WONKESS

Wow, they must think we're really stupid...

Start here (WSJ, paid subscription only):

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend... [What is that they say about the Brooklyn Bridge?  But keep reading...]

One risk is that certain hard-to-value assets mightn't be fairly priced if banks are essentially negotiating with themselves.  Inflated prices could result in the government overpaying.  Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

"Sensible restrictions should be placed on banks, especially those that have received government capital, from investing their own balance sheets in a backdoor effort to reacquire what could be their own assets with an enormous amount of federally guaranteed leverage," said Daniel Alpert, managing director at Westwood Capital LLC, an investment bank.

What does this mean?  Say you are a bank, with a toxic asset that if you had to sell right this moment, could only fetch $1.  But you have it booked at $50.  You don't want to sell it at $1 because then you would have to take a $49 write down.

Now under the PPIP program, the banks can bid on the asset themselves (in other words, they would buy the toxic asset from themselves) but instead of the $1, they could bid, say $35.  The bank would still have to take a loss, but instead of a $49 loss, it would only be a $15 loss.  And then, let's say the PPIP leverage is 7:1 (I've forgotten what the PPIP leverage really is, but I know it's high).  That means that for every dollar the bank puts into to purchasing the asset, the government comes up with $6 (a combination of matching and guarantee).  So for the $35 asset, the bank pays $5, government pays/backs $30.  

Time passes, and what do you know?  The toxic asset is worth... $1 dollar.  But what has the bank lost?  Besides the original $15 write down, they've lost $5 of their money.  What have you and I (the taxpayer schmucks) lost?  $30. Now take that times a couple of billion.

During a press conference today, FDIC Chairwoman Sheila Bair was asked about the above WSJ article (h/t Naked Capitalism).  Her response:

"No [banks] will not be able to bid on their own assets. I think there has been some confusion about that....There will be no structure where we would allow banks to bid on their own assets. I think there have been separate issues about whether banks can be buyers on other bank assets and I think that's an issue that we continue to look at. There's also a question of whether banks who come to the PPIP to sell assets, while they would not be involved in the bidding process---private investors would set the prices---whether part of the consideration they would take back once the price has been set by the private sector, would be in an equity piece in the PPIP. Those are things we're actively discussing....

I think there are a couple of factors that are still at play here as we try to devlop this structure and look toward the launch of PPIP. One is we're finding on both the buyer and the seller side there continues to be discomfort about Congress's view of this program, whether the rules could potentially change. The Boxer/Ensign amendment I think is a good amendment...it addresses conflict of interest issues and we want that too. Nonetheless I think this has created some uncertainty about certain aspects of the Boxer/Ensign amendment and the Treasury will need to issue regulations I think to clarify those issues before we will have comfort by market participants."

Yeah, color me not terribly confident about Bair's "understanding" of the way PPIP is going to work.

The ship be sinkin'

Don't Cry for Me, Derivatives...

What a load of crock:

The U.S. Treasury’s plan to regulate the over-the-counter derivatives market outlined by Secretary Timothy Geithner on May 13 contains recommendations similar to those made by Goldman Sachs Group Inc., JPMorgan Chase & Co., Credit Suisse Group AG and Barclays Plc three months earlier.

The banks sent the Treasury a plan written in February titled “Outline of Potential OTC Derivatives Legislative Proposal,” saying the Federal Reserve should extend capital and margin requirements to companies and hedge funds that trade in the $592 trillion unregulated market, according to a document obtained by Bloomberg News and confirmed by the Treasury. Energy companies, corporations and hedge funds don’t face such requirements now, while banks do under central bank oversight.

“The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”

We're well on our way to creating a regulatory regime that virtually guarantees the existence of too-big-to-fail players.  Apparently, in Geithner world, it's easier to prevent systemic failure by regulating TBTFs than by not allowing them to exist in the first place.

Tool.

Let's Talk About Bankruptcy, Baby...

Forgot to get this up earlier this week.  There was an editorial in the NYT proposing changes to the bankruptcy code that would allow for a controlled resolution of financial institutions.

Since the collapse of Bear Stearns just over a year ago, the government has bailed out financial institutions whose failures threatened the broader financial system (with the exception of Lehman Brothers). In explaining this approach, federal regulators have said that they lack the tools to prevent disorderly failures of such institutions. Bailouts have been the only alternative to bankruptcy filings that can have dangerous effects on the rest of the economy.

But why not adopt an approach that would, where necessary, allow the controlled failure of a major financial institution?

To limit the disruption such an event might cause in the broader market, the government could announce that it would support the institution — for example, by guaranteeing its trading obligations — for, say, 60 to 90 days. During this period, the institution’s creditors and counterparties would not be permitted to cancel their contracts and demand immediate repayment, or force the institution to pony up additional collateral...

In return, the institution requesting government assistance would be required to ask its creditors and counterparties to reduce or defer their claims in order to restore the institution to solvency. It would also be required to commence plans for a possible bankruptcy at the end of the support period; make all material information about itself available to prospective buyers; and cooperate with counterparties that wish to enter into arrangements among themselves that would smooth an eventual bankruptcy, if one cannot be avoided.

If at the end of the support period enough creditors and counterparties have agreed to reduce or defer their claims so that the institution can stay afloat, or a third party has agreed to acquire it, then it would resume normal business.

I'm not a bankruptcy expert, in fact, I know only the barest minimum about bankruptcy law.  What I do know is that our current bankruptcy regime seems ridiculously unfit for handling the problems in our financial industry, which is why we keep avoiding the subject. 

Especially egregious is the fact that due to what I suspect must be serious lobbying efforts on behalf of the financial industry, certain derivatives are not actually subject to the "automatic stay" (or freeze) that all other claimants of the bankrupt entity are subject to (this was part of the 2005 bankruptcy "reform", arguably one of the most corrupt piece of legislation ever put into place).  I believe (though again, would love correction if otherwise) that this is why having a large financial institution going directly into bankruptcy is considered generally undesirable.  From Lehman's example, once a financial entity is pushed into bankruptcy, the counterparties to derivatives with the bankrupt entity have a huge incentive to pull out as fast and recklessly as possible, leaving other stakeholders in the financial institution holding nothing.

This has never been the intention of bankruptcy law, which was always meant to allow the orderly unraveling of insolvent institutions, with due attention to certain fairness considerations (the priority issues we've heard so much about w/r Chrysler, and don't get me started on how insane it is that the Obama administration decided to simply ignore these considerations when negotiating the Chrysler bankruptcy).

Srsly, sometimes I wonder if the American government isn't acting like the poor schlub who thinks that if he puts his overdue bills in a drawer, they cease to exist.

Given that we currently have one of the country's foremost expert on bankruptcy knee deep in this crisis (Elizabeth Warren, chair of the Congressional Oversight Panel overseeing TARP), I don't understand why this isn't on the agenda.

Food Matters...

h/t Cage Free Family

I'm a Free-Range Mom Too...

Cyn3matic (a fellow MOMocrat) has an amazing post about her life as a free-range mom, which explains her (continuing) decision to run an ad-free blog.  I'm far too insignificant a blogger to really consider carrying ads (even blogher ones) but it's also not something I could in good conscience do, because it runs against the way I want to live my life.

On a confessional level, I'm a pretty selfish person.  I know this about me.  I freely admit it.  My husband knows this weakness of mine, and he never fails to deploy it when we are engaged in one of our battles (what's that they say about hurting those you love?).  It is this selfishness, this absurd belief that *I* deserve more, am entitled to more, that led me to live a pretty absurd life in my 20s, despite many years of "pretending" to be a liberal, an environmentalist.

The closest analogy to my situation that I can think of?  Pretty much every politician on the planet (and the reason that I don't fundamentally trust politicians).  The incredible scandal that is happening in the UK right now:

At one level, the scandal is a rich tale of politicians exploiting a lax system of expenses to claim a mind-boggling array of benefits. The claims have centered on so-called second-home allowances, which have allowed some members of Parliament to use nearly $40,000 a year in taxpayers’ money to renovate and even sell properties for profit, while others have claimed monthly payments for mortgages that had already been paid off. Still others claimed “necessities” like the clearing of a country house moat, an electrical massage chair and even a Kit Kat bar.

The truth is, politicians make a fine living wage.  But relative to those they see as their peers: the entrepreneurs, the financiers, the lawyers and the doctors, they are relatively poor.  And while many do-gooders (and I place many politicians - yes, even the conservative ones - as a subset of the do-good population) have their hearts in the right place with regards to helping others, they are often less than honest when it comes to "helping" themselves.  The truth is, doing good comes at a price.  It feels desperately unfair, but that price is usually a commitment to never seeing financial rewards for the good that you do.

But we have forgotten what it means to sacrifice.  And back to my story, I'd forgotten what it means to sacrifice.  I was willing to fight for environmental issues but not willing to not have new shoes, new clothes, a great apartment, and a disposable life; even though my disposable life was a huge contributor to the very environmental problem that I was theoretically trying to solve.

These last few years have been emotionally exhausting for me.  I've realized that despite the fact that my family has been fast-tracking on the road to economic wealth, I've been inherently unhappy.  And the more money I made, the more unhappy I was.  But then as I started cutting back on stuff - we moved from a super large house in Bumfuckville to a much smaller house in Law School city, then to a teeny tiny apartment in our current metropolitan location, shedding stuff all the way - the more weight I felt lifting from my shoulders.  The more that I've been able to follow the personal finance world and cut back on expenses, the better I've felt about myself and about my preparedness for the future.  And, surprise surprise, the less stuff I've had, the less impact I was having on the environment.  It's just been a win-win-win for me.

I'm still not perfect - oh, SOOOOO far from it.  For example, Cyn3matic has made certain parenting choices that I really admire.  Specifically, she chose to use diaper-free elimination communication with her son, which takes a kind of dedication and time commitment that my other big life choices (namely, law school and a law career) didn't allow (yes, I was disposable-clog-the-landfill-diapers all the way).  But I made other decisions to live a lesser footprint lifestyle which I could fit into my larger life goals: I also made 90% of Loo and Kali's baby food from scratch; we have purchased exactly one piece of kiddie furniture (a crib) and everything else has been 2nd hand converted adult furniture (including, remember, mattress on the floor?); we use the library religiously; we buy organic when it's available.

It's still hard.  It's hard not to covet the wardrobe, the fancy vacations, the jewelry, the newest electronic toys.  I can still taste the buzz that comes right after I purchase something shiny and new.  But it's getting easier, over time. 

This is really a roundabout way to get where I was going but here it is:

(1) I can't flog things on this blog because I can't ask anyone out there to want things.  I just can't.
(2) It is entirely too attractive to get things for FREE!  I still don't have the will power to resist the lure of getting, owning, having.  So I need to remove myself from the temptation.
(3) Srsly?  I write about economics and personal finance.  Who the hell would want me to shill their product anyways (except, maybe, Suze Orman?  Oh, Suze, yee of wondrous white teeth...  I'd happily shill for you for no charge though, *call me*).

Want to hear more?  Well, this guy (Jack from Voluntary Simplicity), has got it goin' ON.  If I weren't married w/ kids, that's what I'd do.  Rock on, Jack.

Margaritaville...

Srsly, funniest South Park episode EVER!

Watch it, you can thank me later.

Links O' the Day...

Lots of interesting links today:

(1) From the FT, an evaluation of the goals and strategy of last week's bank "stress test".  I liked this quote:

The biggest question is how far this exercise will help restore the economy. Commercial banks provide only a quarter of financial sector credit in the US, down from close to 40 per cent in the mid-1990s (see chart). Much of the rest came from various forms of securitisation. Unless and until the latter markets reopen fully, private sector credit is likely to be constrained. How far that constraint is binding depends on how far highly leveraged borrowers are willing to borrow, particularly when the collateral against which they borrow has lost value. For this reason, it is the huge stimulus – the least conservative parts of the economic package – that will deliver the recovery. These are also the least upsetting to the interests of powerful lobbies, particularly in finance.

Securitisation is not de facto dangerous.  What we've learned in retrospect is that the default risks in the underlying loans were far greater than bankers projected.  So theoretically, now that we have new data that much more accurately represent what default risks there are, we should now be able to price asset backed securities appropriately.  This should also reduce the number of people willing to lend to the truly sub-prime, as these pools of loans should have a harder time finding buyers.

But if this is true, then securitisation should be on its way to becoming just another bread-and-butter, not so exciting business.  Low margins, and specifically, requiring the issuers to retain a much larger chunk of the lowest tranches as a cushion for the upper tranches.  Which will still mean a much less free flowing credit market than we've become accustomed to. 

Which is, in my opinion, a good thing.  But the message seems to continue to be contaminated with the idea that anything less than a return to the bacchanalian debt gorge of the past two decades is not good for America. 

(2) A couple of articles about the influence of CDSs on the car industry, specifically, skewing the incentive of creditors to push for liquidation bankruptcy rather than a workout b/c they stand to gain more collecting on the default insurance.  I have been out of the loop for a couple of weeks, but I thought this actually happened to Chrysler as well, and the resolution was basically the government coming in pretty heavy handed to push through the re-organization.  I would also love to see some CDS contracts to know exactly what the terms are that trigger payout.

(3) And finally, the bruhaha on NPR's Planet Money.  Again, I'm sooo last Tuesday on this, but I guess what happened is that Adam Davidson, the lead correspondent on Planet Money, interviewed Elizabeth Warren last week and got into a rather heated argument with her over whether she was using her new position as chair of the Congressional Oversight Panel (COP) overseeing the TARP program inappropriately by directing focus on the plight of the middle class in America rather than focusing on what Adam sees as the exclusive goal of the COP, namely, managing TARP towards the goal of stabilizing the financial system. 

Here is the original podcast with the argument.  Here is a subsequent podcast, where Adam Davidson, responding to listener outrage, and apologizes by explaining where the aggression (on his part) came from.  Some listeners believed that Adam's interview of Professor Warren reeked of sexism, partly because, in contrast, he was completely deferential when he interviewed Timothy Geithner earlier in the year, despite the fact that Secretary Geithner did the standard government two-step evasion.  Although the differences between the two interviews are stark, I think it is more a reflection of where Davidson's personal politics lie, and that he, like Geithner, are very much bought into the view that anything short of a complete rescue of the financial system, as it is, would be devastating to the US economy.  The fact that Warren apparently does not share this view (and thus, has a parallel view that what needs to be saved is the American middle class) thus garnered some rather pointed questions from Davidson.

I've not yet listened, but the full interview with Elizabeth Warren has also been made available here.

A Perfect Moment...

Sunday was bright and beautiful.  Windy, and chilly enough that going sweater-less meant goose bumps, but the sun was warm and awakening.

After a morning full of sand and fast food, Loo decided that she wanted to ride her bicycle (with training wheels) around the duck pond.  Loo is decidedly small for her age, in the bottom quartile, and so she's been slow to take to physical activities that involve equipment.  She owned her bicycle for a good half a year before she was able to ride it steadily for a hundred meters, and even now, she needs a bit of a push to get started, and lots of help to ascend slight hills.

She's never biked around the duck pond before, which is a good 1/4 mile in circumference.  I was a bit concerned, but thought, what the heck.  It was too beautiful a day to deny my spunktious daughter anything.

So we set out, with her father and little Kali following, on her pushable big wheel trike.  Before long, we had left J and Kali far behind, and they ultimately decided to turn around and head home without attempting the full walk.  But Loo was steady and confident, easily guiding her princess bicycle around the duck pond.  When we were half way around the pond, we came upon a garage sale, well in progress.  The only items left were some ceramic mugs and holiday tsotchke and a lot of used clothing.  Not of much use to a non-holiday-heathen like myself.

But the enterprising children of the garage sale proprietors had also set up a lemonade/girl scout cookie stand by the roadside, and Loo immediately stated that she was thirsty.  Loo has only recently been introduced to the world of lemonade, since she is much more sweet than sour, so I wasn't sure she would be amenable to the stand's offerings.  But she insisted that she was and we exchanged a dollar for two plastic cups full of what can only be called fluorescent-yellow-from-a-mix goodness.

We sat by the duck pond, on a curb, our legs stretched out in front of us, drinking the more sweet than sour faux-monade. 

I've never seen my little girl drink so heartily, in such complete and utter satisfaction of some deep thirst.  And her face simply beamed with contentment - satisfaction with the feeling of the sun on her face, the warm ache in her thighs, being able to spend alone time with a parent who has had very little alone time to give recently.

She is so not a baby anymore.

Mother's Day, Whatever...

I am not a big holiday person.  The Buddhists don't have many holidays, and the Chinese mostly have agricultural-based holidays (planting, harvest, winter solstice festivals) which were (obviously) not on the calendar I knew as a child growing up in the US.  So I grew up in a largely holiday-free zone.

As an adult, my nonchalance towards holidays has served me well.  I feel no guilt (and my mother foists no guilt upon me) if I can't make it home for Christmas or New Years or the 4th of July.  I rarely gift or am gifted by my immediate family.  As a family, we have even extended our holiday-free mentality to cover birthdays.  A birthday is considered feted if it involves a mylar balloon and a cupcake.

But clearly, as I've become a mother, things have changed.  Partly because holidays are an important part of my husband's life.  His family goes absolutely defcon one over holiday logistics.  They exercise an excruciating calculus of "how much time does each (grown) son spend with each divorced parent" with a holiday weighted point system (with Christmas, New Years, Thanksgiving, and each parent's birthday getting extremely high points, obviously).  And partly because even heathen I believe in the sanctity of the child's belief in holiday magic.

But mother's day is doubly strange to me.  It's a holiday for (presumedly) me, so there is no holiday magic to be preserved for my daughters (outside of the requisite mother's day homemade gift, which Loo did this year for the first time in pre-K, and which was adorable).  And I seriously don't care.  So for the time being, J and I have turned mother's day more into grandmother's day, and we took our mothers out (jointly) this weekend for a "fancy" meal, and so that they could spend some time with their granddaughters.

But there was no breakfast in bed, no flowers and gifts, no night out for me.

Though I did mention to J that my ideal (this year) would have been the freedom to go watch the new Star Trek movie.  Two guesses whether my wish got fulfilled or not.

Nonlinear girl took this series of mother's day questions from the Motherlode blog.  They intrigued me (from an archivist POV) so I thought I would indulge on this not-so-busy Monday-after-Mother's Day.  As Nonlinear Girl did, I am answering these as I might to my daughters (or to my own mother).  I've also deleted some for lack of present relevance.

1.    What’s the one thing you would have done differently as a mom?
I'm sure this will be a more important question once I have more years under my belt.  But I wish I had spend more of my young adulthood preparing (economically) for my family so that I wouldn't feel the same kind of tension right now between providing for them economically and providing for them emotionally/spiritually/ mentally.

2.    Why did you choose to be with my father?
This is pretty easy.  J is the smartest man who has ever been interested in me.  I'm a sucker for a nerd.

3.    In what ways do you think I’m like you?
Loo is unfocused and lazy, which is also my default personality.  My ability to succeed has been entirely a function of my ambition.  Strip away the ambition, there is nothing I love more than a warm TV and a basket full of brownies.  Kali is aggressive, which I think is the toddler expression of ambition.  So Loo and Kali are the Yin and Yang of my personality.

4.    Which one of us kids did you like the best?
As Metrodad has said, whichever one isn't pissing me off at any given moment.

5.    Is there anything you regret not having asked your parents?
My mom and I have have a very weird, and yet very typical Chinese mother-daughter relationship.  She has been a very pure source of steadfast guidance and support my entire life.  She has been a fount of good advice about the most difficult situations.  But she's also devastatingly critical.  I've never felt that I've been able to do even one thing right by her standards, which then means that we've never been able to share things beyond a fairly superficial level. 

6.    Is there anything that you wish had been different between us — or that you would still like to change?
I want desperately to stop equating status with a good life.  I think I do this a lot.  And status is not just money, but also intelligence, education, and even liberalism.  And mostly I want to figure out a way so that my daughters can distinguish between the desire for status and what it takes to have a good life.  I think right now, I'm imparting too much of my desire for status onto my daughters.

7.    When did you realize you were no longer a child?
For me, this had nothing to do w/ being a mother.  I knew I  wasn't a child when I stopped being a drama queen.  Which probably happened at around 28/29.  I stopped acting like a petulant child whenever things didn't go my way, and I stopped thinking that the world owed me anything.  Interestingly, I would also say that this was the moment I turned into my mom.

For all you mother's out there who do take Mother's Day seriously, I hope you had a very lovely Mother's Day and that you were all able to fully bask in the love of your children.

A Stimulus Package for the Hard Times...

Still on hiatus, but OMG!  (h/t She Says)

I really needed that.  My final is tomorrow!