner's book about the auto bailout and in particular, his encounter with the the seemingly immovable cluelessness of old GM.  From Rattner's perspective, they just didn't get it: after a generation as lords of the universe and another of declining market share, they still saw themselves as lords of the universe--they just couldn't get their mind round the idea that some of their problems might be of their own making.


All this comes into focus for Rattner in the matter of of picking the right CEO for  new GM.  The story eminds me a bit of Lincoln's problem in finding a general to run the Civil War--just as Lincoln rolled the dice with McClellan and Halleck and Meade before he finally found Grant, so GM went through two insiders in a year, then an outsider who didn't work out so well either, before they settled on the current incumbent.  Is the new guy Grant?  Necessarily, the returns are not yet in.


But there is the larger problem of turning the battleship, moving the iceberg, herding the cats, herding the turkeys, whatever is the right metaphor as one tries to describe the process of instituting change at this vast empire, stilll running on the inertial force of generations.  You've got to get senior staff from somewhere, and in the nature of things, the talent pool is bound to include some of the old culprits.  Rattner makes no particular point of it, but the reader is impressed to learn that one of his least favorite people at old GM--the CFO--lands on his feet running after it is all over, running GM Asia.  Maybe it's just horses for courses, getting him into the right job, but it is a somewhat alarming climax for Rattner's story.


I wonder if, in the end, the problem of corporation-building isn't a lot like the problem  of nation-building: you can disband Saddam's army but you'll have chaos if you do, and one way or another, you''ll probably find yourself creeping back to them again because the alternatives are even worse.

Rattner on Rattner, and the Campaign to Save Big Auto

Steve Rattner's Overhaul,  his surprisingly cheerful account of his campaign to save the American auto industry, may be the best book I've ever read about what actually happens in a Chapter 11 bankruptcy.  Does this strike you as odd?  It surprises me.  Rattner's case--two cases actually,Chrysler and GM--was not remotely typical in so many ways: it was a Chapter 11 ultimately run by and in some sense also for the President of the United States.

Still it is surprising, once you get down to the mud and the blood and the gore, how much the case was animated by the kind of constraints you'd see in Chapter 11 every day.  Is this dog's breakfast worth saving at all?  In trying to save it, are we throwing good money after bad?  Can we change the tires while the vehicle is charging forward?  Above all, can we get the stakeholders on board--and in particular, how much money will it take to get them on board, and can we scrape it together?

It's that last that gives the narrative its dramatic tension and that will be most recognizable to anyone who ever spent time hanging around the bankruptcy court.   Ratner had to cope, first of all, with the unions: couldn't live with 'em, couldn't live without 'em.  They've had fat pay packets and gold-plated fringe benefits (GM pensions: the largest single buyer of Viagra).  Much as you love 'em, you have to cut them back to somewhere near competitive with the overseas Japanese.

This first job may have been easier than the reader might have guessed.  One, on close scrutiny it turns out that Detroit pay was not that-all out of line with overseas Japanese pay--a little ripe, but not jaw-dropping. And two: the unions seem to have seen this one coming.  They'd been taking casualties from all quarters for years and they seem to have come round to the view that the best thing they could do was to try to negotiate a soft landing.

The senior institutional creditors were another story.  Chrysler's senior debt, aggressively represented by the seniorest sort of lender, held IOUs totting up to $6.9 billion.  They made noises about wanting every cent. but Rattner believes that in straight liquidation, they would have collected no more than a single billion.  The plan gave them two; some creditors squawked and very nearly brought down the curtain on the whole show.

In the end, both Chrysler and GM survive (at least for the moment) and the reader is a bit surprised that they do--perhaps because Rattner himself is a bit surprised.  To hear him tell it, everything had to come together perfectly, and in the end (nearly) everything does.

Rattner caps it off with an apparently well-justified rant about the potential obstructiveness of Congress--not that he suffered much from it, but that he so narrowly and fortuitously escaped.  It was really more good luck than good planning that the whole operation went forward under the TARP umbrella, impervious to the death by a thousand cuts that Congressional nit-picking could have inflicted on them.

Rattmer left his government post after the confirmation of the two plans, more or less half a year after he had begun.  By his account, he left under his own steam--"my job on this planet is done," as it were.  But by the spring of 2009, Rattner himself was caught up in a pay-to-play scandal about the New York State pension funds.  I've read a bit of the news coverage; I'm still on the fence as to whether Rattner was out of line here or not, though my guess is that had he been willing to roll the dice with a jury, he might have walked.  So even if he did leave Washington under his own power, still it is likely that the Obama administration was not sorry to see him go.  And aside from the current job: for the moment, it appears that the pay-to-play case on any higher ambitions Rattner may have harbored like, for example, to be Secretary of  Treasury

Rattmer talks a bit in the book about the charges against him and it's pretty clear that he is feeling put upon.  If he is innocent as he seems to believe he is, one can hardly blame him.  Even if his hands are as dirty as his adversaries want us to believe, he might still be at least confused.  For even a guy with dirty hands might know how to reorganize a couple of car companies.

Kling More or Less Loses it on Foreclosures

Arnold Kling can barely contain himself: 

[T]toss around words like "shoddy" or "sloppy" or "fraud" is going rather far. If you want the record-keeping process to adhere perfectly to the traditional process, then you effectively eliminate securitization. I think that would be fine, but it would have been more helpful to have made that determination in 1968, before the government created GNMA, and before it created Freddie Mac in 1970.

It is safe to say that what is going on now is not helping "little people" against "the banks." It is an assault on a process that has done little or no actual harm to borrowers, and which supports the complex allocation of mortgage cash flows under today's securities.

In the end, the biggest losers will be the unemployed, because the assault on the foreclosure process is going to keep the housing market in limbo for years. That in turn is going to make economic recovery something that does not begin until well after President Palin takes office.

It's hard to know where to begin here but I can't for the life of me understand why insistence on effective record-keeping. would "effectively eliminate securitization."  It would have slowed it down, I suppose, but so what?  And is he saying that the very existence of securitization was the fault of some crack-brained government decision?  That the poor misled banks are just so many lemmings walking off a government cliff.

And I have to admit I fail to grasp the linkage between the bankers' serene indifference to facts and their horror at the possibility of mortgage writedowns.  Just for the record, I'm not that nuts about writedowns either (FWIW I'm with him also on bankrupting banks).  And I would assume that most of these borrowers do, in good conscience, owe something to somebody.  But I should think that minimum civility would require that they pay their creditor, not any guy in polyester who happens to show up at the sale.

Maybe what Arnold is thinking of is that bit from the AP Herbert story (in The Common Law) about the guy who was brought up on charges after a policeman fished him out of the canal.  The judge said (I quote from memory):

It's been my experience that most people who come to the attention of police have done something to deserve it and I don't see why it should be the policeman's fault if he can't come up with the charge.

 On second thought, I suspect Arnold probably wouldn't understand why that is funny.

[Going away thought: I suspect he is probably right when he says that the biggest losers will be "the unemployed" (by which I guess he means "the borrowers").  We'd agree that it certainly won't be the banks.  Oh, and by the way, I'm sure the thought of President Palin turns his small intestine to water just as much as it does mine.]