WONKESS

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.

On McCain...

Clearly the primary is no done deal, but just wanted to tag this for my own sake. NYTimes had a surprising pro-McCain op-ed piece today. I've said before and I'll say again that if I vote against McCain this election, it will be with some misgivings. I'll do it because (1) he wants to continue this stupid, stupid war in Iraq, (2) he's unlikely to address health care in any real way, (3) he's not the best versed on economic policy and (4) in order to win the support of the core Republican constituency, he will probably have to promise a whole bevy of other distasteful (to me) policies.

However, he is pretty darn strong on two of the issues that are among the nearest and dearest to my heart. The environment and special interest groups.

I'll have to address my thoughts on the environment in a separate entry, too big for today, but as for special interest groups, here are some exerpts from today's column:

In 1996, McCain was one of five senators, and the only Republican, to vote against the Telecommunications Act. He did it because he believed the act gave away too much to the telecommunications companies, and protected them from true competition. He noted that AT&T alone gave $780,000 to Republicans and $456,000 to Democrats in the year leading up to the vote.

The Telecommunications Act of 1996 is one of those great unsung boondoggles to corporate America. One of the reasons I've been relatively immune to Republicans who rail against safety net programs like universal health care, expanded family care, etc... is that for every government dollar that is distributed to the middle class and below, I have no doubt a dollar is distributed to the wealthiest. Since "airwaves" are relatively uncapturable by private industry, it is one arena that has been rather uncontroversially granted to government control. In other words, it's something really valuable that pretty much everyone agrees belongs to the government. The Telecommunications Act granted major broadcasters valuable licenses for broadcasting digital signals on the public airwaves at relatively little cost. In other words, the ABC/CBS/NBCs of the world, who have already had previous rights to analog broadcasting which cost them almost nothing and at the same time protected them against competition (huge barrier to entry here - only those granted licenses can broadcast) were once again granted a continuation of their broadcast monopoly for almost no cost. Can we say "subsidy for the wealthy"?

In 1998, McCain championed anti-smoking legislation that faced furious opposition from the tobacco lobby. McCain guided the legislation through the Senate Commerce Committee on a 19-1 vote, but then the tobacco companies struck back. They hired 200 lobbyists and spent $40 million in advertising (three times as much as the Harry and Louise health care reform ads). Many of the ads attacked McCain by name, accusing him of becoming a big government liberal. After weeks of bitter debate, the bill died on the Senate floor.

In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.

I agree with the ethanol studies. I think it is a fairly misguided attempt by the most recent Republican administration and oil/car companies to distract us from what we should be concentrating on: cars that do NOT run on fuel burning, whether that fuel is oil or corn based. Ethanol has gotten a lot of positive publicity recently, but as far as I can tell, it is manipulated publicity coming from two sectors: the farming sector, who are hugely profiting from the subsidies now available for growing corn, and from the car sector, since the cost of outfitting cars to become ethanol burning cars is significantly less than the costs of developing either more fuel efficient vehicles or leaving the entire fuel based vehicle genre entirely. In truth, Ethanol has several problems: (a) corn is a nitrogen depleting monoculture that is successful largely due to the use of pesticide, (b) the process of converting corn to fuel is both energy intensive (findings controversial, but only in terms of degree) and polluting, and (c) if we are actually concerned with poverty, either domestically or globally, there are probably better things to be doing with our foodsupplies than to be converting them to fuel. The one true benefit of Ethanol is that it reduces our dependence on IMPORTED sources of fuel, which is a geopolitical nightmare (and probably part of the appeal of Ethanol for W). But good for the environment? Not so much.

**Update: for anyone who's actually not asleep at this point and wants a good (though not unbiased) summary of ethanol, this is not bad.

In 2002, McCain capped his long push for campaign finance reform by passing the McCain-Feingold Act. People can argue about the effectiveness of the act, but one thing is beyond dispute. It was a direct assault on lobbyist power, and earned McCain undying enmity among many important parts of the Republican coalition, who felt their soft money influence was being diminished.

In 2003, the Senate nearly passed the McCain-Lieberman Climate Stewardship Act. The act was opposed by the usual mix of energy, auto and mining companies. But moderate environmental groups were thrilled that McCain-Lieberman was able to attract more than 40 votes in the Senate.

In 2004, McCain launched a frontal assault on the leasing contract the Pentagon had signed with Boeing for aerial refueling tankers. McCain’s investigation exposed billions of dollars of waste and layers of contracting irregularity.

In 2005, McCain led the Congressional investigation into the behavior of the lobbyist Jack Abramoff. The investigation was exceedingly unpleasant for Republicans, because it exposed shocking misbehavior by important conservative activists.

Over the past few years, McCain has stepped up his longstanding assault on earmarks. Every year, McCain goes to the Senate floor to ridicule the latest batch of earmarks, and every year his colleagues and the lobbyists fume. For years, McCain has proposed legislative remedies [such as] greater transparency [and] a 60-vote supermajority requirement.

I don't believe any other member of the Senate has as long and consistent a track record of fighting special interests as Senator McCain. Which is why this snarky and harsh article in the New York Times last week was pretty much across the board attacked by liberals and conservatives alike. It is undeniable that McCain was part of the Keating Five, the five legislators who tried to intervene with regulators on behalf of a quickly faltering Lincoln Savings and Loan. It seems entirely believable to me that the then naive Senator, doing what he saw all of Washington doing, was suddenly, swiftly and brutally dragged into the spotlight and shown just what it was that special interest groups were trying to buy with their money, jet planes and fancy meals. And he was not only embarrassed, but he was appalled that he participated. And he has spent every year since then crusading against such influence. Yes, he was lucky that emerged from the Keating Five debacle without being unseated, but this does not take away from all that he has tried to accomplish since.

Anyways, the point of the article was actually to encourage the candidates on both side to stop the all-too-common strategy of attacking an opponent's strength.  In this case, he sees the Obama campaign starting to focus on McCain's "closeness" to lobbyists.  For those of us already affected with PCF (Presidential Campaign Fatigue), this seems like sound advice for all concerned.

Where's the Beef?

My family is (sorta) a beef lovin’ family.  My husband LURVES himself some beef.  I’m more of a pork-gal, but I definitely get burger cravings.  My girls?  Eh, not so much.  In fact, they don’t really like meat at all, which is ok because we live on a pan-asian diet which includes lots of soy-protein.

But we have, more or less, been on a beef boycott since 2004.  Entirely at the direction of my husband, even though he LURVES his beef.  Why?  Because he’s seriously pissed at the USDA for the crap they pulled the last time (in 2004) they faced a beef recall based on the presence of bovine spongiform encephalopathy, or the mad cow disease, in one American cow.

When the US found that one mad cow back in nought four, one of the first things that happened was that Japan (at that time the largest importer of U.S. beef) immediately put a ban on all beef imports from the United States.  Now, I don’t know if you know Japan, but I know Japan, and the Japanese seriously lurve themselves some beef.  And I ain’t talkin’ ground beef, but the good stuff.  You know the stuff that have fancy European names like mignon or angus, or are raised on beer like Kobe.  The stuff that is priced by the oz and not the lb.